Group chief executive's statement

Continued international development

We continue to make real progress in growing our long-term savings businesses in continental Europe and have gained good ground in the developing markets of Asia. We are confident that we can maintain our current momentum. Indeed, in June we announced our belief that we can achieve an average 10% sales growth, after minority interests, from our international long-term businesses over the next five years. Additionally, we aim to grow new business contribution at least as quickly as sales. This growth ambition does not include any additional sales resulting from acquisitions or new distribution partnerships.

We have been actively expanding our distribution arrangements during 2006. Our new joint venture with Allied Irish Banks represents a transformational deal for Hibernian in Ireland. We have entered into a partnership with Centurion Bank of Punjab that will strengthen our leadership in the bancassurance market in India, and have acquired 51% of Eagle Insurance, the third-largest insurer in Sri Lanka. On a visit there, I was delighted to sign a letter of intent for a bancassurance partnership with Standard Chartered Bank. In addition, we will soon commence full scale trading in Russia and have announced our ambitions to achieve a 10% market share within five years.

A changing market place

In the UK, our sales continue to build momentum in a competitive market, while maintaining strong margins. Since April, changes brought about by pension simplification (A-Day) have had a marked impact on the UK pension market. The new rules are designed to make pensions simpler and more flexible, and to encourage people to save for their retirement. While it is difficult to predict the full impact of A-Day, we are confident in our strategy and are well prepared for the significant opportunities that the reform of the pension regime presents. We have already announced our views on the government’s proposal for a sustainable low-cost national pension scheme to provide a much-needed platform for the UK’s future retirement planning. We regard it as a great opportunity for the financial services industry to work in partnership with the government to deliver a first-class pension scheme.

Sustained cash generation

Our worldwide general insurance operations continue to generate sustainable results and strong cash flows, emphasising the benefits of sharing knowledge between businesses. This continuing generation of cash allows us to fund organic growth without the need to raise additional capital.

In the UK, the integration of RAC is now complete and we are on course to meet our cost savings and revenue generation targets. Additionally, we have sold the Manufacturing Support Services division and Lex Vehicle Leasing, which we obtained as part of the RAC deal. Their sale completes our strategy to dispose of non-core businesses and to focus on our strengths. Our acquisition of RAC is firmly on track to deliver an overall run-rate return on capital of 18.8%.

Organisational clarity

In January, we announced a change in the group’s internal organisation to create Aviva UK and Aviva International. We believe that there is much to gain in the UK from closer working practices and a more integrated management approach to our life and general insurance businesses. Additionally, the change will present our growing international portfolio of businesses with greater clarity and simplicity to customers and other stakeholders. Patrick Snowball and Philip Scott are the executive directors responsible for Aviva UK and Aviva International, respectively.

We have also reviewed and refreshed our strategy, which is very straightforward: we aim to be a clear leader in helping our customers to grow their wealth and to protect their assets and health. This emphasis on clarity is increasingly important as we look to the future. Aviva is a large and complex group, operating in a geographically diverse and multi-cultural environment. The clearer our vision and purpose, the more chance we have of achieving our goals.

Prudential

In March, we approached the board of Prudential plc with a proposal to merge our respective companies on an agreed basis. The proposal set out the significant commercial benefits and value creation potential of the merger. The board of Prudential plc declined to enter into discussions with us and the proposal was consequently withdrawn.

Dividend

I am pleased to announce that the board has recommended an interim dividend of 10.82 pence per share (2005 interim dividend: 9.83 pence), an increase of 10%. It remains our intention to increase the total dividend on a basis judged prudent using a dividend cover in the 1.5 to 2.0 times range as a guide, while retaining capital to support future business growth.

Group results

Worldwide long-term savings new business sales were £15.6 billion (2005: £12.5 billion), reflecting continued growth in our international businesses and a fantastic performance in the UK. Our pre-tax operating profit* of £1,699 million (2005: £1,318 million) reflects the conversion of sales into increased profit and higher expected returns on in-force business. Our annualised return on equity shareholders’ funds was 14.0% (2005: 14.6%).

Pre-tax life operating return on a European Embedded Value (EEV) basis was £1,021 million (2005: £857 million).

Our general insurance and health operating profit of £866 million (2005: £694 million) demonstrates our continued underwriting discipline, cost control, and the benefit of benign weather. We have achieved a general insurance combined operating ratio** of 92% (2005: 95%), beating our target of 98%.

Our IFRS fund management operating profit of £61 million (2005: £41 million) reflected the impact of new business inflows and the good performance of worldwide investment markets.

On an IFRS basis, our group operating profit before tax was £1,376 million (2005: £943 million) and the profit before tax attributable to shareholders’ profits was £1,248 million (2005: £1,124 million).

Capital and financial strength

Shareholders' funds* increased to £15.5 billion (full year 2005: £14.9 billion), as a result of our strong operational performance; consequently increasing net asset value per share by 3% to 643 pence (full year 2005: 622 pence).

The solvency of our main operations remains strong with excess capital measured in accordance with the Insurance Groups Directive of £4.2 billion (full year 2005: £3.6 billion). Additionally, the inherited estate of our UK life businesses was £5.8 billion (full year 2005: £5.2 billion), based on a realistic assumption of liabilities.

Building our brand

We have seen excellent results from our “forward thinking” advertising campaign, which has resulted in an increased awareness among our target audience of opinion formers and major investors of both Aviva and our strengths. We are also establishing a greater awareness of Aviva in the UK by helping people to understand better the relationship between Aviva and Norwich Union.

I am delighted to congratulate Dee Caffari on her amazing feat of sailing solo, non-stop around the world against the prevailing winds and currents in the Aviva Challenge. It is a magnificent achievement and embodies the spirit of “forward thinking”. In tackling this voyage, Dee challenged convention to achieve something unique and we are proud to be associated with her success.

External view

Retirement planning is generating a welcome amount of media and public interest. In April, Hibernian published a report on the Irish pensions “crisis” and how it compares with the situation in France, the USA and the UK. While some of the findings were specific to Ireland it is clear that there is a general need for people to save more and to start saving earlier, if their aspirations for a comfortable retirement are to be met. Europe as a whole has an ageing population and this will necessarily lead to a greater requirement for long-term saving products. This represents a significant opportunity for our industry, and Aviva in particular.

Outlook

Our balanced portfolio, in terms of geography, products and distribution, means that we are better positioned than ever to seize profitable opportunities in our chosen markets. We have good growth prospects in the short, medium and longer term and our ability to generate strong cash flows allows us to fund this growth internally. Importantly, we are not sacrificing profitability to achieve this growth.

We continue to seek further innovative ways to improve our products, services and operations and we have a strong management team with a proven track record of investing our shareholders’ money wisely.

Overall, Aviva is in great shape, and we will seek to build on the momentum we have generated in the first half of 2006.

Richard Harvey
Group chief executive
 

* On an EEV basis.
** Combined operating ratio (COR) broadly expresses the total of claims costs, commissions and expenses as a percentage of premiums.