Aviva 2002 Annual Report Download - page 39

25 Aviva plc
Annual report + accounts 2002
resulted in an improved COR of 102% (2001: 107%). In the
Netherlands profitability was lower as a result of the storms in
October and higher project spend on a new shared service centre.
In the UK, we have sacrificed some volume to achieve rating
increases, which is contributing significantly to the COR as the
increases earn through. We expect increasing competition in the
personal lines market in 2003 which will slow rating increases
further. We remain committed to our strict underwriting strategy
across all our target markets.
General insurance: operating profit
2002 2001
Year ended 31 December £m £m
UK 611 590
France 47 58
Ireland 44 48
Netherlands (including Belgium and Luxembourg) 13 19
Other Europe 49 41
Canada 80 72
Other international 37 48
Continuing operations 881 876
Australia and New Zealand 78 69
United States –(21)
959 924
The operating profit from continuing operations reflects the
improvement in the underwriting performance to £145 million loss
(2001: £223 million loss), together with the normalised investment
return of £1,026 million (2001: £1,099 million).
Normalised investment returns have declined during 2002 as a result
of general insurance disposals over the last two years, falling values
of investments and changes to the asset mix from equities to fixed
income securities. The effect of lower investment values at the end
of 2002 is expected, all other things being equal and assuming
unchanged longer term investment rates of return, to have an
even more pronounced effect in 2003 reducing normalised
investment returns by an estimated £125 million, based on a fall
of £1,754 million in equity and property portfolios.
Fund Management
Falling market values of equity investments have led to depressed
fund management fees across the Group’s fund management
operations. The notable exception was France where the majority
of the investment portfolio is held in fixed income securities.
Our UK fund management business, which includes the results of
our retail investment operations and our institutional business,
Morley Fund Management, reported a loss of £12 million (2001:
loss of £4 million). The investment in the retail operation has been
significantly scaled back this year. In spite of the fall in the
worldwide equity markets, the group finished the year with
£208 billion of assets under management (2001: £209 billion).
Non-insurance
The Group’s non-insurance businesses suffered a loss of
£69 million (2001: profit of £7 million). This decline primarily
reflects the costs of upgrading our unit-pricing system and costs
associated with the reorganisation of a number of IFA service
centres borne by the UK life service company.
Corporate costs
Higher corporate costs reflect a £26 million spend on a programme
to improve the quality of our global finance systems and processes.
We have assessed the impact of the changing corporate
governance, regulatory and financial reporting environment and
believe that it is critical that the group undertakes this investment.
Capital management
Shareholders’ funds have declined by 18% to £9,669 million,
(2001: £11,752 million, restated) largely reflecting the fall in
European equity markets. This corresponds to a net asset value per
ordinary share of 433 pence (2001: 524 pence per share, restated)
after adding back the equalisation provision of £314 million
(2001: £272 million).
The operating performance of the group, including life achieved
profit, generated £1.1 billion of after-tax profits, which has been
more than offset by £3.1 billion of after-tax short-term fluctuations
in investment returns and other non-operating items. Aviva’s
shareholders’ funds are sensitive to movements in global investment
markets. We estimate the sensitivity to a 10% fall in global equity
markets or a 1% rise in global interest rates to be as follows:
Sensitivity analysis
31 Equities Interest
December down rates
2002 10% up 1%
Component of shareholders’ funds £bn £bn £bn
Additional value of in-force14.4 4.1 4.7
Other net assets 12.9 12.6 12.5
Borrowings2(6.9) (6.9) (6.9)
Shareholders’ funds 10.4 9.8 10.3
1. Assumes achieved profit assumptions adjusted to reflect revised bond yields
2. Comprising internal, external and subordinated debt.
3. These sensitivities assume a full tax charge/credit on market value appreciation/falls.
Capital employed
The group maintains an efficient capital structure from a
combination of equity shareholders’ funds, preference capital,
subordinated debt and borrowings, consistent with the group’s risk
profile and the regulatory and market requirements of its business.
Capital employed by segment
Restated*
2002 2001
At 31 December £m £m
Long-term savings 10,379 11,307
General insurance and health 3,917 4,560
Other business 554 324
Corporate 2,476 2,947
Total continuing operations 17,326 19,138
Discontinued operations – Australia and New Zealand –357
Total capital employed 17,326 19,495
*Restated for the effect of Financial Reporting Standard 19 “Deferred Tax”.