11th Aug 2005 07:00
Aviva PLC11 August 2005 PART 1 OF 4 11 August 2005 INTERIM RESULTS FOR THE 6 MONTHS ENDED 30 JUNE 2005 • Worldwide operating profit up 21% to £1,318 million • Life operating profit up 5% to £857 million, with more than 60% coming from businesses outside the UK; Group margin up at 3.6% (2004: 3.5%) • Strong long-term savings sales growth, up 13% to £12,078 million, with bancassurance a major driver for growth in continental Europe and Asia • Sustained excellent general insurance performance, with general insurance and health profits up 18% to £694 million, and worldwide combined operating ratio ahead of target at 95% (2004: 97%) • Strong performance from fund management with profits up 94% to £33 million***** (2004: £17 million) and assets under management up to over £290 billion (31 December 2004: £280 billion) • Interim dividend increased by 5% Richard Harvey, group chief executive, commented: "This is a very good set of results, delivered by managing our business for value. Our balanced internationalportfolio of life and general insurance businesses has enabled us to sustain real growth momentum. "We've delivered strong and profitable life growth, reaping the benefit from our growing position in continentalEurope and managing our UK business for profit. In Asia we continue to develop our footprint for the long-term withnew distribution in India and access to new regional centres in China. "In general insurance, we've delivered another excellent result, once again delivering strong and resilient returns.Our integration of RAC in the UK is moving quickly and we are on track to deliver our targeted cost savings for 2006. "Our shareholders continue to see healthy dividend growth, backed by strong statutory profits. Our continuing aimis profitable growth in all our businesses." Highlights HY 05 HY 04 Growth in constant currencyOperating profit before tax - EEV basis* £1,318m £1,076m 21%Operating profit before tax - IFRS basis** £943m £781m 19%Life EEV operating return £857m £799m 5%General insurance and health operating profit £694m £583m 18%Worldwide long-term savings new business sales £12,078m £10,528m 13%New business contribution - gross £393m £338m 15%New business contribution - net of required capital, tax and minorities £158m £146m 7%Total dividend per share 9.83p 9.36p 5%Total shareholders' funds*** £12,633m £11,661m**** -Return on capital employed 14.6% 13.7%**** -Net asset value per share 533p 511p**** - All operating profit is from continuing operations. All growth rates quoted are at constant rates of exchange. The 2004 comparative information has been restated for the adoption of European Embedded Value (EEV) principles and International Financial Reporting Standards (IFRS).* Including life EEV operating return, before exceptional items.** Before exceptional items.*** Measured on an EEV basis, excluding preference shares, direct capital instrument and minority interests.**** As at 31 December 2004***** On an IFRS basis. ------------------------------------------------------------------------------------------------------------------- Segmental analysis of Group operating profit* 6 months 2004 at 2005 exchange Restated** 6 months rates 6 months 2005 Restated** 2004 £m £m £mContinuing operations Life EEV operating returnUnited Kingdom 327 345 345France 158 114 112Ireland 22 16 16Italy 47 37 36Netherlands (including Belgium and Luxembourg) 115 135 132Poland 46 41 35Spain 92 83 81Other Europe 14 14 14International 36 28 28------------------------------------------------------------------------------------------------------------------ 857 813 799==================================================================================================================Fund Management***United Kingdom 5 - -France 2 5 5Other Europe 5 1 1International 6 4 4------------------------------------------------------------------------------------------------------------------ 18 10 10==================================================================================================================General insurance and healthUnited Kingdom 431 364 364France 17 20 20Ireland 83 61 60Netherlands 55 54 53Other Europe 19 12 12Canada 67 54 52Other 22 22 22------------------------------------------------------------------------------------------------------------------ 694 587 583==================================================================================================================Non-insurance operations**** 45 (12) (12) Corporate costs - global finance transformation programme (28) (45) (45) - central costs and sharesave schemes (55) (54) (54) Unallocated interest charges - external (130) (125) (124) - intra-group (101) (100) (100) - net pension income 18 19 19------------------------------------------------------------------------------------------------------------------Group operating profit before tax* 1,318 1,093 1,076================================================================================================================== * Group operating profit before tax. All operating profit is from continuing operations.** Restated for the effect of implementing European Embedded Value principles.*** 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.**** Excludes the results of Norwich Union Equity Release. 