9th Mar 2005 07:02
Aviva PLC09 March 2005 PART 2 OF 4 -------------------------------------------------------------------------------------------------------------------- Contents Page Operating and financial review 1 European Embedded Value (EEV) basis Summarised consolidated profit and loss account - EEV basis 20Earnings per share - EEV basis 21Consolidated statement of total recognised gains and losses - EEV basis 21Reconciliation of movements in consolidated shareholders' funds - EEV basis 21Summarised consolidated balance sheet - EEV basis 22Segmentation of summarised consolidated balance sheet - EEV basis 23Basis of preparation - EEV basis 24EEV methodology 25Components of life EEV return 27New business contribution 28EEV basis - new business contribution before and after the effect of required capital, tax and minority interest 29Post tax internal rate of return on life and pensions new business 29Experience variances 30Operating assumption changes 30Geographical analysis of life EEV operating return 30Analysis of movement in life and related businesses embedded value 31Segmental analysis of life and related businesses embedded value 32Time value of options and guarantees 33Minority interest in life and related businesses EEV results 33Principal economic assumptions - deterministic calculations 34Principal economic assumptions - stochastic calculation 35Other assumptions 36Sensitivity analysis - economic assumptions 37Sensitivity analysis - non-economic assumptions 39 Modified statutory basis Summarised consolidated profit and loss account - modified statutory basis 40Earnings per share - modified statutory basis 41Consolidated statement of total recognised gains and losses 41Reconciliation of movements in consolidated shareholders' funds 41Summarised consolidated balance sheet 42Consolidated cash flow statement 43Basis of preparation - modified statutory solvency basis 44Exchange rates 44Acquisitions 44Exceptional costs for termination of operations 44Disposals 45Geographical analysis of life and pensions and investment sales - new business and total income 46Geographical analysis of modified statutory life operating profit 47Geographical analysis of health premiums after reinsurance and operating result 47Geographical analysis of general insurance premiums after reinsurance and operating result 48Fund management operating result 50Non-insurance operations 50Corporate costs 50Tax 51Dividends 52Earnings per share 52 Statistical supplement Life EEV operating return before tax 54Supplementary analysesGeneral insurance - geographical ratio analysis 56General insurance - class of business analyses 59Appendix A: Group capital structure 62Appendix B: Restated preliminary opening balance sheet as at 1 January 2004 under International Financial Reporting Standards 70Shareholder information 86 --------------------------------------------------------------------------------------------------------------------Page 1 OPERATING AND FINANCIAL REVIEW Group operating profit before tax Following the launch of the European Embedded Value (EEV) principles in May 2004, the Group has adopted these principles for its 31 December 2004 supplementary financial statements. The EEV principles have therefore replacedthe Achieved Profits basis previously reported by the Group. Accordingly, the 31 December 2003 comparative figureshave been restated. During 2004, the Group continued to focus its core businesses on creating shareholder value. Throughout the yearappropriate pricing actions have been taken, the efficiency of claims management processes have improved and costsavings have been made. As a result the Group's operating profit before tax from continuing operations, includinglife EEV operating return, increased 25% at constant exchange rates to £2,344 million (2003: £1,906 million). This includes strong performances from both the life and general insurance operations and delivers an increased return oncapital of 14.4% (2003: 13.1%) exceeding our target of 10% after inflation. On a modified statutory basis, the operating profit from continuing operations was up 27% to £1,861 million (2003: £1,490 million). EEV basis MSSB basis ------------- ----------- Restated* 2004 2003 2004 2003 £m £m £m £m Life EEV operating return / Modified statutory life profit 1,611 1,496 1,185 1,122Health 58 61 58 61Fund management 23 (4) 43 10General insurance 1,326 911 1,326 911Non-insurance operations (31) 8 (108) (48)Corporate costs (178) (160) (178) (160)Unallocated interest charges (465) (406) (465) (406)------------------------------------------------------------------------------------------------------------------Operating profit before tax 2,344 1,906 1,861 1,490================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. Long-term savings In terms of long-term savings new business growth, the Group had a strong finish to the year with worldwide total new business sales up 17% to £17.2 billion (2003: £14.9 billion). Total new business sales 2004 Local currency growth -------------------------------- ---------------------------- Life and Retail Life and Retail pensions investments Total pensions investments Total £m £m £m % % % Long-term savings salesUnited Kingdom 7,018 859 7,877 10% 26% 12%Europe (excluding UK) 7,812 527 8,339 22% 49% 23%International 765 243 1,008 (4%) 144% 13%----------------------------------------------------------------------------------------------------------------- 15,595 1,629 17,224 15% 44% 17%=================================================================================================================Navigator 661 - 661 5% - 5% In 2004 we saw a gradual return of customer confidence in many of our markets and we captured growth through our trusted brands, strong distribution network and wide product range. Worldwide life and pension sales were up 15% to £15,595 million (2003: £13,793 million). In the UK, Norwich Union continues to focus on profitable growth, and retained its market-leading position while growing both value