Final Results - Part 4

Aviva PLC 09 March 2005 PART 4 OF 4 Statistical supplement ---------------------------------------------------------------------------------------------------------------------- Page 54 Segmental analysis of the components of life EEV operating return Full year 2004 Â£m Other UK France Ireland Italy Netherlands Poland Spain Europe International Total New business contribution (after the effect of required capital) 215 54 16 34 43 9 121 - 24 516 Profit from existing business - expected return 367 112 30 29 141 45 40 24 31 819 - experience variances: Maintenance expenses(1) 31 (2) (1) 2 (9) 5 - 1 1 28 Exceptional expenses(2) (153) - - - (12) - (1) (3) (1) (170) Mortality/Morbidity(3) 49 21 7 - 17 8 1 2 5 110 Lapses(4) (50) 5 (1) (5) (2) 5 2 (4) 6 (44) Other(5) 42 (2) - 3 18 - 2 - (2) 61 -------------------------------------------------------------------------------------- (81) 22 5 - 12 18 4 (4) 9 (15) - operating assumption changes: Maintenance expenses(6) 77 - (6) (3) - 14 3 1 4 90 Exceptional expenses(7) (34) (2) - - (72) - - - - (108) Mortality/Morbidity 2 - (2) 7 5 (2) - 1 (1) 10 Lapses(8) (110) - (16) (3) 9 - 1 1 (1) (119) Other(9) 7 37 - 1 79 2 3 (6) (3) 120 -------------------------------------------------------------------------------------- (58) 35 (24) 2 21 14 7 (3) (1) (7) Expected return on shareholders' net worth 108 63 13 14 60 7 8 5 20 298 ---------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 551 286 40 79 277 93 180 22 83 1,611 ====================================================================================================================== (1) Maintenance expenses in the UK reflect the benefit of cost saving initiatives undertaken. (2) Exceptional expenses in the UK reflect costs of Â£65 million for the restructuring of one business service division and one-off project costs of Â£88 million associated with the pace of regulatory change. (3) Mortality experience across our major businesses continues to be better than our assumptions for protection and annuity business in the UK and protection business in Continental Europe. (4) Lapse experience in the UK has been adverse and mainly relates to bonds, protection schemes and pension products. (5) In the UK, other experience profits include Â£29 million of profits arising from better than assumed default experience on corporate bonds and commercial mortgages. (6) Maintenance expense assumption changes in the UK reflect the benefit of cost saving initiatives coming through. (7) The UK and the Netherlands include capitalised additional future project expenses. (8) Adverse lapse assumption changes in the UK relates to unitised with-profit bonds and unit-linked bonds. In Ireland, lapse assumption changes have been made on unit-linked pensions business following recent experience. (9) Other operating assumptions in the Netherlands relates to positive changes in asset mix and tax reflecting, in part, the fact that the embedded value of Delta Lloyd was previously assessed using a blended average tax rate of 25%, which is below the local corporation tax rate. The calculation has been refined to tax all future profits at the full corporation tax rate at the beginning of the year of 34.5% and to allow explicitly for the tax benefit arising from investing in the '5% holdings' (investments in Dutch companies where at least 5% of the share capital is owned), on which all investment income is tax free. This change results in a Â£53 million one-off benefit. France includes the benefit of tax assumption changes. France has historically recorded favourable tax operating experience as a result of better than assumed tax on dividend income. Previously the tax assumptions had been set at full corporation tax for all future profits, whereas in fact dividend income from subsidiaries is tax exempt. In 2004, the calculation has been refined such that the future tax benefit arising from dividend from subsidiaries has now been recognised. This change results in a Â£39 million benefit. ---------------------------------------------------------------------------------------------------------------------- Page 55 Full year 2003 Â£m Other UK France Ireland Italy Netherlands Poland Spain Europe International Total New business contribution (after the effect of required capital) 212 39 26 27 29 3 122 (6) 22 474 Profit from existing business - expected return 335 104 29 27 146 51 32 17 20 761 - experience variances: Maintenance expenses (8) 1 (3) (1) (1) 4 1 (3) - (10) Exceptional expenses(1) (63) (12) - (1) (35) - (4) 1 (2) (116) Mortality/Morbidity(2) 22 14 3 3 (3) 7 2 2 4 54 Lapses(3) (29) (1) (22) (2) (11) 5 (3) 2 3 (58) Other(4) 37 54 11 8 (10) 4 4 (9) - 99 ------------------------------------------------------------------------------------- (41) 56 (11) 7 (60) 20 - (7) 5 (31) - operating assumption changes: Maintenance expenses(5) 7 (21) 2 - 1 51 (9) 4 1 36 Exceptional expenses (7) (2) - - - - - - - (9) Mortality/Morbidity(6) 22 - 10 - 2 (20) 13 1 (1) 27 Lapses(7) (46) - (10) (4) (2) (3) 1 - (3) (67) Other(8) 25 (4) - 1 27 (13) (1) - (3) 32 ------------------------------------------------------------------------------------- 1 (27) 2 (3) 28 15 4 5 (6) 19 Expected return on shareholders' net worth 90 56 11 12 55 10 7 9 23 273 --------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 597 228 57 70 198 99 165 18 64 1,496 ===================================================================================================================== (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 Life 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 to the benefit of lower tax charges on dividends from subsidiaries and to a lesser extent, one-off benefits following the utilisation of tax losses. (5) In France, there is a Â£21 million charge, mainly resulting from updated expense assumptions, following the revisions to the agreement between Aviva and the AFER association. Expense assumptions have been changed in Poland reflecting improvements in efficiency. (6) Changes in the UK reflect expected beneficial mortality experience for protection business. (7) In the UK, lapse assumption changes reflect experience in savings contracts mainly on with-profits and endowment business. (8) Changes in the Netherlands primarily relate to increased annual management fees on unit linked contracts. ---------------------------------------------------------------------------------------------------------------------- Page 56 Supplementary analyses (a) Life new business premiums Under the EEV principles, new business margins are required to be disclosed as a percentage of the present value of new business premiums (PVNBP). The present value of new business premiums is derived from the single premiums and regular premiums of the products sold during the financial period and is expressed at the point of sale. The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate new business contribution, so the components of the new business margin are on a consistent basis. The discounted value of regular premiums is also expressed as annualised regular premiums multiplied by a Weighted Average Capitalisation Factor (WACF). The WACF will vary over time depending on the mix of new products sold, the average outstanding term of the new contracts and the projection assumptions. The table below sets out the factors required to derive the present value of regular premiums by business units, and combined with single premium sales derives the present value of future new business premiums. 31 December 2004 --------------------------------------------------------------- Weighted Present Present value average value of of new Regular capitalisation regular Single business premiums factor premiums premiums(1) premiums Â£m Â£m Â£m Â£m United Kingdom Individual pensions 265 5.2 1,373 1,742 3,115 Group pensions 88 5.0 440 540 980 Annuities - - - 1,278 1,278 Bonds - - - 2,260 2,260 Protection 163 5.3 857 682 1,539 --------------------------------------------------------------------------------------------------------------------- Total life and pensions 516 5.2 2,670 6,502 9,172 France Eurosavings 15 5.0 75 1,745 1,820 Unit-linked savings 30 5.0 150 668 818 Protection business 17 6.1 103 41 144 --------------------------------------------------------------------------------------------------------------------- Total life and pensions 62 5.3 328 2,454 2,782 Ireland Life and savings 18 6.3 114 54 168 Pensions 48 5.1 244 149 393 --------------------------------------------------------------------------------------------------------------------- Total life and pensions 66 5.4 358 203 561 Italy Life and savings 45 6.0 270 1,529 1,799 --------------------------------------------------------------------------------------------------------------------- 45 6.0 270 1,529 1,799 Netherlands (including Belgium and Luxembourg) Life 96 6.8 651 467 1,118 Pensions 52 7.4 386 664 1,050 --------------------------------------------------------------------------------------------------------------------- Total life and pensions 148 7.0 1,037 1,131 2,168 Poland Life and savings 15 4.4 66 40 106 Pensions 16 7.2 115 20 135 --------------------------------------------------------------------------------------------------------------------- Total life and pensions 31 5.8 181 60 241 Spain Life and savings 52 5.7 297 1,061 1,358 Pensions 39 6.3 247 505 752 --------------------------------------------------------------------------------------------------------------------- Total life and pensions 91 6.0 544 1,566 2,110 Other Europe Life and pensions 90 5.2 468 336 804 International Life and pensions 105 3.7 390 660 1,050 --------------------------------------------------------------------------------------------------------------------- Total 1,154 5.4 6,246 14,441 20,687 ===================================================================================================================== (1) United Kingdom includes single premiums of Â£478 million in respect of NUER included in Protection business. ---------------------------------------------------------------------------------------------------------------------- Page 57 Supplementary analyses (continued) (b) Analysis of service companies and fund management businesses within embedded value The EEV methodology incorporates the impact of profits and losses arising from subsidiary undertakings providing administration, investment management and other services where these arise in relation to covered business. The principal subsidiaries of the Aviva group providing such services are NU Life Services Ltd (UK), Morley Fund Management (UK) and Aviva Gestion d'Actifs (France). The following table provides an analysis of the elements within the life and other related business embedded value: Full year Full year 2004 2003 ------------------------------------- ---------- Fund Management Non-Insurance Total Total Â£m Â£m Â£m Â£m United Kingdom 54 (397) (343) (388) France 45 (13) 32 27 Other Europe and International 6 (21) (15) (21) -------------------------------------------------------------------------------------------------------------------- 105 (431) (326) (382) ==================================================================================================================== The 'look-through' value attributable to fund management is based on the level of after-tax profits expected to be earned in the future over the outstanding term of the covered business in respect of services provided to the Group's life operations. The EEV basis profit and loss account excludes the actual statutory basis profits arising from the provision of fund management services to the Group's life businesses. The EEV profit and loss account records the experience profit or loss compared to the assumed profitability, the return on the in-force value arising from the unwind at the relevant risk discount rate and the effect on the in-force value of changes to economic assumptions. NU Life Services Ltd (NULS) is the main provider of administration services to the UK Life business. NULS incurs substantially all of the UK Life business' operating expenditure, comprising acquisition, maintenance and project costs. Costs are recharged to the UK Life companies (the product companies) on the basis of pre-determined Management Services Agreement (MSA) which was negotiated in 1998 and will be reviewed in 2008. The EEV principles 'look-through' the contractual terms of the MSA to the underlying expenses of NULS. Accordingly the actual maintenance expenses and a 'normal' annual level of project expense allowances have been applied to the product companies. Under EEV, any further one-off project expenditure is reported as experience losses when incurred. (c) Treatment of pension scheme deficit in embedded value The adoption of the EEV principles and the inclusion of NULS in the calculations have resulted in the recognition within EEV of the future funding obligations to the UK pension scheme in relation to both future service costs and pension deficits. The table below shows the component parts of the impact of adopting the EEV principles on the UK life valuation. 