9th Mar 2005 07:02
Aviva PLC09 March 2005 PART 3 OF 4 --------------------------------------------------------------------------------------------------------------------Page 20 Summarised consolidated profit and loss account - EEV basisFor the year ended 31 December 2004 Restated* 2004 2004 2003Page •m £m £m Operating profit 27 2,369 Life EEV operating return 1,611 1,496 47 86 Health 58 61 34 Fund management(1) 23 (4) 48 1,950 General insurance 1,326 911 (46) Non-insurance operations(2) (31) 8 50 (262) Corporate costs (178) (160) 50 (684) Unallocated interest charges (465) (406)------------------------------------------------------------------------------------------------------------------ 3,447 Operating profit before tax, amortisation of goodwill and exceptional items** 2,344 1,906 (177) Amortisation of goodwill (120) (103) (72) Financial Services Compensation Scheme and other levies (49) ------------------------------------------------------------------------------------------------------------------- 3,198 Operating profit before tax 2,175 1,803 831 Variation from longer-term investment return 565 779 (468) Effect of economic assumption changes (318) (55) (34) Change in the equalisation provision (23) (49) 45 (200) Net loss on the disposal of subsidiary and associated undertakings (136) (6) 44 (73) Exceptional costs for termination of operations (50) (19)------------------------------------------------------------------------------------------------------------------ 3,254 Profit on ordinary activities before tax 2,213 2,453 (957) Tax on operating profit - before amortisation of goodwill and exceptional items (651) (563) 6 Tax on credit/(charge) on (loss)/profit on other ordinary activities 4 (176)------------------------------------------------------------------------------------------------------------------ 2,303 Profit on ordinary activities after tax 1,566 1,714 (244) Minority interests (166) (121)------------------------------------------------------------------------------------------------------------------ 2,059 Profit for the financial year 1,400 1,593 52 (25) Preference dividends (17) (17) 52 (9) Direct capital instrument appropriation (6) ------------------------------------------------------------------------------------------------------------------- 2,025 Profit for the financial year attributable to equity shareholders 1,377 1,576 52 (845) Ordinary dividends (575) (545)------------------------------------------------------------------------------------------------------------------ 1,180 Retained profit for the financial year 802 1,031================================================================================================================== * Restated for the effect of implementing European Embedded Value principles.** All operating profit is from continuing operations. (1) Excludes the proportion of the results of Morley's fund management businesses and of our French asset management operation Aviva Gestion d'Actifs (AGA) that arise from the provision of fund management services to our life businesses. These results are included within the life EEV operating return. (2) Excludes the results of Norwich Union Equity Release (NUER). Also excludes the proportion of the results of Norwich Union Life Services relating to the services provided to the UK life business. These results are included within the life EEV operating return. Other subsidiaries providing services to our life businesses do not significantly impact the Group results. --------------------------------------------------------------------------------------------------------------------Page 21 Earnings per share - EEV basisFor the year ended 31 December 2004 Restated* 2004 Earnings per share 2004 2003 Operating profit on an EEV basis before amortisation of goodwill and exceptional items,98.8c after tax, attributable to equity shareholders** 67.2p 53.0p89.7c Profit attributable to equity shareholders 61.0p 70.0p88.8c Profit attributable to equity shareholders - diluted 60.4p 69.8p * Restated for the effect of implementing European Embedded Value principles.** All operating profit is from continuing operations. Consolidated statement of total recognised gains and losses - EEV basisFor the year ended 31 December 2004 Restated* 2004 2003 £m £m Profit for the financial year** 1,400 1,593Foreign exchange gains 104 415-------------------------------------------------------------------------------------------------------------------Total recognised gains arising in the year 1,504 2,008=================================================================================================================== * Restated for the effect of implementing European Embedded Value principles.** Stated before the effect of foreign exchange movements, which are reported within the foreign exchange line. Reconciliation of movements in consolidated shareholders' funds - EEV basisFor the year ended 31 December 2004 Restated* 2004 2003 £m £m Shareholders' funds at the beginning of the year, as originally reported on an achieved profits basis 9,668Prior year adjustment (364)--------------------------------------------------------------------------------------------------------------------Shareholders' funds at the beginning of the year, as restated 10,752 9,304 Total recognised gains arising in the year 1,504 2,008Dividends and appropriations (598) (562)Movement in shares held by employee trusts 1 -Increase in share capital 25 2Issue of direct capital instrument 990 -Issue costs of direct capital instrument (9) -Shares issued in lieu of dividend 103 -Goodwill written back 169 --------------------------------------------------------------------------------------------------------------------Shareholders' funds at the end of the year on an EEV basis 12,937 