Interim Results - Part 1 of 3

Aviva PLC 04 August 2004 PART 1 OF 3 ------------------------------------------------------------------------------------------------------------------------ NEWS RELEASE 4 August 2004 INTERIM RESULTS - 6 MONTHS ENDED 30 JUNE 2004 • Strong growth in achieved operating profits: up 37% to £1,130 million • Good life results in testing market conditions: maintaining focus on value over volume growth; life and pensions margins up at 26.5% (2003: 24.5%) • Gradual recovery in new life, pension and investment sales: total sales up 7%; life and pensions APE up 2% at £1.2 billion, including Continental Europe up 5% and UK up 3% • Excellent general insurance performance sustained and improved: worldwide combined operating ratio ahead of target at 97% (2003: 101%) • Interim dividend increased by 4% Richard Harvey, group chief executive, commented: 'Aviva is in great shape. Profits are up 37% and long-term growth prospects remain strong. 'Our focus is on value and cost control across our businesses. This has driven an increase in margins in our long-term savings business. In general insurance we've delivered another set of excellent results, maximising the competitive advantages of scale. 'Consumers are slowly regaining their appetite for saving. The speed of recovery will be linked to investment market conditions and the elimination of regulatory uncertainty, particularly in the UK. Our extensive distribution networks in Europe mean we will capture growth when this recovery happens. We will also continue to develop our businesses in Asia, which represent a significant long-term growth opportunity for us.' Highlights 6 months 6 months 2004 2003 Growth* Operating profit before tax - achieved profit basis** £1,130m £828m 37% Operating profit before tax - modified statutory basis*** £878m £638m 38% Worldwide new business sales# £7,889m £7,451m 7% New business contribution+ £324m £297m 10% Interim dividend per share 9.36p 9.00p 4% Earnings per share - achieved profit basis** 31.7p 22.5p Earnings per share - modified statutory basis*** 25.4p 17.9p Total shareholders' funds**** £11,054m £11,165m^ Return on capital employed 13.4% 11.0% Net asset value per share 496p 502p^ All operating profit is from continuing operations. * All growth rates quoted are at constant rates of exchange. ** Including life achieved operating profit, before amortisation of goodwill and exceptional items. *** Before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items. **** Measured on an embedded value basis. # Including share of associates' premiums (life, pensions and investment sales). ^ As at 31 December 2003. + Before the effect of solvency margin, tax and minorities. ------------------------------------------------------------------------------------------------------------------------ NEWS RELEASE Group chief executive's statement on the first half year trading The Group operating profit on an achieved basis increased by 37% to £1,130 million against the first half of last year. The benefit of cost and pricing actions, seen in the second half of last year, was sustained into 2004. Our value focus produced improved life margins on the same period last year and an improved combined operating ratio of 97% from general insurance. The interim dividend has increased by 4% to 9.36 pence net per share and is strongly covered by modified statutory earnings. The dividend policy, which is unchanged, is to grow the dividend by approximately 5% per annum, whilst looking to maintain a target cover in a range of 1.5 to 2.0 times operating earnings after tax on a modified statutory basis. Long-term savings Long-term savings new business sales continued to recover with total sales, including investment products, of £7.9 billion, up 7%. The recovery is gradual but with encouraging signs as unit-linked sales increased in France and in the UK, where investment products were also popular. Whilst worldwide life and pensions sales increased by 2% on an APE basis to £1,224 million, new business contribution increased by 10% to £324 million, with margins of 26.5% (2003: 24.5%), continuing to benefit from the actions taken on pricing and costs. Total life achieved operating profit was £800 million, up 14%. In the UK, Norwich Union's competitive position in long-term savings has improved significantly as weaker players have closed for new business. We are focused on driving additional value using pricing and cost levers. Sales of unit-linked bonds were up 84% to £577 million and investment products were up 41% to £451 million in the first half. The move to a 1.5% charging cap for new stakeholder products will provide a modest stimulus to the market, contingent on the adoption of a simplified sales approach. Ahead of the depolarisation changes that come into effect at the end of the year, we have reached agreements with a number of distributors, including Bankhall, Sesame and Portman. Total new business sales in Continental Europe, including investment sales, increased by 14% to £4.1 billion, with life and pension sales up 5% on an APE basis to £603 million. Aviva France saw strong growth in new business sales and out-performed the market. Higher margins resulted from increased sales of unit-linked and other products which were up 27% to £478 million in the first half of the year. The Credit du Nord bancassurance joint venture will add further impetus to sales from the fourth quarter of 2004. In the Netherlands, our joint venture with ABN AMRO performed very strongly, with sales ahead by 67% on an APE basis to £35 million and margins at 31.4%. Elsewhere, Spain and Italy produced robust margins. Sales were satisfactory compared to a very strong first half in 2003. Growth prospects remain good in these under penetrated markets, where we have strong and growing bancassurance distribution networks. Aviva has a leading position in the UK market and has successfully developed its businesses across Continental Europe in recent years. Increased focus is now being given to expand our Asian businesses which have excellent long-term prospects. In recent years, we have invested some £200 million in developing a platform in the region in Singapore, Hong Kong, China and India. During 2004, we will establish businesses in Beijing and also in Chengdu, western China, making us the first joint venture foreign life insurer in that city. This adds to our presence in Guangzhou. General insurance Operating profit from our general insurance business was up strongly at £613 million (2003: £387 million). The worldwide COR of 97% is ahead of our 100% target for each of the next three years to 2006. A low level of weather-related claims continued to benefit these results. In the UK, Norwich Union has competitive scale advantages in claims purchasing and has developed a significant capability in India, which will be able to handle a substantial element of our personal claims processing. Service quality in the UK and India is ahead of industry benchmarks. The strong cost control culture saw the administration expense ratio fall to 10% in the first half of 2004 (2003: 10.5%). Rate increases, albeit slowing, continued to be achieved across the book, but we anticipate annual cost savings of £200 million in the supply chain to offset claims inflation. The underwriting outlook in personal and small commercial lines remains favourable. Cost savings We remain on-track to deliver the £250 million of annualised cost savings from actions announced in 2003. Efficiency remains a focus in 2004, particularly in our larger life and general insurance businesses. In June 2004, we announced the outsourcing of 950 jobs in our UK life business which will generate future savings, with the first full year arising in 2006. An estimated charge of £30 million will be taken in the Norwich Union Life Services operating result in the second half of 2004 for the costs related to this change. ------------------------------------------------------------------------------------------------------------------------ NEWS RELEASE Balance sheet The Group's capital position remains strong on both regulatory and realistic measures. The Group had estimated excess regulatory capital at 30 June 2004, as measured under the EU Groups Directive, of £2.2 billion which includes the impact of the new FSA Solvency 1 rules introduced in 2004. In the UK, the financial strength of our with-profit funds gives Norwich Union competitive advantage. The FSA finalised the rules for realistic solvency reporting of with-profit funds in July 2004 in PS04/16 'Integrated Prudential Sourcebook for Insurers'. The orphan estate measured on this basis was £4.2 billion at 30 June 2004 and covers the required capital margin (RCM), as defined by PS04/16, by 2.3 times, without the inclusion of any shareholder capital. Outlook Aviva is in a strong and competitive position. Profitability is responding well to ongoing value-based management actions across our businesses. The life distribution network that we have put in place across Europe combined with our excellent general insurance business, gives us a strongly financed business model with promising long-term prospects. Aviva's extensive distribution networks mean we can capture long-term savings growth as markets pick up. In general insurance, disciplined underwriting, cost efficiency and scale advantages are creating a sustainable, profitable outlook. Richard Harvey Group chief executive ------------------------------------------------------------------------------------------------------------------------ NEWS RELEASE Enquiries: Richard Harvey Group chief executive Telephone +44 (0)20 7662 2286 Andrew Moss Group finance director Telephone +44 (0)20 7662 2679 Analysts: Steve Riley Investor relations director Telephone +44 (0)20 7662 8115 James Matthews Head of investor relations Telephone +44 (0)20 7662 2137 Media: Hayley Stimpson Director of external affairs Telephone +44 (0)20 7662 7544 Sue Winston Head of group media relations Telephone +44 (0)20 7662 8221 Rob Bailhache Financial Dynamics Telephone +44 (0)20 7269 7200 NEWSWIRES: There will be a conference call today for wire services at 8:15am (GMT) on +44 (0)20 7098 0703 Quote: Aviva, Richard Harvey. ANALYSTS: A presentation to investors and analysts will take place at 9:30am (GMT) at St Helen's, 1 Undershaft, London, EC3P 3DQ. The investors and analysts presentation is being filmed for live webcast and can be viewed on the Group's website www.aviva.com or on www.cantos.com. In addition a replay will be available on these websites later today. There will also be a live teleconference link to the investor and analyst meeting on +44 (0)20 7019 9504. A replay facility will be available for two weeks on +44 (0)20 7984 7578. The pass code is 916840 for the whole presentation including Question & Answer session or 989439 for Question & Answer session only. The presentation slides will be available on the Group's website, www.aviva.com/investors/presentations.cfm from 9am (GMT). Photographs are available from the Aviva media centre or by clicking www.aviva.com/media Notes to editors • Aviva is one of the leading providers of life and pensions to Europe with substantial positions in other markets around the world, making it the world's fifth-largest insurance group, based on reported worldwide gross written premiums, at 31 