and market share. Total sales, including investment sales, increased by 12% to £7,877 million (2003: £7,051 million), reflecting a strong performance given pricing actions taken throughout the year in pensions, annuities and protection business. Our Continental European businesses now account for over half of life and pensions new business sales and total lifeand pension sales accelerated, up 22% to £7,812 million (2003: £6,569 million). Our businesses in France, theNetherlands, Italy and Spain outperformed local market growth and our bancassurance sales in these businesses madestrong contributions to local performance. Total bancassurance sales were up 17% to £4,022 million (2003:£3,507 million) and include sales from our new bancassurance arrangement in France with Credit du Nord. Total retailinvestment sales were up 44% to £1,629 million (2003: £1,141 million) reflecting improvement in investor confidencetowards equity-backed and property-backed products. In the UK we expect modest market growth in 2005, with a stronger pick-up in 2006 and 2007. We remain very positiveabout the growth prospects in our continental European markets, particularly through our bancassurance network,where customer penetration rates for insurance products offer significant opportunities. We continue to make furtherprogress in developing our businesses and distribution capability in our Asian life businesses, particularly in Indiaand China to complement our businesses in Singapore and Hong Kong. The region provides excellent longer-term growthpotential. --------------------------------------------------------------------------------------------------------------------Page 2 Life EEV operating return Restated* 2004 2003 £m £m New business contribution (after the effect of required capital) 516 474 Profit from existing business - expected return 819 761 - experience variances (15) (31) - operating assumption changes (7) 19Expected return on shareholders' net worth 298 273------------------------------------------------------------------------------------------------------------------Life EEV operating return before tax 1,611 1,496================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. Life EEV operating return before tax was higher at £1,611 million (2003: £1,496 million) driven by higher profits from both new and in-force business. Higher sales volumes and product mix contributed an additional £42 million of new business contribution relative to 2003. The combined expected returns on existing business and shareholders' net worth increased by £83 million due to higher start of year embedded values. The overall adverse impact of experience variances and operating assumption changes was marginally higher compared to the prior period, although there were a number of significant positive and negative variances in our various life businesses. Under EEV, the calculation of new business margin is now based on new business sales measured as the present value of new business premiums (PVNBP), rather than the current UK industry standard Annual Premium Equivalent (APE) measureof annual premiums plus 10% of single premiums. This change to the basis of calculating margins produces a more meaningful ratio, since profit and income are now calculated using consistent economic and operating assumptions. The table below sets out new business margin information measured on both a PVNBP and APE basis. To facilitate marketcomparisons new business margins have also been calculated on the traditional basis using sales expressed on an APEbasis. Present value of New business New business new business New business margin(2) margin(3) premiums contribution(1) (using PVNBP) (using APE) ---------------- --------------- -------------- -------------- Restated* 2004 2003 2004 2003 2004 2003 2004 2003 £m £m £m £m % % % % United Kingdom 9,172 8,516 269 250 2.9% 2.9% 23.1% 22.4% France 2,782 2,224 95 72 3.4% 3.2% 30.9% 29.9%Ireland 561 529 19 28 3.4% 5.3% 22.0% 34.7%Italy 1,799 1,752 48 45 2.7% 2.6% 24.3% 23.2%Netherlands (including Belgium and Luxembourg) 2,168 1,821 80 69 3.7% 3.8% 30.6% 30.8%Poland 241 226 11 5 4.6% 2.2% 29.7% 14.2%Spain 2,110 1,964 143 141 6.8% 7.2% 57.8% 57.2%Other Europe 804 587 5 (1) 0.6% (0.2%) 4.0% (1.0%)Continental Europe 10,465 9,103 401 359 3.9% 3.9% 31.8% 32.0% International 1,050 1,190 36 37 3.4% 3.1% 21.1% 19.8%------------------------------------------------------------------------------------------------------------------Total life and pensions business 20,687 18,809 706 646 3.4% 3.4% 27.2% 26.6%================================================================================================================== * Restated for the effect of implementing European Embedded Value principles.(1) Before effect of required capital which amounted to £190 million (2003: £172 million).(2) EEV basis new business margin represents the ratio of new business contribution to present value of new business premiums, expressed as a percentage.(3) New business margin represents the ratio of new business contribution on an EEV basis to annual premium equivalent, expressed as a percentage. Our world-wide new business contribution increased by 11% to £706 million (2003: £646 million) driven by strong growth in the UK, France and the Netherlands. This represents a new business margin using PVNBP of 3.4% (2003: 3.4%)while margins on an APE basis were 27.2% (2003: 26.6%) reflecting the benefits of pricing, cost control measures andbusiness mix. The internal rate of return (IRR) of our life and pensions new business was 12.3% (2003: 12.4%). PVNBP represents the total single premium sales received in the year and the discounted value of premiums expectedto be received over the term of the new regular premium contracts, and is expressed at the point of sale. Consequently, the PVNBP calculation is sensitive to changes in the mix of single and annual premium business and changes in product mix, as different products have different terms. PVNBP is also sensitive to interest