10,752=================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. --------------------------------------------------------------------------------------------------------------------Page 22 Summarised consolidated balance sheet - EEV basisAs at 31 December 2004 Restated* 31 December 31 December 2004 2003 £m £mAssets Goodwill 1,135 1,105-------------------------------------------------------------------------------------------------------------------InvestmentsLand and buildings 637 637Investments in associated undertakings and participating interests 178 279Variable yield securities 3,149 2,967Fixed interest securities 10,750 10,098Mortgages and loans, net of non-recourse funding 1,387 929Deposits 1,871 435Other investments 29 34------------------------------------------------------------------------------------------------------------------- 18,001 15,379 Reinsurers' share of technical provisions 2,589 2,926Reinsurers' share of provision for linked liabilities 852 579Assets of the long-term business 148,209 136,709Assets held to cover linked liabilities 51,144 40,665Other assets 9,889 10,829Acquired value of in-force long-term business 451 488Additional value of in-force long-term business 4,875 4,340-------------------------------------------------------------------------------------------------------------------Total assets 237,145 213,020===================================================================================================================Capital, reserves and subordinated debt Shareholders' funds Equity 7,130 6,354 Non-equity 1,190 200Minority interest 1,182 953Additional retained profit on an EEV basis 4,617 4,198Subordinated debt 2,823 2,814-------------------------------------------------------------------------------------------------------------------Total capital, reserves and subordinated debt 16,942 14,519 Liabilities Liabilities of the long-term business 131,099 121,125Fund for future appropriations 9,218 8,443Technical provision for linked liabilities 51,996 41,244General insurance liabilities 18,155 17,515Borrowings 1,423 1,720Other creditors and provisions 8,312 8,454-------------------------------------------------------------------------------------------------------------------Total liabilities, capital, reserves and subordinated debt 237,145 213,020=================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. --------------------------------------------------------------------------------------------------------------------Page 23 Segmentation of summarised consolidated balance sheet - EEV basisAs at 31 December 2004 Restated* Restated* Life and General Life and General related business related business Restated* businesses and other Group businesses and other Group 2004 2004 2004 2003 2003 2003 £m £m £m £m £m £mTotal assets before acquired additional value of in-force long-term business 200,205 31,614 231,819 177,953 30,239 208,192Acquired additional value of in-force long-term business 451 - 451 488 - 488--------------------------------------------------------------------------------------------------------------------Total assets included in the modified statutory balance sheet 200,656 31,614 232,270 178,441 30,239 208,680==================================================================================================================== Liabilities of the long-term business (192,313) - (192,313) (170,812) - (170,812) Liabilities of the general insurance business - (27,890) (27,890) - (27,689) (27,689)---------------------------------------------------------------------------------------------------------------------Net assets on a modified statutory basis 8,343 3,724 12,067 7,629 2,550 10,179 Additional value of in-force long-term business(1) 4,875 - 4,875 4,340 - 4,340-------------------------------------------------------------------------------------------------------------------- Net assets on an EEV basis(2) 13,218 3,724 16,942 11,969 2,550 14,519==================================================================================================================== Shareholders' capital, share premium, shares held by employee trusts and merger reserves 5,638 4,622Modified statutory basis retained profit 2,682 1,932 Additional EEV basis retained profit 4,617 4,198--------------------------------------------------------------------------------------------------------------------Shareholders' funds on an EEV basis 12,937 10,752 Minority interests 1,182 953-------------------------------------------------------------------------------------------------------------------- 14,119 11,705Subordinated debt 2,823 2,814--------------------------------------------------------------------------------------------------------------------Total capital, reserves and subordinated debt on an EEV basis 16,942 14,519==================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. (1) The analysis between the Group's and the minority interest share of the additional value of in-force long-term business is as follows: 31 December 31 December Movement in 2004 2003 the year £m £m £m Group's share included in shareholders' funds 4,617 4,198 419Minority interest share 258 142 116-------------------------------------------------------------------------------------------------------------------Balance at 31 December 4,875 4,340 535=================================================================================================================== (2) Analysis of net assets on an EEV basis is as follows: 31 December 31 December 2004 2003 £m £m Embedded value 13,014 11,751RBSG goodwill 204 218-------------------------------------------------------------------------------------------------------------------Long-term business net assets on an EEV basis 13,218 11,969=================================================================================================================== --------------------------------------------------------------------------------------------------------------------Page 