December 2003. • Aviva's principal business activities are long-term savings, fund management and general insurance, with worldwide premium income and retail investment sales from continuing operations of £30 billion and assets under management of around £240 billion. • Overseas currency results are translated at average exchange rates. • All growth rates are quoted in local currency. • This announcement may contain 'forward looking statements' with respect to certain of Aviva's plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Aviva's control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which Aviva and its affiliates operate. As a result, Aviva's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in Aviva's forward-looking statements. Aviva undertakes no obligation to update the forward-looking statements contained in this presentation or any other forward-looking statements we may make. Financial calendar 2004 Ex-dividend date for 2004 interim dividend 11 August 2004 Record date for 2004 interim dividend 13 August 2004 Final date for scrip dividend mandate forms to be recieved, in order to be effective 20 October 2004 Announcement of long-term savings new business for 9 months to 30 September 2004 29 October 2004 Payment date of interim dividend 17 November 2004 ------------------------------------------------------------------------------------------------------------------------ CONTENTS Page Operating and financial review 1 Life new business sales 10 Achieved profit basis Summarised consolidated profit and loss account - achieved profit basis 18 Consolidated statement of total recognised gains and losses - achieved profit basis 19 Reconciliation of movement in shareholders' funds - achieved profit basis 19 Summarised consolidated balance sheet - achieved profit basis 20 Basis of preparation 21 Components of total life achieved profit 21 New business contribution 22 Post-tax internal rate of return on life and pensions new business 23 Experience variances 23 Operating assumption charges 23 Analysis of life achieved operating profit 24 Embedded value of life business 24 Segmental analysis of embedded value of life business 25 Minority interest in life achieved profit 25 Methodology 26 Principal economic assumptions 27 Other assumptions 28 Modified statutory basis Summarised consolidated profit and loss account - modified statutory basis 29 Earnings per share - modified statutory basis 30 Consolidated statement of total recognised gains and losses 30 Reconciliation of movements in consolidated shareholders' funds 30 Summarised consolidated balance sheet 31 Consolidated cash flow statement 32 Basis of preparation 33 Exchange rates 33 Exceptional costs for termination of operations 33 Disposals 34 Geographical analysis of life and pensions and investment sales - new business and total income 34 Geographical analysis of modified statutory life operating profit 35 Geographical analysis of health premiums after reinsurance and operating result 35 Geographical analysis of general insurance premiums after reinsurance and operating result 36 Corporate costs 36 Tax 37 Dividends 38 Earnings per share 38 Statistical supplement Segmental analysis of Group operating profit at constant currency - achieved profit basis 40 Supplementary analyses 41 General insurance - geographical ratio analysis 44 General insurance - class of business analyses 45 Assets under management 47 Group capital structure 48 Shareholder information 55 ------------------------------------------------------------------------------------------------------------------------ PAGE 1 OPERATING AND FINANCIAL REVIEW Group operating profit before tax The first six months of 2004 saw a continuation of the strong operational performance achieved in the second half of 2003, across all of our major businesses. This has been achieved by our continued focus on pricing and costs, our philosophy of writing for profit not volume and our disciplined approach to underwriting and efficient claims handling. The Group achieved an operating profit before tax, including life achieved operating profit, of £1,130 million (2003: £828 million), an increase of 37%. On a modified statutory basis, the equivalent operating profit was £878 million (2003: £638 million). 6 months 6 months 2004 2003 £m £m Achieved operating profit before tax 1,130 828 Amortisation of goodwill (49) (52) Financial Services Compensation Scheme levy (25) - Change in claims equalisation provision (11) (28) Exceptional costs for termination of operations (50) (19) Profit/(loss) on disposal of subsidiary and associated undertakings 6 (7) Effect of economic assumption changes 205 (217) Short-term fluctuations in investment return - general insurance and shareholder business (285) 137 Variation from longer-term investment return - life business (214) 208 -------------------------------------------------------------------------------------------------------------------- Profit on ordinary activities before tax - achieved profit basis 707 850 -------------------------------------------------------------------------------------------------------------------- Profit on ordinary activities before tax - modified statutory basis 414 742 ==================================================================================================================== Profit before tax on an achieved profit basis was lower at £707 million (2003: £850 million), reflecting the combination of lower actual returns on equities compared to our longer-term investment return assumptions and increases to short and medium-term bond yields which have adversely impacted the value of fixed interest securities, particularly in the UK and the Netherlands. The first half of 2003 was characterised by reductions in short and medium-term bond yields across our major European businesses, increasing our profit before tax. The effect of the investment market movements is also reflected in the reduction in the modified statutory basis profit before tax to £414 million (2003: £742 million). The taxation charge for the period was £247 million (2003: £278 million) on an achieved operating profit basis and includes a charge of £338 million (2003: £260 million) in respect of the operating profit, which is equivalent to an effective rate of 29.9% (2003: 31.4%). On a modified statutory basis the effective rate on operating profit was 29.0% (2003: 30.4%). Long-term savings Our worldwide long-term new business sales showed steady progress in the first half of 2004 with growth in total long-term business sales (including investments sales) of 7% to £7.9 billion (2003: £7.5 billion). 6 months 2004 Local currency growth ------------------------------ ---------------------------- Life and Retail Life and Retail pensions investments Total pensions investments Total £m £m £m % % % Long-term savings sales United Kingdom 3,014 451 3,465 2% 41% 6% Europe (excluding UK) 3,824 260 4,084 11% 59% 14% International 276 64 340 (43%) 75% (35%) -------------------------------------------------------------------------------------------------------------------- 7,114 775 7,889 3% 49% 7% ==================================================================================================================== Navigator 323 3% Worldwide life and pension sales increased by 3% to £7.1 billion (2003: £6.9 billion), with worldwide life and pension sales on an APE basis increasing by 2% to £1.2 billion (2003: £1.2 billion). In the UK, Norwich Union, our market leading business, delivered an increase in total sales of 6% to £3.5 billion. This reflects a good performance in a relatively flat market, with good growth in sales of bonds and savings and protection products. Investment sales increased largely as a result of more stable equity markets. We welcome the Government's recent announcement on stakeholder pricing made in June this year and the clarity that it provides for the marketplace in the future. We have undertaken a review of our pensions propositions and we will be repositioning our products during the third quarter this year. ------------------------------------------------------------------------------------------------------------------------ PAGE 2 In Continental Europe, our businesses delivered 14% growth to £4.1 billion, reflecting strong sales of unit-linked savings products in France and the Netherlands, particularly those sold through our ABN AMRO bancassurance channel. Sales through our bancassurance partnerships in Spain and Italy were lower compared to the first half of 2003, which benefited from the impact of marketing efforts and one-off sales. In our International business, total sales fell by 35% to £340 million due to the slowing of fixed annuity sales in our US life operations, offset in part by improving sales in Australia, where investor confidence is returning. We are seeing signs of investor confidence returning, particularly in unit-linked sales as markets have stabilised. However, the level of uncertainty surrounding worldwide economic conditions continues to dampen an upturn in demand, particularly in respect of savings growth in the UK. We continue to work on retaining a strong competitive position in the UK and increasing customer penetration in our developing bancassurance arrangements around the world. We look forward to the launch of our joint venture with Credit du Nord in France during the fourth quarter this year and the expansion of our distribution network with Banche Popolari Unite (BPU) in Italy, coming on stream during the first quarter of 2005. Life achieved operating profit 6 months 6 months 2004 2003 £m £m New business contribution (after the effect of solvency margin) 246 211 Profit from existing business - expected return 406 376 - experience variances (13) (19) - operating assumption changes (4) (10) Expected return on shareholders' net worth 165 147 -------------------------------------------------------------------------------------------------------------------- Life achieved operating profit before tax 800 705 ==================================================================================================================== Life achieved operating profit before tax was higher at £800 million (2003: £705 million). The expected returns on existing business and shareholders' net worth were higher at £571 million (2003: £523 million), reflecting the higher embedded values at the beginning of the year on which the expected return assumptions are applied. New business margins were also higher at 26.5% (full year 2003: 26.1%) with margins improving in all major territories, except Ireland and Spain. New business contribution after the effect of solvency margin was higher at £246 million (2003: £211 million), reflecting the ongoing benefits of our pricing and cost control actions and an improvement in business mix towards unit-linked products. We have continued to incur modest, albeit improving, levels of experience losses on our existing businesses despite the pressures exerted by the uncertain economic conditions on the operating environment. Underpinning this are strong mortality experience profits across our businesses of £36 million and better than assumed default experience on corporate bonds and commercial mortgages. This has been offset by exceptional project expenses of £48 million. Increases in lapse rates for