9 June 2004 Monte Carlo Goldman Sachs Conference Philip Scott Group Executive Director Aviva plc Managing life profitability in a volatile economic environment
Disclaimer This presentation may contain certain forward-looking statements with respect to certain of Aviva s plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Aviva s control including among other things, UK domestic and global economic business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which Aviva and its affiliates operate. As a result, Aviva s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in Aviva s forward-looking statements. Aviva undertakes no obligation to update the forward-looking statements contained in this presentation or any other forward-looking statements we may make. 2
Managing life profitability in a volatile economic environment Volatility Equity markets Interest rates Heavy regulation Lower unit-linked & conventional savings Higher solvency capital Spreads for bond backed policies Guarantee issues Uncertainty 3
Managing life profitability in volatile economic environment Product mix and profitability in the UK Product mix and profitability in France Guarantees and asset liability management Group-wide cost management and statutory profits 4
Product mix and profitability in the UK The benefits of product breadth for Aviva Tax incentivised savings Norwich Union Sales APE 600 m 500 400 300 Reduced with-profits Reduced unit-linked Higher cost of capital 200 100 0 Pensions Annuities Bonds Protection Investment products Equity release 2000 2003 5
Product mix and profitability in the UK Aviva offset c2% margin impact from lower sales in 2003 Life & pensions sales 1400 1200 1000 Margin 23.5 23 22.5 Management actions in 2003 140m cost reduction ( 33m to bottom line) m APE 800 600 400 22 21.5 21 % Improved pricing - annuities - term assurance - reduced commissions 200 20.5 0 20 2002 2003 Q1 2004 Note: 2002 margins restated for 2003 assumptions.. increased market share to 12% in 2003 6
Value Product mix and profitability in the UK UK Life: potential Golden Scenario CONTRACT GROW STABILISE Bear Market Tough regulatory env Confidence down Industry shakeout Aviva : Reducing costs Price increases Trusted brand Financial strength Better equity Markets Less regulation Confidence returns Fewer competitors Aviva : Margin & sales growth Unit linked With profits 1998-2002 2003 2004 7
Product mix and profitability in France French consumer preference for Euro products 100% 80% Individual product sales Unit-linked 60% 40% Euro (bond based) 20% 0% 2000 2001 2002 2003 Source: Fédération Française des Sociétés d Assurances 8
Product mix and profitability in France Unit-linked sales highly geared to market levels bn 3.5 3.0 Unit-linked fund turnover CAC 40 CAC 40 7000 Targeting unit-linked as equity market stabilised to improve net margins 2.5 2.0 5000 1.5 1.0 3000 0.5 0.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Q1 04 1000 Life and savings turnover on a monthly average Sources: Euronext and Fédération Française des Sociétés d Assurances 9
Product mix and profitability in France Aviva France outperforming in unit-linked Aviva 2003 unit-linked sales +1% (market 15%) Aviva Q1 2004 unit-linked sales +32% Unit-linked sales supported by: Product guarantees Sales force incentivisation Investment performance Targeting flat costs despite +20% volume increase from Crédit du Nord (Q4 2004) 10
Guarantees and asset liability management Guarantees more attractive in volatile conditions An important differentiator for the industry Highly valued by customers Must be properly priced, valued and managed Increasingly sophisticated approaches applied to legacy books New products subject to strict control processes 11
Guarantees and asset liability management Interest profits to shareholders on Dutch life contracts 30% 25% Traditional SP NPV (interest profit) % of NPV (premium) 20% 15% 10% 5% 0% -5% -10% -15% -20% Mitigated by reserving, ALM & hedging 3% 4% 5% 6% 7% 8% Traditional RP Unit-linked Total investment return Large potential from higher investment returns 12
Guarantees and asset liability management Spain: Cashflow matching of annuities Aseval Externalisation Business 35 Annual Income/outgo m 30 25 20 15 10 5 0 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 Asset Income Liability Outgo Cashflow matching achieved with FI securities and structured bonds/spvs from leading banks Exposed to risk of sub 2% yields from 2040 13
Group-wide cost savings announced in 2003 Builds on merger saves of 317m pa Efficiency remains a focus in 2004 m 250 200 Cost saves: P&L benefit (from 2003 actions) 250m pa Gross run rate 150 100 50 0 2003 2004 2005 14
Strong statutory profit flows support financing in volatile conditions Aviva 2003 statutory profits 1.5bn* Europe & Int Life 26% Other 1% General insurance 44% UK Life 29% * before tax amortisation of goodwill, amortisation of acquired additional value of in-force business and exceptional items. Analysis is before corporate costs and unallocated interest and before tax, amortisation of goodwill, amortisation of acquired additional value of in-force business and exceptional items 15
Managing life profitability in a volatile economic environment Volatility Aviva Responses Built strong statutory profits Equity markets Interest rates Heavy regulation Reduce costs Product innovation Guarantees (well managed) Expertise to shape regulation 16