Group chief executive's statement

Growth in our international businesses

During the year, we continued to grow our international long-term savings portfolio and it now generates over 60% of our worldwide gross new business contribution. Our international portfolio comprises large established businesses in mature markets, bancassurance-led distribution in developed markets, direct sales force businesses that are moving towards a multi-distribution model and smaller well established business with high growth potential. We have ambitious plans to grow across this portfolio. We now have over 30 bancassurance relationships across the world and are generating excellent growth through this channel. These relationships genuinely benefit both parties and we are fast becoming the “partner of first choice”. This is highlighted by our new joint venture with Allied Irish Banks within Ireland. We have invested further in our partnership with UniCredit Group in Italy and have 18 bancassurance partnerships in India. However, bancassurance represents only part of our international story and we have strength in our intermediated businesses and direct sales forces.

Resilient UK long-term savings performance

In the UK long-term savings market, we have demonstrated our strength and resilience during 2005. We have seen new entrants attempting to grow their market share, which has meant a more competitive market. Our approach has been to focus on value while maintaining market share. We are able to write all new business at returns exceeding our cost of capital. We have maintained our broad product offering and have a wide range of distribution channels, and this combination puts us in a unique position. We recognise that customer service is vital to the future of our business and we are actively addressing service standards provided to individuals and intermediaries. We are now starting to see the benefits of these actions. During 2005, our bancassurance joint venture with the Royal Bank of Scotland has seen significant growth and is demonstrating the benefits of such partnerships. Additionally, we launched our Lifetime “wrap” product, an innovative proposition that we expect to be the preferred platform for leading investment solutions.

A strong and sustainable general insurance performance

Our general insurance business has a uniquely balanced distribution range covering brokers, partnerships and direct sales. This mix means that we are less dependent on any one product or distribution channel than our competitors, enabling us to take selective pricing actions. The purchase, in May 2005, of RAC further enhances our options and provides significant growth potential. The integration is on track and, in October, we announced that we expect the total pre-tax profits arising from the RAC acquisition to reach £250 million per annum on a like-for-like basis by the end of 2008 through cost savings and significant additional revenues. Our businesses in Canada and Ireland continue to deliver strong results and, in the UK, we are generating significant growth in our direct sales, particularly online. We have consistently proved that our general insurance business is able to produce sustainable profits which, in turn, provide capital to fund new business growth and acquisitions.

This sustainability, allied to confidence in our operating model, has allowed us to announce a worldwide Combined Operating Ratio (COR) target of 98% for the foreseeable future.

Group results

Our pre-tax operating profit* of £2,904 million (2004: £2,224 million) reflected another strong performance as most businesses reported increased profit. Our return on capital employed was 15%* (2004: 13.7%). Worldwide long-term savings new business sales were £24.6 billion (2004: £22.3 billion), reflecting strong international sales growth and continued success in the bancassurance channel.

Pre-tax life operating return on a European embedded value (EEV) basis was £1,814 million (2004: £1,611 million).

Our general insurance operating profit of £1,551 million (2004: £1,259 million) is another excellent result in a year were we have also acquired and integrated the RAC. We have achieved a combined operating ratio** of 95% (2004: 97%), beating our target of 98%.

Our fund management operating profit of £92 million (2004: £40 million), reflected good income growth as a result of investment market conditions and the benefits of cost initiatives.

On an IFRS basis, the group operating profit before tax was £2,128 million (2004: £1,669 million). The group delivered an overall profit before tax attributable to shareholders of £2,528 million (2004: £1,642 million).

Capital and financial strength

Shareholders’ funds† increased to £14.9 billion (2004: £11.7 billion) as a result of the strong operational performance and the impact of investment markets in 2005. Net asset value per share* was up by 22% to 622 pence (2004: 511 pence).

The solvency position in our main trading operations remains robust. Excess capital measured according to the Insurance Groups Directive is £3.5 billion (2004: £3.6 billion). The orphan estate of our UK life businesses was £5.2 billion (2004: £4.6 billion), based on a realistic assumption of liabilities.

