Aviva 2003 year end - Part 2

Aviva PLC 25 February 2004 Aviva plc PART 2 OF 2 Page 20 Summarised consolidated profit and loss account - modified statutory basis For the year ended 31 December 2003 Page 2003 2003 2002 â‚¬m Â£m Â£m Premium income (after reinsurance) and investment sales Continuing operations 25 27,587 Life premiums, including share of associates' premiums 19,035 18,172 25 1,654 Investment sales 1,141 1,028 26 1,545 Health premiums 1,066 928 ------------------------------------------------------------------------------------------------------------------- 30,786 21,242 20,128 27 12,353 General insurance premiums 8,524 7,805 ------------------------------------------------------------------------------------------------------------------- 43,139 Total continuing operations 29,766 27,933 27 - Discontinued operations - Australia and New Zealand general insurance operations - 692 ------------------------------------------------------------------------------------------------------------------- 43,139 Total 29,766 28,625 =================================================================================================================== Operating profit 26 1,650 Modified statutory life profit 1,138 1,022 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 tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and 2,159 exceptional items 1,490 1,218 27 - Discontinued operations - Australia and New Zealand general insurance operations - 78 ------------------------------------------------------------------------------------------------------------------- Operating profit - before tax, amortisation of goodwill, amortisation of acquired 2,159 additional value of in-force long-term business and exceptional items 1,490 1,296 (149) Amortisation of goodwill (103) (135) (196) Amortisation of acquired additional value of in-force long-term business (135) (139) -------------------------------------------------------------------------------------------------------------------- 1,814 Operating profit before tax 1,252 1,022 308 Short-term fluctuation in investment return 212 (1,243) (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) - ------------------------------------------------------------------------------------------------------------------- 2,014 Profit/(loss) on ordinary activities before tax 1,390 (282) 28 (531) Tax on profit/(loss) on ordinary activities (367) (206) -------------------------------------------------------------------------------------------------------------------- 1,483 Profit/(loss) on ordinary activities after tax 1,023 (488) (108) Minority interests (74) (46) -------------------------------------------------------------------------------------------------------------------- 1,375 Profit/(loss) for the financial year 949 (534) 29 (24) Preference dividends (17) (17) -------------------------------------------------------------------------------------------------------------------- 1,351 Profit/(loss) for the financial year attributable to equity shareholders 932 (551) 29 (790) Ordinary dividends (545) (519) -------------------------------------------------------------------------------------------------------------------- 561 Retained profit/(loss) transferred to/(from) reserves 387 (1,070) ==================================================================================================================== * The wealth management result has been included within non-insurance in all periods. --------------------------------------------------------------------------------------------------------------------- Page 21 Earnings per share - modified statutory basis For the year ended 31 December 2003 Page 2003 2002 29 Operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax, attributable to equity shareholders in respect of: Continuing operations 44.0p 34.8p Continuing and discontinued operations 44.0p 38.0p 29 Profit/(loss) attributable to equity shareholders 41.4p (24.4)p 30 Profit/(loss) attributable to equity shareholders - diluted 41.3p (24.4)p 29 Dividend per share 24.15p 23.0p Consolidated statement of total recognised gains and losses For the year ended 31 December 2003 Page Restated* 2003 2002 Â£m Â£m 20 Profit/(loss) for the financial year 949 (534) Foreign exchange gains 329 104 -------------------------------------------------------------------------------------------------------------------- Total recognised gains/(losses) arising in the year 1,278 (430) ===================================================================================================================== * Restated for the effect of a change in accounting policy in respect of internally-generated additional value of in-force long-term business no longer recognised. Further details are set out on page 24. Reconciliation of movements in consolidated shareholders' funds For the year ended 31 December 2003 Page Restated* 2003 2002 Â£m Â£m Shareholders' funds at the beginning of the year As originally reported 9,669 11,752 Prior year adjustments (3,833) (5,278) -------------------------------------------------------------------------------------------------------------------- As restated 5,836 6,474 Total recognised gains/(losses) arising in the year 1,278 (430) 29 Dividends (562) (536) Movement in shares held by employee trusts - 9 Increase in share capital 2 11 Goodwill written back and other movements - 308 ------------------------------------------------------------------------------------------------------------------- Shareholders' funds at the end of the year 6,554 5,836 =================================================================================================================== * Restated for the effect of changes in accounting policies in respect of internally-generated additional value of in-force long-term business no longer recognised and the treatment of shares held by employee trusts as a deduction from shareholders' funds. Further details are set out on page 24. --------------------------------------------------------------------------------------------------------------------- Page 22 Summarised consolidated balance sheet As at 31 December 2003 Restated* 2003 2002 Â£m Â£m Assets Goodwill 1,105 1,040 ------------------------------------------------------------------------------------------------------------------- Investments Land and buildings 637 668 Investments in associated undertakings and participating interests 279 287 Variable yield securities 2,967 2,603 Fixed interest securities 10,098 7,737 Mortgages and loans, net of non-recourse funding 1,448 1,149 Deposits 435 550 Other investments 65 52 ------------------------------------------------------------------------------------------------------------------- 15,929 13,046 Reinsurers' share of technical provisions 2,926 2,882 Reinsurers' share of provision for linked liabilities 579 337 Assets of the long-term business 136,662 123,012 Assets held to cover linked liabilities 40,665 29,538 Other assets 10,326 10,645 Acquired value of in-force long-term business 488 505 ------------------------------------------------------------------------------------------------------------------- Total assets 208,680 181,005 =================================================================================================================== Liabilities Shareholders' funds Equity 6,354 5,636 Non-equity 200 200 Minority interests 811 658 ------------------------------------------------------------------------------------------------------------------- 7,365 6,494 Subordinated debt 2,814 1,190 ------------------------------------------------------------------------------------------------------------------- Total capital, reserves and subordinated debt 10,179 7,684 Liabilities of the long-term business 121,078 113,310 Fund for future appropriations 8,443 3,745 Technical provision for linked liabilities 41,244 29,875 General insurance liabilities 17,515 16,031 Borrowings 1,760 2,064 Other creditors and provisions 8,461 8,296 ------------------------------------------------------------------------------------------------------------------- Total liabilities 208,680 181,005 =================================================================================================================== * Restated for the effect of changes in accounting policies in respect of internally-generated additional value of in-force long-term business no longer recognised and the treatment of shares held by employee trusts as a deduction from shareholders' funds. Further details are set out on page 24. --------------------------------------------------------------------------------------------------------------------- Page 23 Consolidated cash flow statement For the year ended 31 December 2003 2003 2002 Â£m Â£m Net cash inflow from operating activities, excluding exceptional items* 1,208 1,005 Exceptional items* (522) (523) Net cash outflow from servicing of finance (256) (265) Corporation tax (paid)/received (174) 175 Net purchases of tangible fixed assets (101) (102) Acquisitions and disposals of subsidiary and associated undertakings** 600 241 Equity dividends paid (523) (732) Proceeds from issue of subordinated debt 1,567 - Net cash inflow/(outflow) from other financing activities: Issue of share capital 2 11 Net drawdown/(repayment) of loans 80 (68) ------------------------------------------------------------------------------------------------------------------- Net cash flows 1,881 (258) =================================================================================================================== Cash flows were invested as follows: (Decrease)/increase in cash holdings (164) 719 Net purchases/(sales) of investments 2,262 (747) Non-trading cash outflow to long-term business operations (217) (230) ------------------------------------------------------------------------------------------------------------------- Net investment of cash flows 1,881 (258) ==================================================================================================================== The cash flows