Aviva 2002 Annual Report Download - page 38

Financial review continued
24 Aviva plc
Annual report + accounts 2002
of changes to the annuitant mortality assumptions in the UK.
The output of industry studies in the UK has indicated revised
predictions of the rate of improvement in male annuitant mortality.
Our current experience shows profits against the existing reserve
basis, however, in setting our assumptions we have taken the
prudent decision to increase our reserves on our UK annuity
portfolio by a net £123 million (2001: £78 million).
On a modified statutory basis, the profit from long-term business
operations before tax was £1,022 million (2001: £1,194 million).
The year on year reduction principally reflects falling annual and
final bonus rates to our with-profit policyholders and lower
expected investment returns in the Netherlands. On this basis of
profit measurement, the impact of improved life expectancy on our
UK annuity portfolio has been offset by the impact of a number of
other adjustments including items arising out of our normal year
end reserving reviews.
General Insurance
Worldwide general insurance net premium income, from
continuing operations, amounted to £7,805 million (2001:
£7,850 million) reflecting a rigorous approach to underwriting
and pricing and a consequent adverse impact on policy volumes.
Including the contribution from the disposed general insurance
operations in Australia and New Zealand and the US general
insurance operation disposed in June 2001, net premium income
decreased to £8,497 million (2001: £9,536 million).
We are committed to our strategy of taking a focused approach
to general insurance operations. During 2002 we withdrew from
Spain, completed the sale of our broker-based operations in France
and announced our exit from an aviation pool in the UK.
General insurance: combined operating ratio*
2002 2001**
Year ended 31 December % %
UK 101 102
France 102 104
Ireland 100 101
Netherlands (including Belgium and Luxembourg) 105 104
Other Europe 102 105
Canada 102 107
Other international 101 102
Continuing operations 102 103
Australia and New Zealand 98 99
101 102
*Combined Operating Ratio (COR) expresses the extent to which expenses and claims
cover insurance premiums. It is the sum of expenses, including commissions, as a
percentage of net written premiums, and claims as a percentage of net earned premiums.
** The group withdrew from the US general insurance market in 2000 and the disposal
of the operations was completed during 2001. In 2001 the COR for the discontinued US
general insurance operations was 115%. Including this item produces a COR in respect
of 2001 from continuing and discontinued operations of 104%.
Our aim is to achieve a group COR of 102% across the cycle, and
it is satisfying to see this delivered. Although market conditions are
favourable, the achievement of 101.7% on continuing operations
is an excellent result. Except for the Netherlands, improvements
have been made in all segments with particular success in Canada
where the strong rating action and disciplined underwriting has
New business contribution amounted to £578 million for the year
with strong growth in Italy, Spain and our International operations.
In the UK, an increasing proportion of new business relates to
products with a much tighter pricing structure, most notably in the
pensions sector. The reduction in the UK new business contribution
is in part attributed to the switch in mix towards these products.
The effect of changes in business mix and lower sales volumes is
reflected in reduced new business contribution in both France and
the Netherlands.
Long-term savings new business margin1, 2
2002 2001
Year ended 31 December % %
UK 23.6 25.8
France 30.9 33.9
Ireland 28.2 28.5
Italy 24.9 22.2
Netherlands (including Belgium and Luxembourg) 13.3 22.3
Poland 20.8 18.4
Spain 45.9 46.5
Other Europe (5.4) –
International 22.2 12.1
Total 24.4 25.5
1. The ratio of long-term savings new business contribution to sales measured on
an annual premium equivalent basis.
2. Excludes retail investment sales and is stated before the effects of solvency margin.
New business margins in our rapidly growing operations in Italy
and Spain remain strong as business expansion secures incremental
economies of scale. The new business margins of our more
developed businesses in the UK, France and the Netherlands are
lower compared to 2001, due to strong competition in the
respective marketplaces.
Long-term savings: life achieved operating profit
2002 2001
Year ended 31 December £m £m
New business contribution 452 479
Profit from existing business
Expected return 849 848
Experience variances (110) (18)
Operating assumption changes 917
Expected return on shareholders’ net worth 324 339
Life achieved operating profit 1,524 1,665
Life achieved operating profit of £1,524 million is lower than last
year due to a combination of economic and operational factors.
The depressed state of equity markets has meant that the expected
returns on existing business and shareholders’ net worth have been
lower than in 2001. The effect of this will be even more
pronounced in 2003 where we estimate, all other things being
equal, that the equivalent expected returns will be lower by
£175 million based upon an opening embedded value which is
lower by £915 million and economic assumptions which are also
lower by between 0.5% and 1%.
In 2002 there have been a number of changes to operational
assumptions, the most significant being the adverse impact