Our dividend grew by 7.5% to 27.27 pence, and we have recommended to the pension scheme trustees that the group makes an additional deficit funding contribution of £700 million to the Aviva and RAC pension schemes over the next two years. The dividend and the funding contribution reflect our capital strength, and will benefit both shareholders and employees.

Reporting developments

The 2005 financial statements are our first full set that have been produced using International Financial Reporting Standards. This is a change to the reporting and presentation of our results; however, it does not reflect a change to the underlying economics of our business.

As a market leader, it is essential that Aviva engages actively with external regulators, professional bodies and industry groups on technical issues affecting financial services. We need to understand these issues and influence how they will affect our external reporting and hence how we are viewed by the market.

External view

It is vital that Aviva plays a leading role in shaping industry opinion and developments in our important markets.

In Europe, the Solvency II Directive will play a key part in setting out the future framework for the allocation of insurers’ capital. Consequently, it will have a significant impact on the formation of a single market that delivers wider choice for the consumer. We are supportive of the move towards a transparent and risk-based approach to capital allocation for insurers and are actively engaging with regulators to achieve the best results for the industry. We are also supportive of the European Commission’s White Paper on financial services policy for the next five years, with its over-riding theme of dynamic consolidation.

During 2005, in my twin capacity as chairman of the Association of British Insurers (ABI) and Aviva group chief executive, I hosted a number of high-level focus groups to identify the main issues affecting the long-term savings industry and to agree what we need to do to resolve them. The meetings involved politicians, regulators, employers, charities, consumer groups and people from the financial services industry. The starkest messages were that young people are not sufficiently aware of the need to save and that there is a lack of trust in the savings industry. It was also clear that employers have a key role to play in encouraging savings in the workplace and that the current pensions system in the UK is seen as being too complex. In response, the ABI set out a five-point programme of action to address the main concerns. It is clear that many of the issues raised are equally applicable to our other markets, particularly in Europe. There is no single, simple solution and much remains to be done. However, I am determined that Aviva will play a full part in improving products and services, and restoring confidence in long-term savings.

Across Aviva, we recognise the importance of listening and responding to our customers. In addition to the ongoing work in our business units, we undertake an annual survey across many countries to track consumers’ changing needs and attitudes to savings. The findings provide valuable insights that underpin our strategic thinking and support new product development in our businesses.

Our people

I am delighted to welcome Lord Sharman of Redlynch, who became our chairman on 1 January 2006. He has wide international experience and an outstanding track-record in international finance. We are fortunate to have him as successor to Pehr Gyllenhammar, and I am looking forward to working with him on the next stage of Aviva’s development.

In November 2005, we conducted our first global employee survey. It is important to listen to the voice of our staff and the survey has helped us to gain a clear picture of personal views across the group. In turn, this information will enable us to focus on the issues that are most important to our employees.

We have also been running an internal “think again” diversity campaign. The world is more competitive than ever, and we regard the diversity of our business and the people we employ as key strengths. Our employees are responding positively to the changes in our markets, technology, products, regulations and the needs of our customers. To retain our competitive advantage in these challenging environments, we are embracing diversity in everything we do. Our future success depends on business teams that include people with different backgrounds, experiences and perspectives and who identify with, and respond to, our customers.

Outlook

We have a balanced portfolio that benefits from diversification of distribution, products and geography. Our business model provides capital to fund new business growth and acquisitions, and to support dividend growth.

Our international long-term savings operations continue to grow strongly, and we have a positive outlook on our competitive position in the UK. We continue to deliver sustainable profits from our general insurance businesses and are creating significant momentum in our asset management operations. Across all businesses, we have a track record of delivering on our commitments.

We continue to focus on managing our business for value, have laid strong foundations to achieve further growth with improving profitability, and continue to explore value-driven inorganic growth opportunities.

*	On an EEV basis.
**	Combined operating ratio (COR) broadly expresses the total of claims costs, commissions and expenses as a percentage of premiums.
†	On an EEV basis, excluding preference shares, direct capital instrument and minority interests.

Richard Harvey
Group chief executive