some of our products sold in Ireland have caused us to change our assumptions. The combined effect of this change in lapse assumptions together with the adverse experience losses incurred in Ireland amounted to £13 million. Annual premium New business equivalent(1) contribution(2) New business margin(3) ------------------- ------------------ ----------------------------- 6 months 6 months 6 months 6 months 6 months 6 months 2004 2003 2004 2003 2004 2003 Full year £m £m £m £m % % % Life and pensions business United Kingdom 547 531 126 117 23.0 22.0 22.6 Europe (excluding UK) 603 581 181 159 30.0 27.4 29.8 International 74 100 17 21 23.1 21.1 24.6 -------------------------------------------------------------------------------------------------------------------- 1,224 1,212 324 297 26.5 24.5 26.1 ==================================================================================================================== (1) Annual premium equivalent represents regular premiums plus 10% of single premiums. (2) Before effect of solvency margin which amounted to £78 million (2003: £86 million). (3) New business margin represents the ratio of new business contribution to annual premium equivalent, expressed as a percentage. UK Our market-leading business, Norwich Union, recorded an achieved operating profit of £356 million (2003: £339 million). The increase includes higher new business contribution before the effect of solvency margin of £126 million (2003: £117 million), with improved margins at 23.0% (full year 2003: 22.6%). The improvement in margin is as a result of pricing, cost actions and a change in business mix towards higher margin products. In addition, expected returns on shareholders' net worth and the value of in-force were higher by £27 million, due to higher start of year asset values and higher economic assumptions. Adverse experience variances of £18 million reflect exceptional expenses in relation to project costs associated with regulatory change and adverse lapse experience on bond, pension and endowment products, offset by the better than assumed mortality and default experience on corporate bonds and commercial mortgages. ------------------------------------------------------------------------------------------------------------------------ PAGE 3 Europe (excluding UK) Total life achieved operating profit from our Continental European businesses was £413 million (2003: £336 million). New business contribution increased to £181 million (2003: £159 million), with strong performances in France and the Netherlands. New business margins increased to 30.0% (full year 2003: 29.8%), with improvements in all territories except Ireland and Spain. In Ireland, increased competition in the protection market and the change in lapse assumptions on some business has adversely affected the new business margin. In Spain, the reported margin of 51.0% (full year 2003: 54.4%) includes the impact of a one-off bulk pensions contract, with new business premiums on an APE basis of £18 million written at a margin of 17%. Excluding this item, margins for our Spanish businesses were 56.3%. Improvements in operational performance on existing business have helped us post experience profits of £12 million (2003: losses of £12 million). Furthermore, the higher start of year asset values have resulted in a £20 million increase in expected returns on net worth and in-force business. International Life achieved operating profit from our International business was £31 million (2003: £30 million), benefiting from higher new business contribution in Singapore and Australia, offset by reduced business levels in our US operations. New business margins were 23.1% (full year 2003: 24.6%). New business contribution - after deducting the effect of solvency margin, tax and minority interest New business margins after the effect of solvency margin, tax and minority interest improved to 13.2% (full year 2003: 12.9%). The increase arose primarily in our non-bancassurance channels, reflecting the impact of pricing and cost control actions and benefits from changes to business mix towards unit-linked products. Annual premium New business equivalent(1) contribution(2) New business margin(3) ------------------- ------------------ ------------------------------ 6 months 6 months 6 months 6 months 6 months 6 months Full year 2004 2003 2004 2003 2004 2003 2003 £m £m £m £m % % % Attributable to equity shareholders 1,082 1,063 143 119 13.2 11.2 12.9 Analysed between: - Bancassurance channels 154 168 32 29 20.8 17.3 20.8 - Other distribution channels 928 895 111 90 12.0 10.1 11.5 ===================================================================================================================== (1) Stated after deducting the minority interest of sales. (2) Contribution stated after deducting effect of solvency margin, tax and minority interest. (3) New business margin represents the ratio of new business contribution after deducting the effect of solvency margin, tax and minority interest to annual premium income after deducting the minority share expressed as a percentage. Bancassurance margins Bancassurance new business margins before the effect of solvency margin increased to 40.4% (full year 2003: 39.7%). In the UK, new business margins from our life and pensions sales from our partnership with The Royal Bank of Scotland Group (RBSG) increased to 22.7% (full year 2003: 17.9%). New business bancassurance margins in Italy and Spain were 25.2% and 55.8% (full year 2003: 23.4% and 59.4%), respectively. Our bancassurance agreement with ABN AMRO in the Netherlands generated margins of 31.4% (full year 2003: 32.2%). New business bancassurance margins from our partnership with DBS in Singapore and Hong Kong were 49.6% (full year 2003: 43.7%) reflecting profitable growth from these developing operations. Life operating profit on a modified statutory basis On a modified statutory basis, our life operating profit amounted to £548 million (2003: £515 million). The operating result from the UK with-profit business has fallen to £54 million (2003: £64 million) as bonus rates were reduced in January 2004. The UK non-profit result was £235 million (2003: £229 million). In Continental Europe, life modified statutory profit totalled £238 million (2003: £199 million) which was driven primarily by increased profits in the Netherlands. The Dutch result of £54 million (2003: £29 million) benefited from the increases in bond yields in the first six months of the year. Operating profit from our International businesses was lower at £21 million (2003: £23 million) reflecting lower investment returns. ------------------------------------------------------------------------------------------------------------------------ PAGE 4 Health Premium income from our health business was £682 million (2003: £646 million), with total operating profit of £33 million (2003: £27 million). Our business in the Netherlands continues to be the main contributor to the results with total operating profit higher at £28 million (2003: £20 million), as a result of improved claims experience. Fund management The first half of 2004 saw more stability in worldwide investment markets compared to the first half of 2003. Operating profit from our worldwide businesses was £17 million (2003: £10 million). Assets under management at 30 June 2004 grew to £242 billion (31 December 2003: £240 billion), reflecting the impact of new business flows. In the UK, our fund management businesses comprise our Morley Fund Management retail and institutional business, our retail investment business operating as Norwich Union and our collective investment joint venture business with RBSG. Total profits from these businesses in the period were £3 million (2003: £5 million). Total investment sales across these businesses were up 41% to £451 million (2003: £319 million). Morley's combined UK operations reported a profit of £6 million (2003: £6 million). The result reflects increased fee income following the improved market conditions compared to the prior year offset by the initial costs relating to a number of cost control initiatives. Property and Fixed Income bonds continue to dominate new business growth, while sales in our retail investment businesses improved. Our property expertise has been recognised by winning the Property Fund Manager of the Year award at the Property Week Property Awards 2004. In addition, within the group results are £4 million (2003: £1 million) of profits relating to other Morley businesses, including the pooled pensions business and overseas operations. This brings the contribution that Morley makes to the total group result to £10 million (2003: £7 million). Operating profit through Norwich Union increased to £3 million (2003: loss of £1 million), whilst our new collective investment business with RBSG sustained a loss of £6 million (2003: nil) in the period due to new business strain from increasing sales of regular premium investment business. Operating profit from Aviva Gestion d'Actifs, our fund management operations in France, increased to £8 million (2003: £6 million). New business sales through Navigator, our top-five master trust investment portfolio service in Australia, increased by 3% to £323 million (2003: £291 million), benefiting from improved equity markets. Profits rose to £3 million (2003: loss of £1 million). Although not included in our life achieved operating profit, on an achieved profit basis, Navigator's new business contribution was a loss of £2 million (2003: loss of £2 million) and its embedded value was £41 million (2003: £41 million). General insurance Our worldwide general insurance operations had an excellent start to 2004, with total operating profit of £613 million (2003: £387 million) and a combined operating ratio (COR) of 97% (2003: 101%) across the Group. The results from all of our major businesses benefited from a positive rating environment, lower claims frequency and better than expected weather-related claims experience. Scale advantages, claims management and efficiencies should provide us with ongoing benefits. The longer-term investment return on general insurance business assets increased to £508 million (2003: £458 million), reflecting the higher start of year asset values and the interest earned on the proceeds of the subordinated debt issue, raised in the third quarter of 2003. Underwriting profit for the period amounted to £105 million (2003: loss of £71 million). The improved performance was driven by our disciplined approach to underwriting and claims management and the non-recurrence of the reserve strengthening of £70 million in our Canadian business, Pilot, in the first half of 2003. Better than expected weather-related claims experience in the first six months of 2004 amounted to £30 million (2003: £40 million). The worldwide expense ratio improved to 10.8% (2003: 10.9%). The improvement reflects the benefit of ongoing cost efficiency initiatives across our business operations. Net written premiums Underwriting result* Operating profit* -------------------- --------------------- -------------------- 6 months 6 months 6 months 6 months 6 months 6 months 2004 2003 2004 2003 2004 2003 £m £m £m £m £m £m United Kingdom 2,674 2,496 67 10 408 313 Europe (excluding UK) 1,061 1,035 27 - 122 86 International 719 747 11 (81) 83 (12) ------------------------------------------------------------------------------------------------------------------- Continuing operations 4,454 4,278 105 (71) 613 387 =================================================================================================================== * Excludes the change in the equalisation provision of £11 million (2003: £28 million) and the Financial Services Compensation Scheme levy of £25 million (2003: nil). ------------------------------------------------------------------------------------------------------------------------ PAGE 5 UK Norwich Union Insurance is the leading general insurer in the UK. We are committed to providing high quality service whilst increasing access to our customers through a wider range of propositions, including NU Rescue and oneswoop.com. We have delivered sustainable, profitable growth, with a 7% increase in net written premiums to £2.7 billion and a 19% growth in net written premiums from our direct operation to £434 million. Better than expected weather experience has benefited our result by £20 million (2003: £30 million) and we have achieved an improved COR of 98% (2003: 99%). In personal lines our COR has improved to 99%. We continue to achieve small rate increases (2% for motor and homeowners) and cost efficiencies. These, allied with over £200 million of annual savings in claims costs through our supply chain management have enabled us to sustain profitability. We have delivered an excellent commercial lines COR of 96% (2003: 99%). Although the level of competition in commercial lines has increased, we have recorded annualised rate increases (8% for commercial property and 15% for commercial liability) over the period. Our focus on the small/medium enterprise sector, allied with rigorous underwriting and cost control, enables us to retain our target business and maintain profitability. We have delivered an expense ratio of 10.0% (2003: 10.5%), whilst making substantial investment in operational efficiency. We are one of the lowest cost providers in the market, with a combined expense and commission ratio, excluding creditor business, of 27%. We deliver leading standards of service with customer satisfaction scores well above industry benchmarks and continue to improve. We have successfully developed our offshore operations with over 2,200 jobs relocated to date. Service levels in our Indian centres have matched the improvements seen in the UK. We continue to invest in market-leading initiatives, including digital flood mapping, and Pay As You Drive insurance which will provide the competitive advantage required to maintain our COR through the underwriting cycle. We have a multi-distribution strategy, with leading positions in broker, corporate partner and direct markets. We have secured a five-year contract to provide household insurance products to HSBC customers. In February we announced the closure of our UK national broker subsidiary Hill House Hammond (HHH), at an exceptional cost of £50 million and we are on course to convert over 550,000 customers into our direct operation. We have sold the HHH commercial business and realised a gain on sale of £4 million. Profit before tax also includes our full year cost of £25 million in respect of the Financial Services Compensation Scheme levy. Europe (excluding UK) In Europe, our general insurance businesses produced total operating profits of £122 million (2003: £86 million) with improvements in performance in all of our main markets. In France, our general insurance business recorded operating profit of £13 million (2003: £15 million) with an underwriting loss of £6 million (2003: loss of £7 million) and a COR of 100%. The longer-term investment return was lower at £19 million (2003: £22 million). Hibernian, our market-leading general insurance business in Ireland, reported a substantial improvement in its operating profit to £68 million (2003: £43 million). The strong underwriting profit of £36 million (2003: £14 million) reflects our disciplined underwriting, the positive rating environment in the previous year and reduced claims frequency and costs. The result for the first half of the year includes better than expected weather-related claims of £3 million (2003: £7 million). As a result of the improvement in profitability, the market dynamics are changing and we expect an increase in competition. We continue to participate in a number of market initiatives to control claims costs in order to absorb to some extent the adverse impact of the current rating environment. In the Netherlands, operating profit increased to £23 million (2003: £12 million) representing a COR of 94% (2003: 98%). The result has benefited from the continued excellent profitability of the business written through our joint venture with ABN AMRO. Elsewhere, profits have increased as a result of prior period rate increases and improved claims experience. International Our International businesses recorded an operating profit of £83 million (2003: £12 million loss). This improvement is predominantly as a result of the non-recurrence of £70 million claims reserve strengthening in Pilot in the first half of 2003. Our Canadian business reported an underwriting profit of £4 million (2003: loss of £85 million) which includes £5 million better than expected weather-related claims and also the benefit of lower claims frequency. The rating environment has begun to soften, with annualised rate increases in the first half year being minimal for personal lines and around 9% for commercial lines. Personal auto rate reductions imposed by local regulators are expected in the second half of the year and these are anticipated to be matched by legal reforms which should deliver a corresponding benefit to claims costs. The longer-term investment return was higher at £55 million (2003: £52 million), primarily reflecting the higher asset base at the start of the year. ------------------------------------------------------------------------------------------------------------------------ PAGE 6 Non-insurance operations The result of the Group's non-insurance operations amounted to a loss of £15 million (2003: loss of £47 million) and includes an improvement in the result from Norwich Union Life Services to a loss of £15 million (2003: loss of £27 million). The improvement is due to the ongoing benefits of the cost reduction programme. In July 2004, we announced the sale of Your Move estate agency and e.surv surveying businesses for £42 million. Corporate costs Corporate costs include £45 million (2003: £12 million) in respect of the global finance transformation programme. This increase is in line with the level of finance related change activity across the Group, which has gained momentum over 2004. Our considerable investment in this project is in response to the significant changes we face arising from the Financial Services Authority and European Union regulation, and the introduction of International Financial Reporting Standards in 2005. Total costs of the programme in 2004 are anticipated to peak at £55 million in the second half of 2004, reducing substantially in 2005. Other corporate costs amounted to £49 million (2003: £44 million). Unallocated interest charges Unallocated interest charges comprise internal and external interest on borrowings, subordinated debt and intra-group loans not allocated to local business operations. Total interest costs in the period were £224 million (2003: £198 million). External interest costs were higher at £124 million (2003: £94 million), reflecting the subordinated debt issue in the second half of 2003. Internal interest costs were comparable to 2003 at £100 million (2003: £104 million). Cost savings The Group continues to focus on achieving operational efficiencies and to drive costs out of the business. Over the past year, we have made progress and announced a further series of actions to reduce the cost borne across our larger business units. At the 2003 year end, we announced that we expected to achieve in 2004 estimated annualised savings of £250 million (relative to the 2002 expense base), delivering a net pre-tax benefit of £85 million in the profit and loss account, after the impact of one-off costs of £140 million. We remain on target to achieve the estimated gross annualised savings of £250 million based on the actions announced up to the end of 2003. As at 30 June 2004, the net pre-tax benefit to the profit and loss account (relative to the first half of 2002) was £30 million. This benefit was achieved after bearing one-off costs of £75 million. These costs include £30 million for the continued investment in our off-shoring activities in India, and £45 million spend on our global finance transformation programme. Total costs of our off-shoring activities are anticipated to be in the region of £70 million for 2004, which is in line with our previous estimates. In June 2004, we announced the restructuring of our business services division in UK life. The restructuring will result in approximately 700 job losses and a reduction of 250 contract worker positions. A significant amount of these job losses will be compulsory redundancies and hence there is a large one-off cost to be incurred to achieve cost savings. We expect these costs to be incurred over the remainder of 2004 and, combined with our other ongoing cost initiatives, to be in the order of approximately £30 million. We have ongoing initiatives to identify and drive further efficiency gains. Dividend The Board has declared an interim dividend of 9.36 pence net per share (2003: 9.00 pence) payable on 17 November 2004 to shareholders on the register on 13 August 2004. Group capital and financial strength Shareholders' funds Equity shareholders' funds on an embedded value basis were £10.9 billion (31 December 2003: £11.0 billion) reflecting strong operational performance and the adverse impact of foreign exchange in the period. Net asset value per ordinary share, based on equity shareholders' funds, was lower at 496 pence per share (31 December 2003: 502 pence per share) after adding back the equalisation provision of £375 million (31 December 2003: £364 million). The ratings of the Group's main operating subsidiaries are AA/AA- ('very strong') from Standard & Poor's and Aa2 ('excellent') from Moody's. Return on capital employed The Group's normalised annualised 2004 post-tax operating return on equity was 13.4% (full year 2003: 12.7%), which reflects the strong operational performance delivered by our businesses in the year. The normalised annualised return is based on the post-tax operating profit, including life achieved profit, before amortisation of goodwill and exceptional items, expressed as a percentage of the opening equity capital. ------------------------------------------------------------------------------------------------------------------------ PAGE 7 Financial strength of the Group and its principal insurance operations The Group is subject to a number of regulatory capital tests and also employs a number of realistic tests to allocate capital and manage risk. Overall, the Group comfortably meets all of these requirements and has significant resources and financial strength. We report on these below. EU Groups directive Aviva Group had an estimated excess regulatory capital, as measured under the EU Groups