Aviva plc FY 2007 Part 5

Aviva PLC 28 February 2008 Aviva plc FY07 Part 5 Part 5 of 5 ------------------------------------------------------------------------------------------------------------------------ Page 103 Appendix D Analysis of Assets Disclosure --------------------------------------------------------------------------------------------------------------------- Page 104 1. Key Messages â€¢ The quality of AVIVA's balance sheet asset base is strong, as detailed and evidenced in this comprehensive disclosure â€¢ Balance sheet assets have been appropriately valued with 83% of assets (including 100% of financial investments) measured at fair value â€¢ Except for tax assets and investments in joint ventures and associates (which are equity accounted) the remaining assets are recognised at costs/amortised cost and tested for impairment â€¢ Asset valuations have been arrived at using external market parameters - 68% of fair values are calculated based on quoted market prices - a further 31% of fair values are valued using models applying observable market parameters - where applicable fair values have been adjusted for any assets that operate in an illiquid market â€¢ The principal asset classes are Debt Securities (Â£119 billion), Equities (Â£56 billion), Other Financial Investments (Â£40 billion) and Loans (Â£36 billion) â€¢ The majority (95%) of debt securities are investment grade (with 1% below investment grade and 4% not rated) â€¢ The Group has very limited exposure to Sub-prime RMBS/ABS, Alt A, Wrapped Credit, CDO's and CLO's; whilst typically AAA rated, these investments represent less than 1% of total balance sheet assets and are typically AAA rated â€¢ The Groups Loan portfolio continues to perform well with 99.3% of the portfolio neither past due nor impaired â€¢ Of the assets specifically attributable to shareholders (as compared to Policyholder and Participating Fund risks), only 5% is held in equities reflecting the equity de-risking programme in the second half of 2007 â€¢ Equities and other financial investments are principally held to back Policyholder liabilities (in unit-linked and participating funds) and as such reflect policyholder investment mandates 2. Introduction Set against the background of recent volatility in the credit markets, there is an increasing demand for financial institutions to provide additional insight into the quality of assets recognised on the balance sheet. AVIVA has responded to the requests for further information with this extensive special disclosure which evidences the Group's prudent management of its balance sheet. The purpose of this disclosure is to evidence the quality of Aviva's Group's balance sheet assets by providing: â€¢ Further detail on the composition of the asset base â€¢ Details of the valuation bases used â€¢ An analysis of assets to reflect whether the shareholder or policyholder ultimately bears the underlying credit and market risk â€¢ Supplementary analysis to evidence asset quality This disclosure focuses on the balance sheet position. To understand the impact of investment returns on the income statement it is important to note the following underlying financial dynamics of the Business (as reflected in the Proforma reconciliation of Group operating profit to profit before tax - IFRS basis): â€¢Long Term Business - For the life policyholder funds, there is a close matching between most long-term business assets and liabilities - Operating profit is reported based on expected investment returns with consistent allowance for the corresponding expected movements in liabilities - Investment variances and economic assumption changes are reported separately outside of operating profit. The variance for 2007 was +Â£15 million with favourable movements in the Europe region largely offset by negative effects in the USA and UK â€¢General Insurance and Health Business - Operating profit is calculated based on longer term investment returns - Any short term fluctuations in investment returns (e.g. arising from changes in interest rates or equity market movements) are identified and reported separately - The value of short term fluctuations in investment returns in 2007 was - Â£184 million, principally driven by movements in equity prices --------------------------------------------------------------------------------------------------------------------- Page 105 3. Total Assets - Shareholder / Policyholder Exposure to Risk Within this disclosure, the Group's total assets have been segmented based on where the market and credit risks are held, according to the following guidelines: Policyholder Assets The Group writes unit-linked business in a number of long-term business operations. In unit-linked business, the policyholder bears the investment risk on the assets in the unit-linked funds, as the policy benefits are directly linked to the value of the assets in the funds. These assets are managed according to the investment mandates of the funds which are consistent with the expectations of the policyholders. By definition, there is a precise match between the investment assets and the policyholder liabilities, and so the market risk and credit risk lie with policyholders. The shareholders' exposure on this business is limited to the extent that income arising from asset management charges is based on the value of assets in the funds. Participating Fund Assets Some insurance and investment contracts in our long-term businesses contain a discretionary participating feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts. The market risk and credit risk in relation to assets held within Participating Funds (including 'with-profit' funds) are shared between policyholders and shareholders in differing proportions. In general, the risks and rewards of participating funds rests primarily with the policyholders. The assets within Participating Funds cover liabilities for participating insurance contracts and participating investment contracts in addition to other liabilities within the participating funds. Shareholder Assets Assets held within long-term businesses that are not backing unit-linked liabilities or participating funds, directly expose the Shareholders of Aviva to market and credit risks. Likewise, assets held within General Insurance & Health, Fund Management and non-insurance businesses also expose our shareholders to market and credit risks. The Group has established comprehensive risk management policies to monitor and mitigate these risks as outlined in this disclosure. Less Assets of operations Policyholder Participating Shareholder classified as Balance assets fund assets assets Total Assets held for Sale Sheet Total Â£m Â£m Â£m Â£m Â£m Â£m Assets Goodwill, Acquired value of in-force business and intangible assets - - 6,279 6,279 - 6,279 Interests in joint ventures and associates 749 1,675 1,358 3,782 - 3,782 Property and equipment - 114 828 942 - 942 Investment Property 5,385 7,818 1,874 15,077 - 15,077 Loans 347 8,581 27,265 36,193 - 36,193 Financial investments Debt securities 15,065 61,549 42,403 119,017 (80) 118,937 Equity securities 27,743 22,826 5,685 56,254 (236) 56,018 Other investments 26,284 11,362 2,767 40,413 - 40,413 Reinsurance assets 1,905 999 5,205 8,109 - 8,109 Deferred tax assets - - 606 606 (16) 590 Current tax assets - - 376 376 - 376 Recievables and other financial assets 458 2,206 6,519 9,183 (554) 8,629 Deferred acquisition costs and other assets 114 292 4,081 4,487 - 4,487 Prepayments and accrued income 181 1,263 1,688 3,132 (146) 2,986 Cash and cash equivalents 3,939 5,012 6,919 15,870 (96) 15,774 Assets of operations classified as held for sale - - - - - 1,128 --------------------------------------------------------------------------------------------------------------------- Total assets 82,170 123,697 113,853 319,720 (1,128) 319,720 ===================================================================================================================== 