Chairman's statement

Strategy outlook

Aviva is a complex and evolving business and we have recently given consideration to clarifying our strategy. In summary, our business strategy is to be a clear leader in helping our customers grow their wealth and protect their assets and their health. We do this by offering a superior range of long-term savings, investment and protection products in markets that offer significant opportunities for growth; and by providing a broad range of competitive motor, property, health and related insurance services to individuals and small to medium-sized enterprises in chosen markets. References in our strategy to withdrawing from businesses that do not offer the potential for market-leading positions or superior returns have been discontinued, as that work is now complete.

Market developments

The European Commission has described the state pension deficits in the European Union (EU) as its major structural economic challenge. Although the impact varies between member states, governments across the EU are increasingly focussed on strategies to address the consequences of an ageing population.

In November, the Turner Report was issued by the Pensions Commission, setting out their views of the future of UK pensions and recommending changes for a new policy direction. The key recommendations were the establishment of a low cost National Pension Saving Scheme in which people are automatically enrolled and an increase in the state retirement age.

We continue to believe that cost-effective solutions are required and that to achieve this, unnecessary legislation, regulation and complexity must be removed. Pension simplification on “A day” in April 2006 will provide a great opportunity for Norwich Union to offer customers a choice of simpler, more flexible products. We should not underestimate the challenges that lie ahead, but I am confident that we will succeed.

Share performance

Our end of year share price rose to 705 pence (2004: 628 pence), an increase of 12% during 2005. When adding in dividends paid during 2005, this represents a total shareholder return of 21.2%* for the year. While this is a strong stand-alone performance, it is below average for our sector. It is always difficult to explain share price performance, but there is little doubt the share issue supporting the acquisition of RAC dampened our share performance during the first half of 2005.

This was compensated by a strong recovery in the second half which can be attributed to a combination of demonstrating the value of the RAC acquisition and a growing confidence in the sustainability of our general insurance result.

Dividend

I am pleased to announce that the board has recommended a final dividend of 17.44 pence per share, which brings the total dividend for the year to 27.27 pence. This represents an increase of 7.5% on the 2004 full year dividend and exceeds the group’s previous policy of seeking to grow the dividend by approximately 5% per annum.

Our previous target, to grow the dividend by 5%, was put in place when the dividend was cut in 2002. Naturally, at that time, the board wanted to give a high degree of certainty to our shareholders regarding future dividend growth. The board believes that the target has become too rigid a constraint. Our future intention is to increase the dividend on a basis judged prudent using a dividend cover in the 1.5 to 2.0 times range as a guide, on an IFRS operating earnings after tax basis, while retaining capital to support future business growth.

Board matters

The end of last year saw the retirement of Pehr Gyllenhammar. I would like to thank Pehr, on behalf of the board and our shareholders, for his vision, hard work and dedication to Aviva in his role as chairman. He leaves a company that is financially fit and strongly positioned. Deputy chairman George Paul and non-executive director Elizabeth Vallance also retired at the end of 2005. They go with the thanks of the board for their significant contributions to the success of Aviva.

Mary Francis has been appointed as a non-executive director during the year. Mary is, among other roles, a non-executive director of the Bank of England and a former director general of the Association of British Insurers. The experience and knowledge she brings with her will add to the strength of the board.

The board is committed to the highest standards of governance and has an excellent record in this area. To develop further our governance work, we are introducing a governance committee that will provide even greater focus on this important aspect of the board’s responsibilities. I would like to thank Russell Walls for agreeing to become chairman of this committee.

Additionally, we recognise the importance of our responsibilities to all of Aviva’s stakeholders. Consequently, we have introduced a corporate social responsibility committee to enable our pioneering work in this area to be recognised and regularly reported to the board. I am grateful to Wim Dik for chairing this committee.

Brand

October 2005 saw the launch of our first pan-European advertising campaign to promote “Aviva: Forward thinking”. I firmly believe that Aviva is in the business of building better tomorrows, and is a progressive company in all that it does. This campaign seeks to communicate our “Forward thinking” message to key decision makers across Europe.

The Aviva brand earned further exposure during the year through sport. We are supporting yachtswoman Dee Caffari as she attempts to sail solo, non-stop around the world against the prevailing winds and currents in the Aviva Challenge.

We sponsored two major badminton tournaments in Asia, the Aviva-COFCO China Masters in Beijing and the Aviva Open in Singapore, and we continued our sponsorship of the Aviva Ballkids at the Australian Open tennis tournament. All these sponsorships generated a huge amount of interest around the world.

Recognition

It is gratifying when our hard work is noticed and recognised. For the third consecutive year, Norwich Union Insurance was named general insurer of the year by Insurance Times. Commercial Union Poland was named life insurance company of the decade by Home & Market magazine, reflecting the consistently high quality of our products and services. Further success was achieved by Morley Fund Management, named as property manager of the year at the UK Pensions Awards, and by our French business Aviva Gestion d’Actifs, which once again secured a number of awards for fund management.

Corporate social responsibility

The board believes that good governance and an understanding of the impacts of our international business operations are important aspects of the way we conduct business. It is therefore pleasing to be recognised for our performance in this area. We are the only UK insurer to be included in both the Dow Jones Sustainability World and STOXX (European) Indices. Additionally, out of 100 global companies we were ranked second in our sector by Fortune magazine for our management of corporate social responsibility (CSR) issues. As chair of the United Nations Global Compact in the UK, Aviva continues to lead development in CSR thinking and practice.

More than £700,000 was committed by Aviva to tsunami relief work in Asia, including over £200,000 given by staff. Part of this funding has been directed towards building schools and replacing fishing boats to help families in India rebuild their lives. This, and numerous other unheralded examples, illustrates the commitment of staff to making a positive difference to the communities in which we operate.

Employees

I would like to give my warm thanks to the staff of Aviva for their continued commitment and hard work. We operate in a complex and ever-changing environment, and it is through the efforts of all our employees across the world that Aviva has been able to achieve the excellent results set out in this report.

Outlook

I believe that our multinational, composite structure puts us in a good position to provide stable earnings and sustained growth into the future. While we encounter challenging trading conditions in certain of our markets, others offer good opportunities for growth, notably the increasing demand for private pension provision. It is this balance that differentiates us from our peers.

Lord Sharman of Redlynch OBE
Chairman

*Source: Deloitte.