presented in this statement relate to non-long-term business transactions only. Long-term business profits are included as net cash inflows/(outflows) from operating activities only to the extent that they have been remitted to shareholders by way of dividends from life operations. * Included within the exceptional items are payments to the Berkshire Hathaway Group for reinsurance purchased in December 2000, to secure protection against any adverse impact of the run-off of London Market claims reserves. The final instalment was paid on 2 January 2003. ** The 2003 figure includes Â£651 million of consideration received on 2 January 2003 in relation to the disposal of the Australia and New Zealand general insurance businesses. --------------------------------------------------------------------------------------------------------------------- Page 24 1. Basis of preparation - modified statutory solvency basis (a) The preliminary announcement for the year to 31 December 2003 does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The results on the modified statutory basis for 2003 have been taken from the Group's 2003 Annual Report and Accounts. The auditor has reported on the 2003 accounts and their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The Group's 2002 Annual Report and Accounts have been filed with the Registrar of Companies. (b) 'Discontinued operations' disclosures in 2002 relate to the disposal of the general insurance businesses in Australia and New Zealand. The results of all other operations are entitled 'Continuing operations'. (c) The contribution from the Group's share of the alliance with The Royal Bank of Scotland Group (RBSG) is incorporated within the modified statutory life profit. Goodwill amortised in the year in respect of the Group's holding in the associated company, RBS Life Investments Limited, is included within 'Amortisation of goodwill' on page 20. (d) In November 2000, the Accounting Standards Board issued Financial Reporting Standard 17 ('FRS17') 'Retirement Benefits', the accounting provisions, which are not required to be adopted by the Group until 2005. FRS17 requires certain transitional disclosures to be made in the statutory accounts and the table shown in the supplementary analyses on page 32 shows the balance sheet effect of these memorandum disclosures. The Group has continued to account for pension costs in accordance with SSAP24. (e) Changes in accounting policy (i) Additional value of internally-generated in-force business In November 2003, the Association of British Insurers issued a revised version of its Statement of Recommended Practice on accounting for insurance business ('ABI SORP'). One of the amendments is that insurance companies are no longer allowed to recognise the internally-generated additional value of in-force business ('AVIF') on their balance sheets, either as an asset or as part of shareholders' funds. The effect of implementing this change are that shareholders' funds at 31 December 2003 have been reduced by Â£4,611 million (2002: reduced by Â£3,832 million) and minority interests have been reduced by Â£133 million (2002: reduced by Â£85 million). (ii) Presentation changes In December 2003, the Urgent Issues Task Force issued UITF Abstract 38 which requires shares held in employee share trusts to be deducted from capital in arriving at shareholders' funds rather than being held as assets. The effects of implementing this change are that shareholders' funds at 31 December 2003 have been reduced by Â£1 million (2002: reduced by Â£1 million). 2. Exchange rates The euro rates employed in this announcement are an average rate of 1 euro = Â£0.69 (2002: 1 euro = Â£0.63) and a closing rate of 1 euro = Â£0.70 (31 December 2002: 1 euro = Â£0.65). 3. Acquisitions On 8 May 2003 the Group's Dutch subsidiary, Delta Lloyd Group ('Delta Lloyd') entered into a bancassurance agreement with ABN AMRO Bank NV (ABN AMRO) for life and general insurance. As part of this agreement, the Group purchased 51% of the issued share capital of Delta Lloyd ABN AMRO Verzekeringen Holding BV (DL ABN AMRO), the company established by ABN AMRO on 30 December 2002, into which the insurance businesses were transferred. Total cash consideration was Â£178 million, including transaction costs, with a further maximum amount payable over the next five years of Â£16 million if DL ABN AMRO meets certain performance criteria. The Group's share of DL ABN AMRO embedded value and net assets was Â£62 million, giving rise to goodwill of Â£132 million after taking into account the estimated value of the deferred consideration. Under the terms of the agreement, the results of DL ABN AMRO have been consolidated in the Group accounts with effect from 1 January 2003. 4. Exceptional costs for termination of operations During 2003 we incurred costs on the closure of our general insurance operations in Belgium. These exceptional costs relate to termination activities, including redundancy costs and closure provisions. --------------------------------------------------------------------------------------------------------------------- Page 25 5. Disposals The net loss on the disposal of subsidiary undertakings comprises: 2003 2002 Â£m Â£m General insurance businesses United Kingdom - (20) France - 6 Australia and New Zealand - (66) Spain - 94 Other businesses France - 1 Other small operations (6) (19) ------------------------------------------------------------------------------------------------------------------ (6) (4) ================================================================================================================== No disposals were sufficiently material to warrant separate disclosure. 6. Geographical analysis of life and pensions and investment sales - new business and total income New business sales ------------------------------------ Premium income New single New regular (after reinsurance) premiums premiums and investment sales ------------------------------------ -------------------- 2003 2002 2003 2002 2003 2002 Â£m Â£m Â£m Â£m Â£m Â£m Life and pensions sales United Kingdom - group* 5,184 6,066 511 591 8,688 8,800 - associates 152 171 23 16 254 299 ------------------------------------------------------------------------------------------------------------------- 5,336 6,237 534 607 8,942 9,099 Europe (excluding UK) France 1,950 1,814 46 42 2,300 2,081 Ireland 188 267 62 76 442 469 Italy 1,399 1,089 54 44 1,662 1,382 Netherlands (including Belgium and Luxembourg) 850 709 139 87 1,722 1,300 Poland - Life 24 22 17 24 263 284 - Pensions 8 9 15 21 440 446 Spain 1,353 1,244 111 65 1,641 1,489 Other 280 240 73 69 616 548 International 740 863 113 89 1,007 1,074 ------------------------------------------------------------------------------------------------------------------- Total life and pension sales (including share of associates) 12,128 12,494 1,164 1,124 19,035 18,172 Investment sales United Kingdom 664 543 16 13 680 556 Netherlands 204 119 - - 204 119 Poland 109 16 1 - 110 16 Other Europe 49 70 - - 49 70 International 98 267 - - 98 267 ------------------------------------------------------------------------------------------------------------------- Total investment sales 1,124 1,015 17 13 1,141 1,028 ------------------------------------------------------------------------------------------------------------------- Total long-term savings (including share of associates) 13,252 13,509 1,181 1,137 20,176 19,200 =================================================================================================================== Single premiums are those relating to products issued by the Group, which provide for the payment of one premium only. Regular premiums are those where there is a contractual obligation to pay on an ongoing basis. * Included within premium income (after reinsurance) and investment sales of Â£8,688 million (2002: Â£8,800 million) are transfers of institutional business into Morley Pooled Pensions of Â£1,247 million (2002: Â£34 million) which, since they are institutional in nature, are excluded from new business sales. --------------------------------------------------------------------------------------------------------------------- Page 26 7. Geographical analysis of modified statutory life operating profit 2003 2002 Â£m Â£m United Kingdom With-profit 145 190 Non-profit 449 436 Europe (excluding UK) France 179 142 Ireland 41 36 Italy 30 24 Netherlands (including Belgium and Luxembourg) 107 111 Poland 103 66 Spain 50 27 Other (4) (19) International 38 9 ------------------------------------------------------------------------------------------------------------------ Total modified statutory life operating profit 1,138 1,022 ================================================================================================================== 8. Geographical analysis of health premiums after reinsurance and operating result (a) Premiums after reinsurance: 2003 2002 Â£m Â£m United Kingdom 270 264 France 134 107 Netherlands 662 557 ------------------------------------------------------------------------------------------------------------------ 1,066 928 ================================================================================================================== (b) Operating result: Operating Underwriting profit result -------------- -------------- 2003 2002 2003 2002 Â£m Â£m Â£m Â£m United Kingdom 13 9 9 5 France 9 10 (2) (2) Netherlands 39 42 (20) (27) ------------------------------------------------------------------------------------------------------------------- 61 61 (13) (24) =================================================================================================================== --------------------------------------------------------------------------------------------------------------------- Page 27 9. Geographical analysis of general insurance premiums after reinsurance and operating result (a) General insurance premiums after reinsurance: 2003 2002 Â£m Â£m United Kingdom 5,135 4,740 Europe (excluding UK) France 515 478 Ireland 611 377 Netherlands 