31 December 31 December 2004 2003 Â£m Â£m Impact of: Increasing maintenance and normal project allowances (124) (182) Increase in future service pension scheme contribution rate from 11% to 25% (126) (117) ------------------------------------------------------------------------------------------------------------------- (250) (299) Pension scheme deficit funding (147) (137) ------------------------------------------------------------------------------------------------------------------- (397) (436) =================================================================================================================== Under the Modified Statutory basis, pension costs are accounted in NULS in accordance with SSAP24. This results in a pension cost charge to the statutory result of NULS of 11% of pensionable salaries for 2004 (2003: 11%). The funding rate for the annual pension cost was increased to 25% of pensionable salaries with effect from 1 January 2003. In accordance with SSAP24, only 11% of pensionable salaries are charged to the profit and loss account with the remaining 14% treated as prepayment. Under the EEV methodology, allowance has been made for the entire contribution reducing the embedded value of UK Life and related business at 2004 by Â£126 million (31 December 2003: Â£117 million). In addition, pension deficit funding equivalent in 2004 to a further 13% of pensionable salaries commenced on 1 January 2004. The NULS share of the total UK pension scheme deficit is approximately 42% and this liability is fully provided for in the UK embedded value. In effect, under the EEV methodology the element of the pension fund deficit which relates to the UK life and other related businesses is now incorporated within shareholders' funds at an amount equivalent to the post-tax contributions discounted using the UK Life business risk discount rate. This is equal to Â£147 million at 31 December 2004 (2003: Â£137 million), which differs from the FRS17 basis of evaluating pension deficits. ---------------------------------------------------------------------------------------------------------------------- Page 58 In quantifying the impact on the embedded value for the UK covered business, the shareholders have been assumed to incur all of the additional contributions except for an amount equivalent to approximately 2% of pensionable salaries which has been attributed to the with-profits funds. This reflects the contractual nature of the current MSA which prevents shareholders from recharging both the increase in future service costs from 11% to 25% of pensionable salaries and the cost of funding the deficit to the UK with-profit funds. Under the MSA, NULS can renegotiate the terms relating to the recharging of the costs to the UK with-profit funds in 2008, subject to regulatory approval. In evaluating the impact on EEV, Aviva has not sought to pre-empt the outcome of this renegotiation. Any changes to the recharges in respect of the pension costs and the pension deficit to the with-profits funds will be reported as profits or losses in the period agreement is obtained. The Group continues to account for its pension scheme costs in accordance with SSAP24. The following table sets out the impact of adjusting the pension scheme on a FRS17 basis for the adoption of calculating the deficit under the EEV principles. Full year Full year 2004 2003 Â£m Â£m FRS17 pension scheme deficit post tax (619) (583) Element relating to UK life covered business 216 211 -------------------------------------------------------------------------------------------------------------------- Element relating to non-life business (403) (372) Deduct: SSAP24 prepayment (279) (251) -------------------------------------------------------------------------------------------------------------------- Deduction required from restated shareholders' funds to incorporate pension deficit in full as a liability (682) (623) Total shareholders' funds on an EEV basis 14,119 11,705 -------------------------------------------------------------------------------------------------------------------- Total shareholders' funds on an EEV basis including pension liability on FRS17 basis 13,437 11,082 ==================================================================================================================== The element of the FRS17 pension scheme deficit relating to covered business in Ireland and the Netherlands has not been adjusted for in the table above, as the funding arrangements in these territories have not changed. (d) Pension schemes - MSSB basis The group continues to account for its pension costs in accordance with SSAP24. The effect on the group's MSSB net assets of substituting the FRS17 figures for the corresponding SSAP24 balance sheet entries would be as follows: Net assets ---------------- 2004 2003 Â£m Â£m Total included on the MSSB balance sheet 9,244 7,365 Less: pension net asset on SSAP24 basis (279) (251) -------------------------------------------------------------------------------------------------------------------- Total excluding pension asset 8,965 7,114 Less: pension liability net of deferred tax on FRS17 basis (619) (583) -------------------------------------------------------------------------------------------------------------------- Total net assets on an MSSB basis including pension liability on FRS17 basis 8,346 6,531 ==================================================================================================================== The pension net asset shown above is after deducting Â£56 million held within technical reserves in respect of future funding. ---------------------------------------------------------------------------------------------------------------------- Page 59 General insurance - geographical ratio analysis Combined Claims ratio Expense ratio operating ratio ------------- ------------- -------------- 2004 2003 2004 2003 2004 2003 % % % % % % United Kingdom 64.7% 66.4% 10.0% 10.5% 97% 99% France 72.2% 70.6% 12.2% 13.6% 101% 102% Ireland 66.6% 78.5% 10.8% 8.9% 87% 97% Netherlands 59.9% 60.5% 13.9% 17.4% 95% 101% Canada 66.6% 78.4% 12.0% 11.7% 97% 108% ------------------------------------------------------------------------------------------------------------------- 65.2% 69.3% 10.9% 11.3% 97% 100% =================================================================================================================== 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 60 General insurance - class of business analyses (a) United Kingdom Combined Net written premiums Underwriting result operating ratio -------------------- ------------------- --------------- 2004 2003 2004 2003 2004 2003 Â£m Â£m Â£m Â£m % % Personal Motor 1,380 1,345 (14) (34) 102% 102% Homeowner 1,041 970 29 5 97% 99% Creditor 644 588 (2) 5 101% 102% Other 93 84 13 - 90% 101% ------------------------------------------------------------------------------------------------------------------- 3,158 2,987 26 (24) 100% 101% ------------------------------------------------------------------------------------------------------------------- Commercial Motor 755 767 23 31 97% 97% Property 924 859 104 62 88% 91% Liability 457 409 (22) (32) 105% 108% Other 140 113 27 13 80% 89% ------------------------------------------------------------------------------------------------------------------- 2,276 2,148 132 74 94% 96% ------------------------------------------------------------------------------------------------------------------- Â£m 5,434 5,135 158 50 97% 99% =================================================================================================================== During the year to 31 December 2004, annualised rating increases were as follows: commercial liability: 7%; commercial property: 4%; commercial motor: nil; homeowners: 1%; and personal motor: 2%. (b) France Combined Net written premiums Underwriting result operating ratio -------------------- ------------------- --------------- 2004 2003 2004 2003 2004 2003 â‚¬m â‚¬m â‚¬m â‚¬m % % Motor 370 355 (8) 12 103% 97% Property and other 401 391 (4) (25) 100% 107% ------------------------------------------------------------------------------------------------------------------- â‚¬m 771 746 (12) (13) 101% 102% ------------------------------------------------------------------------------------------------------------------- Â£m 524 515 (8) (9) 101% 102% =================================================================================================================== ---------------------------------------------------------------------------------------------------------------------- Page 61 General insurance - class of business analyses (continued) (c) Netherlands Combined Net written premiums Underwriting result operating ratio -------------------- -------------------- --------------- 2004 2003 2004 2003 2004 2003 â‚¬m â‚¬m â‚¬m â‚¬m % % Property 347 327 31 18 90% 93% Motor 368 314 30 2 95% 98% Liability 56 55 (10) (12) 119% 160% Other 286 120 (13) (15) 97% 101% ------------------------------------------------------------------------------------------------------------------- â‚¬m 1,057 816 38 (7) 95% 101% ------------------------------------------------------------------------------------------------------------------- Â£m 719 563 26 (5) 95% 101% =================================================================================================================== (d) Canada Combined Net written premiums Underwriting result operating ratio -------------------- ------------------- --------------- 2004 2003 2004 2003 2004 2003 C$m C$m C$m C$m % % Automobile 1,747 1,736 5 (262) 100% 115% Property 822 760 80 24 90% 96% Liability 249 233 (12) 5 106% 97% Other 43 38 15 8 65% 74% ------------------------------------------------------------------------------------------------------------------- C$m 2,861 2,767 88 (225) 97% 108% ------------------------------------------------------------------------------------------------------------------- Â£m 1,202 1,208 37 (98) 97% 108% =================================================================================================================== ---------------------------------------------------------------------------------------------------------------------- Appendix A Group capital structure ---------------------------------------------------------------------------------------------------------------------- Page 62 Group capital structure The Group maintains an efficient capital 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 European Embedded Value 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 this 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* 2004 2003 Â£m Â£m Long-term savings 13,218 11,969 General insurance and health 4,633 4,481 Other business 735 725 Corporate 755 666 -------------------------------------------------------------------------------------------------------------------- Total capital employed 19,341 17,841 ==================================================================================================================== Financed by Equity shareholders' funds and minority interests 12,929 11,505 Direct capital instrument 990 - Preference shares 200 200 Subordinated debt 2,823 2,814 External debt 1,412 1,709 Net internal debt 987 1,613 -------------------------------------------------------------------------------------------------------------------- 19,341 17,841 ==================================================================================================================== * Restated for the effect of implementing European Embedded Value principles and for the reclassification of internal debt. As at 31 December 2004 the Group had Â£19.3 billion (31 December 2003: Â£17.8 billion) of total capital employed in its trading operations which is financed by a combination of equity shareholders' funds, preference capital, direct capital instruments, subordinated debt and internal and external borrowings. In 2004, the total capital employed in our long-term savings operations increased due to the positive impact of retained earnings and the upward trend in equity markets partially offset by dividends paid to holding companies. The total capital employed in our general insurance businesses also increased due to retained profits partially offset by dividends paid to holding companies. In addition to its external funding sources, the Group has a number of internal debt arrangements in place. These have allowed 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 these internal debt arrangements are treated 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 order to better reflect the underlying level of internal leverage we have revised the presentation of internal debt. The revised presentation depicts a net debt position which represents the upstream of internal loans from business operations to corporate and holding entities net of tangible assets held by these entities. The reduction in the net internal debt reflects, in part, the repayment by the corporate and holding entities of upstream loans and an increase in the tangible assets held by corporate entities arising from a combination of capital raising activity and dividends received from business operations. External debt has fallen during the year as Â£300 million of the direct capital instrument proceeds have been used to repay commercial paper. As indicated at the time of issuing the direct capital instrument, a further Â£650 million of senior debt will be repaid in 2005, thereby reducing the level of external borrowings further. This repayment will be made from tangible assets held by corporate entities and, accordingly, the net internal debt will increase by a corresponding amount. This leaves the overall external and net internal leverage position unchanged. ---------------------------------------------------------------------------------------------------------------------- Page 63 Group capital structure (continued) The ratio of the Group's external debt to shareholders' funds and subordinated debt was 8% (31 December 2003: 12%). Fixed charge cover, which measures the extent to which external interest costs, including the subordinated debt interest and preference share dividends, are covered by EEV operating profit, was 9 times (31 December 2003: 9 times). At 31 December 2004 the market value of the Group's external debt, subordinated debt, preference shares and direct capital instrument was Â£5,953 million (31 December 2003: Â£5,455 million), with a weighted average cost of 3.9% (31 December 2003: 3.9%). The group WACC is 7.4% and has been calculated by reference to the cost of equity and cost of debt at the relevant date. It is based on an equity market premium of 3% and a market beta of 1.4. Deployment of equity shareholders' funds Restated* 2004 2003 ------------------------------------------------------ --------- 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 685 4,347 1,718 938 7,688 6,923 General insurance, health, and other business 3,149 970 722 147 4,988 4,767 --------------------------------------------------------------------------------------------------------------------- 3,834 5,317 2,440 1,085 12,676 11,690 Goodwill 1,339 1,323 Additional value of in-force long-term business 5,326 4,828 --------------------------------------------------------------------------------------------------------------------- Assets backing total capital employed in continuing operations 19,341 17,841 External debt (1,412) (1,709) Net internal debt (987) (1,613) Subordinated debt (2,823) (2,814) --------------------------------------------------------------------------------------------------------------------- 14,119 11,705 Minority interests (1,182) (953) Direct capital instrument (990) - Preference capital (200) (200) --------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 11,747 10,552 ===================================================================================================================== * Restated