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. The total IFRS operating profit for the six months to 30 June 2005 was £943 million (2004: £781 million; £794 millionrestated at constant exchange rates). ------------------------------------------------------------------------------------------------------------------ GROUP CHIEF EXECUTIVE'S STATEMENT Aviva's strategy of managing for value has resulted in another very good result for the first six months of 2005. TheGroup has seen robust operational performance across all major businesses. Operating profit before tax is up 21% on an EEV basis to £1,318 million (2004: £1,076 million), representing an annualised return on capital employed of 14.6%(2004: annualised of 12.8%). On an IFRS basis, operating profit before tax reached £943 million (2004: £781 million),an increase of 19%. The Board is announcing a dividend increase of 5% to 9.83 pence net per share. The dividend is strongly covered andis in line with our stated policy of growing the dividend by approximately 5% per annum, while looking to maintain atarget cover in a range of 1.5 to 2.0 times operating earnings after tax. Long-term savings With over 50% of Aviva's life new business sales and contribution on both a headline and a post minorities basis coming from outside the UK, during the first half of 2005 we benefited from our growing position in continental Europe. Focusing on disciplined growth, our long-term savings businesses delivered a groupwide IRR of 13% (2004: 12%)and operating profit before tax grew 5% to £857 million on an EEV basis. We delivered groupwide sales growth of 12% to £11,016 million on a PVNBP basis (2004: £9,753 million). With new business contribution up 15% to £393 million (2004: £338 million), Aviva is clearly demonstrating its focus on profitable growth. On a post-minorities basis, both new business sales and new business contribution rose by 7%. Sales in continental Europe grew strongly by 21% to £6,218 million driven by our increasing presence in bancassuranceacross most of our businesses. New business contribution on a gross basis increased 21% to £240 million and on a netbasis increased by 16% to £76 million. In particular, we demonstrated a particularly strong increase in value in ourFrench business where new business contribution increased 52% to £71 million compared to sales volume growth of 36%to £1,854 million. Our Credit du Nord bancassurance arrangement is showing impressive performance with sales of £411million in the first half. Aviva France is managing its business mix towards a greater proportion of unit-linked products and this in turn is delivering increased margins of 3.8%, compared to 3.4% for the same period last year. The market for long-term savings business in the UK has been very competitive during the first six months of the year.Our strategic focus on managing our business for value continues. Sales were lower at £4,244 million (2004: £4,299million), while new business contribution rose 6% to £135 million (2004: £127 million) increasing new business marginsto 3.2% from 3.0%. We aim to retain significant presence across the product portfolio whilst selling all our productranges comfortably above the cost of capital. We expect some margin pressure in the short term but remain confident inthe medium-term growth prospects for the UK life market. Our Asian operations have seen significant developments this year. We continue to increase the rate of growth in newbusiness sales, in line with our longer-term strategic ambitions in the region. In India, we continue to developour bancassurance relationships and direct sales force. In China we have received regulatory approval to open new sales offices in Nauchong and Mianyang in Sichuan province, and Zhongshan in Guangdong province, which further extendour reach in this growing market, and we have applied for further licences. Fund management Our fund management operations continue to deliver improved performance. Worldwide investment sales increased 35% to£1,062 million (2004: £775 million). On an IFRS basis, operating profit before tax almost doubled to £33 million from£17 million and assets under management at 30 June 2005 grew to over £290 billion (31 December 2004: £280 billion). New business flows, tight management of our cost base, an increase in fee income and the performance of worldinvestment markets have all contributed to this improved result. General Insurance With a COR of 95%, our general insurance performance is comfortably ahead of our stated target of 100%. Aviva's general insurance operations continue to outperform with operating profit of £694 million (2004: £583 million)demonstrating the continued resilience of the returns. In the UK we have since continued to produce excellent results with an operating profit of £431 million, up 19% from £361 million. The COR of 96% demonstrates the value of disciplined underwriting, an efficient supply chain, and positive claims experience. Investment in innovative technology has been possible due to strict cost management. We believe digital flood mapping, for example, provides Norwich Union Insurance with a competitive advantage. The acquisition of RAC was completed on 4 May and the integration has commenced and is firmly on track. We are excited by the opportunities now available to us and we are