563 412 Other 226 408 International Canada 1,208 1,009 Other 266 381 ------------------------------------------------------------------------------------------------------------------ Continuing operations 8,524 7,805 Discontinued operations - Australia and New Zealand - 692 ------------------------------------------------------------------------------------------------------------------ 8,524 8,497 ================================================================================================================== (b) Operating result: Operating profit* Underwriting result* ------------------ -------------------- 2003 2002 2003 2002 Â£m Â£m Â£m Â£m United Kingdom 676 611 50 (52) Europe (excluding UK) France 35 47 (9) (14) Ireland 91 44 26 (15) Netherlands 35 13 (5) (21) Other 32 49 (6) (10) International Canada 12 80 (98) (28) Other 30 37 (12) (5) ------------------------------------------------------------------------------------------------------------------- Continuing operations 911 881 (54) (145) Discontinued operations - Australia and New Zealand - 78 - 7 ------------------------------------------------------------------------------------------------------------------ 911 959 (54) (138) =================================================================================================================== * The general insurance operating profit and underwriting result are stated before the change in the equalisation provision of Â£49 million (2002: Â£57 million). --------------------------------------------------------------------------------------------------------------------- Page 28 10. Tax The tax charge in the profit and loss account comprises: (a) Tax on profit/(loss) on ordinary activities: 2003 2002 Â£m Â£m Current tax UK corporation tax - current year (55) 1 - prior year 17 (4) Overseas tax - current year (1) (66) - prior year 3 6 Tax attributable to balance on technical account (315) (299) ------------------------------------------------------------------------------------------------------------------- (351) (362) ------------------------------------------------------------------------------------------------------------------- Deferred tax Origination and reversal of timing differences (19) 177 Changes in tax rates or law (11) 5 Increase/(Decrease) in discount 14 (26) ------------------------------------------------------------------------------------------------------------------- (16) 156 ------------------------------------------------------------------------------------------------------------------ Total tax charged in the profit and loss account (367) (206) =================================================================================================================== (b) Tax charge analysed between: 2003 2002 Â£m Â£m Operating profit before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items Continuing operations (403) (370) Discontinued operations - (6) Profit/(loss) on other ordinary activities 36 170 ------------------------------------------------------------------------------------------------------------------- (367) (206) =================================================================================================================== (c) Factors affecting current tax charge for the year: 2003 2002 Â£m Â£m Profit/(loss) on ordinary activities before tax 1,390 (282) Current tax (charge)/credit at standard UK corporation tax rate of 30% (2002: 30%) (417) 85 Adjustment to tax charge in respect of prior years 20 2 Non-assessable dividends 5 9 Non-taxable loss on the sale of subsidiaries and associates (10) (58) Non-taxable amortisation of goodwill (5) (21) Other disallowable expenses (33) (20) Non-utilisation of current year tax losses (10) - Different local basis of tax on overseas profits 53 (51) Deferred tax charge/(credit) arising from movement in unrealised gains and losses 20 (154) Other deferred tax movements 10 (23) Deferred tax liabilities/(assets) not recognised 38 (96) Other items (22) (35) ------------------------------------------------------------------------------------------------------------------- Current tax charge for the year (351) (362) =================================================================================================================== --------------------------------------------------------------------------------------------------------------------- Page 29 11. Dividends (a) The preference dividends in the profit and loss account comprise: 2003 2002 Â£m Â£m Preference dividends 17 17 =================================================================================================================== The preference dividends are in respect of the cumulative irredeemable preference shares of Â£1 each in issue. (b) The ordinary dividends in the profit and loss account comprise: 2003 2002 Â£m Â£m Ordinary dividends Interim - 9 pence (2002: 8.75 pence) 203 197 Final - 15.15 pence (2002: 14.25 pence) 342 322 ------------------------------------------------------------------------------------------------------------------ Total ordinary dividends 545 519 ================================================================================================================== Irish shareholders who are due to be paid a dividend denominated in euros will receive a payment at the exchange rate prevailing on 24 February 2004. 12. Earnings per share (a) Basic earnings per share 2003 2002 ---------------------------------------- --------------------------------------- Net of tax, Net of tax, minorities minorities and and preference Per preference Per Before tax dividend share Before tax dividend share Â£m Â£m p Â£m Â£m p Operating profit - continuing operations 1,490 991 44.0 1,218 784 34.8 - discontinued operations - - - 78 72 3.2 ------------------------------------------------------------------------------------------------------------------- 1,490 991 44.0 1,296 856 38.0 Adjusted for the following items: - Amortisation of goodwill (103) (103) (4.6) (135) (135) (6.0) - Amortisation of acquired additional value of in-force long-term business (135) (98) (4.4) (139) (100) (4.4) - Exceptional costs for termination of operations (19) (16) (0.7) - - - - Short-term fluctuation in investment return 212 198 8.9 (1,243) (1,071) (47.5) - Change in the equalisation provision (49) (34) (1.5) (57) (40) (1.8) - Loss on the disposal of subsidiary undertakings (6) (6) (0.3) (4) (61) (2.7) ------------------------------------------------------------------------------------------------------------------- Profit/(loss)attributable to equity shareholders 1,390 932 41.4 (282) (551) (24.4) =================================================================================================================== Earnings per share has been calculated based on the operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax, attributable to equity shareholders, for continuing and for total operations, as well as on the profit attributable to equity shareholders. The directors believe the former two earnings per share figures provide a better indication of operating performance. The calculation of basic earnings per share uses a weighted average of 2,251 million (2002: 2,254 million) ordinary shares in issue, after deducting shares owned by the employee share trusts as required by FRS14 'Earnings per share'. The actual number of shares in issue at 31 December 2003 was 2,257 million (31 December 2002: 2,257 million). --------------------------------------------------------------------------------------------------------------------- Page 30 12. Earnings per share (continued) (b) Diluted earnings per share: 2003 2002 ---------------------------- ------------------------- Weighted Weighted average average number of Per number of Per Total shares share Total shares share Â£m m p Â£m m p Profit/(loss) attributable to equity shareholders 932 2,251 41.4 (551) 2,254 (24.4) Dilutive effect of share awards and options - 8 (0.1) - 4 - -------------------------------------------------------------------------------------------------------------------- Diluted earnings per share 932 2,259 41.3 (551) 2,258 (24.4) ==================================================================================================================== 13. Longer-term investment return The longer-term investment return is calculated separately for each principal general insurance business and certain long-term business operations. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of investment return. The longer-term rate of investment return is determined using consistent assumptions between operations,having regard to local economic and market forecasts of investment return. The allocated longer-term return for other investments is the actual income receivable for the year. The principal assumptions underlying the calculation of the longer-term investment return are: Longer-term rates of return Equities Properties -------------- -------------- 2003 2002 2003 2002 % % % % United Kingdom 8.1% 8.1% 6.6% 6.6% France 7.5% 7.5% 6.5% 6.5% Ireland 8.7% 8.7% 6.7% 6.7% Netherlands 8.4% 8.4% 6.5% 6.5% Canada 9.3% 9.3% 7.3% 7.3% The table below shows the sensitivity of the full year 2003 operating profit to changes in the longer-term rates of return: Movement in investment return By Change in By ------------------ -------------------------------- ---- Equities 1% higher/lower Group operating profit before tax Â£33m Properties 1% higher/lower Group operating profit before tax Â£11m The Group intends to retain the same longer-term rates of investment return for the 2004 financial year. Statistical supplement -------------------------------------------------------------------------------------------------------------------- Page 31 Segmental analysis of Group operating profit* at constant currency - achieved profit basis 2002 at 2003 exchange 2003 rates 2002 Continuing operations Â£m Â£m Â£m Life achieved operating profit United Kingdom 659 699 699 France 220 252 228 Ireland 65 83 75 Italy 70 57 52 Netherlands (including Belgium and Luxembourg) 189 