rate movements. --------------------------------------------------------------------------------------------------------------------Page 3 UK Norwich Union continues to leverage successfully its strong brand, wide product offering and multi-distributionnetwork to achieve profitable growth, with total sales on a PVNBP basis up 8% to £9,172 million (2003: £8,516 million).We are well placed for the changes taking place in the market as a result of depolarisation, having already announceddistribution agreements with Bankhall, Millfield, Portman Building Society, Sesame in 2004 and, more recently, withBarclays and Fidelity. We start 2005 with a greater degree of confidence in the market, with modest market growth expected in 2005 and a stronger pick up beyond then. New business contribution increased by 8% to £269 million (2003: £250 million) with a new business margin on a PVNBP basis of 2.9% (2003: 2.9%). Pricing and cost actions have resulted in a change in business mix towards higher marginproducts and this, together with the securitisation of our protection business has partially offset the impact on themargin of lapse assumption changes. The IRR for the full year improved to 11.4% (2003: 12.1%) from 11.0% in the firsthalf as the second half of the year benefited from improved product mix and the pricing actions we have taken duringthe year. Life EEV operating return was lower at £551 million (2003: £597 million). The decrease reflects adverse experiencevariances and operating assumption changes which in aggregate amounted to a loss of £139 million (2003: loss of £40million) which offset the higher contribution to profits from new business and the higher expected returns fromexisting business and shareholders' net worth of £475 million (2003: £425 million). Adverse exceptional expenses of£153 million (2003: £63 million adverse) includes exceptional project costs associated with required regulatory change and other one-off strategic projects. As previously indicated, the £65 million of costs for the restructure ofour UK life business are also included. The benefits of the cost saving initiatives undertaken in prior years are coming through, with a positive expense experience variance of £31 million (2003: loss of £8 million). This allowedNorwich Union to reduce maintenance expense loadings, increasing profits by £77 million (2003: £7 million). Persistency experience on bond, protection, pension and endowment products was greater than our assumptions, generating a loss of £50 million (2003: loss of £29 million). While action is being taken to improve our current persistency experience, Norwich Union has strengthened the persistency assumptions with a consequential adverse impacton profits of £110 million (2003: loss of £46 million). The change reflects, both the actual experience and higher assumed levels of unitised with-profit policy surrenders occurring at set policy anniversary dates where market valueadjustments (MVAs) do not apply. Norwich Union has again reported mortality profits of £51 million (2003: £44 million)and better than expected default experience on corporate bond and commercial mortgages of £29 million (2003: £39 million). Europe (excluding UK) Our Continental European operations delivered accelerated new business life and pensions growth of 18% up to £10,465 million (2003: £9,103 million) on a PVNBP basis, with particularly strong performances from France, the Netherlands and our bancassurance partnerships in Italy and Spain. New business contribution was £401 million (2003: £359 million)with a new business margin on a PVNBP basis of 3.9% (2003: 3.9%) and new business margin on an APE basis of 31.8% (2003: 32.0%). France: Aviva France outperformed the market in 2004 with 28% growth in new business sales to £2,782 million (2003: £2,224 million) on a PVNBP basis. Single premium sales through our partnership with AFER increased by 33% to £1,594million (2003: £1,225 million), and sales on a PVNBP basis of unit-linked funds across all distribution channels nearly doubled to £818 million. New business contribution increased to £95 million (2003: £72 million) representing a new business margin on a PVNBP basis of 3.4% (2003: 3.2%), reflecting strong sales of unit-linked products. Life EEVoperating return was £286 million (2003: £228 million) reflecting the improved contribution from new business and higher experience and operating assumption change profits of £57 million (2003: £29 million). The positive experiencevariances included £21 million of mortality profits on protection business. Recurring levels of tax experience profits of £10 million (2003: £51 million) have led us to review the tax assumptions improving returns by £39 million. Ireland: Hibernian continues to be the third largest Irish life and pensions provider, with an 8% increase in new business sales on a PVNBP basis to £561 million (2003: £529 million). This performance benefits from both strongsingle premium pension sales throughout the year and increased sales of savings products in the fourth quarter. New business contribution was £19 million (2003: £28 million) giving a full year new business margin on a PVNBP basis of 3.4% (2003: 5.3%). The decrease in margin reflects lapse assumption changes on unit-linked pensions business and the competitive market for protection products. Life EEV operating return was £40 million (2003: £57 million) whichincludes an adverse impact of £16 million due to lapse assumption changes on unit-linked pensions business. Italy: Total new business sales from our Italian business were 5% higher at £1,799 million (2003: £1,752 million) on a PVNBP basis. New business contribution was £48 million (2003: £45 million) with an improved new business margin on a PVNBP basis of 2.7% (2003: 2.6%) reflecting increased sales of structured bond products. Life EEV operating return was£79 million (2003: £70 million). Netherlands (including Belgium and Luxembourg): In 2004, our top five life and pensions business, Delta Lloyd, reported a 