26% 39% 36% As can be seen from the table above, 36% of assets can be directly attributed to shareholders where the apportionment of assets is predominantly weighted towards debt securities and loans. In comparison equities, investment property and other investments (e.g. unit trusts) are weighted more towards policyholder and participating assets, reflecting the underlying policyholder investment mandates. Note, the remainder of this disclosure is prepared based on gross assets prior to the adjustment for assets of operations classified as held for sale. ---------------------------------------------------------------------------------------------------------------------- Page 106 4. Total Assets - Description of Valuation Bases The valuation of the Group's assets have been categorised into four major categories: 1) Fair Value - Fair value is the amount for which an asset can be exchanged between knowledgeable, willing parties in an arm's length transaction; 2) Cost / Amortised Cost - The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition less principal repayments, plus or minus the cumulative amortisation (using the effective interest method) of any difference between the initial amount and the maturity amount, and less any reduction for impairment or uncollectibility. The cost / amortised cost of a non-financial asset is the amount at which the asset is initially recognised less any cumulative amortisation / depreciation (if applicable), and less any reduction for impairment; 3) Equity Accounted - Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group's share of that entity's post-acquisition changes to shareholders' funds, is included as an asset in the consolidated balance sheet. The Group's share of their post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. Distributions received from the investee reduce the Group's carrying amount of the investment; and 4) Tax Assets - Within the Group's balance sheet, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported separately within the analysis of the Group's assets in the table below. A split of the Group's total assets into these categories is as follows: Cost/ Equity Fair Value Amortised Cost Accounted Tax Assets Total Â£m Â£m Â£m Â£m Â£m Assets Goodwill, Acquired value of in-force business and intangible assets - 6,279 - - 6,279 Interests in joint ventures and associates - - 3,782 - 3,782 Property and equipment 497 445 - - 942 Investment Property 15,077 - - - 15,077 Loans 18,325 17,868 - - 36,193 Financial investments Debt securities 119,017 - - - 119,017 Equity securities 56,254 - - - 56,254 Other investments 40,413 - - - 40,413 Reinsurance assets - 8,109 - - 8,109 Deferred tax assets - - - 606 606 Current tax assets - - - 376 376 Receivables and other financial assets - 9,183 - - 9,183 Deferred acquisition costs and other assets - 4,487 - - 4,487 Prepayments and accrued income - 3,132 - - 3,132 Cash and cash equivalents 15,870 - - - 15,870 -------------------------------------------------------------------------------------------------------------------- Total assets 265,453 49,503 3,782 982 319,720 ==================================================================================================================== 83.0% 15.5% 1.2% 0.3% As shown in the above table, 83% of the Group's total assets are carried at fair value (inclusive of cash and cash equivalents). With such a significant portion of the Group's total assets carried at fair value, the impact of market risks and credit risks of these assets has been fully reflected within the Group's reported 31 December 2007 financial position. Furthermore, all other assets have been tested for impairment and, in the case of financial assets carried at amortised cost, this has included a specific analysis of the recoverability of the assets by reference to the credit risk of the counterparty. The carrying values of assets on the different valuation bases are analysed in the tables below between Policyholder, Participating Fund and Shareholder Assets respectively. --------------------------------------------------------------------------------------------------------------------- Page 107 Cost/ Equity Fair Value Amortised Cost Accounted Tax Assets Total Â£m Â£m Â£m Â£m Â£m Assets - Policyholder assets Goodwill, Acquired value of in-force business and intangible assets - - - - - Interests in joint ventures and associates - - 749 - 749 Property and equipment - - - - - Investment Property 5,385 - - - 5,385 Loans 100 247 - - 347 Financial investments Debt securities 15,065 - - - 15,065 Equity securities 27,743 - - - 27,743 Other investments 26,284 - - - 26,284 Reinsurance assets - 1,905 - - 1,905 Deferred tax assets - - - - - Current tax assets - - - - - Receivables and other financial assets - 458 - - 458 Deferred acquisition costs and other assets - 114 - - 114 Prepayments and accrued income - 181 - - 181 Cash and cash equivalents 3,939 - - - 3,939 -------------------------------------------------------------------------------------------------------------------- Assets - Policyholder assets 78,516 2,905 749 - 82,170 ==================================================================================================================== 95.6% 3.5% 0.9% 0.0% Policyholder assets are typically held in respect of unit linked liabilities and as such are principally invested in financial investments measured at fair value. Cost/ Equity Fair Value Amortised Cost Accounted Tax Assets Total Â£m Â£m Â£m Â£m Â£m Assets - Participating fund assets Goodwill, Acquired value of in-force - - - - - business and intangible assets Interests in joint ventures and associates - - 1,675 - 1,675 Property and equipment 114 - - - 114 Investment Property 7,818 - - - 7,818 Loans 428 8,153 - - 8,581 Financial investments Debt securities 61,549 - - - 61,549 Equity securities 22,826 - - - 22,826 Other investments 11,362 - - - 11,362 Reinsurance assets - 999 - - 999 Deferred tax assets - - - - - Current tax assets - - - - - Receivables and other financial assets - 2,206 - - 2,206 Deferred acquisition costs and other assets - 292 - - 292 Prepayments and accrued income - 1,263 - - 1,263 Cash and cash equivalents 5,012 - - - 5,012 -------------------------------------------------------------------------------------------------------------------- Assets - Participating fund assets 109,109 12,913 1,675 - 123,697 ==================================================================================================================== 88.2% 10.4% 1.4% 0.0% In addition to Investment property and financial investments (both measured at fair value), Participating Fund assets include Â£8.2bn of loans held at amortised cost. --------------------------------------------------------------------------------------------------------------------- Page 108 Cost/ Equity Fair Value Amortised Cost Accounted Tax Assets Total Â£m Â£m Â£m Â£m Â£m Assets - Shareholder assets Goodwill, Acquired value of in-force business and intangible assets - 6,279 - - 6,279 Interests in joint ventures and associates - - 1,358 - 1,358 Property and equipment 383 445 - - 828 Investment Property 1,874 - - - 1,874 Loans 17,797 9,468 - - 27,265 Financial investments Debt securities 42,403 - - - 42,403 Equity securities 5,685 - - - 5,685 Other investments 2,767 - - - 2,767 Reinsurance assets - 5,205 - - 5,205 Deferred tax assets - - - 606 606 Current tax assets - - - 376 376 Receivables and other financial assets - 6,519 - - 6,519 Deferred acquisition costs and other assets - 4,081 - - 4,081 Prepayments and accrued income - 1,688 - - 1,688 Cash and cash equivalents 6,919 - - - 6,919 -------------------------------------------------------------------------------------------------------------------- Assets - Shareholder assets 77,828 33,685 1,358 982 113,853 ==================================================================================================================== 68.4% 29.6% 1.2% 0.9% Over two thirds of shareholder assets are measured at fair value. The remaining assets include goodwill, loans, reinsurance assets and receivables, all carried at amortised cost but subject to regular impairment reviews. 