Aviva 2002 Annual Report Download - page 40

Financial review continued
26 Aviva plc
Annual report + accounts 2002
In addition to its external funding sources, the group has a number
of internal debt arrangements in place. These have allowed the
assets supporting technical liabilities to be invested into the pool of
central capital for use across the group. They have also enabled the
shareholders to deploy cash from some parts of the business to
others in order to fund growth. Although intra-group loans in
nature, they are counted as part of the capital base for the
purpose of capital management. All internal loans have been
negotiated at market rates and are appropriately serviced. Internal
debt increased in 2002 as a result of the formalisation of intra
group arrangements, offset by the use of corporate assets to
satisfy the third instalment of the Berkshire Hathaway premium of
£0.5 billion.
Our capital position has suffered as a result of the decline in equity
markets but remains healthy. The ratings of the group’s main
operating subsidiaries are AA (“very strong”) from Standard &
Poor’s and Aa2 (“excellent”) from Moody’s. These ratings were
confirmed in February 2003, although the rating agencies have
highlighted that the insurance sector remains under review.
Return on capital employed
Progress towards the group’s 10% net real return target has
been frustrated this year by depressed profitability on long-term
savings and the reduced profitability of our Netherlands
general insurance business.
Return on capital employed1
Restated*
2002 2001
Opening
Normalised equity Return on
after-tax capital capital Return on
return restated* annualised capital
At 31 December £m £m % %
Long-term savings 1,064 11,307 9.4 10.0
General insurance and health 569 4,560 12.5 12.0
Other business (67) 324 (20.7) (27.0)
Corporate (63) 2,947 (2.1) (3.2)
1,503 19,138 7.9 8.8
Borrowings (314) (7,092) 4.4 4.4
1,189 12,046 9.9 11.3
Minority interests (83) (651) 12.7 15.9
Preference capital (17) (200) 8.5 8.5
Total continuing operations 1,089 11,195 9.7 11.1
Discontinued operations
– Australia and New Zealand 72 357 20.2 11.1
– US general insurance ––––
Equity shareholders’ funds 1,161 11,552 10.1 9.7
1. The return on capital is calculated as the after tax return on opening equity capital,
based on operating profit, including life achieved profit, before amortisation of
goodwill and exceptional items.
*Restated for the effect of Financial Reporting Standard 19 “Deferred Tax”.
Financial strength of the group and its principal
insurance operations
In a market that increasingly looks for quality and financial strength,
the resilience of the regulatory capital position of the group and its
principal insurance operations is of great importance.
The group’s capital, from all funding sources, has been allocated
such that the capital employed by trading operations is some
£5.7 billion (2001: £5.9 billion) greater than the capital provided by
its shareholders and its subordinated debtholders. As a result, the
group is able to enhance the returns earned on its equity capital.
At 31 December 2002, total capital employed in our long-term
savings operations was lower, predominantly reflecting a reduction
in the future value of inforce business. The disposal of a number
of general insurance businesses and the impact of lower equity
markets on the asset base reduced the total capital employed in
our general insurance businesses.
Deployment of equity shareholders’ funds
Restated*
Full year Full year
2002 2001
Fixed
income Other Other
Equities securities investments net assets Total Total
£m £m £m £m £m £m
Assets
Long-term savings 523 3,552 674 977 5,726 5,115
General insurance,
health, corporate
and other business 2,603 2,481 1,115 (292) 5,907 6,734
3,126 6,033 1,789 685 11,633 11,849
Goodwill 1,271 1,341
Additional value of in-force long-term business 4,422 5,948
Assets backing total capital employed
in continuing operations 17,326 19,138
External debt (2,053) (2,651)
Internal debt (3,671) (3,284)
Subordinated debt (1,190) (1,157)
10,412 12,046
Minority interests (743) (651)
Preference capital (200) (200)
Total continuing operations 9,469 11,195
Discontinued operations – Australia and New Zealand –357
Equity shareholders’ funds 9,469 11,552
*Restated for the effect of Financial Reporting Standard 19 “Deferred Tax”.
Our exposure to equities has reduced from £4.9 billion at
31 December 2001 to £3.1 billion, which represents 18% of our
total capital employed. This reduction reflects the divestment of
businesses during the year, the impact of falling markets and the
reduction of equity holdings.
At the end of 2002, the group’s total external borrowings
amounted to £3.2 billion (2001: £3.8 billion) including
subordinated debt. A significant proportion of these borrowings
are on a fixed rate basis with maturity terms between two and
34 years, with the balance being represented by commercial paper
and floating rate bank borrowings.
The ratio of the group’s external debt to shareholders’ funds was
18% (2001: 20%, restated). Interest cover, which measures the
extent to which external interest costs are covered by achieved
operating profit, was 14 times (2001: 12 times).