Directive, of £2.2 billion at 30 June 2004 (31 December 2003: £2.4 billion). This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the Group's UK and Irish with-profit funds. The reduction since the 2003 year end is principally attributed to the effect of incorporating the impact of the FSA's Solvency 1 regime on the required minimum capital of UK general insurance businesses. This was introduced in 2004 and amounted to £0.2 billion. The FSA issued PS04/20 Financial groups in July 2004, which contains its final policy statement for the implementation of the Financial Groups Directive from 1 January 2005 onwards. Under these rules, there is no material change to our solvency position at a group level and we comfortably meet the requirement within our existing financial resources. We will continue to report our IGD solvency position to the FSA, as we have done for a number of years. General insurance - regulatory basis Our principal UK general insurance regulated subsidiaries are CGU International Insurance group (CGUII) and Norwich Union Insurance (NUI). The combined businesses of the CGUII group and NUI group have strong solvency positions. On an aggregate basis the estimated excess solvency margin (representing the regulatory value of excess available assets over the required minimum margin) at 30 June 2004 was £3.9 billion (31 December 2003: £3.9 billion) after covering the required minimum margin of £3.5 billion (31 December 2003: £3.3 billion). The increase in the required minimum margin is largely attributable to the changes in the rules under Solvency 1. Solvency cover for the CGUII group has been estimated at 6.3 times (31 December 2003: 7.6 times) and for the NUI group at a cover of 2.6 times (31 December 2003: 3.2 times). General insurance - realistic basis Capital requirements for the Group's worldwide general insurance businesses are assessed using risk-based capital techniques. Using this basis, capital is defined as that required to ensure that at all times the ongoing level of capital will exceed the statutory minimum solvency margin over the next 5 years with a 99% probability. Calculations reflect the increasing strength of the general insurance business balance sheets and improving stability and reductions achieved in the combined operating ratios, which produced a risk based capital requirement of 34% of net written premiums (31 December 2003: 34%). As at 30 June 2004 the risk based capital requirement of our worldwide general insurance businesses was £3.3 billion (31 December 2003: £3.3 billion) in comparison to £4.6 billion (31 December 2003: £4.5 billion) of capital employed by these businesses after deducting goodwill and adding back the claims equalisation reserve. The combined general insurance businesses of CGUII and NUI hold total regulated available assets of £7.4 billion (31 December 2003: £7.2 billion). After deducting the risk based capital for the general insurance businesses of CGUII and NUI of £3.3 billion (31 December 2003: £3.3 billion) and, adding back the claims equalisation reserve of £0.4 billion (31 December 2003: £0.4 billion), the remaining available capital of £4.5 billion (31 December 2003: £4.3 billion) is sufficient to cover the minimum margins of the overseas life businesses by approximately 2.3 times (31 December 2003: 2.2 times). UK Life operations We manage the strength of our funds through a variety of different means. We have the option to use, where appropriate, financial reinsurance, securitisation, shareholder funds and policyholder funds. In July 2004 we announced our proposals to simplify the structure of many of our non-profit funds by transferring them into Norwich Union Life and Pensions (NUL&P). The transfer of these funds will create a simpler and more efficient structure for Norwich Union. The transfer of funds is subject to a set legal procedure and we are working towards an approval of the fund transfer, to be effective from 1 January 2005. We continue our investigation for the reattribution of the orphan estate. However, with the level of regulatory change taking place in the with-profits industry, we do not envisage progressing this in the short-term. With-profit funds - statutory and realistic basis Statutory basis During 2003, the FSA indicated that those companies which could demonstrate that statutory regulations for valuation of liabilities were unduly onerous relative to a realistic assessment of solvency could secure modifications to the rules by way of a waiver. Such waivers were granted to CGNU Life (CGNU) and Commercial Union Life Assurance Company (CULAC) in 2003 and the statutory valuation approach was modified at year end. We did not seek a waiver for NUL&P. ------------------------------------------------------------------------------------------------------------------------ PAGE 8 Having modified the statutory approach for CGNU and CULAC, it was no longer appropriate to continue to use an implicit item for these companies and this has been allowed to lapse. The implicit item in NUL&P is supported by the non-profit business. The free asset ratio (FAR) is the measure of the excess of assets over liabilities, expressed as a proportion of liabilities. The ratio is based on the statutory basis (as modified) including provision for adverse movement in asset values - the resilience test, based on a fall in equity values of 13.7% and property of 20.0%. Realistic basis We measure our realistic strength by the value of the orphan estate. The estate provides a level of capital that is available to absorb any unexpected short-term impact from adverse experience. It provides investment freedom to improve policyholders' returns and enables the operation of the with-profit business and associated features of guarantees and smoothing. The FSA published PS04/16 Integrated Prudential Sourcebook for insurers in July 2004, which includes final policy statements on non-life and life capital requirements. This is expected to become final in November 2004 in order to be applicable for 31 December 2004 year ends. PS04/16 includes a final policy statement on the enhanced capital requirement (ECR) and the appropriate balance sheet provisions and capital requirements for with-profit business. The results below for the realistic orphan estate have been calculated in line with the key principles of PS04/16, including the stress tests to determine the required capital margin (RCM). This is a stronger basis than the ABI basis on which our previous results were disclosed. Appropriate allowance is made for all realistic liabilities of the with-profit funds, including provision for future bonus, the fair value of guarantees, options and promises on a market consistent basis and the cost of shareholder transfers and tax associated with future bonus. The calculations also make allowance for how the with-profit funds are expected to be run, for example investment policy, and how policyholders are expected to behave, for example persistency. Free asset ratios for the three main companies at 30 June 2004 are set out below, with a comparison of the realistic solvency position. Estimated Estimated Estimated realistic required Estimated statutory FAR orphan estate capital margin excess % £bn £bn £bn CGNU Life 16.8% 1.4 0.4 1.0 CULAC 12.2% 1.5 0.4 1.1 NUL&P 14.4% 1.3 1.0 0.3 Aggregate 14.3% 4.2 1.8 2.4 * The FAR for NUL&P includes implicit items for non-profit business only. Based on PS04/16, the RCM is 2.3 times covered by the orphan estate in aggregate. The aggregate value of assets in the three main with-profit funds amounted to £52 billion. The aggregate investment mix of these funds at the half year was: 30 June 31 December 2004 2003 % % Equity 39% 38% Property 17% 16% Fixed interest 41% 42% Other 3% 4% ------------------------------------------------------------------------------------- 100% 100% ===================================================================================== Equity backing ratios, including property, supporting with-profit asset shares is 64% in CGNU Life and CULAC and 54% in NUL&P. With-profit new business is mainly written through CGNU Life. Other external developments European Embedded Value (EEV) In May 2004 the CFO Forum, a group representing the Chief Financial Officers of major European insurers, launched the European Embedded Value Principles, with the intention of improving comparability and transparency in embedded value reporting across Europe. Aviva strongly supported this initiative through the Chairmanship of the Working Party that developed the principles. We believe that embedded value remains the best measure of value added for our long-term insurance business and believe that in a time of significant accounting change, users require a consistent and meaningful basis of reporting. ------------------------------------------------------------------------------------------------------------------------ PAGE 9 The CFO Forum members agreed that all participants will implement the principles as their supplementary basis of reporting from the 2005 year end, with optional early implementation at the 2004 year end. We will seek to publish numbers on the new basis over that period. The implementation of these new principles represents a significant investment by the industry and we are currently in the process of making the enhancements required to our actuarial systems. We currently anticipate that we will present disclosures in compliance with the European Embedded Value Principles at the 2004 year end. International Financial Reporting Standards (IFRS) From 2005, all listed companies within the European Union must present their results in accordance with IFRS. Aviva supports the convergence of accounting standards, which over the long term should improve comparability internationally and particularly across Europe. The standards themselves have undergone significant change over the last 12 months and there remain a number of areas of uncertainty, not least whether the standards IAS 32 and IAS 39 which cover accounting for financial instruments will be endorsed by the European Union. Despite these external factors, our conversion project, which is part of the global finance transformation programme, is progressing well and we continue to take a leading position in debating the accounting issues affecting the insurance industry. Aviva believes that, in the interest of good governance, it is important that the process of educating its stakeholders on the transition to IFRS begins as soon as possible despite the uncertainties remaining. We therefore intend to hold an external presentation giving an indication of the impact upon Aviva of IFRS adoption (Phase 1) in the early autumn. ------------------------------------------------------------------------------------------------------------------------ PAGE 10 LIFE NEW BUSINESS SALES Geographical analysis of life, pensions and investment sales and new business contribution Total new business Annual premium New business sales equivalent sales(2) contribution(3) --------------------- --------------------- --------------------- 6 months to 6 months to 6 months to 30 June Local 30 June Local 30 June Local 2004 currency 2004 currency 2004 currency £m growth(1) £m growth(1) £m growth(1) Life and pensions United Kingdom 3,014 2% 547 3% 126 8% France 1,210 22% 145 21% 44 