220 200 Poland 104 107 111 Spain 158 91 83 Other Europe 9 - (2) International 81 79 78 ---------------------------------------------------------------------------------------------------------------- 1,555 1,588 1,524 ================================================================================================================ Health United Kingdom 13 9 9 France 9 11 10 Netherlands 39 46 42 ---------------------------------------------------------------------------------------------------------------- 61 66 61 ================================================================================================================ Fund Management United Kingdom (6) (12) (12) France 13 12 11 Netherlands - 5 4 Other Europe 3 2 2 Australia and New Zealand (1) (1) (1) International 1 - 1 ---------------------------------------------------------------------------------------------------------------- 10 6 5 ================================================================================================================ General insurance United Kingdom 676 611 611 France 35 52 47 Ireland 91 48 44 Netherlands 35 15 13 Other Europe 32 53 49 Canada 12 85 80 Other 30 34 37 ---------------------------------------------------------------------------------------------------------------- 911 898 881 ================================================================================================================ Non-insurance operations** (64) (100) (99) Corporate costs (160) (221) (218) Unallocated interest charges - external (210) (208) (206) - intra-group (196) (230) (228) ---------------------------------------------------------------------------------------------------------------- Group operating profit before tax* - continuing operations 1,907 1,799 1,720 ================================================================================================================ Discontinued operations - Australia and New Zealand general insurance operations - 88 78 ---------------------------------------------------------------------------------------------------------------- Group operating profit before tax* - continuing and discontinued operations 1,907 1,887 1,798 ================================================================================================================ * Group operating profit before tax, before amortisation of goodwill and exceptional items. ** The wealth management result has been included within non-insurance in all periods. Restating 2002 modified statutory life profits to account for the impact of exchange rate movements in 2003 would result in modified statutory life profits being restated from Â£1,022 million to Â£1,061 million for the year to 31 December 2002. -------------------------------------------------------------------------------------------------------------------- Page 32 Supplementary analyses (a) Non-insurance operations - operating result 2003 2002 Â£m Â£m Hill House Hammond 4 4 Norwich Union Equity Release and other personal finance subsidiaries (16) (6) Your Move 1 (9) Norwich Union Life Services (54) (54) Wealth management - (30) Other 1 (4) ---------------------------------------------------------------------------------------------------------------- (64) (99) ================================================================================================================ The operating result from our equity release business in the UK is included within the non-insurance results on a statutory basis. On an achieved profit methodology new business contribution was Â£19 million before tax (2002: Â£27 million) and operating profit before tax, including the benefits of the securitisation of our book, was Â£31 million (2002: Â£47 million) which is excluded from our results. (b) Corporate costs 2003 2002 Â£m Â£m Global finance transformation programme (60) (26) Central costs and sharesave schemes (176) (192) ----------------------------------------------------------------------------------------------------------------- (236) (218) Allocation of staff profit share and other incentive plans to business unit operating results 76 - ----------------------------------------------------------------------------------------------------------------- (160) (218) ================================================================================================================= (c) Pension schemes The Group continues to account for its pension costs in accordance with SSAP24. The effect on the Group's net assets of substituting the FRS17 figures for the corresponding SSAP24 balance sheet entries would be as follows: Profit and loss Net assets account reserve ------------------ ------------------ Restated* 2003 2002 2003 2002 Â£m Â£m Â£m Â£m Total included on the balance sheet 7,365 6,494 1,932 1,126 Less: pension asset on SSAP24 basis (251) (175) (251) (175) ----------------------------------------------------------------------------------------------------------------- Total excluding pension asset 7,114 6,319 1,681 951 Less: pension liability on FRS17 basis (583) (456) (583) (456) ----------------------------------------------------------------------------------------------------------------- Total net assets including pension liability on FRS17 basis 6,531 5,863 1,098 495 ================================================================================================================= * Restated for the effect of changes in accounting policies in respect of internally-generated additional value of in-force long-term business no longer recognised and the treatment of shares held by employee trusts as a deduction from shareholders' capital. Further details are set out on page 24. -------------------------------------------------------------------------------------------------------------------- Page 33 (d) New business contribution - after the effect of solvency margin 2003 2002 Â£m Â£m United Kingdom 215 269 Europe (excluding UK) France 31 35 Ireland 20 26 Italy 28 27 Netherlands(including Belgium and Luxembourg) 33 1 Poland 1 7 Spain 116 69 Other (7) (8) International 35 26 ----------------------------------------------------------------------------------------------------------------- Total new business contribution after the effect of solvency margin* 472 452 ================================================================================================================= * New business contribution after the effect of solvency margin includes minority interests of Â£83 million (2002: Â£52 million). This comprises minority interests in Italy Â£16 million (2002: Â£14 million), France nil (2002: nil), Netherlands Â£7 million (2002: nil), Poland nil (2002: Â£1 million) and Spain Â£60 million (2002: Â£37 million). (e) Experience variances Experience variances include the impact of the difference between expense, demographic and persistency assumptions, and actual experience incurred in the year. Also included are variances arising from tax, where such variances are due to management action. The source of profit is included in the table below. 31 December 2003 Exceptional Mortality/ expenses(1) morbidity(2) Lapses(3) Other(4) Total Â£m Â£m Â£m Â£m Â£m United Kingdom (40) 22 (24) 32 (10) France (12) 12 (1) 55 54 Netherlands (including Belgium and Luxembourg) (36) (3) (11) (8) (58) Other Europe (5) 16 (21) 25 15 International (18) 6 1 (2) (13) ------------------------------------------------------------------------------------------------------------------ (111) 53 (56) 102 (12) ================================================================================================================== (1) Exceptional expenses in the UK reflect one-off project costs including those associated with the pace of regulatory change. In the Netherlands, they relate to project costs in Delta Lloyd and development costs in Belgium. (2) Mortality experience has typically been better than anticipated in many of the group businesses. (3) Lapse experience has been adverse in a number of businesses including on certain savings contracts in the UK. (4) In the UK, other experience profits include exceptional profits arising from better than assumed default experience on corporate bonds. In France, profits relate the benefit of lower tax charges on dividends from subsidiaries and to a lesser extent, one-off benefits following the utilisation of tax losses. (f) Operating assumption changes Changes in operating assumptions are made when the assumed future levels of expenses, mortality or other operating assumptions are expected to change permanently. An analysis of operating assumptions is as follows: 31 December 2003 Maintenance Mortality/ expenses(1) morbidity(2) Lapses(3) Other(4) Total Â£m Â£m Â£m Â£m Â£m United Kingdom - 25 (46) 17 (4) France (23) - - - (23) Netherlands (including Belgium and Luxembourg) - - (2) 23 21 Other Europe 38 5 (8) 1 36 International - (1) (3) 12 8 ------------------------------------------------------------------------------------------------------------------ 15 29 (59) 53 38 ================================================================================================================== (1) In France, there is a Â£23 million charge, mainly resulting from updated expense assumptions, following the agreement signed recently between Aviva and the AFER association. Expense assumptions have been changed primarily in Poland reflecting improvements in efficiency. (2) Changes in the UK reflect expected beneficial mortality experience for protection business. (3) In the UK, lapse assumption changes reflect experience in savings contracts mainly on with-profits and endowment business. (4) Changes in the Netherlands primarily relate to increased annual management fees on unit linked contracts. Risk margin changes in Other Europe and International businesses have benefited the result. -------------------------------------------------------------------------------------------------------------------- Page 34 Supplementary analyses (continued) (g) New business contribution - before minority interest Annual premium New business