confident of achieving our stated 2006 target of £80 million of cost savings. The pro-forma six months operating profit before tax for the RAC business was ahead of plan at £51 million (2004: £45 million), achieved during a period of uncertainty for the business. A profit of £17 million has been included in the Group results relating to the post acquisition period. ------------------------------------------------------------------------------------------------------------------ Outlook We believe that Aviva has a strong platform for organic growth in long-term savings across continental Europe, the UKand Asia. In general insurance we continue to generate high returns for shareholders and will continue to maximisethe opportunities our scale advantage brings. We continue to review value-driven inorganic growth opportunites and newmarket entries. In summary, these are a very good set of results. Our balanced portfolio of international life and general insurancebusinesses has enabled Aviva to sustain real growth momentum, generating value for both shareholders and customers. Richard HarveyGroup chief executive ------------------------------------------------------------------------------------------------------------------ Enquiries:Richard Harvey Group chief executive Telephone +44 (0)20 7662 2286Andrew Moss Group finance director Telephone +44 (0)20 7662 2679 Analysts:Charles Barrows Investor relations director Telephone +44 (0)20 7662 8115Media:Hayley Stimpson Director of external affairs Telephone +44 (0)20 7662 7544Sue Winston Head of group media relations Telephone +44 (0)20 7662 8221Rob Bailhache Financial Dynamics Telephone +44 (0)20 7269 7200 NEWSWIRES: There will be a conference call today for wire services at 8.15am (BST) on +44 (0)20 7365 1854 Quote: Aviva, Richard Harvey. ANALYSTS: A presentation to investors and analysts will take place at 9:00am (BST) 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 7365 1854. A replay facility will be available until 25 August 2005 on +44 (0) 20 7784 1024. The pass code is 4063138# for the whole presentation including Question & Answer session or 3104645# for Question & Answer session only. The presentation slides will be available on the Group's website, www.aviva.com/investors/presentations.cfm from 8.30am (BST). The Aviva media centre at www.aviva.com/media includes images, company information and news release archive. High resolution images are also available for the media to view and download free of charge from www.vismedia.co.uk Photographs are available from the Aviva media centre at 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 sixth largest insurance group based on both gross worldwide premiums and market capitalisation at 31 December 2004.• Aviva's principal business activities are long-term savings, fund management and general insurance, with worldwide total income of £40 billion and assets under management of £280 billion at 31 December 2004.• Overseas currency results are translated at average exchange rates. • The present value of new business premiums (PVNBP) is equal to total single premium sales received in the year plus the discounted value of annual premiums expected to be received over the term of the new contracts, and is expressed at the point of sale.• All growth rates are quoted at constant currency, which excludes the impact of changes in exchange rates between periods.• This interim 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. ------------------------------------------------------------------------------------------------------------------ Contents PageOperating and financial review 1 European Embedded Value (EEV) basisSummarised consolidated income statement - EEV basis 24Earnings per share - EEV basis 25Consolidated statement of recognised income and expense - EEV basis 25Consolidated statement of changes in equity - EEV basis 25Summarised consolidated balance sheet - EEV basis 26Segmentation of summarised consolidated balance sheet - EEV basis 27Basis of preparation - EEV basis 28EEV methodology 28Components of life EEV return 31New business contribution 32EEV basis - new business contribution before and after the effect of required capital, tax and minority interest 33Post tax internal rate of return on life and pensions new business 33Experience variances 34Operating assumption changes 34Geographical analysis of life EEV operating return 35Analysis of life EEV operating return 35Analysis of movement in life and related businesses embedded value 36Segmental analysis of life and related businesses embedded value 37Time value of options and guarantees 38Minority interest in life and related businesses EEV results 38Principal economic assumptions - deterministic calculations 39Principal economic assumptions - stochastic calculations 40Other assumptions 41Sensitivity analysis - economic assumptions 42Sensitivity analysis - non-economic assumptions 44 IFRS basisSummarised consolidated income statement - IFRS basis 45Earnings per share - IFRS basis 45Reconciliation of Group operating profit to profit before tax attributable to shareholders' profits 46Summarised consolidated balance sheet - IFRS basis 47Consolidated statement of recognised income and expense - IFRS basis 48Consolidated statement of changes in equity - IFRS basis 48Consolidated cash flow