27% Ireland 120 3% 44 13% 10 (9%) Italy 714 (15%) 89 (24%) 21 (20%) Netherlands (including Belgium and Luxembourg) 607 24% 119 17% 38 79% Poland 48 66% 18 4% 3 - Spain 917 9% 130 (7%) 66 (1%) Other Europe 208 57% 58 38% (1) 65% Continental Europe 3,824 11% 603 5% 181 15% International 276 (43%) 74 (21%) 17 (9%) --------------------------------------------------------------------------------------------------------------------- Total life and pensions 7,114 3% 1,224 2% 324 10% ===================================================================================================================== Investment sales United Kingdom 451 41% 58 55% Netherlands 120 4% 12 4% Poland 49 77% 6 79% Other Europe 91 332% 9 332% Continental Europe 260 59% 27 60% International 64 75% 6 76% --------------------------------------------------------------------------------------------- Total investment sales 775 49% 91 56% --------------------------------------------------------------------------------------------- Total long-term savings 7,889 7% 1,315 4% ============================================================================================= Navigator sales 323 3% (not included above) (1) Growth rates are calculated based on constant rates of exchange. (2) Annual premium equivalent (APE) is the UK industry's standard measure of new regular premiums and 10% of single premiums. (3) Stated before the effect of solvency margin. United Kingdom: Total sales (including investment sales) on an APE basis grew by 6% to £605 million (2003: £568 million) reflecting a good performance in a relatively flat market overall. Our focus continues to be on value over volume, and new business contribution rose 8% to £126 million (2003: £117 million). Total pension sales for the first six months were lower at £1,288 million (2003: £1,309 million) reflecting lower sales of group corporate pensions at £352 million (2003: £476 million), offset to some extent by higher individual pensions sales of £936 million (2003: £833 million). Norwich Union continues to focus on the defined contribution group pensions market as employers move away from defined benefit schemes. As a result, combined sales of group money purchase and group personal pensions within total pension sales increased by 25% to £221 million (2003: £177 million). The investment market shows some signs of recovery. Bond sales for the first six months increased by 12% to £964 million (2003: £862 million) mainly as a result of continued increase in unit-linked bond sales, up 84% to £577 million (2003: £314 million). Sales of with-profit bonds were broadly flat compared to the first half of 2003. Collective investment sales were up 41% to £451 million (2003: £319 million) as a result of increased single premium unit trust business. Sales of protection business grew by 30% to £194 million (2003: £149 million) reflecting an increase in mortgage protection and creditor business. Whilst the market remains competitive we are confident of continued strong sales, supported by the imminent launch of our term assurance and mortgage protection online underwriting capability which will provide improved processing efficiency. ------------------------------------------------------------------------------------------------------------------------ PAGE 11 Annuity sales were 11% lower at £568 million (2003: £641 million). The market continues to be extremely price competitive but Norwich Union remains focused on setting prices to protect profitability. Total sales from our joint venture with RBSG in the first six months were £359 million (2003: £426 million) reflecting lower sales of single premium bonds. Aviva's share of these total sales and sales by product mix is shown in the supplementary analysis on page 15. Total sales on an APE basis increased by 6% to £73 million (2003: £69 million). We have made further progress in integrating the sales force more closely with the bank distribution network and this, together with the introduction of new products later in the year, will further strengthen the distribution model. Norwich Union has a strong competitive position, with top three positions across the majority of product areas. As depolarisation approaches, Norwich Union is actively progressing discussions with major distributors and is confident of consolidating its market position. Market share grew to 12.5% in the first quarter. New business contribution was £126 million (2003: £117 million), with new business margin of 23.0% (full year 2003: 22.6%), reflecting pricing for value in a competitive market. France: Aviva France has outperformed the market in the first half, reporting an increase of 22% in total sales to £1,210 million (2003: £989 million), compared to an estimated increase in the individual life and savings market of 19% during the first five months of 2004. Sales through AFER, the largest savings association in France, have been strong in both euro and unit-linked products. Sales are benefiting from improved equity markets in 2004 with unit-linked products accounting for 15% of AFER sales compared against 5% for the same period last year. Sales of single premium AFER euro products were 20% higher at £700 million (2003: £581 million) compared with market growth of 12% during the first five months of 2004. This sales performance shows the strength of the distribution capability of AFER, which has approximately 600,000 members. Just over 20,000 new members joined during the first half of 2004, a 55% increase on the same period last year. In a buoyant unit-linked market, Aviva France sales of unit-linked and other savings products increased by 27% to £478 million (2003: £376 million) including strong growth in SFER equity-backed products sold through AFER. In pursuing growth in value, we continue to identify opportunities to increase the proportion of unit-linked business, including the conversion of existing euro products to unit-linked products for non-AFER customers. We plan to launch two new unit trust funds to AFER customers from the third quarter. Aviva France launched its Plan d'Epargne Retraite (PERP) product during the second quarter, a unit-linked investment product for private pensions targeted at high regular premium savers, where margins will be most attractive. However pensions are a relatively new market in France and we expect sales to be moderate until there is wider investor understanding of these products. Plans for the launch of our joint venture with Credit du Nord in the fourth quarter this year are well advanced. New business contribution was £44 million (2003: £35 million), with a margin of 30.3% (full year 2003: 29.0%) benefiting from the increasing proportion of unit-linked sales. Ireland: Hibernian Life & Pensions, the third largest life and pensions provider in the Irish market, reported a strong first half performance. Total sales on an APE basis increased by 13% to £44 million (2003: £39 million) with an estimated market share of over 11% in the first half of 2004, benefiting from strong regular premium sales. Total sales were 3% higher at £120 million (2003: £116 million). New regular premium pension sales were up 13% to £26 million (2003: £23 million) and new single premium pension sales were 12% higher at £65 million (2003: £58 million). Sales of regular premium personal and executive pensions benefited from Hibernian's attractive product and a market-leading range of successful investment funds. Sales of Personal Retirement Savings Account (PRSA) products have remained disappointing, although increased publicity around PRSAs in the market has helped contribute to the strong sales growth in other pension products. Life regular premium sales increased to £9 million (2003: £7 million) reflecting strong growth in protection business, helped by the buoyant housing market. Investor caution continues to affect life single premium sales, which decreased to £20 million (2003: £28 million). Responding to this, we introduced a new investment fund to our single premium unit-linked bond in July. This includes a capital guarantee after five years and initial market feedback has been favourable. New business contribution was £10 million (2003: £11 million), with a margin of 23.0% (full year 2003: 28.5%) primarily reflecting increased competition in the protection market and a change in lapse assumptions in certain product classes. ------------------------------------------------------------------------------------------------------------------------ PAGE 12 Italy: Total new business sales were lower at £714 million (2003: £841 million), following exceptional growth in new business sales in the first half of 2003 and lower single premium one-off direct business of £82 million (2003: £187 million). Sales through UniCredito Italiano (UCI) were lower at £345 million (2003: £464 million), as 2004 has seen difficult trading conditions for their savings products, which in our case, has been combined with a challenging comparative, as the first half of 2003 saw a concentration of marketing campaigns. We expect these conditions to continue in 2004 although the impact will be somewhat offset by new product launches planned for the second half of 2004, including increased distribution of products through Xelion, the financial advisor network of UCI. Our most recent agreement with Banca Popolare Commercio e Industria, now part of Banche Popolari Unite (BPU), achieved strong growth with total sales of £138 million (2003: £14 million). Sales benefited from successful limited offers on structured investment bonds. Regular premium unit-linked, protection and individual pension plan products are being introduced to widen the product range for the second half of 2004. We look forward to the benefits from the extension of our agreement with BPU to a further 380 branches, with sales expected from the start of 2005. Total sales from Banca Popolare di Lodi Group were £121 million (2003: £151 million) and sales through Banca delle Marche were £20 million (2003: £25 million). Both partners launched limited offer campaigns on structured investment bonds during the second quarter, which closed in July, and we expect sales in the third quarter to benefit. We continue to develop our strong partnerships across Italy and work with our partners to market a range of products to meet our customers' needs. Our long-term growth potential remains strong, although the timing of marketing campaigns and product launches varies throughout the year resulting in some volatility in sales levels each quarter. Italian pension reform proposals are expected to receive parliamentary approval during the summer and should provide future sales opportunities from 2006 as the retirement savings market develops. New business contribution amounted to £21 million (2003: £27 million), with margins of 23.5% (full year 2003: 23.2%). Netherlands (including Belgium and Luxembourg): Total life and pension sales from Delta Lloyd, our top-five life and pensions business in the Netherlands, increased by 24% to £607 million (2003: £490 million), driven by strong sales growth in group pensions, bonds and savings and protection. Total sales through our joint venture with ABN AMRO were flat at £134 million (2003: £134 million) whilst sales on an APE basis were £35 million (2003: £21 million) with the increase due to stronger regular