24 Basis of preparation - EEV basis The consolidated profit and loss account and balance sheet statements on pages 20 to 23 present the Group's results and financial position for the life and related businesses on the European Embedded Value (EEV) basis and for its non-life businesses on the modified statutory solvency basis. The EEV methodology adopted is in accordance with the EEV Principles introduced by the CFO Forum in May 2004. The Group has replaced the Achieved Profits basis with the EEV basis of reporting as its main measure of performance for life and related businesses and comparative figures for the Group's 31 December 2003 supplementary financialstatements have been restated accordingly. The impact on the Group's consolidated supplementary reporting is to reduceshareholders' funds as at 31 December 2003 by £413 million from £11,165 million to £10,752 million and to reduce the Group's consolidated profit after tax and minority interest for the 2003 financial year by £49 million to £1,593 million. The full impact of the adoption of the EEV principles on the Group's results for the periods ending 31December 2003 and 30 June 2004 is shown in the release to the market on 13 January 2005, "Restatement of Aviva's supplementary reporting to the European Embedded Value (EEV) basis". The Group's revised approach to establishing economic assumptions (specifically investment returns, required capitaland discount rates) has been reviewed by Tillinghast, a firm of actuarial consultants, as part of the restatement of 31 December 2003 and 30 June 2004 comparative figures. The approach is based on the well established capital assetpricing model theory and is in line with the EEV Principles and Guidance. In addition, the results of our equity release business have been reclassified from non-insurance operations to lifeinsurance operations. This has resulted in assets, liabilities and operating profits being reclassified out ofnon-insurance segments and into life segments. Comparatives for 2003 have been restated accordingly and the impactof the reclassification on consolidated shareholders' funds and consolidated profit for the 2003 financial year end is nil. In the Directors' opinion, the EEV basis provides a more accurate reflection of the performance of the Group's lifeand related operations year on year than results presented under the modified statutory basis. The Directors considerthat the EEV methodology is a refinement to the Achieved Profits basis previously adopted by the Group and representsthe most meaningful basis of reporting the underlying value in our life business and the underlying drivers of performance. This basis allows for the impact of uncertainty in the future investment returns more explicitly and is consistent with the way the business is priced and managed. The results for 2004 and 2003 have been audited by the auditors, Ernst & Young LLP. Their report in respect of 2004 is included in the Report and Accounts on page 146 of that document. Covered business The EEV calculations cover the following lines of business: life insurance, long term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fundbusiness and our share of the other life and related business written in our associated undertakings and joint ventures, as well as the equity release business written in the UK. Covered business includes the Group's share of our joint venture operations including our arrangement with The RoyalBank of Scotland Group (RBSG) and our operations in India and China. For our joint venture with RBSG, the goodwillarising on the acquisition of the associate company, RBS Life Investments Limited, is included within the 'Amortisationof goodwill' on page 20. In addition, the results of Group companies providing administration, investment management and other services and ofGroup holding companies have been included to the extent that they relate to covered business. Together these businesses are referred to as "Life and related businesses". New business premiums New business premiums include: • premiums arising from the sales of new contracts during the period; • non-contractual additional premiums, including future Department of Work and Pensions (DWP) rebate premiums; and • expected renewals on new contracts and expected future contractual alterations to new contracts. For products sold to individuals, premiums are generally considered to represent new business in certain circumstances,including where a new contract has been signed, or where underwriting has been performed. Renewal premiums includecontractual renewals, non-contractual variations that are reasonably predictable and recurrent single premiums that are pre-defined and reasonably predictable. For group products, new business includes new contracts and increases to aggregate premiums under existing contracts. Renewal premiums are based on the level of premium received during the reporting period and allow for premiumsexpected to be received beyond the expiry of any guaranteed premium rates. Foreign exchange adjustments Embedded value and other balance sheet items denominated in foreign currencies have been translated to sterling using the appropriate closing exchange rate. New business contribution and other profit and loss items have been translatedusing an average exchange rate for the relevant period. The exchange rates adopted in this announcement are shown onpage 44. --------------------------------------------------------------------------------------------------------------------Page 25 EEV methodology Overview Under the EEV methodology, profit is recognised as it is earned over the life of products defined within covered business. The total profit recognised over the lifetime of a policy is the same