statement - IFRS basis 49Basis of preparation - IFRS basis 50Exchange rates 50Acquisitions 51Exceptional costs for termination of operations in 2004 52Disposals 52Geographical analysis of life IFRS operating return 53Geographical analysis of fund management IFRS operating profit 53Geographical analysis of general insurance and health 53Other operations 55Corporate costs 55Unallocated interest 55Tax 56Earnings per share 57Dividends and appropriations 58Segmental information 58 Statistical supplementSegmental components of Life EEV operating return before tax 67Supplementary analyses - life and related businesses 70General insurance business only - geographical analysis 73General insurance business only - class of business analyses 73Appendix A: Group capital structure 75Appendix B: IFRS first time adoption 80Shareholder information 86 -------------------------------------------------------------------------------------------------------------------Page 1 OPERATING AND FINANCIAL REVIEW Group operating profit before tax The European Union requires all European listed groups to prepare their consolidated financial statements usingstandards issued by the International Accounting Standards Board (IASB) with effect from 1 January 2005. Our statutory results have therefore been reported on an International Financial Reporting Standard (IFRS) basis ratherthan the previous modified statutory basis and comparatives for prior periods have been restated accordingly. Aviva continues to believe that embedded value provides the best way to value, measure and report life businesses and European Embedded Value (EEV) is therefore a more accurate reflection of the performance of the Group's life results. The first six months of 2005 saw a continuation of the strong operational performance across all our major businesses. This has been achieved by our continued focus on profitable growth, pricing and cost control, our disciplined approach to underwriting and efficient claims handling. The Group achieved an operating profit before tax, including life EEV operating return, of £1,318 million (2004: £1,076 million), an increase of 21%. On an IFRS basis, operating profit before tax increased by 19% to £943 million (2004: £781 million). EEV basis IFRS basis ------------------ ------------------ Restated* Restated 6 months 6 months 6 months 6 months 2005 2004 2005 2004 £m £m £m £m Life EEV operating return / IFRS long-term business profit 857 799 510 520Fund management 18 10 33 17General insurance and health 694 583 694 583Other: Other operations 45 (12) 2 (35) Corporate costs (83) (99) (83) (99)Unallocated interest charges (213) (205) (213) (205)-------------------------------------------------------------------------------------------------------------------Operating profit before tax 1,318 1,076 943 781=================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. Long-term savings Our worldwide long-term new business sales showed good progress in the first half of 2005 with growth of 13% to £12,078 million (2004: £10,528 million). Of this, life and pension sales increased by 12% to £11,016 million (2004: £9,753 million) and investment sales rose by 35% to £1,062 million (2004: £775 million). Total new business sales on a present value of new business (PVNBP) basis 6 months 2005 Local currency growth ------------------------------- -------------------------------- Life and Retail Life and Retail pensions investments Total pensions investments Total £m £m £m % % %Long-term savings salesUnited Kingdom 4,244 513 4,757 (1%) 14% -Europe (excluding UK) 6,218 443 6,661 21% 63% 23%International 554 106 660 31% 63% 36%------------------------------------------------------------------------------------------------------------------- 11,016 1,062 12,078 12% 35% 13%====================================================================================================================Navigator 432 - 432 33% - 33% In the UK, Norwich Union delivered total long-term savings sales of £4,757 million as the company continued to focuson delivering customer and shareholder value by taking decisive pricing and commission actions in an increasinglycompetitive market. As a result, the first half of the year saw lower pension sales offset by strong growth in unit-linked bonds and annuities. Pricing actions in the second quarter benefited protection sales as anticipated andimproved the company's market presence for the longer term. Norwich Union is committed to achieving disciplined growthto maintain a market-leading position. Sales in continental Europe continue to grow, accounting for 55% of total new business sales. Our businessesdelivered 23% growth in these sales to £6,661 million, reflecting the success of our distribution arrangements,product offerings and quality of service. Our Credit du Nord and ABN AMRO bancassurance arrangements contributed tostrong sales growth in France and the Netherlands, respectively. Sales in Italy increased significantly due to strongproduct marketing campaigns and the expansion of our distribution network with Banche Popolari Unite (BPU) from thestart of 2005. In Ireland, growth in our single premiums products increased, as our five year capital guaranteedfund continues to be popular. In Spain, we continued to focus on higher margin protection and pension