22% increase in new business sales to £2,168 million (2003: £1,821 million) on a PVNBP basis. This includesstrong sales across all our major product lines and sales from our bancassurance agreement with ABN AMRO of £493 million (2003: £345 million) on a PVNBP basis. New business contribution was £80 million (2003: £69 million) with a full year new business margin on a PVNBP basis of 3.7% (2003: 3.8%). New business margin on an APE basis was broadlyflat at 30.6% (2003: 30.8%), reflecting continued favourable business mix and increased business through ABN AMRO in 2004. Life EEV operating return was £277 million (2003: £198 million) largely reflecting an improvement in experienceand operating assumption changes to a profit of £33 million (2003: loss of £32 million). Exceptional project-relatedadverse expense experience amounting to £12 million (2003: loss of £35 million) has caused us to re-evaluate our approach to allowing for these costs. We have now incorporated an appropriate loading within annual maintenance costs,the impact of which was to reduce our reported profits in 2004 by £72 million. The impact of this was partially offsetby mortality experience profits of £17 million. In addition, refinements made to the modelling of tax assumptions and positive asset mix changes have delivered £79 million of profits (2003: £27 million). --------------------------------------------------------------------------------------------------------------------Page 4 Poland: CU Polska continues to be one of the market leaders and reported total new business sales of £241 million (2003: £226 million) on a PVNBP basis. New business contribution was £11 million (2003: £5 million) with an improvement in margin to 4.6% (2003: 2.2%) reflecting pricing and cost actions. Life EEV operating return was £93 million (2003: £99 million). Spain: Our bancassurance businesses delivered strong results in 2004 and Aviva Spain continues to be a leading bancassurance business in the Spanish life market. Total sales on a PVNBP basis increased by 10% to £2,110 million (2003:£1,964 million). New business contribution was £143 million (2003: £141 million) with a full year new businessmargin on a PVNBP basis of 6.8% (2003: 7.2%). The fall in margin reflects the lower margin bulk pension transfer business in Bia Galicia in 2004. Excluding one-off business of £290 million on a PVNBP basis (2003: £210 million) theunderlying margin was 7.6% (2003: 6.7%). Life EEV operating return was £180 million (2003: £165 million), reflectingimproved expected returns and experience on in-force business. International Asia offers significant future growth potential and we continue to make good progress in our developing businesses inSingapore, Hong Kong, India and China. Sales through our partnerships in India and China continued to progress wellwith total sales on a PVNBP basis of £56 million (2003: £27 million) and £66 million (2003: £38 million) respectively.Our share of these sales amounted to £15 million (2003: £7 million) in India and £33 million (2003: £19 million) inChina, representing our 26% and 50% share of the business respectively. Our joint venture life business with Dabur Group in India is now the eighth largest amongst private providers. Distribution is through a number of bancassurancepartnerships including ABN AMRO, Canara Bank and the 3,200 strong direct sales force. In China, we now operate in Guangzhou, Beijing and Chengdu. Aviva COFCO began writing group life insurance policies in January 2005, making it oneof the first foreign or Sino-foreign life assurers operating in China to write this type of business. Total PVNBP from our International businesses amounted to £1,050 million (2003: £1,190 million), affected by lower sales of fixed annuity products in the United States. New business contribution was £36 million (2003: £37 million) with a full year new business margin on a PVNBP basis of 3.4% (2003: 3.1%), benefiting from higher margin sales in Asia. Life EEV operating return from our International businesses was £83 million (2003: £64 million) reflectingincreases in new business contribution from our Asian operations and improved returns on existing business, primarily in Australia, offset by decreased contribution due to lower sales in the US. Bancassurance margins - Before cost of capital, tax and minority interests Bancassurance new business margins before cost of capital, tax and minority interests on a PVNBP basis were 4.9% (2003: 5.1%) and on an APE basis were 41.2% (2003: 41.3%). Present value of New business New business new business New business margin(2) margin(3) premiums contribution(1) (using PVNBP) (using APE) ---------------- --------------- ------------- ------------ Restated* 2004 2003 2004 2003 2004 2003 2004 2003 £m £m £m £m % % % % United Kingdom 461 533 12 13 2.6% 2.4% 21.1% 19.4%France 127 - 4 - 3.1% - 23.3% -Italy 1,666 1,512 46 43 2.8% 2.8% 25.1% 25.1%Netherlands 493 387 21 16 4.3% 4.1% 32.2% 32.2%Spain 1,956 1,848 142 143 7.3% 7.7% 63.5% 62.5%Asia 264 160 17 9 6.4% 5.6% 42.0% 35.7%------------------------------------------------------------------------------------------------------------------Total bancassurance channels 4,967 4,440 242 224 4.9% 5.0% 41.2% 41.3%================================================================================================================== * Restated for the effect of implementing European Embedded Value principles.(1) Before effect of required capital which amounted to £43 million (2003: £39 million).(2) EEV basis new business margin represents the ratio of new business contribution to present value of new business premiums, expressed as a percentage.