as under the modified statutory basis of reporting, but the timing of recognition is different. Calculation of the embedded value The shareholders' interest in the life and related businesses is represented by the embedded value. The embedded valueis the total of the net worth of the life and related businesses and the value of in-force covered business. Calculations are performed separately for each business and are based on the cash flows of that business, after allowing for both external and intra-group reinsurance. Where one life business has an interest in another life business, the net worth of that business excludes the interest in the dependent company. The embedded value is calculated on an after-tax basis applying current legislation and practice together with futureknown changes. Profits are then grossed up for tax at the full rate of corporation tax for the UK and at an appropriaterate for each of the other countries based on opening year tax rates. Net worth The net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in the non-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets, and consists of the required capital and free surplus. The level of required capital for each business, which ranges between 100% and 200% of the EU minimum solvency requirement for our main European businesses, reflects the level of capital considered by the Directors to be appropriate to manage the business, allowing for our internal assessment of the level of market, insurance and operating risk inherent in the underlying products. The same definition of required capital is used for both existing and new business. The free surplus comprises the market value of shareholder assets in excess of local statutory reserves and required capital. Value of in-force covered business The value of in-force covered business is the present value at the appropriate risk discount rate (which incorporatesa risk margin) of the distributable profits to shareholders arising from the in-force covered business projected ona best estimate basis, less a deduction for the cost of holding the required level of capital. In the UK, shareholders' distributable profits arise when they are released following actuarial valuations. These valuations are carried out in accordance with statutory requirements designed to ensure and demonstrate solvency inlong-term business funds. Future distributable profits will depend on experience in a number of areas such as investment return, discontinuance rates, mortality, administration costs, as well as management and policyholder actions. Releases to shareholders arising in future years from the in-force covered business and associated requiredcapital can be projected using best estimate assumptions of future experience. In overseas businesses generally, thereare similar requirements restricting payments to shareholders from life businesses. The value of in-force covered business includes an allowance for the impact of financial options and guarantees arising from best estimate assumptions (the intrinsic value) and from additional costs related to the variability ofinvestment returns (the time value). The intrinsic value is included in the underlying value of the in-force covered business using deterministic assumptions. The time value of financial options and guarantees has been determined usingstochastic modelling techniques. Stochastic modelling involves projecting the future cash flows of the business under thousands of economic scenarios that are representative of the possible future outcomes for market variables such as interest rates and equity returns.Allowance is made, where appropriate, for the effect of management and/or policyholder actions in different economicconditions on future assumptions such as asset mix, bonus rates and surrender rates. The time value is determined bydeducting the average value of shareholder cash flows under these economic scenarios from the deterministic shareholdervalue under best estimate assumptions. The cost of holding required capital is the difference between the required capital and the present value at the appropriate risk discount rate of the projected release of the required capital and investment earnings on the assetsdeemed to back the required capital. Where the required capital is covered by policyholder assets, for example in the UK with-profit funds, there is no impact of cost of capital on shareholder value. The assets regarded as covering therequired capital are those that the operation deems appropriate. The value of in-force covered business includes the capitalised value of profits and losses arising from subsidiary companies providing administration, investment management and other services to the extent that they relate tocovered business. This is referred to as the "look through" into service company expenses. In addition, expenses arising in holding companies that relate directly to acquiring or maintaining covered business have been allowed for.Where external companies provide services to the life and related businesses, their charges have been allowed for in the underlying projected cost base. --------------------------------------------------------------------------------------------------------------------Page 26 Risk discount rates Under the EEV methodology, a risk discount rate (RDR) is required to express a stream of expected future distributableprofits as a single value at a particular date (the present value). It is the interest rate that an investmentequal to the present value would have to earn in order to replicate exactly the stream of future profits. The RDR isa combination of a risk free rate to reflect the time value of money plus a risk margin to make prudent allowance forthe risk that experience in future years may differ from that assumed. In particular, a risk margin is added to allow