products. Afterexcluding one-off sales, underlying sales in Spain were broadly flat. In our International businesses, sales in Asia continue to grow benefiting from our strong partnerships in the region.Strong sales growth was achieved in Singapore and Hong Kong, the largest components of our business in Asia, whichinclude sales through our partnership with the banking group DBS. We continue to make excellent progress in developingour Indian and Chinese operations through the combination of our attractive savings products and strong relationshipswith local partners. In mature markets in Australia and the US, we continue to improve our distribution, product rangeand product terms. In the US, the recently launched equity-indexed annuity product is expected to provide a morebalanced product range that is less susceptible to low interest rates. -------------------------------------------------------------------------------------------------------------------Page 2 In the UK we anticipate modest market growth in the second half of the year and Norwich Union will focus on achievingdisciplined growth in a competitive market. We continue to reap the benefits of our strong position in continental Europe and this region remains key to our growth. Our bancassurance network will enable us to benefit further from thesignificant opportunities these markets provide. Asia provides excellent longer-term growth potential and our growingdistribution infrastructure in the region will allow us to increase value progressively. Life EEV operating return Restated* 6 months 6 months 2005 2004 £m £m New business contribution (after the effect of required capital) 286 251Profit from existing business - expected return 434 417 - experience variances (31) (20) - operating assumption changes 7 -Expected return on shareholders' net worth 161 151-------------------------------------------------------------------------------------------------------------------Life EEV operating return before tax 857 799=================================================================================================================== * Restated for the effect of implementing the European Embedded Value principles. The life EEV operating return before tax was 5% higher at £857 million (2004: £799 million) due to both new andexisting business. New business contribution after the effect of required capital was 12% higher at £286 million(2004: £251 million), reflecting the ongoing benefits of our pricing and cost control actions and an improvementin business mix towards less capital-intensive unit-linked products. New business margins before the effect of required capital increased to 3.6% (full year 2004: 3.4%) driven by improved business mix in the UK, France andSpain. The Group's new business margin after the effect of required capital was also higher at 2.6% (full year2004: 2.5%), reflecting improved business mix and our value focus. The expected returns on existing business and shareholders' net worth were higher at £595 million (2004: £568million) and reflect the application of lower economic assumptions on higher start of year embedded values.Adverse experience variances were £31 million (2004: £20 million adverse) and were partially offset by positiveoperating assumption changes of £7 million (2004: nil). Present value of New business New business new business premiums contribution** margin*** ------------------ ------------------ ---------------------------- Restated* 6 months 6 months 6 months 6 months 6 months 6 months Full year 2005 2004 2005 2004 2005 2004 2004 £m £m £m £m % % % Life and pensions businessUnited Kingdom 4,244 4,299 135 127 3.2% 3.0% 2.9%Europe (excluding UK) 6,218 5,027 240 195 3.9% 3.9% 3.8%International 554 427 18 16 3.2% 3.7% 3.4%------------------------------------------------------------------------------------------------------------------- 11,016 9,753 393 338 3.6% 3.5% 3.4%=================================================================================================================== * Restated for the effect of implementing the European Embedded Value principles.** Before effect of required capital which amounted to £107 million (2004: £87 million).*** New business margin represents the ratio of new business contribution to present value of new business premiums, expressed as a percentage. UK Our market-leading business, Norwich Union, recorded a life EEV operating return of £327 million (2004: £345 million).The result includes a larger new business contribution before required capital of £135 million (2004: £127 million),with an improved margin of 3.2% (full year 2004: 2.9%). The increase in margin is driven by pricing and commissionactions and improved business mix towards higher margin products. After deducting the effect of required capital,the margin also increased to 2.5% (full year 2004: 2.3%) and includes an increased proportion of annuity business,which carries a required capital margin of 200% of the EU minimum solvency requirement. The IRR of 11.4% representsan improvement from the first half of last year (2004: 11.0%) and has been maintained since the full year 2004.We continue to maintain our focus on value through margin and IRR, balancing this with retaining a market-leadingposition. Adverse experience variances of £30 million include £30 million