Aviva 2002 Annual Report Download - page 36

Financial review
22 Aviva plc
Annual report + accounts 2002
Corporate governance is central to the Aviva operating model,
supported by strong performance management and capital
management disciplines. Throughout 2002 these disciplines have
been challenged and developed by the increasing pace of change
across our industry.
The next few years will see this trend continue, improving corporate
accountability and increasing the prospect of stable financial
markets – a benefit to capital providers and policyholders alike.
Performance management
Key financial objectives
The group strategy is underpinned by the following key financial
objectives:
• Delivering an after-tax operating profit, including life achieved
profit, equivalent to a 10% net real return on opening equity capital;
• Maintaining a dividend cover between 1.5 and 2.0 times based
on statutory after-tax operating profits; and
• Achieving a combined operating ratio, on general insurance
business, of 102% across the underwriting cycle.
Basis of preparation
The financial statements have been prepared on the modified
statutory solvency basis, with supplementary information using the
achieved profits basis. The main difference between the two
methods is that the achieved profits basis recognises a prudent
element of profit on insurance contracts at the point of sale,
whereas the modified statutory solvency basis defers more of the
contract profit until later in the policy term.
The directors believe that profit measured on an achieved profits
basis more closely reflects the performance of a long-term savings
operation than that measured on a modified statutory basis.
Accordingly, these financial statements include supplementary
information on achieved profits reporting on pages 92 to 98 and
the group’s incentive schemes and internal management
reporting are aligned to that basis.
Operating profit before tax, including life achieved profit, is a
primary measure used by the group to assess its financial
performance and is the measure used to evaluate a shareholders’
return on equity capital. It is based upon longer term investment
returns and it excludes the amortisation of goodwill and
exceptional items.
The modified statutory solvency basis of reporting is required by
statute. The statutory operating profit excludes amortisation of
goodwill, amortisation of acquired additional value of in-force
long-term business and exceptional items. Dividend cover is
measured as statutory operating profit after tax, minorities and
preference dividends, expressed as a multiple of ordinary dividends
for the year.
At the end of 2002 we disposed of our general insurance
operations in Australia and New Zealand and accordingly the
operating results from these businesses have been treated in the
financial statements as arising from discontinued operations.
All growth rates in the financial review are quoted at constant
rates of exchange.
Operating profit
Restated*
2002 2001
Year ended 31 December £m £m
Pre-tax operating profit, including life achieved profit,
before amortisation of goodwill and exceptional items
Life achieved profit 1,524 1,665
Health 61 70
Fund management 529
General insurance 881 876
Non-insurance (69) 7
Corporate costs (218) (187)
Unallocated interest charges (434) (426)
Wealth management (30) (99)
Continuing operations 1,720 1,935
Discontinued operations
– Australia and New Zealand general insurance 78 69
– US general insurance –(21)
1,798 1,983
Taxation, minorities and preference dividends (637) (734)
Operating profit before amortisation of goodwill and exceptional
items, after tax, attributable to equity shareholders 1,161 1,249
Operating earnings** per share
– achieved profit basis 51.5p 55.5p
– modified statutory solvency basis 38.0p 42.6p
*Restated for the effect of Financial Reporting Standard 19 “Deferred Tax”.
**Operating profit before amortisation of goodwill and exceptional items after-tax,
attributable to equity shareholders in respect of continuing and discontinued
operations. The modified statutory solvency operating earnings is also stated before
the amortisation of acquired additional value of in-force long-term business.
The group’s operating profit before tax from continuing and
discontinued operations, including life achieved profit, was 10%
lower at £1,798 million (2001: £1,983 million).
This corresponds to a normalised post-tax return on opening equity
capital of 10.1% (2001: 9.7%). The total return on equity capital
has steadily increased over the last three years.
The reduction in operating profit, including life achieved profit,
was driven by a number of economic effects. The downturn in the
global equity markets has dampened consumer demand for our
long-term savings products which has in turn reduced the
contribution to profits from new business sales. In addition,
following the recent industry report that indicated improvements in
the rate of life expectancy in UK male annuitant policyholders, we
have taken the prudent decision to strengthen our reserves in our
UK life operations for the second year running, albeit at a more
pronounced level this year. Our fund management operations have
continued to suffer from reduced fee income, while in our non-
insurance operations and at a corporate level we have invested
more heavily in our infrastructure. Finally, the reduction in overall
profitability masks a strong improvement in the underwriting
performance of our general insurance business which is better than
our target of a COR of 102%.
On a modified statutory basis operating profit before tax from
continuing operations was also lower at £1,218 million (2001:
£1,464 million). Including the results of discontinued operations,
operating profits before tax amounted to £1,296 million (2001:
£1,512 million).
Mike Biggs, Group Finance Director