equivalent contribution(1) --------------- --------------- 2003 2002 2003 2002 Â£m Â£m Â£m Â£m Bancassurance arrangements 542 416 215 146 Other distribution 1,835 1,957 406 432 ----------------------------------------------------------------------------------------------------------------- 2,377 2,373 621 578 ================================================================================================================= (1) Stated before effect of solvency margin, tax and minority interest (h) New business contribution - after minority interest Annual premium New business equivalent(2) contribution(1) --------------- --------------- 2003 2002 2003 2002 Â£m Â£m Â£m Â£m Bancassurance arrangements 312 260 65 48 Other distribution 1,796 1,929 207 230 ----------------------------------------------------------------------------------------------------------------- 2,108 2,189 272 278 ================================================================================================================= (1) Stated after effect of solvency margin, tax and minority interest (2) Stated after deducting minority interest (i) Investments in joint ventures 2003 2002 Â£m Â£m Share of gross assets 1,416 1,242 Share of gross liabilities (1,226) (1,126) ----------------------------------------------------------------------------------------------------------------- 190 116 Loans to joint ventures 679 665 ----------------------------------------------------------------------------------------------------------------- 869 781 ================================================================================================================= As part of their investment strategy, the UK long-term business policyholder funds have invested in a number of property limited partnerships ('PLPs') through a mix of capital and loans. The PLPs are managed by general partners ('GPs') in which the UK long-term business shareholder companies hold equity stakes, and which themselves hold nominal stakes in the PLPs. Most of the PLPs have raised external debt, secured on their respective property portfolios. The lenders are only entitled to obtain payment, of both interest and principal, to the extent that there are sufficient resources in the respective PLPs. The lenders have no recourse whatsoever to the policyholder or shareholders' funds of any company of the Aviva Group. Accounting for the PLPs depends on the shareholdings in the GPs and the terms in each partnership agreement. Where the partnership is managed by a contractual agreement such that no one party exerts control, the PLPs have been accounted for as joint ventures. In addition, the Group has invested in a joint venture life assurance company in China, which commenced operations on 1 January 2003. These shares are held by Aviva plc at a cost of Â£22 million (2002: Â£20 million) and share of net assets of Â£18 million (2002: Â£20 million). --------------------------------------------------------------------------------------------------------------------- Page 35 Supplementary analyses (continued) (k) General business - investment return information Actual Longer-term investment return investment return ----------------- ----------------- 2003 2002 2003 2002 Â£m Â£m Â£m Â£m United Kingdom 585 534 626 663 Europe (excluding UK) France 37 56 44 61 Ireland 58 53 65 59 Netherlands 71 30 40 34 Other 20 34 38 59 International Canada 94 91 110 108 Other 36 35 42 42 ----------------------------------------------------------------------------------------------------------------- Total longer-term investment return - continuing operations 965 1,026 Total actual investment income 901 833 Realised gains 47 99 Unrealised gains/(losses) 136 (993) -------------------------------------------------------------------------------------- Total actual investment return - continuing operations 1,084 (61) Discontinued operations - Australia and New Zealand - 33 - 71 ----------------------------------------------------------------------------------------------------------------- 1,084 (28) 965 1,097 ================================================================================================================= Reconciliation between general business investment return information and short-term fluctuation in investment return incorporated in the summarised consolidated profit and loss account - modified statutory basis For the year to 31 December 2003 Short-term Actual Longer-term fluctuation investment investment in investment return return return Â£m Â£m Â£m General business 1,084 965 119 Health business 38 74 (36) ----------------------------------------------------------------------------------------------------------------- 1,122 1,039 83 ----------------------------------------------------------------------------------------------------------------- Life business 129 ----------------------------------------------------------------------------------------------------------------- Total short-term fluctuation in investment return 212 ================================================================================================================= -------------------------------------------------------------------------------------------------------------------- Page 36 General insurance - geographical ratio analysis Combined operating Claims ratio Expense ratio ratio --------------- -------------- ------------------- 2003 2002 2003 2002 2003 2002 % % % % % % United Kingdom 66.4% 70.0% 10.5% 10.4% 99% 101% France 70.6% 71.1% 13.6% 13.9% 102% 102% Ireland 78.5% 85.4% 8.9% 13.0% 97% 100% Netherlands 60.5% 64.6% 17.4% 19.6% 101% 105% Canada 78.4% 74.1% 11.7% 11.3% 108% 102% ----------------------------------------------------------------------------------------------------------------- Continuing operations 69.3% 71.2% 11.3% 11.3% 100% 102% Discontinued operations - Australia and New Zealand - 69.1% - 13.2% - 98% ---------------------------------------------------------------------------------------------------------------- 69.3% 71.0% 11.3% 11.5% 100% 101% ================================================================================================================= Ratios are measured in local currency. The total Group ratios are based on average exchange rates applying to the respective periods. Definitions: Claims ratio - Incurred claims expressed as a percentage of net earned premiums. Expense ratio - Written expenses excluding commissions expressed as a percentage of net written premiums. Commission ratio - Written commissions expressed as a percentage of net written premiums. Combined operating ratio - Aggregate of claims ratio, expense ratio and commission ratio. -------------------------------------------------------------------------------------------------------------------- Page 37 General insurance - class of business analyses (a) United Kingdom Net written Underwriting Combined operating premium result ratio ---------------- -------------- ------------------ 2003 2002 2003 2002 2003 2002 Â£m Â£m Â£m Â£m % % Personal Motor 1,345 1,255 (34) (44) 102% 103% Homeowner 970 1,005 5 5 99% 99% Creditor 588 465 5 19 102% 100% Other 84 86 - 5 101% 98% ----------------------------------------------------------------------------------------------------------------- 2,987 2,811 (24) (15) 101% 101% ----------------------------------------------------------------------------------------------------------------- Commercial Motor 767 727 31 (11) 97% 102% Property 859 692 62 1 91% 100% Liability 409 314 (32) (42) 108% 114% Other 113 196 13 15 89% 90% ----------------------------------------------------------------------------------------------------------------- 2,148 1,929 74 (37) 96% 102% ----------------------------------------------------------------------------------------------------------------- Â£m 5,135 4,740 50 (52) 99% 101% ================================================================================================================= During the year to 31 December 2003, annualised rating increases were as follows: commercial liability: 25%; commercial property: 12%; commercial motor: 2%; homeowners: 4%; and personal motor: 3%. (b) France Net written Underwriting Combined operating premiums result ratio --------------- -------------- ------------------- 2003 2002 2003 2002 2003 2002 â‚¬m â‚¬m â‚¬m â‚¬m % % Motor 355 342 12 (11) 97% 103% Property and other 391 417 (25) (11) 107% 102% ----------------------------------------------------------------------------------------------------------------- â‚¬m 746 759 (13) (22) 102% 102% ----------------------------------------------------------------------------------------------------------------- Â£m 515 478 (9) (14) 102% 102% ================================================================================================================= -------------------------------------------------------------------------------------------------------------------- Page 38 General insurance - class of business analyses (continued) (c) Netherlands Net written Underwriting Combined operating premiums result ratio --------------- -------------- ------------------- 2003 2002 2003 2002 2003 2002 â‚¬m â‚¬m â‚¬m â‚¬m % % Property 327 256 18 6 93% 99% Motor 314 258 2 (22) 98% 109% Liability 55 59 (12) (11) 160% 120% Other 120 81 (15) (6) 101% 107% ----------------------------------------------------------------------------------------------------------------- â‚¬m 816 654 (7) (33) 101% 105% ----------------------------------------------------------------------------------------------------------------- Â£m 563 412 (5) (21) 101% 105% ================================================================================================================= (d) Canada Net written Underwriting Combined operating premiums result ratio ---------------- -------------- ------------------- 2003 2002 2003 2002 2003 2002 C$m C$m C$m C$m % % Automobile 1,736 1,475 (262) (69) 115% 105% Property 760 702 24 11 96% 98% Liability 233 182 5 (15) 97% 108% Other 38 32 8 7 74% 