Summary review

Group chief executive’s review

Overview

During 2004 we strengthened our competitive position in our key markets. Our continuing focus on profitable growth has resulted in Aviva delivering another strong performance.

We benefit from our diversified business model, which combines substantial life and general insurance operations, supported by a broad range of products sold through a variety of distribution channels.

We achieved our operational targets for the year. We set about improving value for money and delivering cost and service excellence for our customers. We manage our performance against return on capital targets. We employ an efficient capital structure which maximises the potential for profitable growth.

These results are a solid base on which we can build for the future as we focus on growing our business to deliver on our promises to customers, who continue to expect high quality at competitive prices, and enhancing our returns to shareholders.

Group results

Our pre-tax operating profit‡ of £2,344 million (2003: £1,906 million) reflected a stronger performance across our businesses coupled with the benefit of the actions we have taken to reduce costs. Our annualised return on capital employed of 14.4% (2003: 13.1%) reflects these strong results.

Worldwide long-term savings new business sales†† were £17.2 billion (2003: £14.9 billion) as we saw a slow recovery in equity markets. Long-term savings new business sales†† in continental Europe were £8,339 million (2003: £6,932 million), with strong performances from our bancassurance distribution agreements. Worldwide gross premiums written were £33,043 million (2003: £31,184 million). Pre-tax life operating return on a European embedded value (EEV) basis was £1,611 million (2003: £1,496 million).

Our general insurance operating profit of £1,326 million (2003: £911 million) was another excellent result. We also achieved a combined operating ratio (COR)* of 97%, beating our group COR target of 100% in each of the three years from the start of 2004.

On a modified statutory basis, group operating profit before tax# was £1,861 million (2003: £1,490 million). In line with our dividend policy, our total dividend for 2004 is 25.36 pence, an increase of 5% with a dividend cover of 2.25 times. The group delivered an overall profit before tax of £1,488 million (2003: £1,390 million).

Shareholders’ funds~ increased to £12.9 billion (2003: £10.8 billion), boosted by our strong operational performance and the issuance of the direct capital instrument.

Attaining operational excellence

Controlling costs is an important element in our drive for profitability. We continue to improve our operational efficiency by taking advantage of economies of scale. We also apply strict financial targets for developments and new projects across our businesses.

We plan to create a further 950 jobs offshore in 2005 to service our Norwich Union businesses in the UK. This is a further major investment in excellent customer service. We expect to conclude these plans by the end of 2007, by which time we shall have up to 7,000 roles offshore.

Reflecting this spirit of focus, in 2004 we have continued the rollout of the Aviva brand. We now manage a more focused brand portfolio. Aviva has a presence across Europe, Asia and North America and in 2005 we will work to further strengthen this young brand.

Taking into account all our cost-efficiencies during 2004, the net pre-tax benefit for the year relative to 2003 was £52 million. This was ahead of our target.

Industry perspective

In my role as chairman of the Association of British Insurers, I have continued to work at improving communications with governments, regulators and consumers.

The trust of stakeholders in our industry has been eroded. Customer confidence has been damaged by the fall in value of their savings. Regulators have introduced far-reaching changes to protect consumers and raise standards. This has occurred most recently with the introduction of new standards in general insurance.

As we emerge from these tough times, the winners will be those companies that regain the trust of their customers and shareholders first.