for the effect of implementing European Embedded Value principles and for the reclassification of internal debt. Our exposure to equities has increased from Â£3.6 billion at 31 December 2003 to Â£3.8 billion at 31 December 2004 which represents 20% of our capital employed. Return on capital employed Restated* 2004 2003 ------------------------------------------------------ --------- Restated* Normalised opening Return on Return on after-tax return capital capital capital Â£m Â£m % % Long-term savings 1,121 11,969 9.4% 10.4% General insurance and health 899 4,481 20.1% 16.4% Other business (6) 725 (0.8)% (0.7)% Corporate (77) 666 (11.6)% (14.5)% -------------------------------------------------------------------------------------------------------------------- 1,937 17,841 10.9% 10.2% Borrowings (244) (6,136) 4.0% 4.7% -------------------------------------------------------------------------------------------------------------------- 1,693 11,705 14.5% 13.4% Minority interests (154) (953) 16.2% 17.9% Direct capital instrument (6) - - - Preference capital (17) (200) 8.5% 8.5% -------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 1,516 10,552 14.4% 13.1% ==================================================================================================================== * Restated for the effect of implementing European Embedded Value principles, and for the reclassification of internal debt. The return on capital is calculated as the after-tax return on opening equity capital, based on operating profit, including life EEV operating return, before amortisation of goodwill and exceptional items. ---------------------------------------------------------------------------------------------------------------------- Page 64 Group capital structure (continued) Shareholders' funds, including minority interests Restated* 2003 2004 Closing shareholders' Closing shareholders' funds funds ----------------------------------------- -------------------------------- 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 3,263 2,351 5,614 2,844 2,356 5,200 France 1,088 731 1,819 1,068 491 1,559 Ireland 369 246 615 338 239 577 Italy 466 72 538 386 49 435 Netherlands (including Belgium and Luxembourg) 1,724 753 2,477 1,621 733 2,354 Poland 189 368 557 146 308 454 Spain 289 295 584 266 180 446 Other Europe 150 63 213 174 10 184 International 6 601 (4) 597 568 (26) 542 -------------------------------------------------------------------------------------------------------------------- 8,139 4,875 13,014 7,411 4,340 11,751 Participating interests 2 204 - 204 218 - 218 -------------------------------------------------------------------------------------------------------------------- 8,343 4,875 13,218 7,629 4,340 11,969 -------------------------------------------------------------------------------------------------------------------- General insurance and health 3 United Kingdom 2,240 2,240 2,448 2,448 France 412 412 414 414 Ireland 358 358 333 333 Netherlands 467 467 250 250 Other Europe 160 160 112 112 Canada 702 702 631 631 Other 294 294 293 293 -------------------------------------------------------------------------------------------------------------------- 4,633 - 4,633 4,481 - 4,481 -------------------------------------------------------------------------------------------------------------------- Other business 735 735 725 725 Corporate 755 755 666 666 External debt 4 (1,412) (1,412) (1,709) (1,709) Net Internal debt (987) (987) (1,613) (1,613) Subordinated debt (2,823) (2,823) (2,814) (2,814) -------------------------------------------------------------------------------------------------------------------- (3,732) - (3,732) (4,745) - (4,745) -------------------------------------------------------------------------------------------------------------------- Shareholders' funds, including minority interests 9,244 4,875 14,119 7,365 4,340 11,705 ==================================================================================================================== Comprising Equities 3,834 3,834 3,571 3,571 Debt and fixed income securities 5,317 5,317 5,736 5,736 Property 595 595 584 584 Deposits and other investments 1,845 1,845 1,036 1,036 Intangible assets 5 1,790 4,875 6,665 1,811 4,340 6,151 Other net assets 1,085 1,085 763 763 Borrowings (5,222) (5,222) (6,136) (6,136) -------------------------------------------------------------------------------------------------------------------- 9,244 4,875 14,119 7,365 4,340 11,705 ==================================================================================================================== * Restated for the effect of implementing European Embedded Value principles, and for the reclassification of internal debt. ---------------------------------------------------------------------------------------------------------------------- Page 65 Group capital structure (continued) Shareholders' funds, including minority interests (continued) Notes 1. Includes acquired additional value of in-force long-term business of Â£451 million (31 December 2003: Â£488 million). 2. The net assets represent the Â£204 million of goodwill on the RBSG joint venture (31 December 2003: Â£218 million). 3. The capital employed in the Group's general insurance operations includes Â£296 million of goodwill (31 December 2003: Â£392 million). 4. The external borrowings reported in the summary consolidated balance sheet of Â£1,423 million (31 December 2003: Â£1,720 million) comprise Â£11 million (2003: Â£11 million) of general insurance borrowings (reported within the general insurance and health net assets) and Â£1,413 million (31 December 2003: Â£1,709 million) of borrowings by holding companies of the Group not allocated to operating companies (shown as external debt). 5. Comprises Â£451 million of acquired additional value of in-force long-term business (31 December 2003: Â£488 million), Â£1,135 million of goodwill arising on acquisitions (31 December 2003: Â£1,105 million) and Â£204 million of goodwill on the RBSG joint venture (31 December 2003: Â£218 million). 6. AVIF is negative for international business due to the embedded value of the USA life business being below its balance sheet value on a UK GAAP basis. This is due to the cost of locked-in required capital under EEV which is not recognised under UK GAAP. ---------------------------------------------------------------------------------------------------------------------- Page 66 Group capital structure (continued) Geographical analysis of return on capital employed 2004 Restated Opening shareholders' funds Normalised return including minority (Note 1) interests (Note 2) Return on capital ----------------------- -------------------- ----------------- Before tax After tax Note Â£m Â£m Â£m % Life assurance United Kingdom 3 551 385 5,418 7.1% France 286 185 1,559 11.9% Ireland 40 35 577 6.1% Italy 79 49 435 11.3% Netherlands (including Belgium and Luxembourg) 277 201 2,354 8.5% Poland 93 75 454 16.5% Spain 180 117 446 26.2% Other Europe 22 14 184 7.6% International 83 60 542 11.1% -------------------------------------------------------------------------------------------------------------------- 1,611 1,121 11,969 9.4% General insurance and health United Kingdom 711 485 2,448 19.8% France 40 28 414 6.8% Ireland 153 134 333 40.2% Netherlands 109 85 250 34.0% Other Europe 39 29 112 25.9% Canada 152 99 631 15.7% Other 47 39 293 13.3% -------------------------------------------------------------------------------------------------------------------- 1,251 899 4,481 20.1% Other business (8) (6) 725 (0.8)% Corporate 5 (178) (77) 666 (11.6)% External debt (77) (65) (1,709) 3.8% Net internal debt 4, 5 (86) (61) (1,613) 3.8% Subordinated debt (169) (118) (2,814) 4.2% -------------------------------------------------------------------------------------------------------------------- 2,344 1,693 11,705 14.5% ==================================================================================================================== Notes 1. The normalised return is based upon operating profit, including life EEV operating return, before amortisation of goodwill and exceptional items. 2. Restated for the effect of implementing European Embedded Value principles. 3. Shareholders' funds includes Â£218 million of goodwill on the RBSG joint venture. 4. The return before tax of Â£(86) million comprises investment return of Â£133 million and unallocated interest of Â£(219) million. 5. Restated for the reclassification of internal debt. ---------------------------------------------------------------------------------------------------------------------- Page 67 Group capital structure (continued) Geographical analysis of return on capital employed (continued) 2003 Restated Restated opening Normalised shareholders' funds Restated return including minority Return on capital (Note 1 & 2) interests (Note 2) (Note 2) ----------------------- -------------------- ----------------- Before tax After tax Note Â£m Â£m Â£m % Life assurance United Kingdom 3 597 418 4,835 8.6% France 228 148 1,326 11.2% Ireland 57 50 493 10.1% Italy 70 43 334 12.9% Netherlands (including Belgium and Luxembourg) 198 148 1,755 8.4% Poland 99 72 398 18.1% Spain 165 107 339 31.6% Other Europe 18 10 164 6.1% International 64 44 372 11.8% -------------------------------------------------------------------------------------------------------------------- 1,496 1,040 10,016 10.4% General insurance and health United Kingdom 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 4 (4) 553 (0.7)% Corporate 5 (160) (95) 657 (14.5)% External debt (109) (86) (2,036) 4.2% Net internal debt 4, 5 (115) (81) (1,870) 4.3% Subordinated debt (101) (71) (1,190) 6.0% -------------------------------------------------------------------------------------------------------------------- 1,906 1,344 10,047 13.4% ==================================================================================================================== Notes 1. The normalised return is based upon operating profit, including life EEV operating return, before amortisation of goodwill and exceptional items. 2. Restated for the effect of implementing European Embedded Value principles. 3. Shareholders' funds includes Â£231 million of goodwill on the RBSG joint venture. 4. The return before tax of Â£(115) million comprises investment return of Â£81 million and unallocated interest of Â£(196) million. 5. Restated for the reclassification of internal debt. ---------------------------------------------------------------------------------------------------------------------- Page 68 Assets under management General Long-term business Restated* business and other Group Group 2004 2004 2004 2003 Â£m Â£m Â£m Â£m Financial investments Shares, other variable yield securities and units in unit trusts 28,430 2,664 31,094 28,294 Strategic investments** 1,707 485 2,192 2,026 Debt and fixed income securities at market value 38,547 10,750 49,297 47,048 Debt and fixed income securities at amortised cost 38,626 - 38,626 34,709 Loans secured by mortgages and other loans, net of non-recourse funding 11,584 1,387 12,971 12,283 Deposits 4,621 1,871 6,492 2,943 Other investments 1,052 29 1,081 1,518 --------------------------------------------------------------------------------------------------------------------- Total financial investments 124,567 17,186 141,753 128,821 Investments in joint ventures 1,271 - 1,271 869 Investments in associated undertakings and participating interests 639 178 817 1,043 Land and buildings 8,770 637 9,407 9,430 --------------------------------------------------------------------------------------------------------------------- Total investments 135,247 18,001 153,248 140,163 Assets held to cover linked liabilities 51,144 - 51,144 40,665 Other assets included in the balance sheet 14,265 13,613 27,878 27,852 --------------------------------------------------------------------------------------------------------------------- Total MSSB assets included in the balance sheet 200,656 31,614 232,270 208,680 Additional value of in-force long-term business 4,875 - 4,875 4,340 --------------------------------------------------------------------------------------------------------------------- Total EV assets included in the balance sheet 205,531 31,614 237,145 213,020 Third party funds under management: Securitised mortgages (gross of non-recourse funding) 5,010 3,143 Unit trusts, Oeics, Peps and Isas 5,450 4,460 Segregated funds 24,899 19,355 --------------------------------------------------------------------------------------------------------------------- Total assets under management 272,504 239,978 ===================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. ** 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. ---------------------------------------------------------------------------------------------------------------------- Page 69 Strategic investments The Group has certain equity investments which are classified as strategic. The market value of these holdings and the percentage of the issued share capital of these companies held by the Group is as follows. General business Long-term business and other Market value Proportion held ------------------ ----------------- ------------- --------------- 2004 2003 2004 2003 2004 2003 2004 2003 Â£m Â£m Â£m Â£m Â£m Â£m % % Societe Generale 242 231 2 2 244 233 1.1% 1.1% Munchener Ruckversicherungs-Gesellschaft 205 232 179 171 384 403 2.5% 2.6% The Royal Bank of Scotland Group 977 808 49 46 1,026 854 1.8% 1.8% UniCredito Italiano 283 279 255 257 538 536 2.8% 2.8% ------------------------------------------------------------------------------------------------- 1,707 1,550 485 476 2,192 2,026 ================================================================================================= General insurance and other investments mix United Continental Total Kingdom Europe International 2004 Â£m Â£m Â£m Â£m Shares, other variable yield securities and units in unit trusts and strategic investments 1,628 1,125 396 3,149 Debt and fixed income securities at market value 4,746 3,693 2,311 10,750 Land and Buildings 255 349 33 637 Other 2,300 937 228 3,465 --------------------------------------------------------------------------------------------------------------------- Total investments 8,929 6,104 2,968 18,001 ===================================================================================================================== ---------------------------------------------------------------------------------------------------------------------- Appendix