72% ----------------------------------------------------------------------------------------------------------------- C$m 2,767 2,391 (225) (66) 108% 102% ----------------------------------------------------------------------------------------------------------------- Â£m 1,208 1,009 (98) (28) 108% 102% ================================================================================================================= -------------------------------------------------------------------------------------------------------------------- Page 39 Assets under management General Long-term business business and other Group Group 2003 2003 2003 2002 Â£m Â£m Â£m Â£m Financial investments Shares, other variable yield securities and units in unit trusts 25,803 2,491 28,294 22,757 Strategic investments 1,550 476 2,026 2,111 Debt and fixed income securities at market value 36,950 10,098 47,048 30,821 Debt and fixed income securities at amortised cost 34,709 - 34,709 42,721 Loans secured by mortgages and other loans, net of non-recourse funding 10,835 1,448 12,283 11,803 Deposits 2,508 435 2,943 2,820 Other investments 1,777 65 1,842 1,105 ---------------------------------------------------------------------------------------------------------------- Total financial investments 114,132 15,013 129,145 114,138 Investments in joint ventures 869 - 869 781 Investments in associated undertakings and participating interests 764 279 1,043 1,050 Land and buildings 8,469 637 9,106 9,416 ---------------------------------------------------------------------------------------------------------------- Total investments 124,234 15,929 140,163 125,385 Assets held to cover linked liabilities 40,665 - 40,665 29,538 Other assets included in the balance sheet 13,495 14,357 27,852 26,082 ---------------------------------------------------------------------------------------------------------------- Total MSSB assets included in the balance sheet 178,394 30,286 208,680 181,005 Additional value of in-force long-term business 4,744 - 4,744 3,917 ---------------------------------------------------------------------------------------------------------------- Total EV assets included in the balance sheet 183,138 30,286 213,424 184,922 Third party funds under management: Securitised mortgages (gross of non-recourse funding) 3,143 2,099 Unit trusts, Oeics, Peps and Isas 4,460 3,636 Segregated funds 19,355 16,955 ---------------------------------------------------------------------------------------------------------------- Total assets under management 240,382 207,612 ================================================================================================================ Strategic investments include the market value of the Group's shareholding in Societe Generale, Munchener Ruckversicherungs-Gesellschaft, The Royal Bank of Scotland Group and UniCredito Italiano. General insurance and other investments mix United Continental Total Kingdom Europe International 2003 Â£m Â£m Â£m Â£m Shares, other variable yield securities and units in unit trusts and strategic investments 1,557 1,077 333 2,967 Debt and fixed income securities at market value 4,884 3,201 2,013 10,098 Land and buildings 276 325 36 637 Other 1,474 596 157 2,227 ---------------------------------------------------------------------------------------------------------------- Total investments 8,191 5,199 2,539 15,929 ================================================================================================================ -------------------------------------------------------------------------------------------------------------------- Page 40 Group capital structure The Group maintains an efficient structure from a combination of equity shareholders' funds, preference capital, subordinated debt and borrowings, consistent with the Group's risk profile and the regulatory and market requirements of its business. 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. Accordingly, the Group's capital structure is analysed on an embedded value basis. The Group's capital, from all funding sources, has been allocated such that the capital employed by trading operations is greater than the capital provided by its shareholders and its subordinated debtholders. As a result, the Group is able to enhance the returns earned on its equity capital. Capital employed by segment Restated* 2003 2002 Â£m Â£m Long-term savings 12,373 10,379 General insurance and health 4,481 3,917 Other business 725 554 Corporate 2,934 2,475 ----------------------------------------------------------------------------------------------------------------- Total capital employed 20,513 17,325 ----------------------------------------------------------------------------------------------------------------- Financed by Internal debt 3,841 3,671 External debt 1,749 2,053 Subordinated debt 2,814 1,190 Shareholders' funds and minority interests 12,109 10,411 ----------------------------------------------------------------------------------------------------------------- 20,513 17,325 ================================================================================================================= *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. At 31 December 2003 we had Â£20.5 billion (31 December 2002: Â£17.3 billion) of total capital employed in our trading operations which is efficiently financed by a combination of equity shareholders' funds, preference capital, subordinated debt and internal and external borrowings. In 2003, the total capital employed in our long-term savings operations increased due to retained profits for the year and the beneficial impact of the Euro foreign exchange movement. The total capital employed in our general insurance businesses was similarly affected by both retained profits and foreign exchange gains. Assets available to shareholders are held within the Group's UK general insurance legal entities and are available to finance future growth of the Group. For the purposes of analysing the capital employed by segment, these assets are classified as corporate. In September 2003, Aviva plc issued Â£1.6 billion of subordinated debt, which provides cost-effective funding and is treated as equity for regulatory purposes. Of the Â£1.6 billion of subordinated debt proceeds, some Â£400 million was used to repay senior debt with the remaining Â£1.2 billion classified within corporate. In addition to its external funding sources, the Group has a number of internal debt arrangements in place. These have allowed the assets supporting technical liabilities to be invested into the pool of central assets for use across the Group. They have also enabled the shareholders to deploy cash from some parts of the business to others in order to fund growth. Although intra-group loans in nature, they are counted as part of the capital base for the purpose of capital management. All internal loans satisfy arms length criteria and all interest payments have been made when due. In the early part of 2003 corporate assets were used to pay the final instalment of the Berkshire Hathaway reinsurance premium, which reduced internal debt. This has been offset by an increase in internal loan arrangements resulting overall in a small increase in internal debt. The ratio of the Group's external debt to shareholders' funds was 12% (31 December 2002: 18%). Interest cover, which measures the extent to which external interest costs are covered by achieved operating profit, was 19 times (31 December 2002: 14 times). -------------------------------------------------------------------------------------------------------------------- Page 41 Group capital structure (continued) Deployment of equity shareholders' funds Restated* 2003 2002 ----------------------------------------------------------- --------- Fixed income Other Other net Equities securities investments assets Total Total Â£m Â£m Â£m Â£m Â£m Â£m Assets Long-term savings 604 3,843 924 1,552 6,923 5,726 General insurance, health, corporate and other business 2,967 3,286 867 (85) 7,035 5,906 ------------------------------------------------------------------------------------------------------------------- 3,571 7,129 1,791 1,467 13,958 11,632 Goodwill 1,323 1,271 Additional and acquired value of in-force long-term business 5,232 4,422 ------------------------------------------------------------------------------------------------------------------- Assets backing total capital employed in continuing operations 20,513 17,325 External debt (1,749) (2,053) Internal debt (3,841) (3,671) Subordinated debt (2,814) (1,190) ------------------------------------------------------------------------------------------------------------------- 12,109 10,411 Minority interests (944) (743) Preference capital (200) (200) ------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 10,965 9,468 =================================================================================================================== *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. Our exposure to equities has increased from Â£3.1 billion at 31 December 2002 to Â£3.6 billion, which represents 17% of our capital employed. During the course of the period, as part of the ongoing portfolio management process, the Group reduced its strategic stakes in Societe Generale, Munich Re, and The Royal Bank of Scotland Group. The Group also has a stake in UniCredito Italiano which has been classified as strategic for the first time this year. The market values of these holdings at 31 December 2003 were Â£233 million, Â£403 million, Â£854 million and Â£536 million respectively (31 December 2002: Â£595 million, Â£372 million, Â£956 million and Â£188 million respectively) and represented 1.1%, 2.6%, 1.8% and 2.8% (31 December 2002: 3.8%, 2.8%, 2.2% and 1.2%) of the respective issued share capital of these companies. Return on capital employed Restated* 2003 2002 ----------------------------------- --------- Normalised Opening after-tax equity Return on Return on return capital capital capital Â£m Â£m % % Long-term savings 1,082 10,379 10.4% 9.4% General insurance and health 641 3,917 16.4% 