of reorganisation costs and £50 million of higherproject expenses which were partially offset by favourable mortality experience on annuity and protection businessamounting to £41 million (2004: £17 million favourable). Expected returns on shareholders' net worth and the valueof in-force were broadly unchanged at £252 million (2004: £251 million). -------------------------------------------------------------------------------------------------------------------Page 3 Europe (excluding UK) New business contribution increased to £240 million (2004: £195 million), with strong performances in Spain, Italyand France which included a contribution of £17 million from our joint venture with Credit du Nord. New businessmargins before and after required capital increased to 3.9% and 2.8% (full year 2004: 3.8% and 2.6%) respectively,as business mix shifted towards higher margin, less capital intensive products particularly in France and Spain.This was offset mainly by a decrease in margins in the Netherlands, due to the impact of the reduction in bondyields by 60 basis points at the end of 2004. Smaller decreases in Italy and Ireland were due to changes in productmix. Life EEV operating return from our continental European businesses was £494 million (2004: £426 million) as newbusiness contribution after required capital improved by £37 million to £171 million. Expected returns were higherat £318 million (2004: £294 million). Although adverse experience variances were small at £2 million (2004: £6 million profit), this included favourable mortality experience of £28 million (2004: £15 million) and positive taxexperience of £16 million (2004: £10 million). These were offset by adverse persistency and expense experience of £23 million and £13 million (2004: £8 million and £13 million adverse), respectively. International The life EEV operating return from our International business was £36 million (2004: £28 million), benefiting from higher new business contribution in Singapore and Australia and more favourable experience variances. Newbusiness margins before and after the effect of required capital were 3.2% and 1.8% respectively (full year 2004: 3.4% and 2.3% respectively). Bancassurance margins - before required capital, tax and minority interests The weighted average bancassurance new business margins before the effect of required capital in the six months were 4.6% (full year 2004: 4.9%). This reflects the change in geographical mix with lower weighting of the high margin business in Spain and a higher weighting of sales from our partnerships in Italy and France where margins are lower by comparison. Present value of New business New business new business premiums contribution** margin*** --------------------- --------------------- ------------------------------ Restated* 6 months 6 months 6 months 6 months 6 months 6 months 12 months 2005 2004 2005 2004 2005 2004 2004 £m £m £m £m % % % United Kingdom 267 216 7 7 2.6% 3.2% 2.6%France 411 - 17 - 4.1% - 3.1%Italy 1,240 715 32 21 2.6% 2.9% 2.8%Netherlands 347 238 9 10 2.6% 4.2% 4.3%Spain 855 1,053 76 71 8.9% 6.7% 7.3%Asia 102 83 8 7 7.8% 8.4% 6.4%------------------------------------------------- ----------------------------------------- ------------------------Total bancassurance channels 3,222 2,305 149 116 4.6% 5.0% 4.9%=================================================================================================================== * Restated for the effect of implementing European Embedded Value principles.** Before effect of required capital which amounted to £31 million (2004: £23 million).*** New business margin represents the ratio of new business contribution to present value of new business premiums, expressed as a percentage. In the UK, the new business margin from life and pensions sales from our partnership with The Royal Bank of ScotlandGroup (RBSG) was maintained at 2.6% (full year 2004: 2.6%). In France our bancassurance joint venture with Creditdu Nord produced an increased new business margin of 4.1% (full year 2004: 3.1%) reflecting unit-linked sales growth.The new business bancassurance margin in Italy was 2.6% (full year 2004: 2.8%), reflecting the increased proportionof lower margin savings and structure bond products sold. In Spain, our bancassurance partnerships produced an increased margin of 8.9% (full year 2004: 7.3%, or excluding one-off business underlying margin: 8.3%) benefiting fromdemand for pension and protection products in the period. Our bancassurance agreement with ABN AMRO in theNetherlands generated a margin of 2.6% (full year 2004: 4.3%) as new business sales included an annuity business special promotion in the first quarter of 2005. The new business bancassurance margin from our partnership with DBSin Singapore and Hong Kong was 7.8% (full year 2004: 6.4%) reflecting the profitable growth of these developingoperations. After the effect of required capital, the bancassurance margin was 3.7% (full year 2004: 4.0%), again reflecting the change in the geographical mix. New business contribution - after deducting required capital, tax and minority interest New business margins after required capital, tax and minority interest improved to 1.7% (full year 2004: 1.6%).The increase arose primarily in our non-bancassurance channels, reflecting the impact of tactical