(3) New business margin represents the ratio of new business contribution on an EEV basis to annual premium equivalent, expressed as a percentage. In the UK, new business margins from life and pensions sales through our partnership with the Royal Bank of ScotlandGroup (RBSG) increased to 2.6% (2003: 2.4%) on a PVNBP basis reflecting improved product mix, despite lower than expected new business sales volumes in 2004. Norwich Union continues to work with RBSG to deliver improved future sales growth and profitability. --------------------------------------------------------------------------------------------------------------------Page 5 New business bancassurance margins from our new joint venture with Credit du Nord generated margins of 3.1% on a PVNBPbasis. In 2005, as the arrangement beds down, we expect the proportion of unit-linked business, and hence margins,to increase. In the Netherlands, ABN AMRO new business margins increased to 4.3% (2003: 4.1%) and they continue to be higher thanthe total business in the Netherlands due to more favourable product mix. In Spain, new business bancassurance marginswere 7.3% (2003: 7.7%) on a PVNBP basis impacted by the lower margin one-off bulk pension transfer in the year. Excluding one-off business the underlying Spanish bancassurance margin is 8.3% (2003: 7.3%). The PVNBP margin reflects business mix, influenced by marketing campaigns and product launches during the year. New business bancassurance margins from our partnership with DBS in Singapore and Hong Kong were 6.4% (2003: 5.6%) on a PVNBP basis reflecting continued profitable growth. New business margin - after minority interest, tax and cost of capital New business contribution after the cost of capital, tax and the deduction of the minority interest grew by 11% to £297 million (2003: £272 million), with a margin on a PVNBP basis of 1.6% (2003: 1.6%) and an increased margin on an APE basis of 12.9% (2003: 12.6%). This increasing trend is driven by higher margins in both our bancassurance and non-bancassurance businesses due to pricing measures, and reflects the shift towards unit-linked business. Present value of New business New business new business New business margin(2) margin(3) premiums contribution(1) (using PVNBP) (using APE) ---------------- --------------- ------------- ------------- Restated* 2004 2003 2004 2003 2004 2003 2004 2003 £m £m £m £m % % % % Bancassurance channels 2,728 2,499 74 66 2.7% 2.6% 22.5% 21.2%Other distribution channels 15,379 14,148 223 206 1.5% 1.5% 11.3% 11.2%------------------------------------------------------------------------------------------------------------------Total life and pensions business 18,107 16,647 297 272 1.6% 1.6% 12.9% 12.6%================================================================================================================== * Restated for the effect of implementing European Embedded Value principles.(1) After the effect required capital, tax and minority interest.(2) EEV basis new business margin represents the ratio of new business contribution to present value of new business premiums, expressed as a percentage.(3) New business margin represents the ratio of new business contribution on an EEV basis to annual premium equivalent, expressed as a percentage. Life operating profit on a modified statutory basis On a modified statutory basis, our life operating profit amounted to £1,185 million (2003: £1,122 million). As a resultof falling annual and final bonus rates, our UK with-profit result has decreased to £107 million (2003: £145 million).The UK non-profit result of £478 million (2003: £433 million) reflects a higher surplus on existing business. In Continental Europe, life modified statutory profit increased to £566 million (2003: £506 million) with strong results across most of our businesses, particularly in the Netherlands, Italy and Spain. Operating profit in theNetherlands increased to £166 million (2003: £107 million) as increased investment return and focus on controllingcosts delivered profitable growth. Operating profit in Spain increased to £61 million (2003: £50 million) largelydriven by the impact of higher volumes of risk business, which delivers statutory earnings in the first year, and higher investment returns. Operating profit in Italy increased to £43 million (2003: £30 million) largely driven byincreased sales of structured bonds and higher investment returns. In Poland, operating profit decreased to £84 million (2003: £103 million) as 2003 included a one-off benefit of £21 million following regulatory changes in the level of required reserves on pensions business. Health Premium income after reinsurance from our health business was £994 million (2003: £1,066 million), with total operating profit of £58 million (2003: £61 million). Our business in the Netherlands continued to be the main contributor to the results with operating profit of £38 million (2003: £39 million) where we continue to focus onreviewing the profitability of business on renewal which has led to the loss of volume during the year, with littleimpact on operating profits. The total combined operating ratio for the health business was 100% (2003: 101%). Fund management The steady recovery across global equity markets during 2004 resulted in increased operating profits on an MSSB basis of £43 million (2003: £10 million)for our worldwide fund management operations. Assets under management at 31December 2004 increased to £273 billion (2003: £240 billion), driven by the benefit of new business flows in the periodand the improvement in worldwide investment markets. Our UK fund management business comprises Morley Fund Management retail and institutional business, our retail investment business operating as Norwich Union, and our collective investment business with RBSG. These businessesreported a profit of £10 million (2003: loss of £6 million). Morley's UK businesses reported a profit of £12 million (2003: £3 million) due to an increase in fee income, reflecting the improvement in investment markets and the benefit of performance fees, and controlled operating costs.Within the Group results are further profits of £12 million (2003: £6 million) relating to other Morley businesses including the pooled pensions business and the overseas operations. This brings the contribution that Morley makes tothe total group result on a MSSB basis to £24 million (2003: £9 million). --------------------------------------------------------------------------------------------------------------------Page 6 Operating result through Norwich Union retail investment businesses improved to £5 million (2003: loss of £3 million) benefiting from lower costs. The loss of £7 million (2003: loss of £6 million) reported by our new collective investment vehicle with RBSG is due to new business strain from sales of regular premium investment business. Aviva Gestion d'Actifs, maintained its reputation for strong investment performance, with over 65% of our funds in the top quartile for returns over three years. Operating profit was £17 million (2003: £13 million) on an MSSB basis. In Australia our master trust fund administration business, Navigator, reported increased sales of £648 million (2003: £617 million) benefiting from improvements in product offerings and a more competitive fee structure. Thesesales are excluded from the Group's headline new business figures. Operating profit increased in Australia by £8 million due to the improvement in investment markets and tight cost control. Sales from our Navigator business in Singapore were £13 million (2003: £8 million). The embedded value of our Navigator Australian business was £54 million (2003: £53 million) on an EEV basis. On an EEV basis, the reported operating profits in respect of fund management were £23 million (2003: loss of £4 million) and principally relate to fund management profits on transactions with third parties and the management ofgroup internal non-life funds. General insurance Our worldwide general insurance operations reported excellent results with a 47% increase in total operating profit to £1,326 million (2003: £911 million). We continue to see the benefits of our strategy of focusing on personal and small commercial business, underpinned by our strict adherence to our operational disciplines of focused underwritingand efficient claims handling despite an increasingly competitive environment. Our worldwide combined operating ratio(COR) improved to 96.7% (2003: 100%), with the UK, Ireland, the Netherlands and Canada reporting CORs of 97%, 87%, 95%and 97% respectively. This outperforms our target Group COR of 100% set for each year from 2004 to 2006 across theworldwide general insurance business. The underwriting result improved to a profit of £301 million (2003: loss of £54 million) due to strong underwriting disciplines, and lower claims frequency, and is underpinned by a strong reserving basis. Also included is the benefitof better than expected weather-related claims experience of £50 million (2003: £40 million) and the non-recurrence ofthe prior year reserve strengthening in 2003 of £70 million in our Canadian subsidiary, Pilot. The worldwide expense ratio from continuing operations was 10.9% (2003: 11.3%). The improvement reflects our continued focus on achieving enhanced efficiencies and the benefit of our cost savings initiatives. Our claims reserves are calculated within a range of possible outcomes and our actuarial analysis suggests that our claims reserves across the Group are strong. Our longer-term investment return improved to £1,025 million (2003: £965 million) reflecting, in part, the higher start of year investment values and the returns earned on the positive cash flows during 2004. Net written premiums Underwriting result* Operating profit* -------------------- -------------------- ------------------ 2004 2003 2004 2003 2004 2003 £m £m £m £m £m £mUnited Kingdom 5,434 5,135 158 50 832 676Europe (excluding UK) 2,018 1,915 99 6 295 193International 1,363 1,474 44 (110) 199 42------------------------------------------------------------------------------------------------------------------Continuing operations 8,815 8,524 301 (54) 1,326 911================================================================================================================== * Excludes the change in the equalisation provision of £23 million (2003: £49 million). UK In the UK, Norwich Union Insurance (NUI) delivered an increased operating profit of £832 million (2003: £676 million), with excellent results in both personal and commercial lines. Our multi-distribution strategy supports sustainable,profitable growth, with a 6% year on year growth in net written premiums to £5,434 million (22% growth in Retail whichis now around 17% of net written premiums). Better than expected weather-related claims experience has benefitedour result by £50 million (2003: £30 million) and we have delivered a 2% improvement in COR to 97%. This performancehas been achieved in an environment of significant organisational change and preparation for the FSA regulatoryregime. Our personal lines COR has improved to 100%. We achieved modest rate increases (2% in personal motor and 1% in homeowners), and there is no evidence of significant rate cutting in the personal lines market. Disciplined underwriting, allied with a £55 million increase in claims cost savings through our supply chain management across our business lines, has enabled us to sustain profitability. We have delivered an excellent commercial lines COR of 94% (2003: 96%). Commercial rate increases are moderating (4% for commercial property and 7% for commercial liability),but maintaining our focus on the SME sector and rigorous cost control has enabled us to increase levels of profitability. We have kept our promise to deliver a full year expense ratio of 10.0%, reaffirming our position as a low-cost provider. During 2004 we successfully completed the offshoring migration of 1,200 roles, bringing the total number ofjobs relocated to around 2,600. We continue to invest in market-leading initiatives, including digital flood maps and'Pay As You Drive'TM insurance, which will help to provide the competitive advantage required to maintain our COR levels through the underwriting cycle. --------------------------------------------------------------------------------------------------------------------Page 