12.5% Other business (44) 554 (7.9%) (20.7%) Corporate (38) 2,475 (1.5%) (2.1%) ------------------------------------------------------------------------------------------------------------------- 1,641 17,325 9.5% 7.9% Borrowings (295) (6,914) 4.3% 4.4% ------------------------------------------------------------------------------------------------------------------- 1,346 10,411 12.9% 9.9% Minority interests (131) (743) 17.6% 12.7% Preference capital (17) (200) 8.5% 8.5% ------------------------------------------------------------------------------------------------------------------- 1,198 9,468 12.7% 9.7% Discontinued operations - Australia and New Zealand - - - 20.2% ------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 1,198 9,468 12.7% 10.1% =================================================================================================================== *Restated for the effect of changes in accounting policies in respect of the treatment of shares held by employee trusts as a deduction from shareholders' funds. The return on capital is calculated as the after-tax return on opening equity capital, based on operating profit, including life achieved profit, before amortisation of goodwill and exceptional items. -------------------------------------------------------------------------------------------------------------------- Page 42 Group capital structure (continued) Capital management In managing its capital, the Group aims to: (i) match the profile of its assets and liabilities, taking account of the risks inherent in each business. In the case of the Group's life operations, which have long-term liabilities, the majority of capital is held in fixed income securities. A significant proportion of the capital supporting the Group's general insurance and health operations is held in equities, reflecting the relatively low risk profile of these businesses; (ii) maintain financial strength to support new business growth and satisfy the requirements of its policyholders, regulators and rating agencies; (iii) retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit lines, and access to a range of capital markets; (iv) allocate capital efficiently to support growth and repatriate excess capital where appropriate; and (v) manage exposures to movements in exchange rates by aligning the deployment of capital by currency with the Group's capital requirements by currency. An important aspect of the Group's overall capital management process is the setting of target risk-adjusted rates of return for individual business units, which are aligned to performance objectives and ensure that the Group is focused on the creation of value for shareholders. Risk based capital The Group uses risk based capital as one of several measures to assess its capital requirements for its general insurance businesses. Financial modelling techniques enhance our practice of active capital management, ensuring sufficient capital is available to protect against unforeseen events and adverse scenarios, and risk management. Our aim continues to be the optimal usage of capital through appropriate allocation to our businesses. Our risk based capital model is part of a longer-term development programme for more complex risk monitoring techniques in part to meet future industry standards. Within a few years we expect to agree capital requirements with the regulator on the basis of our risk based capital models. Our current risk based capital methodology for general insurance business assesses insurance, market and credit risks and makes prudent allowance for diversification benefits. We look at the level of capital necessary to enable the general insurance business to meet the statutory minimum solvency margin over a five year period with 99% probability of not requiring further capital. We consider risks over a five year period allowing for planned levels of business growth. Based on our model, our risk based capital requirement may be expressed as 34% of net written premiums. Capital employed in our general insurance and health business after goodwill and adding back the claims equalisation reserve was Â£4.5 billion at 31 December 2003 and required capital on a risk basis was Â£3.3 billion, giving a surplus capital position of Â£1.2 billion. Sensitivity analysis The sensitivity of the Group's shareholders' funds at 31 December 2003 to a 10% fall in global equity markets or a rise of 1% in global interest rates is as follows: 31 December Equities Interest rates 31 December 2002 2003 down 10% up 1% Â£bn Â£bn Â£bn Â£bn 10.4 Long-term savings(1) 12.4 11.9 12.5 6.9 General insurance and other 8.1 7.9 7.8 (6.9) Borrowings(2) (8.4) (8.4) (8.4) -------------------------------------------------------------------------------------------------------------------- 10.4 Shareholders' funds 12.1 11.4 11.9 ==================================================================================================================== (1) Assumes achieved profit assumptions adjusted to reflect revised bond yields. (2) Comprising internal, external and subordinated debt. (3) These sensitivities assume a full tax charge/credit on market value appreciation/falls. Post-tax internal rate of return on life and pensions new business The total internal rate of return (IRR) on life and pensions new business for the Group was 14% (2002: 16%). The decrease in the IRR is largely as a result of the fall in with-profit sales during the year. The return is the discount rate at which the present value of the post-tax cash flows expected to be earned over the life time of the business written is equal to the initial capital required to support the writing of the business. The capital includes the statutory minimum solvency margin and amounts to Â£900 million (2002: Â£1,000 million). This includes Â£340 million (31 December 2002: Â£300 million) of solvency requirements. -------------------------------------------------------------------------------------------------------------------- Page 43 Group capital structure (continued) Shareholders' funds, including minority interests 2003 2002 Closing shareholders' funds Closing shareholders' funds Restated* ----------------------------------- --------------------------------- MSSB net Internally MSSB net Internally assets generated Embedded assets generated Embedded (note 1) AVIF value (note 1) AVIF value Note Â£m Â£m Â£m Â£m Â£m Â£m Life assurance United Kingdom 2,844 2,829 5,673 2,514 2,498 5,012 France 1,068 381 1,449 924 297 1,221 Ireland 338 216 554 296 176 472 Italy 386 56 442 295 54 349 Netherlands (including Belgium and Luxembourg) 1,621 777 2,398 1,270 536 1,806 Poland 146 250 396 130 222 352 Spain 266 189 455 239 111 350 Other Europe 174 26 200 157 19 176 International 568 20 588 406 4 410 ------------------------------------------------------------------------------------------------------------------ 7,411 4,744 12,155 6,231 3,917 10,148 Participating interests 2 218 - 218 231 - 231 ------------------------------------------------------------------------------------------------------------------ 7,629 4,744 12,373 6,462 3,917 10,379 ------------------------------------------------------------------------------------------------------------------- General insurance and health 3 United Kingdom 4 2,448 2,448 2,052 2,052 France 414 414 481 481 Ireland 333 333 236 236 Netherlands 250 250 275 275 Other Europe 112 112 63 63 Canada 631 631 535 535 Other 293 293 275 275 ------------------------------------------------------------------------------------------------------------------- 4,481 - 4,481 3,917 - 3,917 ------------------------------------------------------------------------------------------------------------------- Other business 725 725 554 554 Corporate 4 2,934 2,934 2,475 2,475 External debt 5 (1,749) (1,749) (2,053) (2,053) Internal debt (3,841) (3,841) (3,671) (3,671) Subordinated debt (2,814) (2,814) (1,190) (1,190) ------------------------------------------------------------------------------------------------------------------- (4,745) - (4,745) (3,885) - (3,885) ------------------------------------------------------------------------------------------------------------------- Shareholders' funds, including minority interests 7,365 4,744 12,109 6,494 3,917 10,411 =================================================================================================================== Comprising Equities 3,571 3,571 3,126 3,126 Debt and fixed income securities 7,129 7,129 6,033 6,033 Property 612 612 496 496 Deposits and other investments 1,179 1,179 1,293 1,293 Intangible assets 6 1,811 4,744 6,555 1,776 3,917 5,693 Other net assets 1,467 1,467 684 684 Borrowings (8,404) (8,404) (6,914) (6,914) ------------------------------------------------------------------------------------------------------------------- 7,365 4,744 12,109 6,494 3,917 10,411 =================================================================================================================== *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 44 Group capital structure (continued) Shareholders' funds, including minority interests (continued) Notes 1. Includes acquired additional value of in-force long-term business of Â£488 million (2002: Â£505 million). 2. The net assets represent the Â£218 million of goodwill on the RBSG joint venture (2002: Â£231 million). 3. The capital employed in the Group's general insurance operations includes Â£392 million of goodwill (2002: Â£282 million). 4. Assets available to shareholders are held by the Group's UK general insurance operations and are available to finance future growth of the Group. Accordingly, for the purposes of preparing this note, these assets have been reclassified as Corporate. 5. The external borrowings reported in the summary consolidated balance sheet of Â£1,760 million (2002: Â£2,064 million) comprise Â£11 million (2002: Â£11 million) of general insurance borrowings (reported within the general insurance and health net assets) and Â£1,749 million (2002: Â£2,053 million) of borrowings by holding companies of the Group not allocated to operating companies (shown as external debt). 