Detailed report

Aviva France sells through a mix of tied agents, brokers, a salaried sales force, direct operations and a partnership with France’s largest savings association, AFER. In addition, our bancassurance partnership with Crédit du Nord, launched in October 2004, has greatly strengthened our distribution capability in what is the main sales channel in the French long-term savings market. The joint venture has access to the bank’s 1.3 million customers for the sale of long-term savings products.

In the Netherlands, Delta Lloyd’s bancassurance joint venture with ABN AMRO has brought significant benefits to sales volumes and profitability. This channel sells life and general insurance products and is an important part of what we believe is an industry-leading approach in the choice we offer to customers. We also sell through independent advisers under our Delta Lloyd operating brand and directly to customers through our OHRA brand. Our agreement with MKB Nederland, the Dutch organisation advising small and medium-sized businesses on pension schemes, gives us access to an important part of the market with significant potential for growth.

In Ireland, Hibernian’s key strength is its leading position in the broker market, through which its life and pensions products are predominantly sold. We are experiencing an environment of increased regulation, but expect brokers to continue to be the main distribution channel, and aim to increase our market share.

In Australia, independent advisers are the main channel for distribution. Navigator, our online investment platform, has also been very effective in winning new business. In the United States we have a network of agents and brokers, and distribution agreements with several leading banks.

+17%

Growth in bancassurance new business sales

We operate a joint venture in India with Dabur Group, one of that country’s largest groups of companies. About 70% of our sales are generated through six bancassurance partnerships – with ABN AMRO, American Express, Bank of Bahrain and Kuwait, Canara Bank, Lakshmi Vilas Bank and, most recently, Punjab & Sind Bank. Through our bancassurance partners, corporate agents and brokers, Aviva products are now available in more than 130 locations around the country. Our direct sales force has also grown and now comprises more than 3,000 specialist financial planning advisers.

Our joint venture in China with COFCO to sell life and pensions products through banks, direct sales, brokers and agents continues to expand. In addition to our operation in Guangzhou, we opened branches in Beijing and Chengdu in September 2004.

Bancassurance

Aviva has a leading position in bancassurance distribution. We generate significant sales volumes through our agreements across a number of markets. Bancassurance has become a highly important source of new business in recent years reflected by the new agreements we have recently entered into. It is an integral part of our strategy in some countries, and the dominant channel in others.

Our Italian and Spanish bancassurance businesses present us with strong growth prospects as market penetration for life and pension products still remains at relatively low levels.

Sales through our bancassurance partners in Italy – UniCredito Italiano, Banca Popolare di Lodi Group, Banca delle Marche and Banche Popolari Unite – account for over 90% of our new business sales in that country. We have extended our agreement with Banche Popolari Unite to include a further 380 branches, with sales starting in early 2005.

Our Spanish bancassurance business contributes over 95% of our total new business sales in that market and gives us access to 10 million customers through 3,800 branches. Our partners – Bancaja, Unicaja, Caixa Galicia, Caja España and Caja de Granada – provide a strong presence in the fastest-growing regions of Spain.

Our bancassurance partnerships with DBS in Singapore and Hong Kong continue to develop, and we have a leading position in the developing broker market.

Worldwide new business sales* £billion

Direct sales

Business generated through direct sales forces, by phone and over the internet provides a valuable stream of income in many of the countries in which we operate. We see this as an important channel for more commoditised products due to the low cost base.

Our businesses in the emerging markets of Central and Eastern Europe use specialist direct sales forces as their main distribution method, but we are also looking for opportunities to diversify distribution as customer preferences and demands change.

Customer service

We are committed to delivering excellent service to our customers. We are driving best practice throughout our business by sharing expertise, and have achieved good standards of service across our life businesses.

We continue to reinforce the improvement made in the UK, which was reflected in the retention of our three-star rating in the Financial Services Awards in November 2004. In Ireland, Hibernian earned a recognition of excellence award from the European Foundation of Quality Management, and was overall winner at the Irish Quality and Excellence Awards 2004.

We have established a major operational site in Pune, India, which employs around 600 people and provides us with enhanced service capability and flexibility. Customer service levels in India are ranked on a par with those in the UK, where we have seen consistent improvements following a series of initiatives focused on raising standards. At the beginning of 2004 we began a process excellence programme reviewing over 50% of our major processes in the UK, resulting in service and quality improvements together with significant cost savings. We also launched market-leading technology for point-of-sale and tele-underwriting for term assurance and mortgage protection products.

We shall continue to build on these initiatives during 2005, giving us greater flexibility to improve our customer service.

Performance

Many of our businesses outperformed in their market, particularly in continental Europe, despite some tough economic conditions.

Worldwide long-term savings new business sales* were higher at £17.2 billion (2003: £14.9 billion). This reflected improving confidence in some markets, while others remained difficult. Life and pension new business sales were up at £15.6 billion (2003: £13.8 billion). A good performance by our continental European businesses saw an increase in new business life and pensions sales of 22% to £7.8 billion (2003: £6.6 billion). Continental European new business sales account for half of our total life and pension sales and over half of our operating return on a European embedded value (EEV) basis.