5. Risk Management Framework - Market Risk Market risk is the risk of adverse financial impact due to changes in fair values or future cash flows of financial instruments from fluctuations in interest rates, equity prices, property prices and foreign currency exchange rates. Market risk arises in Aviva's operating businesses due to fluctuations in both the value of liabilities and the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses and in the value of investment assets owned directly by the shareholders. The Group has established a policy on market risk which sets out the principles that businesses are expected to adopt in respect of management of the key market risks to which the Group is exposed. The Group monitors adherence to this market risk policy and regularly reviews how business units are managing these risks locally, through the Group Investment Committee, which reports to the Group Asset Liability Management Committee (ALCO). For each of the major components of market risk, described in more detail below, the Group has put in place additional policies and procedures to set out how each risk should be managed and monitored, and the approach to setting an appropriate risk appetite. The management of market risk is undertaken in both business units and at Group level. Business units manage market risks locally using their market risk framework and within local regulatory constraints. Business units may also be constrained by the requirement to meet policyholders' reasonable expectations and to minimise or avoid market risk in a number of areas. The Group Investment Committee is responsible for managing market risk at Group level, and a number of investment related risks, in particular those faced by shareholder funds throughout the Group. The financial impact from changes in market risk (such as interest rates, equity prices and property values) is examined through stress tests adopted in the Individual Capital Assessments (ICA) and Financial Condition Reports (FCR), which consider the impact on capital from variations in financial circumstances on either a remote scenario, or to changes from the central operating scenario. Both consider the management actions that may be taken in mitigation of the change in circumstances. The sensitivity of Group earnings to changes in economic markets is regularly monitored through sensitivities to investment returns and asset values in EEV reporting. The Group market risk policy sets out the minimum principles and framework for matching liabilities with appropriate assets, the approaches to be taken when liabilities cannot be matched and the monitoring processes that are required. The Group has criteria for matching assets and liabilities for all classes of business to minimize the impact of mismatches between the value of assets and the liabilities due to market movements. The local regulatory environment for each business will also set the conditions under which assets and liabilities are to be matched. The Group writes unit-linked business in a number of its operations. In unit-linked business, the policyholder bears the investment risk on the assets held in the unit-linked funds, as the policy benefits are directly linked to the value of the assets in the fund. The shareholders' exposure to market risk on this business is limited to the extent that income arising from asset management charges is based on the value of assets in the fund. --------------------------------------------------------------------------------------------------------------------- Page 109 The risk management policies and procedures that the Group has put in place for each major component of market risk is as follows: â€¢Equity price risk The Group is subject to equity price risk due to daily changes in the market values of its equity securities portfolio. The Group's shareholders are exposed to the following sources of equity risk: - direct equity shareholdings in shareholder funds and the Group defined benefit pension funds; - the indirect impact from changes in the value of equities held in policyholders' funds from which management charges or a share of performance are taken; and - its interest in the free estate of long-term funds. At business unit level, equity price risk is actively managed in order to mitigate anticipated unfavourable market movements where this lies outside the risk appetite of either the company in respect of shareholder assets or the fund in respect of policyholder assets concerned. In addition local asset admissibility regulations require that business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdings of unquoted equity securities. Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of stochastic models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. The Investment Committee actively monitors equity assets owned directly by the Group, which may include some material shareholdings in the Group's strategic business partners. Concentrations of specific equity holdings (e.g. the strategic holdings) are also monitored monthly by the Group Capital Management Committee. â€¢ Property price risk The Group is subject to property price risk due to holdings of investment properties in a variety of locations worldwide. Investment in property is managed at business unit level, and will be subject to local regulations on asset admissibility, liquidity requirements and the expectations of policyholders, as well as overall risk appetite. The Investment Committee also actively monitors property assets owned directly by the Group. At 31 December 2007, no material derivative contracts had been entered into to mitigate the effects of changes in property prices. â€¢ Interest rate risk Interest rate risk arises primarily from the Group's investments in long-term debt and fixed income securities, which are exposed to fluctuations in interest rates. Interest rate risk also exists in products sold by the group, in particular from policies that carry investment guarantees on early surrender or at maturity, where claim values can become higher than the value of backing assets when interest rates rise or fall. The Group manages this risk by adopting close asset liability matching criteria, to minimise the impact of mismatches between the value of assets and liabilities from interest rate movements. However, where any residual mismatch is within our risk appetite, the impact is monitored through economic capital measures such as ICA. On short-term business, such as general insurance business, the Group requires a close matching of assets and liabilities to minimise this risk. Interest rate risk is monitored and managed by the Group Investment Committee, and the Group's Asset Liability Management Committee. Exposure to interest rate risk is monitored through several measures that include Value-at-Risk analysis, position limits, scenario testing, stress testing and asset and liability matching using measures such as duration. The impact of exposure to sustained low interest rates is regularly monitored. Interest rate risk is also managed using a variety of derivative instruments, including futures, options, swaps, caps and floors, in order to provide a degree of hedging against unfavourable market movements in interest rates inherent in the assets backing technical liabilities. At 31 December 2007, the Group had entered into a number of interest rate swap agreements to mitigate the effects of potential adverse interest rate movements, and to enable close matching of assets and liabilities. â€¢ Currency risk The Group has minimal exposure to currency risk from financial instruments held by Business Units in currencies other than their functional currencies, as nearly all such holdings are backing either unit-linked or