for the risk that expected additional returns on certain asset classes (e.g. equities) are not achieved. Risk discount rates for our life businesses have been calculated using a risk margin based upon a Group Weighted Average Cost of Capital (WACC). The Group WACC is calculated using a gross risk free interest rate, an equity risk margin, a market assessed risk factor (beta), and an allowance for the gearing impact of debt financing (including subordinated debt). The market assessed risk factor captures the market's view of the effect of all types of risk on our business, including operational and other non-economic risk. The RDR is only one component of the overall allowance for risk in EEV calculations. Risk is also allowed for in the cost of holding statutory reserving margins, additional required capital and in the time value of options and guarantees. Hence to derive an RDR the Group WACC is adjusted to reflect the average level of required capital assumedto be held, and to reflect the explicit valuation of the time value of options and guarantees. In order to derive risk discount rates for each of our life businesses, the adjusted Group WACC is expressed as a riskmargin in excess of the gross risk free interest rate used in the WACC calculation as described above. Business-specificdiscount rates are then calculated as the sum of this risk margin and the appropriate local gross risk free rate at the valuation date, based on returns on government bonds. A common risk free rate, and hence a common RDR, is used for all of our businesses within the Eurozone. Additional country-specific risk margins are applied to smaller businesses to reflect additional economic, political and business-specific risk. Within each business, a constant RDR has been applied in all future time periods and in each of the economic scenarios underlying the calculation of the time value of options and guarantees. At each valuation date, the risk margin is reassessed based on current economic factors and is updated only if a significant change has occurred. In particular, changes in risk profile arising from movements in asset mix are allowedfor via the updated risk margin calculation. Participating business Future regular bonuses on participating business are projected in a manner consistent with current bonus rates and expected future returns on assets deemed to back the policies. For with-profit funds in the UK and Ireland, for the purpose of recognising the value of the estate, it is assumed thatterminal bonuses are increased to exhaust all of the assets in the fund over the future lifetime of the in-forcewith-profit policies. However, under stochastic modelling there may be some extreme economic scenarios when the total assets in the group's with-profit funds are not sufficient to pay all policyholder claims. The average additionalshareholder cost arising from this shortfall has been included in the time value of options and guarantees. For profit sharing business in continental Europe, where policy benefits and shareholder value depend on the timingof realising gains, apportionment of unrealised gains between policyholders' benefits and shareholders reflectcontractual requirements as well as existing practice. Where under certain economic scenarios additional shareholder injections required to meet policyholder payments, the average additional cost has been included in the time value of options and guarantees. Consolidation adjustments The effect of transactions between our life companies such as loans and reinsurance arrangements has been included inresults split by territory in a consistent manner. No elimination is required on consolidation. As the EEV methodology incorporates the impact of profits and losses arising from subsidiary companies providing administration, investment management and other services to the Group's life companies, the equivalent profits and losses have been removed from the relevant segment (non insurance or fund management) and are instead included withinthe results of life and related businesses. In addition, the underlying basis of calculation for these profits has changed from the modified statutory basis to the EEV basis. The capitalised value of the future profits and losses from such service companies are included in the embedded value and new business contribution calculations for the relevant territory, but the net assets (representinghistorical profits and other amounts) remain under non insurance or fund management. In order to reconcile the profitsarising in the financial period within each segment with the assets on the opening and closing balance sheets, atransfer of modified statutory profits from life and related business to the appropriate segment is deemed to occur. An equivalent approach has been adopted for expenses within our holding companies. --------------------------------------------------------------------------------------------------------------------Page 27 Components of life EEV return The life EEV return comprises the following components: • new business contribution written during the period including value added between the point of sale and end of the period; • profit from existing business equal to: - the expected return on the value of the in-force covered business at the beginning of the period, - experience variances caused by the differences between the actual experience during the period and expected experience based on the operating assumptions used to calculate the start of year value, and - the impact of changes in operating assumptions including risk margins;• expected investment return on the shareholders' net worth, based upon assumptions applying at the start of the year;• investment return variances caused by differences between the actual return in the period and the expected return based on economic assumptions