premium sales of protection business and bonds. Total pension and annuity sales increased by 23% to £345 million (2003: £280 million) with growth in group pensions of 65% to £221 million (2003: £134 million), partially offset by the decrease in immediate annuity business following our repricing actions taken last year. Whilst rates have increased in the first half, the annuity market remains competitive. Our focus continues to be on group pensions although sales levels by their nature vary quarter on quarter due to the size of the contracts. Total life product sales rose by 25% to £262 million (2003: £210 million) due to improved single and regular premium bond and saving sales. Unit-linked products continue to be popular, including those sold through ABN AMRO, with policyholders still preferring to select investment funds supported by bonds rather than equities. Sales of protection products increased by 19% to £153 million (2003: £128 million). Investment sales increased by 4% to £120 million (2003: £115 million). New business contribution amounted to £38 million (2003: £22 million) with margins of 31.9% (full year 2003: 27.7%). The increase in margins is driven by an improved product mix across our business units. Poland: Total life sales increased to £27 million (2003: £18 million), reflecting increased demand for single premium investment products. Mutual fund business has also performed strongly, with sales of £49 million (2003: £31 million) helped by the low interest rate environment and improved stock market performance in the first quarter. Pension sales were higher at £21 million (2003: £15 million), benefiting from sales through the State Agency to members of the workforce without a chosen pensions provider in the first half of the year. CU Polska remains the market leader in individual life and private pensions with a 15% share of the life market measured by total premium income in 2003 and a 28% share of the private pensions market measured by total assets under management. Spain: Aviva continues to be the number one bancassurance group in the Spanish life market and achieved an increase in market share from 10.0% to 10.6% in the first quarter of 2004, based on gross written premiums. New business sales grew by 9% to £917 million (2003: £839 million) following further growth in our developing bancassurance partnerships and including one-off single premium sales of £177 million (2003: £149 million comprising single premium sales of £132 million and regular premium sales £17 million). On an APE basis, sales decreased by 7% to £130 million although after excluding one-off sales for 2004 and 2003, sales on an APE basis grew by 3%. This strong sales performance has been achieved in more difficult trading conditions, as evidenced by a market decline of 5% in the first quarter, based on gross written premiums. ------------------------------------------------------------------------------------------------------------------------ PAGE 13 The focus in the first half of 2004 has been on higher margin protection products, with reduced sales of lower margin traditional savings products, compared with the first half of 2003. Sales through Bancaja were lower at £343 million (2003: £457 million) following the strong marketing campaigns during the first half of 2003 for traditional savings products. We achieved underlying growth from our partnerships with Unicaja and Caixa Galicia, which also included a large bulk pension transfer that generated one-off single premium sales of £177 million. Growth potential is strong across our bancassurance partnerships as we look to increase customer penetration and we continue to develop the product range in all our partnerships. However, quarterly sales are variable due to timing of marketing campaigns and product launches. New business contribution amounted to £66 million (2003: £68 million), including £3 million from the bulk pension transfer in Caixa Galicia. New business margins for Spain were 51.0% (full year 2003: 54.4%) reflecting the increasing proportion of higher margin protection sales offset by the impact of the lower margin one-off sales. Other Europe: Total sales for our Other Europe businesses were £208 million (2003: £134 million), including total sales in Germany of £117 million (2003: £65 million). Sales in Germany include the benefit of a new limited offer bond product which delivered sales of £73 million in the first half of 2004. In Turkey, where we are a top-five provider, total new business premiums increased to £16 million (2003: £12 million), reflecting encouraging regular premium sales in the newly launched personal pensions market where we anticipate being a leading player. Sales through our Dublin-based offshore life and savings business were £50 million (2003: £38 million) whilst sales of undertakings for collective investment in transferable securities (UCITS) in Luxembourg increased to £91 million (2003: £21 million), as a result of improved investor sentiment and further development of the broker relationships within this distribution channel, particularly in Italy and Spain. International: Total sales including investment sales in our International business decreased to £340 million (2003: £562 million), due to reduced appetite for fixed annuity products in the United States. Total sales on an APE basis were £80 million (2003: £103 million). Australia: Total life and pension sales on an APE basis were 28% higher at £31 million (2003: £22 million) reflecting continued strong growth from our corporate pension product. Sales of unit trusts were £64 million (2003: £34 million), which benefited from the more positive investor sentiment towards equity markets. Whilst not included in the new business figures, sales of Navigator, our top-five master trust, increased to £318 million (2003: £291 million), benefiting from improvements in equity markets, a more competitive fee structure and the introduction of a 'pre-select' investment option. Navigator was awarded a AAA quality service rating by a leading independent financial services research company. United States: Total life and pension sales were £135 million (2003: £374 million) driven by reduced sales of fixed annuity products, with single premium sales of £123 million (2003: £349 million) and regular premium sales of £12 million (2003: £25 million). We continue to maintain pricing disciplines in a low interest rate environment together with revised product terms. Singapore and Hong Kong: Total sales through our operation in Singapore were £13 million (2003: £15 million) on an APE basis. We continue to focus on higher margin regular premium business with growth of 17%. The timing of product launches and marketing campaigns results in variation of single premium sales levels each quarter. Sales are generated through both our bancassurance partnership with DBS Group Holdings Limited (DBS) and through brokers. Aviva has a 53% market share of bancassurance regular premium new business and is the market leader in the developing broker market. Total sales through our partnership with DBS in Hong Kong increased strongly, particularly during the second quarter to £11 million (2003: £1 million). Whilst not included in the new business figures, total Navigator sales include £5 million (2003: £3 million) of sales through Navigator Asia in Singapore. India: Total sales from our joint-venture life business with Dabur Group were £8 million, ranking us ninth in the market. Our 26% share included in our new business sales amounts to £2 million (2003: £1 million). Sales are through our bancassurance partnerships including Canara Bank, India's second largest bank, and our 1,600 strong direct sales force. The most recent budget in India has approved the increase in foreign investment in life companies from 26% to 49% subject to an amendment to the Insurance Act in parliament. We intend to take the opportunity of increasing our ownership interest in the company once this has been approved. China: Our joint-venture life business, Aviva COFCO, was launched in Guangzhou in 2003 and has made a solid start. Total sales were £2 million (2003: nil), with our 50% share included in our new business sales amounting to £1 million (2003: nil). Following our approval to sell life insurance products in Beijing in the first quarter, our licence application to operate in Chengdu was granted in May and plans are being developed to start operations in both provinces during the second half of 2004. ------------------------------------------------------------------------------------------------------------------------ PAGE 14 Detailed worldwide long-term savings new business analysis Single Regular Total ---------------------------------- ----------------------------------- -------- 6 months to 6 months to 6 months to 6 months to 30 June 30 June Local 30 June 30 June Local Local 2004 2003 currency 2004 2003 currency currency £m £m growth(1) £m £m growth(1) growth(1) United Kingdom Individual pensions 800 706 13% 136 127 7% 12% Group pensions 303 421 (28%) 49 55 (11%) (26%) Annuities 568 641 (11%) - - - (11%) Bonds 964 862 12% - - - 12% Protection 106 70 51% 88 79 11% 30% -------------------------------------------------------------------------------------------------------------------- Total life and pensions 2,741 2,700 2% 273 261 5% 2% Peps/Isas/Unit trusts/Oeics 437 313 40% 14 6 133% 41% -------------------------------------------------------------------------------------------------------------------- 3,178 3,013 5% 287 267 7% 6% France AFER (excluding unit-linked) 700 581 20% - - - 20% Unit-linked & other savings 462 365 27% 16 11 45% 27% Protection business 21 20 5% 11 12 (8%) - -------------------------------------------------------------------------------------------------------------------- 1,183 966 22% 27 23 17% 22% Ireland Life and savings 20 28 (29%) 9 7 29% (17%) Pensions 65 58 12% 26 23 13% 12% -------------------------------------------------------------------------------------------------------------------- 85 86 (1%) 35 30 17% 3% Italy Life and savings 694 804 (14%) 20 37 (46%) (15%) -------------------------------------------------------------------------------------------------------------------- 694 804 (14%) 20 37 (46%) (15%) Netherlands (including Belgium & Luxembourg) Life 221 183 21% 41 27 52% 25% Pensions and annuities 321 248 29% 24 32 (25%) 23% -------------------------------------------------------------------------------------------------------------------- Total life and pensions 542 431 26% 65 59 10% 24% Unit trusts 120 115 4% - - - 4% -------------------------------------------------------------------------------------------------------------------- 662 546 21% 65 59 10% 20% Poland Life and savings 20 10 129% 7 8 (4%) 69% Pensions 13 4 244% 8 11 (12%) 61% -------------------------------------------------------------------------------------------------------------------- Total life and pensions 33 14 164% 15 19 (8%) 66% Mutual funds 48 30 77% 1 1 91% 77% -------------------------------------------------------------------------------------------------------------------- 81 44 105% 16 20 (6%) 71% Spain Life and savings 626 620 1% 27 32 (16%) - Pensions 249 158 58% 15 29 (48%) 41% -------------------------------------------------------------------------------------------------------------------- 