with-profit contract liabilities. The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately half of the Group's premium income arises in currencies other than sterling and the Group's net assets are denominated in a variety of currencies, of which the largest are euro, sterling, and US dollars. The Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group's business and meet local regulatory and market requirements. --------------------------------------------------------------------------------------------------------------------- Page 110 The Group's foreign exchange policy requires that each of our subsidiaries maintains sufficient assets in its local currency to meet local currency liabilities. Therefore, capital held by the Group's business units should be able to support local business activities regardless of foreign currency movements. However, such movements may impact the value of the Group's consolidated shareholders' equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. The Group's foreign exchange policy is to manage these exposures by aligning the deployment of capital by currency with the Group's capital requirements by currency. Limits are set to control the extent to which the deployment of capital is not aligned fully with the Group's capital requirement for each major currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set. â€¢ Derivatives risk Derivatives are used by a number of the larger businesses, within policy guidelines agreed by the Board of directors, as set out in the Group policy on derivatives use. Activity is overseen by the Group Derivatives Committee, which monitors implementation of the policy, exposure levels and approves large or complex transactions proposed by businesses. Derivatives are primarily used for efficient investment management, risk hedging purposes or to structure specific retail-savings products. Derivative transactions are covered by either cash or corresponding assets and liabilities. Speculative activity is prohibited, unless approval has been obtained from the Group Derivatives Committee. Over the counter derivative contracts are entered into only with approved counterparties, in accordance with our Group credit policies, thereby reducing the risk of credit loss. The Group also manages a number of hedge funds which use derivatives extensively within a defined derivative framework. The Group applies strict requirements to the administration and valuation processes it uses, and has a control framework that is consistent with market and industry practice for the activity that is undertaken. â€¢ Correlation risk The Group recognises that identified lapse behaviour and potential increases in consumer expectations are sensitive to and interdependent with market movements and interest rates. These interdependencies are taken into consideration in the ICA in the aggregation of the financial stress tests with the operational risk assessment. FCRs also consider scenarios involving a number of correlated events. A number of policyholder participation features have an influence on the Group's interest rate risk. The major features include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. 6. Risk Management Framework - Credit Risk â€¢ Monitoring credit risk We have a significant exposure to credit risk through our investments in corporate bonds, commercial mortgages, and other securities. We hold these investments for the benefit of both our policyholders and shareholders. Credit risk is the risk of loss in the value of financial assets due to counterparties failing to meet all or part of their obligations. The Group risk management framework also includes the market related aspect of credit risk. This is the risk of a fall in the value of fixed interest securities from changes in the perceived worthiness of the issuer and is manifested through changes in the fixed interest securities' credit spreads. The Group's management of credit risk includes monitoring exposures at a Group level and requiring individual operating businesses to implement local credit risk policies. The local business unit credit risk policies involve the establishment and operation of specific risk management committees and the detailed reporting and monitoring of the financial asset portfolio against pre-established risk criteria. Large individual counterparty exposures exceeding Â£25 million are aggregated and monitored at Group level against centrally-set limits reflecting the credit ratings by companies such as Standard & Poor's. In addition, the Group evaluates the concentration of exposures by industry sector and geographic region through the Group Credit Committee. â€¢ Credit ratings Financial assets are graded according to current credit ratings issued. AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB ratings. Financial assets which fall outside this range are classified as speculative grade. Credit limits for each counterparty are set based on default probabilities that are in turn based on the rating of the counterparty concerned. â€¢ Credit concentration risk The long-term businesses and general insurance businesses are generally not individually exposed to significant concentrations of credit risk due to the regulations, applicable in most markets, limiting investments in individual assets and asset classes. In cases where the business is particularly exposed to credit risk (e.g. in respect of defaults on mortgages or debt matching annuity liabilities) this risk is translated into a more conservative discount rate used to value the liabilities, creating a greater capital requirement, and this credit risk is actively managed. The impact of aggregation of credit risk is monitored as described above. With the exception of Government Debt Securities the largest aggregated counterparty exposure is approximately 0.5% of the Group's total assets. â€¢ Reinsurance credit exposures The Group is exposed to concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used, and the impact from reinsurer default is measured regularly, in particular through the ICA tests, and is managed accordingly. Both the Group Credit Committee and Group Reinsurance Security Committee have a monitoring role over this risk. --------------------------------------------------------------------------------------------------------------------- Page 111 The Group's largest reinsurance counterparty is National Indemnity Corporation, a member of the Berkshire Hathaway Group. At 31 December 2007 the reinsurance asset recoverable from National Indemnity Corporation was Â£1.1 billion. This exposure is monitored on a regular basis with the forecast to completion monitored for any shortfall in the claims history, to verify that the contract is progressing as expected and that no further exposure for the Group will arise. In the event of a catastrophic event, the counterparty exposure to a single reinsurer is estimated not to exceed 1.1% of shareholders' equity. â€¢ Unit-Linked business As discussed previously, in unit-linked business the policyholder bears the market risk, including credit risk, on investment assets in the unit funds, and the shareholders' exposure to credit risk is limited to the extent that their income arises from asset management charges based on the value of assets in the fund. â€¢ Impairment of financial assets Credit terms are set locally within overall credit limits prescribed by the Group Credit Committee and within the framework of the Group Credit Policy. The credit quality of financial assets is managed at the local business unit level. Where assets have been classed as 'past due and impaired', an analysis is made of the risk of default and a decision is made whether to seek collateral from the counterparty. There were no material financial assets that would have been past due or impaired had the terms not been renegotiated. 