7 A key part of our strategy is to increase access to our customers through broader propositions that include non-insurance products and services. In August, we acquired HPI Group Holdings Ltd (HPI), the UK's leading independentprovider of vehicle information and checking services, at a cost of £120 million. This acquisition fits well with ourstrategy of offering customers motoring solutions, strengthening our position as a service provider while offering further distribution opportunities. In addition, we have launched a 'Pay As You Drive'TM Young Drivers' product aimed at 18-21 year-olds. Young drivers now have the chance to get more affordable insurance premiums, whichwill be based on when and how often they drive their car. In a Professional Broking magazine survey we were voted the best insurer for service. We also won the Insurance Times' general insurer of the year for the second year running. NUI is in advanced negotiations with Barclays to become their sole provider of their general insurance products. Thiswill include the provision of household products, in addition to the motor and travel portfolio we currently underwrite. The deal will strengthen our market position, supports our strategy of building mutually beneficial partnerships to distribute our products and is a step towards becoming the preferred partner of the UK's best brands. Europe (excluding UK) In Continental Europe, our general insurance businesses produced total operating profit of £295 million (2003: £193 million) with significant improvements in performance in Ireland and the Netherlands. Weather-related claims in 2004 were in line with long-term averages whereas 2003 included a benefit of £10 million in this respect. In France our business reported a slight improvement in the underwriting result to a loss of £8 million (2003: loss of £9 million) with net premiums rising to £524 million (2003: £515 million). We achieved a COR of 101% (2003: 102%), as we continue to maintain our underwriting and cost control disciplines. The longer-term investment return in France was lower at £40 million (2003: £44 million). In Ireland, the market became progressively more competitive throughout 2004 and, as a result, premiums in Hibernian, our market-leading general insurance business in Ireland, decreased to £545 million (2003: £611 million). We reporteda substantial improvement in operating profit of £153 million (2003: £91 million) with a COR of 87% (2003: 97%), underlining the success of our selective underwriting strategy and focus on containing claims costs. We continue toparticipate in market initiatives to control claims including the introduction of discounts to penalty point free drivers and those who complete our Ignition driver training programme. Weather-related claims were in line with long-term averages (2003: £7 million benefit). The Irish market remains very price competitive, with continuing external pressures for providers to reduce rates. The Government has been instrumental in changing the business environment and has reduced the cost of tort awards, which has consequently led to premium reductions. We have made substantial progress in renewing key business partnerships in our intermediary market, and have successfully increasedthe customer base in our direct channel. The benefits of these actions should help to support short to medium-term growth. In the Netherlands, operating profit increased to £71 million (2003: £35 million) with an improved COR of 95% (2003: 101%), reflecting cost control initiatives, including the benefits of the shared service centre which commenced at theend of 2003. The results also include the ABN AMRO general insurance operations with a COR of 90% (2003: 93%). Our focus is on motor and property personal lines and small commercial risks, particularly in the income protectionand absenteeism sectors, which we anticipated will grow in importance in the market. A number of products were updatedand new products launched during the year to complement our existing offering. International Our International businesses recorded an operating profit from continuing operations of £199 million (2003: £42 million). The 2003 result included a £70 million claims reserve strengthening in our Canadian subsidiary, Pilot. Our Canadian general insurance business reported increased operating profits of £152 million (2003: £82 million excluding impact of Pilot) and a COR of 97% (2003: 101% excluding the impact of Pilot). The result benefits from rateincreases in all lines of business, albeit at a lower rate than 2003, and improved claims frequency. Aviva Canada successfully launched at the end of 2003 the President's Choice Financial (PCF) Corporate Partnership initiative withLoblaw's, Canada's largest supermarket chain, widening our distribution capability. In a number of provinces, successful legislative motor reforms have led to lower claims costs and lower premiums for customers, as expected. The operating profit from our other international businesses of £47 million (2003: £30 million) includes the results of the Group's captive and £21 million (2003: £22 million) from our Asian businesses. In September 2004, we agreed tosell our Asian general insurance operations to Mitsui Sumitomo Insurance Co Limited for £250 million, a multiple of 3.5 times book value. These operations comprise our businesses in Singapore, Malaysia, Thailand, Indonesia, Hong Kong,the Philippines, Marianas, Macau and Taiwan. The sale will be completed in stages with the first stage completed in February 2005. The second stage is anticipated to complete later in the year. The results of this business willcontinue to be included until the sale is formally completed. Had the sale completed on 31 December 2004, we would have reported a pre-tax profit on disposal of £169 million. Non-insurance operations The result of the Group's non-insurance operations on an MSSB basis was a loss of £108 million (2003: loss of £48 million). On an EEV basis, non-insurance losses amounted to £31 million (2003: profit of £8 million). The main difference between the two bases relates to the exclusion of NU Life Services losses arising on services provided toUK life businesses which are factored into the life EEV operating return. --------------------------------------------------------------------------------------------------------------------Page 8 The deterioration in the non-insurance result is principally due to a one-off £40 million vacant property provision following the completion of a UK-wide owner-occupied property strategy review which assessed current requirements inlight of headcount reductions in the UK in recent years. Corporate costs Corporate costs were higher in the year at £178 million (2003: £160 million) and include global finance transformationprogramme (GFTP) costs of £85 million (2003: £60 million). The GFTP costs reflect the peak of the considerableinvestment required in response to the significant accounting and regulatory external changes that the Group must comply with now and over the foreseeable future. We expect GFTP costs to reduce to around £40 million in 2005 when theprogramme will be completed. Other corporate costs were lower at £93 million (2003: £100 million). Unallocated interest charges These charges comprise internal and external interest on external borrowings, subordinated debt and intra-group loansnot allocated to local business operations. Total interest costs were £465 million (2003: £406 million). External interest costs were £246 million (2003: £210 million), and include the full year's charge of £95 million on the subordinated debt issued in September 2003, offset by the impact of interest rate falls and the repayment of seniordebt. Internal interest costs were higher at £219 million (2003: £196 million). We took advantage of the low interest rate environment and favourable market conditions to issue a direct capital instrument which was four times oversubscribed and raised a sterling equivalent of £990 million. This transaction allowed us to lock into favourable funding rates and will be used to repay existing senior debt over the course of 2005 and will leave overall debt levels unchanged. This also enhanced our strong regulatory capital position,whilst leaving the financial leverage of the Group unchanged. The issuance of the direct capital instrument is treated and accounted for as equity, in accordance with FRS 4 'Capital Instruments', and hence the interest charge is treated as an appropriation of profits. Accordingly, the interest charge is not included within operating profit as external interest but is shown as an appropriation in the profit and loss statement. The charge for the year was £6 million. The accounting treatment does not affect the calculation of dividend cover or return on capital employed as non-ordinary share appropriations are excluded in calculating these key performance indicators. Cost savings Reducing costs and improving our operational efficiency continued to be one of our key objectives for 2004. Throughout the year we have taken actions and announced a number of initiatives to reduce our cost base. At the 2003 year end,we announced that we expected to achieve in 2004 estimated annualised savings of £250 million and earned savings of £225 million, both relative to the 2002 cost base for cost saving initiatives announced in the prior years. We havesuccessfully achieved these targets delivering earned savings of £225 million in 2004 and accordingly, we expect to achieve annualised savings of £250 million in 2005. In 2004, we have achieved a net pre-tax benefit to the profit and loss account in 2004 relative to 2003 of £52 millionwhich is greater than the £20 million previously announced. This benefit includes lower than anticipated one-off GFTPand off-shoring costs for 2004. The table below provides an analysis of the net pre-tax benefit to the profit and lossaccount across each business for the £52 million saved in 2004 relative to 2003. Update on cost savings in 2004 compared to 2003 Benefit to the profit and loss account £mUK life 43UK general insurance 27Other businesses -Corporate costs (18)-------------------------------------------------------------------------------------------------------------------Total 52=================================================================================================================== By the end of 2004 we successfully completed the offshoring migration of 3,700 jobs across our UK life and general insurance operations to India to service the Group's UK life and general insurance businesses and our general insurance operations in Canada. In 2004, total upfront costs incurred on these initiatives were around £50 million (2003: £66 million). As previously announced we expect to have around 7,000 staff working in our offshore operations by 2007. In addition to the cost initiatives shown above, we also announced in 2004 the restructuring of our UK life business.The one-off cost incurred in 2004 to achieve cost savings was £65 million and further one-off costs of £88 millionare expected over the next three years. These are expected to deliver annualised savings of £130 million by the end of 2007. --------------------------------------------------------------------------------------------------------------------Page 9 Profit on ordinary activities before tax EEV basis MSSB basis --------------- -------------- Restated* 2004 2003 2004 2003 £m £m £m £m Operating profit before tax 2,344 1,906 1,861 1,490Amortisation of goodwill (120) (103) (120) (103)Amortisation of acquired additional value of in-force long-term business - - (126) (135)Financial Services Compensation Scheme and other levies (49) - (49) -Change in claims equalisation provision (23) (49) (23) (49)Exceptional costs for termination of operations (50) (19) (50) (19)Loss on disposal of subsidiary undertakings (136) (6) (136) (6)Effect of economic assumption changes (318) (55) - -Related Shares:
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