B Restated preliminary opening balance sheet as at 1 January 2004 under International Financial Reporting Standards ---------------------------------------------------------------------------------------------------------------------- Page 70 Introduction of International Financial Reporting Standards (IFRS) Introduction From 2005 all European Union listed groups will be required to prepare their consolidated financial statements using standards issued by the International Accounting Standards Board (IASB) as adopted by the European Union. Aviva will therefore prepare consolidated accounts in 2005 in accordance with IFRS rather than with UK GAAP. The listing rules in the UK require that the 2005 interim results must also be presented on an IFRS basis. Aviva intends to publish its first IFRS results in August 2005. This will include income statement, balance sheet and cash flow statement comparatives for half year and full year 2004. In January 2004 The Committee of European Securities Regulators issued guidance regarding the transition to IFRS which encourages companies to provide markets with appropriate and useful information during the transition phase from local accounting standards to IFRS. Aviva believes that it is important to remove some of the uncertainty regarding IFRS and in line with the recommendations in the guidance has chosen to publish early its consolidated summarised balance sheet prepared in accordance with IFRS at the date of transition, namely 1 January 2004, together with a reconciliation of shareholders' equity at this date. The Group's preparations for reporting under IFRS are well advanced, however, Aviva is not yet required to publish full restated 2004 comparatives. This information will be provided as part of the 2005 interim reporting. Basis of preparation The Group's preliminary consolidated balance sheet at 1 January 2004 ('the restated IFRS preliminary opening balance sheet') has been prepared in accordance with IFRS issued by the IASB and endorsed by the European Commission effective for 2005 year ends. In addition the Group plans to adopt early the recently issued Amendment to IAS19 Employee Benefits (2004). It is assumed that the amendment will be endorsed by the European Commission so as to be available for adoption in 2005. The IFRS themselves are subject to possible amendment by interpretative guidance from the IASB or other external bodies and are therefore subject to change prior to publication of the Group's first IFRS results in August 2005. In October 2004 the European Commission voted to partially adopt International Accounting Standard 39 - Financial Instruments: Recognition and Measurement (IAS39). In summary this 'carve-out version' of IAS39 removes the use of the fair value option for financial liabilities and relaxes the rules for hedge accounting. It is Aviva's intention to comply as far as possible with the full version of IAS39 issued by the IASB. Recent guidance issued by the UK's Accounting Standards Board, clarifies that UK companies are able to apply the hedge accounting provisions within IAS39 in full, and fair value those liabilities that were permitted to be held at current value under UK Company Law. This would include liabilities arising from unit linked contracts. Aviva has applied the guidance in this case. The restated IFRS preliminary opening balance sheet does not reflect any changes in respect of any amendments to IAS39 on the fair value option currently being discussed by the IASB. Proposals to restrict the fair value option are being considered by the IASB and are the subject of continuing debate between the IASB, industry and regulators, in which Aviva is actively participating. It is too early to anticipate the outcome of these discussions and therefore its eventual impact on the Group. Within the restated IFRS preliminary opening balance sheet, those assets held to cover the Group's linked liabilities are no longer disclosed in a single line but have been reported in the various asset classifications. The method of presentation of these assets is currently being debated by the industry and so is subject to change, but in any event we will provide in our full financial statements additional disclosure so that the amounts included in individual asset lines can be separately identified. The industry is still debating the consolidation of mutual funds, such as OEICs and OPCVMs. Aviva has chosen to consolidate these vehicles but will continue to monitor industry developments. Financial Reporting Standard 27 - Life Assurance (FRS27) was issued by the UK's Accounting Standards Board (ASB) on 13 December 2004, in the wake of the Penrose enquiry and is mandatory for reporting periods starting on or after 23 December 2005. Aviva along with other major insurance companies and the Association of British Insurers (ABI) has signed a Memorandum of Understanding (MoU) with the ASB relating to FRS27. Under this MoU, Aviva has agreed to provide voluntarily early disclosure of the requirements for 2004 and then to fully adopt the standard from 2005, including within the Group's IFRS financial statements. Within FRS27 the ASB acknowledged the difficulty of applying the requirements retrospectively and indeed it is the Group's view that it would be impractical to do so. Hence in accordance with IAS8 only the balance sheet at 31 December 2004 will be restated for the impact of FRS27. No adjustments are therefore required, nor have any been made, to the restated preliminary IFRS opening balance sheet below. A summary of the IFRS accounting policies adopted by the Group in preparing the restated preliminary IFRS opening balance sheet have been included on pages 78 to 85. The restated preliminary IFRS opening balance sheet has been audited by Ernst & Young. A copy of their opinion can be found in the Report & Accounts on page 127 of that document. ---------------------------------------------------------------------------------------------------------------------- Page 71 Transitional arrangements upon first time adoption of IFRS In general, a company is required to determine its IFRS accounting polices and apply these retrospectively to determine its opening balance sheet under IFRS. However, International Financial Reporting Standard 1 - First-Time Adoption of International Financial Reporting Standards (IFRS1) allows a number of exemptions to this general principle upon adoption of IFRS. The Group has taken advantage of the following transitional arrangements: Business combinations The Group has elected not to apply retrospectively the provisions of International Financial Reporting Standard 3 - Business Combinations, to business combinations that occurred prior to 1 January 2004. At the date of transition no adjustment was made between UK GAAP and IFRS shareholders' funds for any historical business combination. Cumulative translation differences The Group has elected that the cumulative translation differences of foreign operations were deemed to be zero at the transition date to IFRS. Equity compensation plans The Group has elected not to apply the provisions of International Financial Reporting Standard 2 - Share-based Payment, to options and awards granted on or before 7 November 2002 which had not vested by 1 January 2005. Employee benefits All cumulative actuarial gains and losses on the Group's defined benefit pension schemes have been recognised in equity at the transition date. Comparatives The Group has not taken advantage of the exemption within IFRS1 that allows comparative information presented in the first year of adoption of IFRS not to comply with International Accounting Standard 32 - Financial Instruments: Disclosure and Presentation (IAS32), International Accounting Standard 39 - Financial Instruments: Recognition and Measurement (IAS39) and International Financial Reporting Standard 4 - Insurance Contracts (IFRS4). Estimates Where estimates had previously been made under UK GAAP, consistent estimates (after adjustments to reflect any difference in accounting policies) have been made for the same date on transition to IFRS (i.e., judgements affecting the Group's opening balance sheet have not been revisited for the benefit of hindsight). ---------------------------------------------------------------------------------------------------------------------- Page 72 Summarised preliminary consolidated balance sheet at date of transition to IFRS - 1 January 2004 UK GAAP (MSSB) as published Adjustments IFRS Â£m Â£m Â£m Assets Intangible assets Goodwill 1,105 40 1,145 Acquired value of in-force business and other intangible assets 488 - 488 ---------------------------------- 1,593 40 1,633 Property and equipment 320 563 883 Investment property 9,106 618 9,724 Investments in joint ventures and associates 1,912 69 1,981 Financial investments and loans 129,032 40,480 169,512 Assets held to cover linked liabilities 40,665 (40,665) - Reinsurance assets 6,883 328 7,211 Tax assets 215 633 848 Other assets 15,955 (3,580) 12,375 Cash and cash equivalents 2,999 6,524 9,523 -------------------------------------------------------------------------------------------------------------------- Total assets 208,680 5,010 213,690 ==================================================================================================================== Equity Share capital 764 - 764 Capital reserves 3,859 - 3,859 Shares held by employee trusts (1) - (1) Revaluation and other reserves - 568 568 Retained earnings 1,932 (818) 1,114 -------------------------------------------------------------------------------------------------------------------- Equity attributable to shareholders' of Aviva plc 6,554 (250) 6,304 Minority interests 811 (7) 804 -------------------------------------------------------------------------------------------------------------------- Total Equity 7,365 (257) 7,108 ==================================================================================================================== Liabilities Insurance liabilities 175,304 (61,401) 113,903 Liability for investment contracts - 57,445 57,445 Unallocated divisible surplus 8,443 1,730 10,173 Pension obligations and other provisions Provisions including pension obligations as measured under IAS 19 336 1,469 1,805 Non-transferable investment in life fund - (598) (598) --------------------------------- 336 871 1,207 Tax liabilities 1,276 631 1,907 Borrowings (inc. subordinated debt) 4,722 3,555 8,277 Other liabilities 11,234 830 12,064 Net asset value attributable to unitholders - 1,606 1,606 -------------------------------------------------------------------------------------------------------------------- Total liabilities 201,315 5,267 206,582 -------------------------------------------------------------------------------------------------------------------- Total equity and liabilities 208,680 5,010 213,690 ==================================================================================================================== ---------------------------------------------------------------------------------------------------------------------- Page 73 Analysis of adjustments to the balance sheet at 1 January 2004 as a result of the transition to IFRS Investment Insurance Employee Dividend Deferred Borrowings/ Other valuation changes benefits Goodwill recognition taxation cash items Total (Note 1) (Note 2) (Note 3) (Note 4) (Note 5) (Note 6) (Note 7) (Note 8) adjustments Assets Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Intangible assets: Goodwill 40 40 Acquired value of in-force business and other intangible assets - Property and equipment 563 563 Investment property 618 618 Investments in joint ventures and associates 7 62 69 Financial investments and loans 1,854 6 38,620 40,480 Assets held to cover linked liabilities (40,665) (40,665) Reinsurance assets (134) 462 328 Tax assets 617 16 633 Other assets (6) (427) 67 (3,214) (3,580) Cash and cash equivalents 3,547 2,977 6,524 --------------------------------------------------------------------------------------------------- Total assets 1,861 (140) (427) 40 - 617 3,620 (561) 5,010 =================================================================================================== Equity Share capital - Capital reserves - Shares held by by employee trusts - Revaluation and other reserves 568 568 Retained earnings (377) 289 (834) 40 344 (351) - 71 (818) --------------------------------------------------------------------------------------------------- Equity attributable to shareholders' of Aviva plc 191 289 (834) 40 344 (351) - 71 (250) Minority interests (7) (7) --------------------------------------------------------------------------------------------------- Total Equity 191 289 (834) 40 344 (351) - 64 (257) =================================================================================================== Liabilities Insurance liabilities 161 (530) 58 (61,090) (61,401) Liability for investment contracts 57,445 57,445 Unallocated divisible surplus 1,509 1 (48) 268 1,730 Pension obligations and other provisions 760 111 871 Tax liabilities (353) 958 26 631 Borrowings (inc. subordinated debt) 3,394 161 3,555 Other liabilities 100 (344) 226 848 830 Net asset value attributable to unit holders 1,606 1,606 ---------------------------------------------------------------------------------------------------- Total liabilities 1,670 (429) 407 - (344) 968 3,620 (625) 5,267 --------------------------------------------------------------------------------------------------- Total equity and liabilities 1,861 (140) (427) 40 - 617 3,620 (561) 5,010 =================================================================================================== ---------------------------------------------------------------------------------------------------------------------- Page 74 Notes to the analysis of adjustments to the balance sheet at 1 January 2004 as a result of the transition to IFRS The UK GAAP balance sheet has been presented in a format consistent with IFRS. The only significant change in heading is that the Fund for Future Appropriations is now called Unallocated Divisible Surplus. The basis for the material adjustments between UK GAAP and IFRS are as follows: Note 1: Investment valuation The adjustments in respect of investment valuation arise from the following: Â£m Increase in valuation of debt securities 1,718 Change in valuation of certain mortgages 113 Other sundry adjustments 23 -------------------------------------------------------------------------------------------------------------------- 