7. Analysis of Asset Quality The following sections analyse the quality of various Group assets. The table below provides an overview of where additional information is provided. Cross Further No further Reference Analysis analysis Total Â£m Â£m Â£m Assets Goodwill, Acquired value of in-force business and intangible assets 7.1 6,279 6,279 Interests in joint ventures and associates 7.2 3,782 3,782 Property and equipment 942 942 Investment Property 7.3 15,077 15,077 Loans 7.4 36,193 36,193 Financial investments Debt securities 7.5.1 119,017 119,017 Equity securities 7.5.2 56,254 56,254 Other investments 7.5.3 40,413 40,413 Reinsurance assets 7.6 8,109 8,109 Deferred tax assets 606 606 Current tax assets 376 376 Receivables and other financial assets 7.7 9,183 9,183 Deferred acquisition costs and other assets 4,487 4,487 Prepayments and accrued income 3,132 3,132 Cash and cash equivalents 7.8 15,870 15,870 -------------------------------------------------------------------------------------------------------------------- Total assets 310,177 9,543 319,720 ==================================================================================================================== 97.0% 3.0% As can be seen from the table, the analysis covers 97% of the Group's total assets. The remaining assets are not discussed further in the context of this disclosure on the basis that their value and quality will typically not fluctuate based on movements in the credit markets. Fair Value Hierarchy To provide further information on the valuation techniques used to measure assets carried at fair value, this disclosure categorises the measurement basis for assets carried at fair value into a 'fair value hierarchy' as follows: Quoted market prices in active markets - ('Level 1') Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets. An active market is a market in which transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Examples are listed equities in active markets, listed debt securities in active markets and quoted unit trusts in active markets. --------------------------------------------------------------------------------------------------------------------- Page 112 Valued using models with significant observable market parameters - ('Level 2') Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly. If the asset has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset. Level 2 inputs include the following: - Quoted prices for similar (i.e. not identical) assets in active markets; - Quoted prices for identical or similar assets in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly; - Inputs other than quoted prices that are observable for the asset (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates); and - Inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market-corroborated inputs). Examples are securities measured using discounted cash flow models based on market observable swap yields, investment property measured using market observable information and listed debt or equity securities in a market that is inactive. Valued using models with significant unobservable market parameters - ('Level 3') Inputs to Level 3 fair values are unobservable inputs for the asset. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such, unobservable inputs reflect the business unit's own assumptions about the inputs that market participants would use in pricing the asset. For example, certain private equity investments and private placements. 7.1. Goodwill, Acquired value of in-force business and intangible assets The Group's Goodwill, Acquired value of in-force business and the majority of other intangible assets have arisen from the Group's business combinations. These business combinations have included several bancassurance transactions which have resulted in Â£640 million of the total Â£3,082 million of Goodwill and Â£630 million of the total Â£1,408 million of other intangible assets which primarily represent the value of bancassurance distribution agreements acquired in these business combinations. As at 31 December 2007, the Group has assessed the value of these bancassurance related assets and has not identified a need to impair any of these amounts. 7.2. Interests in Joint Ventures and Associates Investments in Joint Ventures and Associates are accounted for using the equity method. Under this method, the cost of the investment in a given associate or joint venture, together with the Group's share of that entity's post-acquisition changes to shareholders' funds, is included as an asset in the consolidated balance sheet. The carrying value of both joint ventures and associates includes goodwill identified on their acquisition and any loans that Group companies have advanced to them. Some 89% of the carrying value of joint ventures comprises interests in property limited partnerships (PLPs) which are held in the UK and certain European long-term business policyholder and participating funds as part of their investment strategy. These funds have invested in a number of PLPs, either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary. Accounting for the PUTs and PLPs as subsidiaries, joint ventures or other financial investments depends on the shareholdings in the GPs and the terms of each partnership agreement. Where the Group exerts control over a PLP, it has been treated as a subsidiary and its assets and liabilities have been consolidated within the appropriate balance sheet headings. Where the partnership is managed by a contractual agreement such that no party exerts control, notwithstanding that the Group's partnership share in the PLP (including its indirect stake via the relevant PUT and GP) may be greater than 50%, such PUTs and PLPs have been classified as joint ventures and accounted for using the equity method described above. Where the Group holds minority stakes in PLPs, with no disproportionate influence, the relevant investments are carried at fair value through profit and loss within financial investments. The underlying assets of these PLPs are almost entirely investment property which are valued on the same basis as those held directly and shown in section 7.3 of this disclosure. The Group's principal associates are through two bancassurance investments with Royal Bank of Scotland Group (RBSG). Their assets are held for the benefit of their policyholders and, as described above, the Group equity accounts for its share of net assets and any goodwill on acquisition. The Group's investments in the RBSG companies have been tested for impairment by comparing their carrying values with their recoverable amounts, based on value-in-use calculations. The recoverable amounts exceed the carrying values of these investments, and a reasonably possible change to the key underlying assumptions will not cause the carrying values of the investments to exceed their recoverable amounts. We have also accounted for our recent investment in certain Dutch investment funds as associates because of the influence we have over the management of these funds. --------------------------------------------------------------------------------------------------------------------- Page 113 7.3. Investment Property Fair Value Hierarchy --------------------------- Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Investment Property - Total Leased to third parties under operating leases - 14,616 - 14,616 Vacant Investment Property / Held for Capital Appreciation - 461 - 461 -------------------------------------------------------------------------------------------------------------------- Total Investment Property - 15,077 - 15,077 ==================================================================================================================== 0.0% 100.0% 0.0% Investment property assets are further analysed into Policyholder, Participating fund and Shareholder assets. Fair Value Hierarchy --------------------------- Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Investment Property - Policyholder assets Leased to third parties under operating leases - 5,173 - 5,173 Vacant Investment Property / Held for Capital Appreciation - 212 - 212 -------------------------------------------------------------------------------------------------------------------- Investment Property - Policyholder assets - 5,385 - 5,385 ==================================================================================================================== 0.0% 100.0% 0.0% Fair Value Hierarchy --------------------------- Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Investment Property - Participating Fund assets Leased to third parties under operating leases - 7,647 - 7,647 Vacant Investment Property / Held for Capital Appreciation - 171 - 171 -------------------------------------------------------------------------------------------------------------------- Investment Property - Participating Fund assets - 7,818 - 7,818 ==================================================================================================================== 0.0% 100.0% 0.0% Fair Value Hierarchy --------------------------- Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Investment Property - Shareholder assets Leased to third parties under operating leases - 1,796 - 1,796 Vacant Investment Property / Held for Capital Appreciation - 78 - 78 -------------------------------------------------------------------------------------------------------------------- Investment Property - Shareholder assets - 1,874 - 1,874 ==================================================================================================================== 0.0% 100.0% 0.0% Some 87% of investment properties by value are held in unit-linked or participating funds. Investment properties are stated at their market values as assessed by qualified external valuers or by local qualified staff of the Group in overseas operations, all with recent relevant experience. Values are calculated using a discounted cash flow approach and are based on current rental income plus anticipated uplifts at the next rent review, assuming no future growth in rental income. This uplift and the discount rate are derived from rates implied by recent market transactions on similar properties. The basis of valuation therefore naturally falls to be classified as Level 2. Valuations are typically undertaken on a quarterly (and in some cases monthly) basis. Nearly 97% of investment properties by value are leased to third parties under operating leases, with the remainder either being vacant or held for capital appreciation. 7.4. Loans The Group loan portfolio is principally made up of: - Policy loans which are generally collateralised by a lien or charge over the underlying policy; - Loans and advances to banks primarily relate to loans of cash collateral received in stock lending transactions. These loans are fully collateralised by other securities; - Residential mortgage loans (securitised and non-securitised). Securitised mortgages are secured by non-recourse borrowings; - Non securitised commercial loans are primarily held by the UK Life Business to back annuity liabilities; and - Other loans which typically represent loans and advances to customers of our banking business. Loans with fixed maturities, including policy loans, mortgage loans (at amortised cost) and loans and advances to banks, are recognised when cash is advanced to borrowers. These loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method. --------------------------------------------------------------------------------------------------------------------- Page 114 For certain mortgage loans, the Group has taken advantage of the revised fair value option under IAS 39 to present the mortgages, associated borrowings, other liabilities and derivative financial instruments at fair value, since they are managed together on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these three items. The carrying values of mortgages measured as fair value are estimated using discounted cash flow forecasts, based on a risk-adjusted discount rate which reflects the risks associated with these products. They are revalued at each period end, with movements in their fair values being taken to the income statement. Fair Value Hierarchy --------------------------- Sub-Total Amortised Level 1 Level 2 Level 3 Fair Value Cost Total Â£m Â£m Â£m Â£m Â£m Â£m Loans - Total Policy loans - - - - 1,316 1,316 Loans & Advances to Banks - - - - 7,576 7,576 ----------------------------------------------------------------------------------------------------------------------- Securitised mortgage loans - residential - 5,476 - 5,476 1,911 7,387 Securitised mortgage loans - commercial - - - - - - ----------------------------------------------------------------------------------------------------------------------- Total securitised mortgage loans - 5,476 - 5,476 1,911 7,387 ---------------------------------------------------------------------------------------------------------------------- Non-securitised mortgage loans - residential - 1,429 - 1,429 3,065 4,494 Non-securitised mortgage loans - commercial - 11,420 - 11,420 1,682 13,102 ----------------------------------------------------------------------------------------------------------------------- Total non-securitised mortgage loans - 12,849 - 12,849 4,747 17,596 Other Loans - - - - 2,318 2,318 ----------------------------------------------------------------------------------------------------------------------- Total Loans - 18,325 - 18,325 17,868 36,193 ======================================================================================================================= 0.0% 50.6% 0.0% 49.4% Fair Value Hierarchy --------------------------- Sub-Total Amortised Level 1 Level 2 Level 3 Fair Value Cost Total Â£m Â£m Â£m Â£m Â£m Â£m Loans - Policyholder assets Policy loans - - - - - - Loans & Advances to Banks - - - - 247 247 ----------------------------------------------------------------------------------------------------------------------- Securitised mortgage loans - residential - - - - - - Securitised mortgage loans - commercial - - - - - - ----------------------------------------------------------------------------------------------------------------------- Total securitised mortgage loans - - - - - - ----------------------------------------------------------------------------------------------------------------------- Non-securitised mortgage loans - residential - - - - - - Non-securitised mortgage loans - commercial - 100 - 100 - 100 ----------------------------------------------------------------------------------------------------------------------- Total non-securitised mortgage loans - 100 - 100 - 100 Other Loans - - - - - - ----------------------------------------------------------------------------------------------------------------------- Loans - Policyholder assets - 100 - 100 247 347 ======================================================================================================================= 0.0% 28.8% 0.0% 71.2% Fair Value Hierarchy --------------------------- Sub-Total Amortised Level 1 Level 2 Level 3 Fair Value Cost Total Â£m Â£m Â£m Â£m Â£m Â£m Loans - Participating Fund assets Policy loans - - - - 1,014 1,014 Loans & Advances to Banks - - - - 6,605 6,605 ----------------------------------------------------------------------------------------------------------------------- Securitised mortgage loans - residential - - - - - - Securitised mortgage loans - commercial - - - - - - ----------------------------------------------------------------------------------------------------------------------- Total securitised mortgage loans - - - - - - ----------------------------------------------------------------------------------------------------------------------- Non-securitised mortgage loans - residential - - - - 496 496 Non-securitised mortgage loans - commercial - 428 - 428 19 447 ----------------------------------------------------------------------------------------------------------------------- Total