875 778 12% 42 61 (31%) 9% Other Europe Life and pensions 167 100 66% 41 34 29% 57% UCITS and other 91 21 332% - - - 332% -------------------------------------------------------------------------------------------------------------------- 258 121 112% 41 34 29% 95% International Life and pensions 225 476 (49%) 51 52 4% (43%) Unit trusts 64 34 75% - - - 75% -------------------------------------------------------------------------------------------------------------------- 289 510 (39%) 51 52 4% (35%) Total long-term savings 7,305 6,868 7% 584 583 1% 7% ==================================================================================================================== Analysed: Life and pensions 6,545 6,355 4% 569 576 - 3% Investment sales 760 513 48% 15 7 113% 49% -------------------------------------------------------------------------------------------------------------------- Total long-term savings 7,305 6,868 7% 584 583 1% 7% ==================================================================================================================== Navigator sales 323 294 3% - - - 3% (not included above) (1) Growth rates are calculated based on constant rates of exchange. ------------------------------------------------------------------------------------------------------------------------ PAGE 15 Analysis of UK long-term savings by distribution channel Sales Single Regular Total ---------------------------------- --------------------------------- -------- 6 months to 6 months to 6 months to 6 months to 30 June 30 June Local 30 June 30 June Local Local 2004 2003 currency 2004 2003 currency currency £m £m growth(1) £m £m growth(1) growth(1) IFA - life & pensions products 2,085 2,008 4% 219 210 4% 4% - investment products 191 173 10% 1 1 - 10% -------------------------------------------------------------------------------------------------------------------- 2,276 2,181 4% 220 211 4% 4% Bancassurance partnership with RBSG - life & pensions products 184 222 (17%) 8 10 (20%) (17%) - investment products 30 46 (35%) 13 5 160% (16%) -------------------------------------------------------------------------------------------------------------------- 214 268 (20%) 21 15 40% (17%) Other partnerships/Direct - life & pensions products 472 470 - 46 41 12% 1% - investment products 216 94 130% - - - 130% -------------------------------------------------------------------------------------------------------------------- 688 564 22% 46 41 12% 21% -------------------------------------------------------------------------------------------------------------------- Total UK long-term savings 3,178 3,013 5% 287 267 7% 6% ==================================================================================================================== (1) Growth rates are calculated based on constant rates of exchange. Annual premium equivalent (1) Life and pensions sales Investment sales Total sales ----------------------- --------------------- --------------------- 6 months to 6 months to 6 months to 30 June Local 30 June Local 30 June Local 2004 currency 2004 currency 2004 currency £m growth(2) £m growth(2) £m growth(2) IFA 428 4% 20 10% 448 4% Bancassurance partnership with RBSG 26 (18%) 16 67% 42 1% Other partnerships/Direct 93 6% 22 130% 115 18% -------------------------------------------------------------------------------------------------------------------- Total UK long-term savings 547 3% 58 55% 605 6% ==================================================================================================================== (1) Annual premium equivalent (APE) is the UK industry's standard measure of new regular premiums and 10% of single premiums. (2) Growth rates are calculated based on constant rates of exchange. ------------------------------------------------------------------------------------------------------------------------ PAGE 16 Analysis of sales via our principal bancassurance channels Total new business Annual premium sales equivalent sales(2) ---------------------- ------------------------ 6 months to 6 months to 30 June Local 30 June Local 2004 currency 2004 currency £m growth(1) £m growth(1) Life and pensions United Kingdom Royal Bank of Scotland Group 192 (17%) 26 (18%) -------------------------------------------------------------------------------------------------------------------- 192 (17%) 26 (18%) Italy UniCredito 345 (26%) 41 (34%) Banca Popolare di Lodi 121 (20%) 14 (34%) Banca delle Marche 20 (20%) 11 (27%) Banche Popolari Unite 138 - 14 - -------------------------------------------------------------------------------------------------------------------- 624 (5%) 80 (20%) Netherlands ABN AMRO 134 - 35 67% -------------------------------------------------------------------------------------------------------------------- 134 - 35 67% Spain Bancaja 343 (25%) 47 (23%) Caixa Galicia 328 99% 37 (1%) Unicaja 98 42% 17 31% Caja Espana 71 (44%) 10 (51%) Caja de Granada 45 - 9 - -------------------------------------------------------------------------------------------------------------------- 885 8% 120 (8%) International DBS 24 (53%) 14 (6%) -------------------------------------------------------------------------------------------------------------------- 24 (53%) 14 (6%) -------------------------------------------------------------------------------------------------------------------- Total life and pensions 1,859 (2%) 275 (8%) Investment sales United Kingdom Royal Bank of Scotland Group 43 (16%) 16 67% -------------------------------------------------------------------------------------------------------------------- 43 (16%) 16 67% -------------------------------------------------------------------------------------------------------------------- Total bancassurance sales 1,902 (2%) 291 (6%) -=================================================================================================================== (1) Growth rates are calculated based on constant rates of exchange. (2) Annual premium equivalent (APE) is the UK industry's standard measure of new regular premiums and 10% of single premiums. Analysis of total new business sales via our joint venture with Royal Bank of Scotland Group (RBSG) Total sales through our joint venture with RBSG are provided below on a 100% basis and for Aviva's share. In reporting our life and pensions results, we have included our 50% share of sales written through the joint venture life company and 100% of single premium with-profit bond sales written through a Norwich Union fund. Investment sales represent our 50% share of the collective investment sales. Total RBSG sales Aviva's share ---------------------- ------------------------ 6 months to 6 months to 6 months to 6 months to 30 June 30 June 30 June 30 June 2004 2003 2004 2003 £m £m £m £m Single premium with-profit bond sales 111 140 111 140 Other life and pensions sales 162 184 81 92 -------------------------------------------------------------------------------------------------------------------- Total Life and pension sales 273 324 192 232 Collective investment sales 86 102 43 51 -------------------------------------------------------------------------------------------------------------------- Total RBSG bancassurance sales 359 426 235 283 ==================================================================================================================== ------------------------------------------------------------------------------------------------------------------------ PAGE 17 Life profits reporting In reporting the headline operating profit, life profits have been included using the achieved profit basis. This is used throughout the Aviva Group and by many in the investment community to assess performance. We have focused on the achieved profit basis, as we believe life achieved operating profit is a more realistic measure of the performance of life businesses than the modified statutory basis. The modified statutory basis is used in our financial statements and, on this basis, the life operating profit before tax on continuing operations amounted to £548 million. The basis used for reporting achieved profit is consistent with the guidance set out by the Association of British Insurers. Definitions of Group key performance indicators and other terms Achieved operating - Is stated before amortisation of goodwill and exceptional items. profit Achieved operating - Operating profit on an achieved profit basis before amortisation of goodwill and earnings per share exceptional items, after taxation, attributable to equity shareholders. Annual premium - Is the UK industry standard for calculating life, pensions and investments new business equivalent (APE) levels. It is the total of new regular life premiums and 10% of single life premiums. Modified statutory - Is stated before tax, amortisation of goodwill, amortisation of acquired additional value operating profit of in-force long-term business and exceptional items. Net asset value - Is calculated based on equity shareholders' funds, adding back the equalisation provision per ordinary share of £375 million (30 June 2003: £342 million; 31 December 2003: £364 million). Assets under - Represents all assets managed by the Group including funds held on behalf of third management parties. New business - Is calculated using the same economic assumptions as those used to determine the embedded contribution values at the beginning of each year and is stated before tax and the effect of the solvency margin. New business - The ratio of new business contribution to sales measured on an annual premium margin equivalent basis. Combined operating - The aggregate of incurred claims expressed as a percentage of earned premiums and written ratio (COR) expenses and written commissions expressed as a percentage of written premiums. Implicit items - The specific amounts by which prudential margins within life technical provisions may be adjusted to give a more appropriate measure of assets available to meet the Group's solvency requirement. In order to take allowance for implicit items FSA approval must be granted and the FSA must be satisfied that sufficient prudential margins exist to allow this adjustment. Free asset ratio (FAR) - The excess of the regulatory value of assets over total liabilities divided by the regulatory value of total liabilities, expressed as a percentage. Solvency cover - The excess of the regulatory value of total assets over total liabilities, divided by the regulatory value of the required minimum solvency margin. Orphan estate - The assets of the long-term with-profit funds less the realistic reserves for non-profit policies, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs and guarantees. CGUII - A principal UK general insurance company and the parent of the majority of the Group's overseas general insurance and life assurance subsidiaries. EU solvency - The excess of assets over liabilities and the worldwide minimum solvency margins, excluding goodwill and the additional value of in-force long-term business, and excluding the surplus held in the Group's life funds. The Group solvency calculation is determined according to the UK Financial Services Authority application of EU Insurance Groups Directive rules. END OF PART 1 OF 3 This information is provided by RNS The company news service from the London Stock Exchange

Companies

Aviva (AV.)
UK 100