used to calculate the start of year value; and • the impact of changes in economic assumptions in the period. The life EEV operating return comprises the first three of these components and is calculated using economic assumptions as at the start of the year and operating (demographic, expenses and other) assumptions as at the end of the year. Life EEV return Restated* 2004 2003 £m £m New business contribution (after the effect of required capital) 516 474Profit from existing business- expected return 819 761- experience variances (15) (31)- operating assumption changes (7) 19 Expected return on shareholders' net worth 298 273------------------------------------------------------------------------------------------------------------------Life EEV operating return before tax 1,611 1,496 Investment return variances 501 696Effect of economic assumption changes (318) (55)-------------------------------------------------------------------------------------------------------------------Life EEV return before tax 1,794 2,137 Tax on operating profit (490) (457)Tax charge on other ordinary activities (58) (175)------------------------------------------------------------------------------------------------------------------Life EEV return after tax 1,246 1,505=================================================================================================================== There were no separate development costs reported in either period. * Restated for the effect of implementing European Embedded Value principles. --------------------------------------------------------------------------------------------------------------------Page 28 New business contribution The following tables set out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out on page 24. The contribution generated by new business written during the period is the present value of the projected stream ofafter tax distributable profit from that business. New business contribution before tax is calculated by grossing upthe contribution after tax at the full corporation tax rate for UK business and at appropriate rates of tax for other countries. New business contribution has been calculated using the same economic assumptions as those used to determinethe embedded value as at the start of the year and operating assumptions used to determine the embedded value as at the end of the year, and is rolled forward to the end of the financial period. New business sales are expressed on two bases: annual premium equivalent (APE), the UK life industry's standard measure, and the present value of future new business premiums (PVNBP). The PVNBP calculation is equal to total singlepremium sales received in the year plus the discounted value of regular premiums expected to be received over the termof the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used tocalculate the present value of regular premiums for each product are the same as those used to calculate new businesscontribution, so the components of the new business margin are on a consistent basis. New business contribution is shown before and after the effect of required capital, calculated on the same basis as for in-force covered business. New business New business contribution before contribution after Annual premium Present value of new the effect of the effect of equivalent(1) business premiums required capital required capital -------------- -------------------- ------------------- ------------------ Restated* Restated* 2004 2003 2004 2003 2004 2003 2004 2003 £m £m £m £m £m £m £m £mLife and pensions business United Kingdom 1,166 1,118 9,172 8,516 269 250 215 212 Europe (excluding UK)France 307 241 2,782 2,224 95 72 54 39Ireland 86 81 561 529 19 28 16 26Italy 198 194 1,799 1,752 48 45 34 27Netherlands (including Belgium and Luxembourg) 261 224 2,168 1,821 80 69 43 29Poland 37 35 241 226 11 5 9 3Spain 248 246 2,110 1,964 143 141 121 122Other Europe 124 101 804 587 5 (1) - (6) International 171 187 1,050 1,190 36 37 24 22--------------------------------------------------------------------------------------------------------------------Total (before the effect of required capital) 2,598 2,427 20,687 18,809 706 646Effect of required capital (190) (172)----------------------------------------------------------------------------------------------Total (after the effect of required capital) 516 474 516 474===================================================================================================================== (1) APE has been restated to include NUER volumes of £478 million (2003: £501 million). * Restated for the effect of implementing European Embedded Value principles. New business contribution before the effect of required capital includes minority interests in 2004 of £121 million (2003: £109 million). This comprises minority interests in France of £7 million (2003: £3 million), Italy £27 million(2003: £25 million), Netherlands £10 million (2003: £8 million), Poland £2 million (2003: £1 million) and Spain £75 million (2003: £72 million). New business contribution after the effect of required capital includes minority interests in 2004 of £94 million (2003: £86 million). This comprises minority interests in France of £1 million (2003: nil), Italy £19 million (2003: £15 million), Netherlands £8 million (2003: £7 million), Poland £2 million (2003: £1 million) and Spain £64 million (2003: £63 million). --------------------------------------------------------------------------------------------------------------------Page 29 EEV basis - new business contribution before the effect of required capital, tax and minority interest Annual premium Present value of New business equivalent(1) new business premiums contribution -------------- --------------------- ------------- Restated* 2004 2003 2004 2003 2004 2003 £m £m £m £m £m £mAnalysed between:- Bancassurance