non-securitised mortgage loans - 428 - 428 515 943 Other Loans - - - - 19 19 ----------------------------------------------------------------------------------------------------------------------- Loans - Participating Fund assets - 428 - 428 8,153 8,581 ======================================================================================================================= 0.0% 5.0% 0.0% 95.0% Fair Value Hierarchy --------------------------- Sub-Total Amortised Level 1 Level 2 Level 3 Fair Value Cost Total Â£m Â£m Â£m Â£m Â£m Â£m Loans - Shareholder assets Policy loans - - - - 302 302 Loans & Advances to Banks - - - - 724 724 ----------------------------------------------------------------------------------------------------------------------- Securitised mortgage loans - residential - 5,476 - 5,476 1,911 7,387 Securitised mortgage loans - commercial - - - - - - ----------------------------------------------------------------------------------------------------------------------- Total securitised mortgage loans - 5,476 - 5,476 1,911 7,387 ----------------------------------------------------------------------------------------------------------------------- Non-securitised mortgage loans - residential - 1,429 - 1,429 2,569 3,998 Non-securitised mortgage loans - commercial - 10,892 - 10,892 1,663 12,555 ----------------------------------------------------------------------------------------------------------------------- Total non-securitised mortgage loans - 12,321 - 12,321 4,232 16,553 Other Loans - - - - 2,299 2,299 ----------------------------------------------------------------------------------------------------------------------- Loans - Shareholder assets - 17,797 - 17,797 9,468 27,265 ======================================================================================================================= 0.0% 65.3% 0.0% 34.7% ------------------------------------------------------------------------------------------------------------------------ Page 115 Shareholder exposure to non-securitised mortgage loans is predominantly to commercial, rather than residential, mortgages. These are typically held to back annuity liabilities. Historical data has shown the portfolio to be of very high quality, with minimal bad debts incurred on the large UK portfolio in the last 15 years. As there are no quoted prices, mortgages are valued on a Level 2 basis. Securitised mortgage loans above of Â£7.4 billion are secured through non-recourse borrowings in our UK Life and Dutch businesses. Loans to banks predominantly relate to loans of cash received as collateral in stock lending transactions. These loans are made to highly rated banking counterparties and are fully collateralised by other securities. Arrears Financial assets that are past due but not impaired --------------------------------------------------- Financial assets that Neither past due Greater than have been nor impaired 0-3months 3-6months 6months-1year 1 year impaired Total Total Loans 35,937 210 11 3 15 17 36,193 ====================================================================================================================== 99.3% 0.6% 0.0% 0.0% 0.0% 0.0% Policyholder assets 347 - - - - - 347 Participating Fund assets 8,558 16 - - 7 - 8,581 Shareholder assets 27,032 194 11 3 8 17 27,265 ---------------------------------------------------------------------------------------------------------------------- Total Loans 35,937 210 11 3 15 17 36,193 ====================================================================================================================== The Group reviews the carrying value of loans at least at each reporting date. If the carrying value of a loan is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. Impairment is measured based on the present value of expected future cash flows discounted at the effective rate of interest of the loan, subject to the fair value of the underlying collateral. Reversals of impairments are only recognised where the decrease in the impairment can be objectively related to an event occurring after the write-down (such as an improvement in the debtor's credit rating). The level of arrears is negligible in relation to the size of the portfolio. Loan to Value The following section provides an analysis of the loan to value of the securitised and non-securitised mortgage loans. LTV LTV LTV LTV LTV LTV >100% 95-100% 90-95% 80-90% 70-80% <70% Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Mortgage Loans - Loan to Value (LTV) - Total --------------------------------------------------------------------------------------------------------------------- Securitised mortgage loans - residential - 487 1,478 2,882 248 2,292 7,387 Securitised mortgage loans - commercial - - - - - - - --------------------------------------------------------------------------------------------------------------------- Total securitised mortgage loans - 487 1,478 2,882 248 2,292 7,387 --------------------------------------------------------------------------------------------------------------------- Non-securitised mortgage loans - residential - - 1,042 1,539 140 1,773 4,494 Non-securitised mortgage loans - commercial 341 1,003 865 3,626 3,430 3,837 13,102 --------------------------------------------------------------------------------------------------------------------- Total non-securitised mortgage loans 341 1,003 1,907 5,165 3,570 5,610 17,596 --------------------------------------------------------------------------------------------------------------------- Total Mortgage Loans - Loan to Value (LTV) 341 1,490 3,385 8,047 3,818 7,902 24,983 ===================================================================================================================== 1.4% 6.0% 13.5% 32.2% 15.3% 31.6% LTV LTV LTV LTV LTV LTV >100% 95-100% 90-95% 80-90% 70-80% <70% Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Loan to Value (LTV) - Policyholder assets --------------------------------------------------------------------------------------------------------------------- Securitised mortgage loans - residential - - - - - - - Securitised mortgage loans - commercial - - - - - - - --------------------------------------------------------------------------------------------------------------------- Total securitised mortgage loans - - - - - - - --------------------------------------------------------------------------------------------------------------------- Non-securitised mortgage loans - residential - - - - - - - Non-securitised mortgage loans - commercial - - - - - 100 100 --------------------------------------------------------------------------------------------------------------------- Total non-securitised mortgage loans - - - - - 100 100 --------------------------------------------------------------------------------------------------------------------- Loan to Value (LTV) - Policyholder assets - - - - - 100 100 ===================================================================================================================== 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% LTV LTV LTV LTV LTV LTV >100% 95-100% 90-95% 80-90% 70-80% <70% Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Loan to Value (LTV) - Participating Fund assets --------------------------------------------------------------------------------------------------------------------- Securitised mortgage loans - residential - - - - - - - Securitised mortgage loans - commercial - - - - - - - --------------------------------------------------------------------------------------------------------------------- Total securitised mortgage loans - - - - - - - ---------------------------------------------------------------------------------------------------------------------- Non-securitised mortgage loans - residential - - - - - 496 496 Non-securitised mortgage loans - commercial - 16 - 227 185 19 447 --------------------------------------------------------------------------------------------------------------------- Total