pricing actionsand benefits from changes to business mix towards high margin products, such as unit-linked products in France. -------------------------------------------------------------------------------------------------------------------Page 4 Present value of New business New business new business premiums** contribution*** margin**** -------------------- -------------------- ---------------------------- Restated* 6 months 6 months 6 months 6 months 6 months 6 months Full year 2005 2004 2005 2004 2005 2004 2004 £m £m £m £m % % %Bancassurance channels 1,678 1,263 42 35 2.5% 2.8% 2.7%Other distribution channels 7,597 7,288 116 111 1.5% 1.5% 1.5%--------------------------------------------------------------------------------------------------------------------Total life and pensions business 9,275 8,551 158 146 1.7% 1.7% 1.6%====================================================================================================================Analysed:UK 4,244 4,299 74 74 1.7% 1.7% 1.6%Continental Europe 4,477 3,825 76 64 1.7% 1.7% 1.6%International 554 427 8 8 1.4% 1.9% 1.7%-------------------------------------------------------------------------------------------------------------------- * Restated for the effect of implementing European Embedded Value principles** Stated after deducting the minority interest.*** Stated after deducting the required capital, tax and minority interest.**** New business margin represents the ratio of new business contribution to present value of new business premiums expressed as a percentage. In the six months to 30 June 2005 the post-minority value of new business sales and new business contribution fromour combined European businesses exceeded that from our UK Life operations. Long-term business operating profit on an international financial reporting standard (IFRS) basis On an IFRS basis, our long-term business operating profit before shareholder tax was broadly flat at £510 million(2004: £520 million). The operating result from the UK with-profit business of £33 million (2004: £49 million) reflects the reduction inbonus rates compared to 2004 and the change in the shareholder tax rate. The UK non-profit result was broadlyunchanged at £178 million (2004: £179 million). In continental Europe, life IFRS operating profit totalled £315 million (2004: £235 million) which was driven primarily by increased profits in France and Spain. In France, the improvement to £131 million (2004: £89 million)is due to the Credit du Nord joint venture, with underlying growth reflecting the profitable development of thebusiness and tightly controlled expenses. Additionally, the result includes the benefit of higher investment gains. In the Netherlands, the operating profit was £58 million (2004: £54 million). This includes a charge of £70 million for in the money guarantees on unit-linked contracts arising from falling interest rates whose impacthas been partially offset by releases in reserving margins elsewhere. Operating profit in Spain increased to £39 million (2004: £24 million) due to the higher sales of protection products which deliver statutory earnings inthe first year. Our International businesses reported a loss of £16 million (2004: £57 million profit) reflecting lower realised gains in our principal International life businesses and a change in valuation basis in Asia introduced on 1 January 2005. Fund management operating profit Operating profit from our worldwide fund management businesses increased to £33 million (2004: £17 million) on anIFRS basis. Assets under management at 30 June 2005 grew to over £290 billion (31 December 2004: £280 billion) reflecting the impact of new business flows and the performance of world investment markets. In the UK, our fund management businesses comprise our institutional business Morley Fund Management (Morley), our retail investment business trading as Norwich Union, and our collective investment joint venture business with RBSG. These businesses reported an operating profit of £11 million (2004: £3 million) in the period. Morley reported a profit of £11 million (2004: £4 million). The result reflects increased investment fees whilst continuing to focus on cost control. Fee income has risen due to new business mandates, revenue enhancing initiatives launched in 2004 and improved investment market performance. Whilst the expense base has been maintained, Morley continues to invest in the business in order to maintain its competitive position and respond to changing market conditions. In addition, a further £11 million (2004: £4 million) is included within the Groupresults relating to other Morley businesses, including the pooled pensions business and overseas operations. Thisbrings the contribution that Morley makes to the total Group result to £22 million (2004: £8 million). Morley wasnamed "Property Manager of the Year" at the UK Pensions Awards 2005 as its expertise in property continues to be recognised. Operating profit from Norwich Union's retail investment business, amounted to £3 million (2004: £5 million), whilstour collective investment business with RBSG benefited from lower new business strain from sales of regular premiuminvestment to report a loss of £3 million (2004: loss of £6 million). Aviva Gestion d'Actifs, our market-leading fund management operation in