1,854 ==================================================================================================================== The principle changes are discussed further below: a) Debt securities Under UK GAAP, equity securities and unit trusts are carried at current value. Debt and other fixed income securities are carried at current value, with the exception of many non-linked long-term business debt securities and fixed income securities, which are carried at amortised cost. As a result of applying IAS39, the Group now carries all investments in debt and equity securities at fair value. The change in valuation of debt securities from amortised cost to fair value increases the valuation of investments by Â£1,718 million at 1 January 2004. This change in the valuation of debt securities is largely offset by corresponding movements in the unallocated divisible surplus and to a small extent technical liabilities. The net impact on shareholders' funds at 1 January 2004 is to increase them by Â£191 million. b) Commercial mortgages backing certain annuity business Under IFRS, the Group has chosen to move certain of its commercial mortgage portfolio to an active fair valuation basis in accordance with IAS39, which has increased the value of investments by Â£113 million. The annuity liabilities which are backed by these assets have been correspondingly revalued, with the result that there is an insignificant impact on shareholders' funds at 1 January 2004. Revaluation reserve Under IFRS, changes in the fair value of securities classified as 'at fair value through profit or loss' are recognised in the income statement. Changes in the fair value of securities classified as available-for-sale (AFS), except for impairment losses and relevant foreign exchange gains and losses, are recorded as a component of shareholders' equity, net of related deferred taxes. When securities classified as AFS are sold or impaired the accumulated fair value adjustments are transferred out of this reserve to the income statement. Accounting policy Q - Financial Investments, on page 82 explains further how the Group has classified its investments. Furthermore, owner-occupied properties are carried at their revalued amounts and movements are taken to a separate reserve within equity. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. Under UK GAAP, fair value movements on all investments, including those classified as AFS securities under IFRS and owner-occupied properties, are recorded in the consolidated profit and loss account. The above requirements have resulted in a transfer from retained earnings of Â£568 million into separate revaluation reserves at 1 January 2004. Note 2: Insurance change The impact on shareholders' funds of insurance changes is as follows: Â£m Change in valuation of non-participating investment contracts (55) Derecognition of claims equalisation provision 364 Change in the valuation of reinsurance treaties (48) Other sundry items 28 -------------------------------------------------------------------------------------------------------------------- 289 ==================================================================================================================== ---------------------------------------------------------------------------------------------------------------------- Page 75 The principal changes to the Group's insurance accounting upon transition to IFRS are discussed further below: a) Product classification International Financial Reporting Standard 4 - Insurance Contracts (IFRS4) requires all products issued to be classified for accounting purposes into either insurance or investment contracts, depending on whether significant insurance risk exists. In the case of a life contract, insurance risk exists if the amount payable on death differs from the amount payable if the policyholder survives. The Group has deemed insurance risk to be significant if the difference exceeds 5% of the policy value, though the classification would be similar if a 10% test had been used. Following a detailed review, 61% of life policy reserves on an MSSB basis at 31 December 2003 have been classified as insurance, and 24% have been classified as participating investment contracts (being those investment contracts containing a discretionary participating feature as defined within IFRS4) and both classes will continue to be accounted for under the Group's existing (UK GAAP) accounting policies. The remaining 15% have been classified as non-participating investment contracts and therefore are required to be accounted for under IAS39 and International Accounting Standard 18 - Revenue (IAS18). Virtually all our general insurance products are classified as insurance. This product classification change results in technical provisions being allocated between insurance and investment contracts. As described in Note 8, the 'other' column includes Â£57,445 million of liabilities being classified as investment contracts. b) Non-participating investment contracts As noted above, the liability for contracts classified as non-participating investment contracts is valued in accordance with IAS39. This generally requires all financial liabilities to be valued at amortised cost unless previous company regulations permitted a fair valuation of liabilities to be used, such as in the case of unit-linked liabilities. The majority of the Group's contracts classified as non-participating investment contracts are unit-linked contracts and have been valued at fair value. For unit-linked contracts the fair value liability is deemed to equal the current unit fund value, plus positive non-unit reserves if required on a fair value basis. This replaces the reserve held under UK GAAP which equals the unit fund value plus any positive or negative non-unit reserves determined on the local valuation basis, which differs from that required on a fair value basis. In addition to the change in liability valuation, the accounting for deferred acquisition costs has been revised in accordance with IAS18. This restricts the types of acquisition costs that can be deferred leading to a reduction in deferred acquisition costs as compared to UK GAAP. The net impact on shareholders' funds of the above changes is a reduction of Â£55 million. In addition to the above, IFRS now requires that any front end fees received on non-participating investment contracts are included within an explicit deferred income reserve within creditors. Under UK GAAP, any deferred acquisition cost asset created would have been net of these fees. This has led to an increase in 'Other assets' and 'Other liabilities' of Â£100 million. c) Equalisation provision An equalisation provision is recorded in the accounts of individual general insurance companies in the UK and in a limited number of other countries, to eliminate, or reduce, the volatility in incurred claims arising from exceptional levels of claims in certain classes of business. The provision is required by law even though no actual liability exists at the balance sheet date and is included in the UK GAAP consolidated balance sheet. The annual change in the equalisation provision is recorded in the UK GAAP profit and loss account. Under IFRS, no equalisation provision is recorded, as no actual liability exists at the balance sheet date. There is an increase of Â£364 million in shareholders' funds as a result of the removal of the equalisation provision. d) Reinsurance treaties Following a full review of all our reinsurance contracts, a small number of the Group's long term reinsurance treaties have been revalued under IFRS, leading to a reduction in the value of reassurance assets of Â£134 million. The majority of these changes relate to participating contracts and so these value changes affect principally the unallocated divisible surplus rather than shareholders' funds. ---------------------------------------------------------------------------------------------------------------------- Page 76 Note 3: Employee benefits a) Pensions Under the Group's UK GAAP pension policy, as set out in Statement of Standard Accounting Practice 24, Accounting for Pension Costs (SSAP 24), the cost of providing pension benefits is expensed using actuarial valuation methods which gives a substantially even charge over the expected service lives of employees and results in either a prepayment or an accrual to the extent that this charge does not equate to the cash contributions made into the schemes. Under International Accounting Standard 19, Employee Benefits (IAS19), the projected benefit obligation is matched against the fair value of the underlying assets and other unrecognised actuarial gains and losses in determining the pension expense for the year. Any pension asset or obligation must be recorded in the balance sheet. Aviva does not currently intend to apply the 'corridor approach' to valuing pension deficits in the future. This change in accounting has resulted in the removal of the Group's SSAP24 balances, a net debtor of Â£251 million, after allowing for deferred tax, at 1 January 2004 and the recognition of a deficit of Â£583 million, net of deferred tax, valued in accordance with IAS19. This gives an overall impact on shareholders' funds of Â£834 million at 1 January 2004. In some countries, the pension schemes have invested in the Group's life funds. IAS19 requires us to consider the liquidity of the schemes' assets and, if these are non-transferable, the relevant scheme surplus or deficit must be stated before taking account of such assets. Because of the medium-term nature of the contract, the Dutch scheme's investment in the Delta Lloyd life fund is considered non-transferable and, under the terms of IAS19, the reported deficit in this scheme increased by Â£598 million at 1 January 2004 compared to the equivalent deficit under FRS17. The corresponding liability to the scheme has been retained within insurance liabilities and the scheme asset has been offset against the gross deficit for presentation purposes. This has had no effect on shareholders' funds. There are a number of adjustments impacting the Group's 'pension obligations and other provisions' line. However, the most significant adjustment relates to the recognition of the gross pension deficit as illustrated in the table below: Â£m Â£m 'Pension obligations and other provisions' as stated under UK GAAP 336 Less: SSAP 24 pension obligation (78) Add: Pension deficit measured in accordance with IAS19 1,436 Less: Non-transferable investment in life funds included in insurance liabilities (598) ----------------------------------------------------------------------------------------------------------- Pension deficit disclosed under FRS17 838 Adjustments to other provisions arising under IFRS (included in note 8) 111 --------------------------------------------------------------------------------------------------------------------- 1,207 ===================================================================================================================== All amounts above are stated gross of deferred tax. b) Equity Compensation plans Under UK GAAP, the costs of awards to employees under equity compensation plans, other than the Save As You Earn plans, are recognised immediately if they are not conditional on performance criteria. If the award is conditional upon future performance criteria, the cost is recognised over the period to which the employee's service relates. The minimum cost for the award is the difference between the fair value of the shares at the date of grant less any contribution required from employee or exercise price. The cost is based on a reasonable expectation of the extent that the performance criteria will be met. Any subsequent changes in that expectation are reflected in the income statement as necessary. Under IFRS2 - Share-based Payment, compensation costs for stock-based compensation plans that were granted after 7 November 2002, but had not yet vested at 1 January 2005, are determined based on the fair value of the share-based compensation at grant date, which is recognised in the income statement over the period of the expected life of the share-based instrument. This change in accounting has not resulted in any material change to the balance sheet at 1 January 2004. Note 4: Goodwill Under International Accounting Standard 36 - Impairment of Assets (IAS36), goodwill is no longer amortised but is tested for impairment, at least annually. Any goodwill previously amortised or, for goodwill arising before 1 January 1998, eliminated against shareholders' funds has not been reinstated. Negative goodwill previously recognised under UK GAAP, has been recognised directly in retained earnings at 1 January 2004, increasing shareholders' funds by Â£40 million. ---------------------------------------------------------------------------------------------------------------------- Page 77 Note 5: Dividend recognition Under UK GAAP, dividends are accrued in the period to which they relate regardless of when they are declared and approved. Under International Accounting Standard 10 - Events after the Balance Sheet Date (IAS10), shareholders' dividends are accrued only when declared and appropriately approved. This has increased shareholders' funds by Â£344 million. Note 6: Deferred taxes Under UK GAAP, provision is made for deferred tax assets and liabilities, using the liability method, arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in a tax computation. No provision is made for tax that might arise on undistributed earnings of subsidiaries unless a binding agreement for distribution exists. Deferred tax is recognised as a liability or asset if the transactions or events that give the entity an obligation to pay more tax in future or a right to pay less tax in future have occurred by the balance sheet date. The Group policy is to discount its deferred tax balances. Under International Accounting Standard 12 - Income Taxes (IAS12), deferred taxes are provided under the liability method for all relevant temporary differences, being the difference between the carrying amount of an asset or liability in the balance sheet and its value for tax purposes. IAS12 does not require all temporary differences to be provided for, in particular the Group does not provide for deferred tax on undistributed earnings of subsidiaries where the Group is able to control the timing of the distribution and the temporary difference created is not expected to reverse in the foreseeable future. Deferred