Pre-tax EEV operating return was £1,611 million (2003: £1,496 million), driven by improved new business contribution and increased returns on a higher value of assets at the start of the year. The higher new business contribution amounted to £706 million (2003: £646 million) and reflected growth in the UK, France and the Netherlands.

UK

Total new business sales, including investment products and sales through our UK equity release business, were £7.9 billion (2003: £7.1 billion). Investor confidence returned slowly and the overall market was broadly flat. We increased business levels against 2003 but remain selective about where we compete. We are aiming to build long-term sustainable business with good margins rather than chase sales volume.

We continue in talks with the UK government about the future development of the UK long-term savings market. During the year we had confirmation of the price cap for stakeholder products. While not as much as we had hoped for, it creates potential for us to sell a greater number of products. During the final quarter of 2004 we took a number of actions to reposition our pension product offering. We reduced commission levels on individual “stakeholder” pensions and introduced a new “non-stakeholder” personal pension for the “full advice” market giving customers the opportunity to pay for their advice through fees, commission or a combination of both. We will continue to design and manage our pricing and commission structures to attract appropriate volumes and value of business.

Life operating return £million

We are one of only three significant remaining players in the with-profit market and expect to benefit from a continued flight to quality as customers seek the reassurance of trusted brands. We are also building business in the unit-linked market where there is evidence of returning confidence.

Sales of bonds were up 21%, and sales of investment funds – supported via our bancassurance joint venture with The Royal Bank of Scotland Group (RBSG) – rose by 26%. During 2005 we plan to launch a stakeholder child trust fund product through a relationship with The Children’s Mutual, and are developing a stakeholder medium-term savings plan.

We reported an operating return** of £551 million (2003: £597 million), which reflected higher new business contribution and higher returns on assets, offset by increased lapse experience and costs associated with implementing regulatory change and the restructuring of our UK business.

In 2004 Norwich Union consolidated its market-leading position and starts 2005 with a greater degree of confidence in the market. Some further market growth is expected over the next 12 months with a stronger pick-up beyond then, and we are confident that our multi-distribution capability, strong brand and wide product range will enable us to capitalise on this.

France

Our long-term savings business in France, which serves some 1.5 million customers, reported total new business sales of £2.5 billion (2003: £2.0 billion) and an operating return** of £286 million (2003: £228 million). This business is positioned for further growth following the launch of our bancassurance partnership with Crédit du Nord, and the continuation of a strong relationship with our long-term partner, AFER.

New business sales of single-premium euro funds through the AFER savings association increased by 23% to £1,389 million (2003: £1,157 million). Encouraging signs for this partnership included a significant increase of 38,000 new AFER members.

Total new business sales of unit-linked funds almost doubled to £698 million (2003: £358 million), against overall growth of around 34% in the unit-linked life and savings market. The unit-linked proportion of our total new business sales increased year-on-year from 18% to 28% in 2004. This reflected our strategy of promoting unit-linked investments to our customers, supported by steadily improving stock markets.

Following the French government’s introduction of a new pension framework, Aviva France launched its Plan d’Epargne Retraite Populaire (PERP) in June 2004. Sales to date of the PERP product have been moderate, as higher net worth individuals, who are the target market for Aviva France, have yet to embrace annuity type products. However, the publicity surrounding the launch of the government’s pension reforms was used to stimulate investment in other existing products, in particular regular premium savings plans.

We continued our drive to achieve cost efficiencies and reduce operating expenses while preparing our back office teams to combine the in-force and future business generated by the Crédit du Nord partnership.

Ireland

Investor confidence in Ireland is returning only slowly, despite more stable markets. Unit-linked sales have been similarly slow to recover. Hibernian reported total new business sales of £269 million (2003: £250 million). Operating return** was £40 million (2003: £57 million) reflecting increased competition and a change in lapse assumptions in certain product classes.

Pensions business is the main sector in the Irish market. Our focus on winning new pensions business resulted in an increase in single premium sales to £149 million (2003: £137 million) and regular premium sales to £48 million (2003: £46 million). Sales of personal retirement savings account (PRSA) products remained low, in line with experience across the industry. However, the publicity from these products has boosted sales of pensions business overall.

Life regular premium sales increased to £18 million (2003: £16 million), reflecting an increase in protection business and additional new premiums on existing Special Savings Incentive Account (SSIA) policies.

In the third quarter of 2004, we launched a web-enabled new business system, Write Now. This system will deliver improvements to the quality and efficiency of our service to brokers in processing new business sales.

Italy

New business sales in Italy increased to £1,574 million (2003: £1,453 million), ahead of modest market growth. This included sales through our bancassurance partnerships of £1,458 million (2003: £1,245 million). Operating return** improved to £79 million (2003: £70 million).

The proportion of bancassurance new business is expected to increase when our agreement covering additional branches of Banche Popolari Unite starts in early 2005.

Aviva is one of the most cost-efficient providers in the Italian bancassurance market. Our business model allows us to maintain a low ratio of expenses to premiums.