channels 587 542 4,967 4,440 242 224- Other distribution channels 2,011 1,885 15,720 14,369 464 422--------------------------------------------------------------------------------------------------------------------Total 2,598 2,427 20,687 18,809 706 646==================================================================================================================== (1) APE has been restated to include NUER volumes. * Restated for the effect of implementing European Embedded Value principles. EEV basis - new business contribution after the effect of required capital, tax and minority interest Annual premium Present value of New business equivalent(1) new business premiums contribution(2) -------------- --------------------- --------------- Restated* 2004 2003 2004 2003 2004 2003 £m £m £m £m £m £mAnalysed between:- Bancassurance channels 328 312 2,728 2,499 74 66- Other distribution channels 1,978 1,846 15,379 14,148 223 206---------------------------------------------------------------------------------------------------------------------Total 2,306 2,158 18,107 16,647 297 272===================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. (1) APE has been restated to include NUER volumes.(2) Contribution stated after deducting the effect of required capital, tax and minority interests. Post tax internal rate of return on life and pensions new business The internal rate of return (IRR) on life and pensions new business for the Group was 12.3% for the year to 31 December2004 (31 December 2003: 12.4%). The internal rate of return is equivalent to the discount rate at which the present value of the post tax cash flows expected to be earned over the life time of the business written is equal to the total invested capital to supportthe writing of the business. The capital included in the calculation of the IRR is the initial capital required to payacquisition costs and set up statutory reserves in excess of premiums received, plus required capital at the same level as for the calculation of new business contribution post cost of capital. 2004 ------------------------------------------------------------------- Internal rate Total invested of return Initial capital Required capital capital % £m £m £m UK 11% 421 148 569 Continental EuropeFrance 11% 23 85 108Ireland 12% 32 18 50Italy 15% 10 39 49Netherlands (including Belgium and Luxembourg) 9% 42 66 108Poland 18% 9 3 12Spain 24% 15 53 68Other Europe 8% 28 16 44 International 15% 20 30 50------------------------------------------------------------------------------------------------------------------Total 12% 600 458 1,058================================================================================================================== The total initial capital for life and pensions new business for 31 December 2004 of £600 million (2003: £655 million)shown above is expressed at the point of sale. Hence it is higher than the impact of writing that new business on networth of £520 million (2003: £581 million) shown on page 31, because the latter amount includes expected profits fromthe point of sale to the end of the reporting period, partly offset by the expected return on the initial capital. --------------------------------------------------------------------------------------------------------------------Page 30 Experience variances Experience variances include the impact of the difference between expense, demographic and persistency assumptions, and actual experience incurred in the year. Also included are variances arising from tax, where such variances are dueto management action. Restated* 2004 2003 £m £m United Kingdom (81) (41)France 22 56Netherlands (including Belgium and Luxembourg) 12 (60)Europe 23 9International 9 5------------------------------------------------------------------------------------------------------------------ (15) (31)==================================================================================================================* Restated for the effect of implementing European Embedded Value principles. Operating assumption changes Changes in operating assumptions are made when the assumed future levels of expenses, mortality or other operating assumptions are expected to change permanently. Restated* 2004 2003 £m £m United Kingdom (58) 1France 35 (27)Netherlands (including Belgium and Luxembourg) 21 28Europe (4) 23International (1) (6)------------------------------------------------------------------------------------------------------------------ (7) 19==================================================================================================================* Restated for the effect of implementing European Embedded Value principles. Further disclosures on experience variances and operating assumption changes are provided on page 54 and 55. Geographical analysis of life EEV operating return Restated* 2004 2003 £m £m United Kingdom 551 597 Europe (excluding UK)France 286 228Ireland 40 57Italy 79 70Netherlands (including Belgium and Luxembourg) 277 198Poland 93 99Spain 180 165Other Europe 22 18 International 83 64------------------------------------------------------------------------------------------------------------------ 1,611 1,496==================================================================================================================* Restated for the effect of implementing European Embedded Value principles. Life EEV operating return includes minority interests in 2004 of £186 million (2003: £157 million). This comprises minority interests in France of £9 million (2003: £4 million), Italy £43 million (2003: £37 million), Netherlands £26million (2003: £13 million), Poland £16 million (2003: £21 million), Spain £90 million (2003: £81 million) and OtherEurope £2 million (2003: £1 million). Analysis of life EEV operating return 2004 2003 £m £mRelated Shares:
Aviva