tax assets are recognised for unused tax losses and other deductible temporary differences to the extent that it is probable that future taxable profit will be utilised against the unused tax losses and credits. Discounting is prohibited under IAS12. The changes to deferred tax arise from the removal of discounting, changes to the valuation of the Group's assets and liabilities under IFRS and presentational changes to disclosure of tax assets and liabilities. The main net increases in deferred tax at 1 January 2004 that reduce shareholders' funds are: Â£m Reversal discounting (the total discounting applied to UK GAAP deferred tax liabilities was Â£151 million, of which Â£110 million relates to non-life and shareholders' interests) 110 Deferred tax impact of the removal of the equalisation provision 108 Deferred tax impact of other changes to technical provisions, valuation of investments and other sundry adjustments 133 -------------------------------------------------------------------------------------------------------------------- Net decrease to shareholders' funds 351 ==================================================================================================================== Note 7: Borrowings and cash IFRS requires a number of presentational changes to borrowings and cash. The most significant change is that the linked presentation can no longer be adopted for the Group's borrowing securitised on certain of its mortgage portfolios. This increases borrowings and investments by Â£3,143 million. In addition, Â£3,307 million of the Group's investments meet the definition of cash equivalents and so have been reclassified to 'cash and cash equivalents'. Note 8: Other items The other changes that arise as a result of the transition to IFRS are principally reclassifications and presentational changes. The total effect of the other changes to shareholders' funds is Â£71 million, which mainly represents the pre-tax impact of consolidating certain entities, such as real estate companies in France, for the first time. The other significant reclassification and presentational changes which have no impact on shareholders' funds are: â€¢ Assets held to cover linked liabilities of Â£40,665 million are no longer disclosed in a single line but have been reported in the various asset classifications. Of this amount assets of Â£3,343 million have been netted off technical liabilities, reducing the gross assets and investment contract liabilities of the Group. There is no impact on profit or shareholders' funds as a result of this change. â€¢ Technical provisions are disclosed as either insurance contracts or investment contracts, reflecting the product classification included in Note 2(a). The Group held investment contracts of Â£57,445 million at 1 January 2004. â€¢ The assets and liabilities of the banking business are no longer disclosed entirely in 'other debtors' and 'other creditors' but have been reported in the appropriate balance sheet classifications. â€¢ Owner occupied properties have been reclassified from 'investment property' to property and equipment. We continue to hold these properties at fair value. â€¢ Though the industry is still debating the treatment of mutual funds, we have chosen to consolidate those vehicles that meet the definition of a subsidiary. This has resulted in an increase in gross assets of Â£1,606 million, representing the part of the funds owned by third parties. This third party interest is recorded in the line 'net assets attributable to unitholders' within liabilities. The consolidation of mutual funds has no impact on shareholders' funds or profit after tax. ---------------------------------------------------------------------------------------------------------------------- Page 78 Accounting policies The principal accounting policies adopted in the preparation of the restated preliminary IFRS opening balance sheet are set out below. Full accounting policies for the income statement have not been included and will be published with our interim announcement in August 2005. (A) Basis of presentation The restated preliminary IFRS opening balance sheet has been prepared in accordance with International Financial Reporting Standards (IFRS) expected to be applicable at 31 December 2005. The Standards themselves are subject to possible amendment by interpretative guidance from the IASB or other external bodies and are therefore subject to change prior to publication of the Group's first IFRS results in August 2005. The IASB issued an amendment to IAS19, Employee Benefits, in December 2004. Its requirements are applicable for accounting periods beginning on or after 1 January 2006, but the Group intends to adopt them early. This has no impact on the opening balance sheet presented. In accordance with the standard for Phase I of insurance contracts (IFRS4), the Group has applied existing accounting practices for insurance and participating investment contracts, modified, as appropriate, to comply with the IFRS framework and applicable standards. Items included in the financial statements of each of the Group's entities are measured in the currency of the primary economic environment in which that entity operates 'the functional currency'. The restated IFRS opening balance sheet is stated in sterling, which is the Company's functional and presentation currency. (B) Use of estimates The preparation of financial statements requires the Group to make estimates and assumptions that affect items reported in the restated IFRS opening balance sheet. Although these estimates are based on management's best knowledge of current facts, circumstances and, to some extent, future events and actions, actual results ultimately may differ from those estimates, possibly significantly. (C) Consolidation principles Subsidiaries Subsidiaries are those entities (including Special Purpose Entities) in which the Group, directly or indirectly, has power to exercise control over financial and operating policies in order to gain economic benefits. Subsidiaries are consolidated from the date on which effective control is transferred to the Group and are excluded from consolidation from the date of disposal. All inter-company transactions, balances and unrealised surpluses and deficits on transactions between Group companies have been eliminated. From 1 January 2004, the date of first time adoption of IFRS, the Group is required to use the purchase method of accounting to account for the acquisition of subsidiaries. Prior to 1 January 2004, certain significant business combinations were accounted for using the 'pooling of interests method' (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations have given rise to a merger reserve in the consolidated balance sheet. These transactions have not been restated as permitted by the IFRS1 transitional arrangements. Associates and joint ventures Associates are entities over which the Group has significant influence but which it does not control. Generally, it is presumed that the Group has significant influence where it has between 20% and 50% of voting rights. Joint ventures are entities whereby the Group and other parties undertake an economic activity which is subject to joint control arising from a contractual agreement. In a number of these, the Group's share of the underlying assets and liabilities may be greater than 50% but the terms of the relevant agreements make it clear that control is not exercised. Such jointly-controlled entities are referred to as joint ventures in these IFRS disclosures. Gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group's interest in the associates and joint ventures. Losses are also eliminated, unless the transaction provides evidence of an impairment of the asset transferred between entities. Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group's share of that entity's post-acquisition changes to shareholders' funds, is included as an asset in the consolidated balance sheet. Equity accounting is discontinued when the Group no longer has significant influence over the investment. When the Group's share of losses in an associate or joint venture equals or exceeds its interest in the entity, the Group does not recognise further losses unless it has incurred obligations or made payments on behalf of the entity. ---------------------------------------------------------------------------------------------------------------------- Page 79 (D) Foreign currency translation Balance sheets of foreign entities are translated into the Group's presentation currency at the year end exchange rates. Exchange differences arising from the translation of the net investment in foreign subsidiaries, associates and joint ventures, and of borrowings and other currency instruments designated as hedges of such investments, are taken to a separate reserve within equity. At 1 January 2004 this reserve had been deemed to be zero in accordance with IFRS1. The euro exchange rate employed in the translation of the restated IFRS preliminary opening balance sheet is â‚¬1 = Â£0.70. (E) Product classification Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. Contracts can be reclassified as insurance contracts after inception if insurance risk becomes significant. Any contracts not considered to be insurance contracts under IFRS are classified as investment or service contracts. Some insurance and investment contracts contain a discretionary participating feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts. As noted in policy A above, insurance contracts and participating investment contracts continue to be measured and accounted for under existing accounting practices at the date of transition to IFRS. (F) Premiums earned Premiums on long-term insurance contracts and participating investment contracts are recognised as income when receivable, except for investment-linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular premium contracts, receivables are taken at the date when payments are due. General insurance and health premiums written reflect business incepted during the year. Unearned premiums are those proportions of the premiums written in a year that relate to periods of risk after the balance sheet date. Unearned premiums are computed principally on either a daily or monthly pro rata basis. Premiums collected by intermediaries, but not yet received, are assessed based on estimates from underwriting or past experience, and are included in premiums written. (G) Other Investment contract fee revenue Investment contract policyholders are charged fees for mortality, policy administration, investment management, surrenders or other contract services. These fees are recognised as revenue in the period in which they are assessed unless they relate to services to be provided in future periods. Amounts are considered to be assessed when the policyholder's balance has been adjusted for those fees. If the fees are for services to be provided in future periods, then they are deferred and recognised as the service is provided. Initiation and other 'front-end' fees (fees that are assessed against the policyholder balance as consideration for origination of the contract) are charged on some non-participating investment and investment fund management contracts. Where the investment contract is recorded at amortised cost, these fees are deferred and recognised over the term of the policy. Where the investment contract is measured at fair value, the front-end fees that relate to the provision of investment management services are deferred and recognised as the services are provided. (H) Other fee and commission income Other fee and commission income consists primarily of investment fund management fees, distribution fees from mutual funds, commission revenue from the sale of mutual fund shares, and transfer agent fees for shareholder record keeping. Revenue from investment management fees, distribution fees and transfer agent fees is recognised when earned. Reinsurance commissions receivable and other commission income are recognised on the trade date. (I) Net investment income Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest income is recognised as it accrues, taking into account the effective yield on the investment. It includes the interest rate differential on forward foreign exchange contracts. Rental income is recognised on an accruals basis. ---------------------------------------------------------------------------------------------------------------------- Page 80 (J) Insurance and participating investment contract liabilities Long-term business provisions Under current IFRS requirements, insurance and participating investment contract liabilities are measured using accounting policies consistent with those adopted previously under existing accounting practices. Accounting for insurance contracts is determined in accordance with the Statement of Recommended Practice issued by the Association of British Insurers in November 2003. As stated in the basis of preparation on page 70, no changes are required to the accounting policies adopted for the restated preliminary IFRS opening balance sheet for FRS27. The long-term business provisions are calculated separately for each life operation, based on local regulatory requirements and actuarial principles consistent with those applied in the UK. Each calculation represents a determination within a range of possible outcomes, where the assumptions used in the calculations depend on the circumstances prevailing in each life operation. Within the long-term business provisions, explicit allowance is made for vested bonuses, including those added following the current valuation, but allowances are not generally made for future reversionary or terminal bonuses. The liability in respect of guaranteed benefits for participating insurance contracts is calculated in accordance with local actuarial principles, using a deterministic approach and a prudent set of valuation assumptions. Unallocated divisible surplus In certain participating long-term insurance and investment business, the nature of the policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain. Amounts whose allocation either to policyholders or shareholders has not been determined by the end of the financial year are held within liabilities as an unallocated divisible surplus. General insurance and health provisions (i) Outstanding claims provisions General insurance and health outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the balance sheet date, whether reported or not, together with related claims handling costs and a reduction for the expected value of salvage and other recoveries. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the balance sheet date. Provisions for certain claims are discounted, using rates having regard to the returns generated by the assets supporting the liabilities. Any estimate represents a determination within a range of possible outcomes. Outstanding claims provisions are valued net of an allowance for expected future recoveries. Recoveries include non-insurance assets that have been acquired by exercising rights to salvage and subrogation under the terms of insurance contracts. (ii) Provision for unearned premiums The proportion of written premiums, gross of commission payable to intermediaries, attributable to subsequent periods is deferred as a provision for unearned premiums. The change in this provision is taken to the income statement in order that revenue is recognised over the period of risk. (iii) Liability adequacy At each reporting date, the Group carries out a liability adequacy test for any overall excess of expected claims and deferred acquisition costs over unearned premiums, using the current estimates of future cash flows under its contracts after taking account of the investment return expected to arise on assets relating to the relevant general business provisions. If these estimates show that the carrying amount of its insurance liabilities (less related deferred acquisition costs and additional value in-force) is insufficient in light of the estimated future cash flows, the Group recognises the deficiency in the income statement by setting up a provision in the consolidated balance sheet. Other assessments and levies The Group is subject to various periodic insurance-related assessments or guarantee fund levies. Related provisions are established where there is a present obligation (legal or constructive) as a result of a past event. Such amounts are not included within insurance liabilities but are included under 'Pension Obligations and Other Provisions', within the balance sheet. ---------------------------------------------------------------------------------------------------------------------- Page 81 (K) Non-participating investment contract liabilities Liabilities for non-participating investment contracts are measured at amortised cost unless previous company regulations permitted a fair valuation of liabilities to be used, such as in the case of unit-linked liabilities. The majority of the Group's contracts classified as non-participating investment contracts are unit-linked contracts and are measured at fair value. The fair value liability is in principle established through the use of prospective discounted cash flow techniques. For unit-linked contracts, the fair value liability is equal to the current unit fund value, plus additional non-unit reserves if required on a fair value basis. Amortised cost is calculated as the fair value of consideration received at the date of initial recognition, less the net effect of principal payments such as transaction costs and front end fees, plus or minus the cumulative amortisation (using the effective interest rate method) of any difference between that initial amount and the maturity value, and less any write-down for surrender payments. The effective interest rate is the one that equates the discounted cash payments to the initial amount. At each reporting date, the amortised cost liability is determined as the value of future best estimate cash flows discounted at the effective interest rate. (L) Reinsurance The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies, using assumptions consistent with those used to account for these policies. Gains or losses on buying retroactive reinsurance are recognised in the income statement immediately at the date of purchase and are not amortised. Premiums ceded and claims reimbursed are presented on a gross basis in the restated IFRS opening balance sheet. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract. Reinsurance contracts that principally transfer financial risk are accounted for directly through the balance sheet and are included in reinsurance assets or liabilities. A deposit asset or liability is recognised, based on the consideration paid or received less any explicitly identified premiums or fees to be retained by the reinsured. If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises that impairment loss in profit and loss. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. (M) Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets of the acquired subsidiary, associate or joint venture at the date of acquisition. Goodwill on acquisitions prior to 1 January 2004 (the date of transition to IFRS) is carried at book value (original cost less amortisation) on that date, less any impairment subsequently incurred. Goodwill arising before 1 January 1998 was eliminated against reserves and has not been reinstated. Goodwill arising on the Group's investments in associates and joint ventures since that date is included within the carrying value of these investments. Under UK GAAP, goodwill previously written off to shareholders' funds is taken back through the profit and loss account when calculating the profit and loss account in the event of any subsequent disposal of the underlying investment. There is no requirement for this adjustment under IFRS. Acquired value of in-force business (AVIF) The present value of future profits on a portfolio of long-term insurance and investment contracts, acquired either directly or through the purchase of a subsidiary, is recognised as an intangible asset. If this arises through the acquisition of an investment in an associate, the AVIF is held within the carrying amount of that associate. In all cases, the AVIF is amortised over the useful lifetime of the related contracts in the portfolio on a systematic basis. The rate of amortisation is chosen by considering the profile of the additional value of in-force business acquired and the expected depletion in its value. The value of the acquired in-force long-term business is reviewed annually for any impairment in value and any reductions are charged as expenses in the income statement. Other intangible assets Other intangible assets consist primarily of access to distribution networks. These are amortised over their useful lives using the straight-line method. ---------------------------------------------------------------------------------------------------------------------- Page 82 (N) Property and equipment Owner-occupied properties are carried at their revalued amounts, which are supported by market evidence, and movements are taken to a separate reserve within equity. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. All other items classed as property and equipment within the balance sheet are carried at historical cost less accumulated depreciation. Investment properties under construction are included in property and equipment until completion, and are stated at cost less provision for any impairment in their values. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. All borrowing costs are expensed as they are incurred. Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the most recently assessed standard of performance of the existing asset will flow to the Group and that the renovation replaces an identifiable part of the asset. (O) Investment property Investment property is held for long-term rental yields and is not occupied by the Group. Completed investment property is stated at its fair value, which is supported by market evidence, as assessed by qualified external valuers or by local qualified staff of the Group in overseas operations. Changes in fair values are recorded in the income statement within net investment income. (P) Derecognition and offset of financial assets and financial liabilities A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where: â€¢ the rights to receive cash flows from the asset have expired; â€¢ the company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-through' arrangement; or â€¢ the company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (Q) Financial investments The Group classifies its investments as either financial assets at fair value through profit or loss (FV), available for sale financial assets (AFS), or loans and receivables. The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. In general, the FV category is used, but the AFS category is used where the relevant life liability (including shareholders' funds) is passively managed and carried at amortised cost. The FV category has two sub-categories - those that meet the definition as being held for trading and those the Group chooses to designate as at fair value through profit or loss (referred to in this accounting policy as 'other than trading'). Fixed maturities, purchased loans and equity securities, which the Group buys with the intention to resell in the near term (typically between three and six months), are classified as trading. All other securities in the FV category are classified as other than trading. Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values less transaction costs. Debt securities are initially recorded at their fair value which is taken to be amortised cost, with amortisation credited or charged to the income statement. Investments classified as trading, other than trading and AFS are subsequently carried at fair value. Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS, except for impairment losses and relevant foreign exchange gains and losses, are recorded in a separate reserve within equity. The fair values of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Equity securities for which fair values cannot be measured reliably are recognised at cost less impairment. ---------------------------------------------------------------------------------------------------------------------- Page 83 (R) Derivative financial instruments and hedging Derivative financial instruments include foreign exchange contracts, interest rate futures, currency and interest rate swaps, currency and interest rate options (both written and purchased) and other financial instruments that derive their value mainly from underlying interest rates, foreign exchange rates, commodity values or equity instruments. All derivatives are initially recognised in the balance sheet at their fair value, which usually represents their cost. They are subsequently re-measured at their fair value, with the method of recognising movements in this value depending on whether they are designated as hedging instruments and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset on the balance sheet at the date of purchase, representing their fair value at that date. Derivative instruments for hedging On the date a derivative contract is entered into, the Group designates certain derivatives as either: (i) a hedge of the fair value of a recognised asset or liability (fair value hedge); (ii) a hedge of a future cash flow attributable to a recognised asset or liability, a highly probable forecast transaction or a firm commitment (cash flow hedge); or (iii) a hedge of a net investment in a foreign operation (net investment hedge). The Group does not currently have any material fair value or cash flow hedges. Hedge accounting is used for derivatives designated in this way, provided certain criteria are met. At the inception of the transaction, the Group documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the strategy for undertaking the hedge transaction. The Group also documents its assessment, both on inception and on an on-going basis, of whether the hedge is expected to be, and has been, highly effective in offsetting the risk in the hedged item. Changes in the fair value of derivatives that are designated and qualify as net investment hedges, and that prove to be highly effective in relation to the hedged risk, are recognised in a separate reserve within equity. Gains and losses accumulated in this reserve are included in the income statement on disposal of the relevant investment. Upon transition to IFRS this reserve is deemed to be zero. (S) Loans Loans with fixed maturities, including policyholder loans, mortgage loans on investment property, securitised mortgages and collateral loans, are recognised when cash is advanced to borrowers. The majority of these loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method. Loans with indefinite future lives are carried at unpaid principal balances or cost. Certain mortgages which back long-term business have been classified at fair value through profit or loss in order to match the movement in those liabilities. Those loans are revalued to fair value at each period end, with movements in valuation being taken to the income statement. To the extent that a loan is uncollectable, it is written off as impaired. Subsequent recoveries are credited to the income statement. (T) Deferred acquisition costs The costs directly attributable to the acquisition of new business for insurance and participating investment contracts are deferred to the extent that they are expected to be recoverable out of future margins in revenues on these contracts. For non-participating investment and investment fund management contracts, incremental acquisition costs that are directly attributable to securing an investment management service are also deferred. Where such business is reinsured, an appropriate proportion of the deferred acquisition costs is attributed to the reinsurer, and is treated as a separate liability. Long-term business deferred acquisition costs are amortised systematically over a period no longer than that in which they are expected to be recoverable out of these margins. Deferrable acquisition costs for non-participating investment and investment fund management contracts are amortised over the period in which the service is provided. General business deferred acquisition costs are amortised over the period in which the related revenues are earned. The reinsurers' share of deferred acquisition costs is amortised in the same manner as the underlying asset. Deferred acquisition costs are reviewed by category of business at the end of each reporting period and are written off where they are no longer considered to be recoverable. ---------------------------------------------------------------------------------------------------------------------- Page 84 (U) Cash and cash equivalents Cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments with less than 90 days maturity from the date of acquisition. (V) Leases Leases where a significant portion of the risks and rewards of ownership is retained by the lessor are classified as operating leases. Payments made as lessees under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. There are no material finance leases affecting the Group as either lessor or lessee. (W) Provisions and contingent liabilities Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is more probable than not. The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. (X) Employee benefits Employee entitlements to annual leave and long-service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as a result of services rendered by employees up to the balance sheet date. Pension obligations The Group operates a number of defined benefit and defined contribution plans throughout the world, the assets of which are generally held in separate trustee-administered funds. The pension plans are generally funded by payments from employees and by the relevant Group companies, taking account of the recommendations of qualified actuaries. For defined benefit plans, the pension costs are assessed using the projected unit credit method. Under this method, the cost of providing pensions is charged to the income statement so as to spread the regular cost over the service lives of employees, in accordance with the advice of qualified actuaries. The pension obligation is measured as the present value of the estimated future cash outflows using a discount rate based on market yields for high quality corporate bonds. The resulting pension scheme surplus or deficit appears as an asset or obligation in the consolidated balance sheet. The Group intends to early adopt the December 2004 amendment to IAS19, Employee Benefits, with the result that all actuarial gains and losses will be recognised immediately in equity through the Statement of recognised income and expense. For defined contribution plans, the Group pays contributions to publicly or privately administered pension plans. Once the contributions have been paid, the Group, as employer, has no further payment obligations. In some countries, the pension schemes have invested in the Group's life funds, details of which are given on page 76. Other post-retirement obligations Some Group companies provide post-retirement healthcare or other benefits to their retirees. The entitlement to these benefits is usually based on the employee remaining in service up to retirement age and the completion of a minimum service period. None of these schemes is material to the Group. The costs of the Dutch and Canadian schemes are included within pension obligations and other provisions. For such schemes in other countries, provisions are calculated in line with local regulations, with movements being charged to the income statement within staff costs. Equity compensation plans The Group offers share award and option plans over the Company's ordinary shares for certain employees, including a Save As You Earn plan (the 'SAYE plan'). The Group accounts for share equity compensation plans, using the fair value based method of accounting (the 'fair value method'). Under the fair value method, the cost of providing equity compensation plans is based on the fair value of the share awards or option plans at date of grant, which is recognised in the income statement over the expected service period of the related employees and credited to the equity compensation reserve, part of shareholders' funds. Shares purchased by employee share trusts to fund these awards are shown as a deduction from shareholders' funds at their original cost. ---------------------------------------------------------------------------------------------------------------------- Page 85 When the options are exercised and new shares are issued, the proceeds received, net of any transaction costs, are credited to share capital (par value) and the balance to share premium. Where the shares are already held by employee trusts, the net proceeds are credited to this account, with the difference between cost and proceeds being taken to retained earnings. In both cases, the relevant amount in the equity compensation reserve is then credited to retained earnings. (Y) Income taxes Provision is made for deferred tax liabilities, or credit taken for deferred tax assets, using the liability method, on all material temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. The principal temporary differences arise from depreciation of property and equipment, revaluation of certain financial assets and liabilities including derivative contracts, provisions for pensions and other post-retirement benefits and tax losses carried forward; and, in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base. The rates enacted or substantively enacted at the balance sheet date are used to determine the deferred tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising from investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future. Deferred taxes are not provided in respect of temporary differences arising from the initial recognition of goodwill, or from goodwill for which amortisation is not deductible for tax purposes, or from the initial recognition of an asset or liability in a transaction which is not a business combination and affects neither the accounting profit nor taxable profit or loss at the time of the transaction. Deferred tax related to fair value re-measurement of available-for-sale investments, owner-occupied properties and other amounts taken directly to equity is credited or charged to equity and is recognised in the balance sheet as a deferred tax asset or liability. (Z) Borrowings Borrowings are recognised initially at their issue proceeds less transaction costs incurred. Subsequently, borrowings are stated at amortised cost, and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method. (AA) Share capital and treasury shares Dividends Dividends on ordinary shares are recognised in equity in the period in which they are declared and, for the final dividend, approved by shareholders. Dividends on preference shares are recognised in the period in which they are declared and appropriately approved. Equity instruments A financial instrument is treated as equity if: a) there is no contractual obligation to deliver cash or other financial assets or to exchange financial assets or liabilities on terms that may be unfavourable; and b) the instrument will not be settled by delivery of a variable number of shares or is a derivative that can be settled other than for a fixed amount of cash, shares or other financial assets. Treasury shares Where the Company or its subsidiaries purchase the Company's share capital or obtains rights to purchase its share capital, the consideration paid (including any attributable transaction costs net of income taxes) is shown as a deduction from total shareholders' equity. (AB) Fiduciary activities Assets and income arising thereon, together with related undertakings to return such assets to customers, are excluded from the IFRS financial statements where the Group has no contractual rights in the assets and acts in a fiduciary capacity such as nominee, trustee or agent. ---------------------------------------------------------------------------------------------------------------------- Page 86 Shareholder Services Scrip dividend The Aviva Scrip Dividend Scheme (the 'Scheme') provides shareholders with the option of receiving new ordinary shares instead of cash dividends. The Scheme replaced the former Dividend Reinvestment Plan. Shareholders who have not already joined the Scheme but wish to do so should contact Lloyds TSB Registrars at the address shown and request a mandate form. The mandate form will need to be received by Lloyds TSB Registrars no later than 25 April 2005 in order to be effective for the 2005 final dividend. Dividend payments direct to your bank account As an alternative to having dividends paid by cheque, shareholders can, if they wish, have them credited directly into their bank or building society account on the dividend payment date. For overseas shareholders, Transcontinental Account Payment Service (TAPS) is available, which allows shareholders in many countries to have dividends credited direct to their bank accounts in local currencies. To obtain further details and a mandate form please contact the Company's registrar at the address shown. For those private shareholders who currently receive dividends paid directly into their bank or building society account, it is now the Company's practice to issue one consolidated tax voucher each year instead of a voucher with each dividend payment. Shareholders who do not wish to receive this service and wish to continue to receive tax vouchers with each dividend may elect to do so by contacting the Company's registrar at the address shown. E-Communications To receive communications electronically: Log on to www.aviva.com/shareholders and register for shareholder e-communications. Shareholders will be able to access details of their Aviva shareholding online, elect to receive the Report and Accounts and other shareholder documentation electronically, update their address details online and elect to have their dividends paid directly into their bank or building society account. To vote online at the AGM: Please refer to the explanatory notes on the AGM voting form which details the steps to vote online. Share price Shareholders can access the current share price of Aviva ordinary shares at www.aviva.com or alternatively can call 0906 843 2197*. Share dealing facilities The Company has arranged the following services that can be used to buy or sell Aviva shares. Alternatively, if shareholders hold a share certificate they can also use any bank, building society or stockbroker offering share dealing facilities. If shareholders are in any doubt about buying or selling their shares they should seek professional financial advice. Share dealing facilities for UK shareholders/share account members To buy and sell shares over the telephone or internet shareholders can contact Shareview Dealing, arranged through Lloyds TSB Registrars. For telephone purchases or sales call 0870 850 0852 between 8.30am and 4.30pm, Monday to Friday and for internet purchases or sales log on to www.shareview.co.uk/dealing To buy or sell shares over the telephone, shareholders can contact Barclays Stockbrokers on 0870 549 3002 (if they hold a share certificate) or 0870 549 3001 (if they hold a share account statement). NatWest Stockbrokers provide a Share Dealing Service at certain branches for Aviva Share Account holders only. For more information contact NatWest Stockbrokers on 0845 122 0689. Share dealing facilities for overseas shareholders To sell Aviva shares over the telephone, shareholders can contact Barclays Stockbrokers on +44 (0)141 352 3959 who will be able to sell the shares and send shareholders a sterling cheque for the proceeds. Non-UK residents will need to provide various documentation in order to use this service and details will be provided on registration. Please note that regulations prevent this service being offered to US residents. Settlement proceeds will be sent to either a UK sterling bank account or by sterling cheque for the proceeds. ShareGift The Orr Mackintosh Foundation operates a purely voluntary charity share donation scheme for shareholders who wish to dispose of small numbers of shares whose value makes it uneconomical to sell them. Details of the scheme are available from ShareGift at www.sharegift.org or can be obtained from the Company's registrar. Shareholders with disabilities Alternative versions of this publication (including Braille, large print and audio-tape) are available on request from the Company's registrar. Shareholder information Full report and accounts A copy of the full Report and Accounts is available free of charge from the Aviva internet site at www.aviva.com or from the Company's registrar, Lloyds TSB Registrars. Group Financial Calendar for 2005 26 April Annual General Meeting 28 April Announcement of first quarter long-term savings new business figures 11 August Announcement of unaudited six months' interim results 27 October Announcement of third quarter long-term savings new business figures Ordinary shares 16 March Ex-dividend date 18 March Record date 23 March Scrip dividend price available 17 May Dividend payment date Preference shares 31 March First dividend payment for 83/8% cumulative irredeemable preference shares 30 June First dividend payment for 83/8% cumulative irredeemable preference shares 30 Sept Second dividend payment for 83/4% cumulative irredeemable preference shares 31 Dec Second dividend payment for 83/8% cumulative irredeemable preference shares Useful contact details Detailed below are various addresses that shareholders may find useful if they have a query in respect of their shareholding. Please quote Aviva plc, as well as the name and address in which the shares are held, in all correspondence. General shareholding administration queries and Aviva share account queries: Lloyds TSB Registrars The Causeway, Worthing West Sussex BN99 6DA Telephone 0870 600 3952 Corporate and single company Peps: Barclays Stockbrokers Limited Tay House, 300 Bath Street Glasgow G2 4LH Telephone 0870 514 3263 Individual Savings Accounts (Isas) Lloyds TSB Registrars (Isa Manager) The Causeway, Worthing West Sussex BN99 6DA Telephone 0870 242 4244 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/websites *Calls are currently charged at 60 pence per minute at all times. The average time to access the share price is approximately one minute. END OF PART 4 OF 4 St Helen's, 1 Undershaft, London EC3P 3DQ Telephone +44 (0)20 7283 2000 Registered in England No. 2468686 For a PDF version of this announcement please go to www.aviva.com END OF ANNOUNCEMENT This information is provided by RNS The company news service from the London Stock Exchange

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Aviva (AV.)

Monday, 23rd December 2024

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Direct Line Group agrees takeover terms from Aviva, Carnival floats higher as Friday’s results continue to buoy share price and Seeing Machines accelerates following investment from Mitsubishi Electric Mobility.

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1 hour ago Henry Boot

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