Spain

We achieved good underlying growth in Spain, with new business sales up 16% to £1,657 million (2003: £1,464 million). This excludes one-off sales of £242 million (2003: £149 million) from a large bulk pension transfer during the year.

Total sales through our bancassurance partnerships were £1,579 million (2003: £1,407 million). We are also seeing growth in Aviva Vida y Pensiones, which sells through professional intermediaries and a direct sales force, supported by a branch network.

In line with our strategy of pursuing profit over volume, our focus during 2004 was to sell higher-margin protection products rather than traditional savings plans. Operating return** increased to £180 million (2003: £165 million).

We continue to keep our costs low in both Spain and Italy by using a “factory” company in each country to produce and administer bancassurance products. This operating model provides considerable cost and scale efficiencies.

Worldwide new business sales* by distribution channels

1	Independent advisers	£8,073m
2	Bancassurance	£4,022m
3	Direct	£4,432m
4	Partnerships with non-banking organisations	£697m
Total		£17,224m

Netherlands, including Belgium and Luxembourg

Delta Lloyd achieved a 32% increase in life and pensions new business sales to £1,279 million (2003: £989 million). This included improved sales of £238 million (2003: £227 million) from our bancassurance partnership with ABN AMRO in the Netherlands, where bonds and regular premium mortgage products were particularly successful. Operating return** improved strongly to £277 million (2003: £198 million).

Sales were also higher through our intermediary and direct channels, with a strong improvement in group pensions new business. Total life sales were higher at £563 million (2003: £420 million), with improved sales of bonds and savings products. Unit-linked products became more attractive to investors as equity markets showed more stability.

Cost control remains a key focus for our Dutch business. Our shared service centre for administrative functions will be expanded to bring further economies of scale. In May 2004 we outsourced Delta Lloyd’s information and communication technology (ICT) infrastructure services, which is expected to bring further savings. Life sales in Belgium increased, reaffirming our position as a top 10 provider in the market.

Other European operations

Total new business sales from our other European operations were £848 million (2003: £576 million), reflecting growth in life and pension sales across all our other European territories.

In Turkey we are achieving good growth and are now the second-largest provider in the life market and third-largest in the pensions market. Sales of individual pensions increased encouragingly and we will enter the group pension market in 2005.

Sales in Germany were £218 million (2003: £163 million), benefiting from sales of tax-efficient products ahead of the introduction of a revised tax regime in 2005.

CU Polska remains a leading provider in Poland, with a share of the life market of around 14% (measured by premium income) and 28% of the private pensions market (measured by assets under management). Sales of life products increased but sales of mutual funds were lower. However, following accession to the European Union, the economic outlook looks more positive.

We saw strong growth in Lithuania, including good sales of pension products launched in late 2003. Sales through Norwich Union’s Dublin-based offshore life and savings business were £110 million (2003: £82 million).

International operations

Total new business sales through our International operations were £1,008 million (2003: £951 million).

Our business in Australia reported life and pension new business sales of £230 million (2003: £230 million), with encouraging sales of our corporate pension products. Unit trust sales rose as customer sentiment improved in line with more stable equity markets. During 2004, financial advisers voted Aviva equal first in Australia’s largest independent study of the life insurance and wealth management industry.

Sales of single premium fixed annuities in the United States continue to be affected by the low interest rate environment, which was reflected in reduced total sales of £359 million (2003: £538 million). We are maintaining price disciplines and revising our product terms as appropriate.

In Singapore and Hong Kong we enjoyed increased new business sales through our bancassurance partnership with DBS. Sales in Singapore were focused on higher-margin regular premium products supported by a successful single premium product launch during the third quarter. In Singapore we have around 50% of the regular premium bancassurance market and lead the employee benefits and healthcare business, and the developing broker market. In Hong Kong, total new business sales of primarily single premium products also increased strongly.

Geographical analysis of pre-tax life operating return**

1	UK	£551m
2	Continental Europe	£977m
3	Rest of world	£83m
Total		£1,611m

In India our joint venture with Dabur Group is developing well. We are ranked eighth among private providers. During 2004 we launched a series of unit-linked funds, with encouraging initial sales. Our 26% share of new business sales was £5 million (2003: £2 million).

Our joint venture life and pensions business in China, Aviva-COFCO, expanded during 2004 and now operates in three cities. Our 50% share of new business sales was £3 million (2003: £1 million).

Outlook

We saw some improvement in world markets in 2004, and expect this to continue through 2005. This improvement has led to increasing customer confidence, although it has been slower to return than expected in some places, most notably in the UK. We did however see further signs of growth returning in the UK during the second half of 2004, and we anticipate that this momentum will continue into 2005.

We have focused on improving cost-efficiency over the past two years, an important factor in sustaining our profitability. This, along with our operating model, customer service improvements and geographical spread, has put us in a strong position to achieve growth and improve profitability as we benefit from further market upturns. Our established businesses in the UK and Europe offer further opportunities for growth while our operations in the developing markets of Eastern Europe and Asia provide excellent prospects for the long term.

*	Including share of associates’ premiums.
**	On a European embedded value (EEV) basis.
†	On an achieved profits basis.

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