France, was awarded best asset manager for its investment performance over one, three and five years by La Tribune/Standard & Poor's for the second consecutiveyear. Operating profit from Aviva Gestion d'Actifs increased to £10 million (2004: £8 million) on an IFRS basis. Operating profits across our Other Europe and International businesses rose to £5 million (2004: £3 million).New business sales through Navigator, our master trust fund administration business in Australia, increased by 26% to £403 million (2004: £318 million), benefiting from continuing improvements in product offerings. Our Navigator business in Singapore reported sales of £29 million (2004: £5 million). --------------------------------------------------------------------------------------------------------------------Page 5 On an EEV basis, the total operating profit from our fund management businesses was £18 million (2004: £10 million)predominantly relating to those funds managed on behalf of third parties and Group non-life businesses. General insurance and health operating profit Our worldwide general insurance and health operations reported an increase of 18% in operating profit to £694 million(2004: £583 million). The Group's general insurance combined operating ratio (COR) improved to 95% (full year 2004: 97%). Scale advantages, focused underwriting, claims management and efficiencies continue to provide us with ongoingbenefits. Underwriting profit for the period amounted to £182 million (2004: £92 million). The improved performance was drivenby our disciplined approach to underwriting, claims management and lower claims frequency across all our majorbusinesses. Better than expected weather-related claims experience in the first six months of 2005 amounted to£3 million (2004: £30 million). The worldwide expense ratio was maintained at 11.2% (full year 2004: 11.2%) reflecting the benefit of ongoing cost efficiency initiatives across our business operations offset by our continuedinvestment in the business to gain competitive advantage. The expense ratio includes employee benefit costs on a more current actuarial basis than previously accounted for under UK GAAP. The longer-term investment return (LTIR) on general insurance and health business assets increased to £512 million(2004: £491 million). The higher start-of-year asset base, together with positive cash inflows, more than offsetthe decrease in LTIR rates applied in 2005. As previously announced, the Group has decided to make this discretionary change to its LTIR methodology from 2005 in addition to including the amortisation of the premiumor discount arising upon the acquisition of fixed income securities as a proxy for gross redemption yield and restated its 2004 comparatives accordingly. Net written premiums Underwriting result* Operating profit* -------------------- ------------------- ---------------- 6 months 6 months 6 months 6 months 6 months 6 months 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m United Kingdom 2,891 2,819 104 52 431 364Europe (excluding UK) 1,605 1,598 57 27 174 145International 708 718 21 13 89 74--------------------------------------------------------------------------------------------------------------------Continuing operations 5,204 5,135 182 92 694 583==================================================================================================================== * Excludes the Financial Services Compensation Scheme levy of nil (2004: £25 million). UK Our general insurance business, Norwich Union Insurance (NUI) delivered an operating profit of £431 million (2004:£361 million) and COR of 96% (full year 2004: 97%). This excellent result reflects disciplined underwriting and pricing, resulting in favourable claims experience. The cost of the storms in January was mitigated by better thanexpected weather during the rest of the period, to give a neutral impact (2004: £20 million benefit). We are on target to deliver £240 million annualised savings in claims costs through effective supply chain management. Despite a highly competitive market we have achieved a 5% increase in personal motor rates (2004: 2%) and 6% (including indexation) in homeowners rates (2004: 5%). Commercial rate increases have flattened but profitabilityremains excellent. Premium growth is 2%, however we are accelerating our strategy to move closer to our customers with 22% net written premium growth in our direct operation. The acquisition of RAC on 4 May 2005 reinforced this strategy providing access to 2.2 million direct Roadside members and the opportunity to develop fully the RAC brand in insurance and financial services. Furthermore the purchase enhances our partnership business introducing new distribution partners,with an additional 4.5 million corporate Roadside customers and the potential to develop the RAC's current partnership relationships. The acquisition of RAC was completed on 4 May for a consideration of £1.1 billion paid in the form of ordinary shares and cash in equal proportions. The fair value of tangible net liabilities acquired, including the pensionfund deficit, amounted to £0.3 billion. The difference between the fair value of consideration and the fair valueof tangible net liabilities of £1.4 billion, represents the value of the brand and other intangibles net ofRelated Shares:
Aviva