6. Comprises Â£488 million of acquired additional value of in-force long-term business (2002: Â£505 million), Â£1,105 million of goodwill arising on acquisitions (2002: Â£1,040 million) and Â£218 million of goodwill on the RBSG joint venture (2002: Â£231 million). -------------------------------------------------------------------------------------------------------------------- Page 45 Group capital structure (continued) Return on capital employed 2003 Opening shareholders' funds including Normalised return minority interests Return on (Note 1) (Note 2) Capital ----------------------- ------------------ ----------- Before tax After tax Note Â£m Â£m Â£m % Life assurance United Kingdom 3 659 461 5,243 8.8% France 220 142 1,221 11.6% Ireland 65 57 472 12.1% Italy 70 42 349 12.0% Netherlands (including Belgium and Luxembourg) 189 140 1,806 7.8% Poland 104 76 352 21.6% Spain 158 102 350 29.1% Other Europe 9 6 176 3.4% International 81 56 410 13.7% --------------------------------------------------------------------------------------------------------------------- 1,555 1,082 10,379 10.4% General insurance and health United Kingdom 4 608 416 2,052 20.3% France 44 33 481 6.9% Ireland 91 78 236 33.1% Netherlands 74 55 275 20.0% Other Europe 32 24 63 38.1% Canada 12 8 535 1.5% Other 30 27 275 9.8% --------------------------------------------------------------------------------------------------------------------- 891 641 3,917 16.4% Other business (54) (44) 554 (7.9%) Corporate 4,5 (79) (38) 2,475 (1.5%) External debt (109) (86) (2,053) 4.2% Internal debt (196) (138) (3,671) 3.8% Subordinated debt (101) (71) (1,190) 6.0% --------------------------------------------------------------------------------------------------------------------- 1,907 1,346 10,411 12.9% ===================================================================================================================== Notes 1. The normalised return is based upon operating profit, including life achieved profit, before amortisation of goodwill and exceptional items. 2. 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. 3. Shareholders' funds include Â£231 million of goodwill on RBSG joint venture. 4. Assets available to shareholders are held by the Group's UK general insurance operations and are available to finance future growth of the Group. Accordingly, these assets together with their associated pre-tax investment return of Â£81 million (post-tax Â£57 million) have been reclassified as Corporate. 5. The return before tax of Â£(79) million comprises investment return of Â£81 million and corporate costs of Â£(160) million. -------------------------------------------------------------------------------------------------------------------- Page 46 Group capital structure (continued) Return on capital employed (continued) 2002 Opening shareholders' funds including Normalised return minority interests Return on (Note 1) (Note 2) Capital ----------------------------------- --------------------- --------- Before tax After tax Note Â£m Â£m Â£m % Life assurance United Kingdom 3 699 488 6,274 7.8% France 228 145 1,243 11.7% Ireland 75 66 467 14.1% Italy 52 31 278 11.2% Netherlands (including Belgium and Luxembourg) 200 147 1,866 7.9% Poland 111 80 371 21.6% Spain 83 54 309 17.5% Other Europe (2) (1) 107 (0.9%) International 78 54 392 13.8% ---------------------------------------------------------------------------------------------------------------------- 1,524 1,064 11,307 9.4% General insurance and health United Kingdom 4 491 330 2,043 16.2% France 57 41 619 6.6% Ireland 44 37 200 18.5% Netherlands 55 41 430 9.5% Other Europe 49 36 276 13.0% Canada 80 54 590 9.2% Other 37 30 402 7.5% ---------------------------------------------------------------------------------------------------------------------- 813 569 4,560 12.5% Other business (94) (67) 324 (20.7%) Corporate 4,5 (89) (63) 2,937 (2.1%) External debt (133) (102) (2,651) 3.8% Internal debt (228) (161) (3,284) 4.9% Subordinated debt (73) (51) (1,157) 4.4% ---------------------------------------------------------------------------------------------------------------------- (617) (444) (3,831) 11.6% ---------------------------------------------------------------------------------------------------------------------- 1,720 1,189 12,036 9.9% Australia and New Zealand 78 72 357 20.2% ---------------------------------------------------------------------------------------------------------------------- 1,798 1,261 12,393 10.2% ====================================================================================================================== Notes 1. The normalised return is based upon operating profit, including life achieved profit, before amortisation of goodwill and exceptional items. 2. 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. 3. Shareholders' funds include Â£244 million of goodwill on RBSG joint venture. 4. Assets available to shareholders are held by the Group's UK general insurance operations and are available to finance future growth of the Group. Accordingly, these assets together with their associated pre-tax investment return of Â£129 million (post-tax Â£90 million) have been reclassified as Corporate. 5. The return before tax of Â£(89) million comprises return of Â£129 million and corporate costs of Â£(218) million. -------------------------------------------------------------------------------------------------------------------- Page 47 Shareholder information Financial calendar 2004 Ex-dividend date (ordinary shares) 24 March ------------------------------------------------------------------------------------------------------------------- Record date (ordinary shares) 26 March ------------------------------------------------------------------------------------------------------------------- Announcement of long-term savings new business for 3 months to 31 March 2004 5 May ------------------------------------------------------------------------------------------------------------------- Dividend payment date (ordinary shares) 17 May ------------------------------------------------------------------------------------------------------------------- Announcement of unaudited six months' interim results 4 August ------------------------------------------------------------------------------------------------------------------- Dividend reinvestment plan Aviva's Dividend Reinvestment Plan (the 'Plan') enables cash dividends to be reinvested in the Company's shares at reduced dealing costs. Shareholders who have not already joined the Plan and wish to do so should contact the Company's Registrar (at the address below) to obtain full details and a mandate form. Shareholders who have previously elected to join the Plan need take no further action. Dividend payments direct to your bank account If you wish, you can have your dividend payments credited to your bank or building society account on the dividend payment date - a tax voucher will still be posted to your home address to confirm the payment. The Company has also introduced a service - the Transcontinental Accounts Payment Service ('TAPS') - which allows shareholders in many countries to have dividends credited direct to bank accounts in local currencies. To obtain further details and a mandate form for either service please contact the Company's Registrar (at the address below). Shareview Shareview is the internet based service that allows you to view your shareholding online and, if you wish, to receive shareholder communications (e.g. Notice of Meeting, Report and Accounts, etc) via e-mail rather than by post. To register, please go to www.shareview.co.uk where you will find more details of the service, practical help and extensive information on other share registration matters. Useful contact details Detailed below are various addresses that may prove useful in the event that you have a query in respect of your shareholding. Please quote Aviva plc, as well as the name and address in which your shares are held, in all correspondence. -------------------------------------------------------------------------------------------------------------------- General shareholding administration queries and Aviva share account queries Lloyds TSB Registrars The Causeway 0870 600 3952 Worthing West Sussex BN99 6DA -------------------------------------------------------------------------------------------------------------------- Corporate and single company PEPS Barclays Stockbrokers Limited Tay House 0870 514 3263 300 Bath Street Glasgow G2 4LH -------------------------------------------------------------------------------------------------------------------- Individual Savings Accounts ('Isas') Lloyds TSB Registrars The Causeway 0870 242 4244 (Isa Manager) Worthing West Sussex BN99 6DA -------------------------------------------------------------------------------------------------------------------- Internet sites Aviva owns various internet sites, most of which interlink with each other. Aviva group www.aviva.com -------------------------------------------------------------------------------------------------------------------- UK long-term savings and general insurance www.norwichunion.com -------------------------------------------------------------------------------------------------------------------- Fund management www.morleyfm.com -------------------------------------------------------------------------------------------------------------------- Aviva worldwide internet sites www.aviva.com/customers/global.cfm -------------------------------------------------------------------------------------------------------------------- Aviva plc Registered in England no: 2468686 Registered Office: St Helen's, 1 Undershaft, London EC3P 3DQ A full pdf version of this announcement can be downloaded from www.aviva.com END OF ANNOUNCEMENT This information is provided by RNS The company news service from the London Stock Exchange GDZM

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