non-securitised mortgage loans - 16 - 227 185 515 943 --------------------------------------------------------------------------------------------------------------------- Loan to Value (LTV) - Participating Fund assets - 16 - 227 185 515 943 ===================================================================================================================== 0.0% 1.7% 0.0% 24.1% 19.6% 54.6% ------------------------------------------------------------------------------------------------------------------------ Page 116 LTV LTV LTV LTV LTV LTV >100% 95-100% 90-95% 80-90% 70-80% <70% Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Loan to Value (LTV) - Shareholder assets Securitised mortgage loans - residential - 487 1,478 2,882 248 2,292 7,387 Securitised mortgage loans - commercial - - - - - - - --------------------------------------------------------------------------------------------------------------------- Total securitised mortgage loans - 487 1,478 2,882 248 2,292 7,387 Non-securitised mortgage loans - residential - - 1,042 1,539 140 1,277 3,998 Non-securitised mortgage loans - commercial 341 987 865 3,399 3,245 3,718 12,555 --------------------------------------------------------------------------------------------------------------------- Total non-securitised mortgage loans 341 987 1,907 4,938 3,385 4,995 16,553 Loan to Value (LTV) - Shareholder assets 341 1,474 3,385 7,820 3,633 7,287 23,940 ===================================================================================================================== 1.4% 6.2% 14.1% 32.7% 15.2% 30.4% The loan to value data is based on an estimated current property valuation. The residential loans (securitised and non-securitised) are predominantly based in the Netherlands where the LTV's have been calculated on a conservative basis. More specifically recorded property values, and lending criteria, are based on Execution Values - which typically represent 85% of actual property value at outset. LTV calculations have therefore been estimated based on Execution Values indexed for property price movements from date of loan origination. In addition, loans over 100% of Execution Value will typically be supported by other collateral - the data above includes the full loan amounts but not the additional collateral. Commercial loans are principally held by the UK Life Business to back annuity liabilities. The portfolio is well diversified in terms of property type, location and tenants as well as the spread of loans written over time. The UK portfolio has had an excellent track record with minimal losses in the last 15 years. There are effectively several layers of protection. Even if tenants default on their lease payments we would still expect the borrower to be able to service the loan. A high proportion of borrowers are long term property investors and long standing customers of Aviva with a strong track record. Additionally, there is the option of selling the security or restructuring the loans. Of the total non-securitised commerical mortgage loans - commercial of Â£12.6 billion, Â£2.3 billion relates to mortgages secured against General Practitioner premises or other health related premises leased to NHS trusts or Primary Care Trusts. Due to Government involvement in these sectors, we consider these loans to be particularly low risk. The LTVs of these loans are as follows: LTV LTV LTV LTV LTV LTV >100% 95-100% 90-95% 80-90% 70-80% <70% Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m LTV - Non-securitised mortgage loans - commercial (UK health related premises) - 828 326 347 307 493 2,301 ===================================================================================================================== 0.0% 36.0% 14.2% 15.1% 13.3% 21.4% --------------------------------------------------------------------------------------------------------------------- Page 117 7.5. Financial Investments Financial investments are an integral element of an insurance business. Aviva holds very large quantities of high quality bonds, primarily to match our liability to make guaranteed payments to policyholders. Some credit risk is taken, partly to boost returns to policyholders and partly to optimise the risk/ return profile for shareholders. The risks are consistent with the products we offer and the related investment mandates, and are in line with our risk appetite. The Group also holds significant quantities of equities. Many of these are held in participating funds or unit linked funds, where they form an integral part of the investment expectations of policyholders and follow well-defined investment mandates. Some equities are also held in shareholder funds and the staff pension schemes, where the holdings are designed to maximise long-term returns with an acceptable level of risk. The vast majority of equity investments are valued at quoted market prices. The Group's credit risk policy restricts the exposure to individual counterparties across all types of risk. The fair values of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Securities, for which fair values cannot be measured reliably, are recognised at cost less impairment. Where it is determined that the market in which a price is quoted has become inactive, the quoted price is assessed against either independent valuations or internally modelled valuations which take into account other market observable information. Where the quoted price differs sufficiently from these reassessed prices, the fair value recognised on the balance sheet is based on this adjusted valuation. However, if these reassessed prices confirm that the quoted price remains appropriate, then the fair value recognised on the balance sheet continues to be the quoted price. The Group classifies its investments as either financial assets at fair value through profit or loss (FV) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. In general, the FV category is used as, in most cases, the Group's investment or risk management strategy is to manage its financial investments on a fair value basis. The AFS category is used where the relevant long-term business liability (including shareholders funds) is passively managed. Investments classified as FV and AFS are subsequently carried at fair value. Changes in the fair value of FV investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS, except for impairment losses, are recorded in a separate investment valuation reserve in equity. Where investments classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve to the income statement. To test for impairment, the Group reviews the carrying value of its investments on a regular basis. If the carrying value of an investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. For listed investments classified as AFS, the Group performs an objective review of the current financial position and prospects of the issuer on a regular basis, to identify whether any impairment provision is required. This review takes into account the likelihood of the current market price recovering to former levels. For unlisted investments classified as AFS, the Group considers the current financial position of the issuer and the future prospects in identifying the requirement for an impairment provision. For both listed and unlisted AFS securities identified as being impaired, the cumulative unrealised net loss previously recognised within the AFS reserve is transferred to realised losses for the year. Less than 1.5% of financial investments (less than 1% of total assets recorded at fair value) are fair valued using models with significant unobservable market parameters. Where estimates are used, these are based on a combination of independent third party evidence and internally developed models, calibrated to market observable data where possible. Whilst such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions for reasonably possible alternative assumptions would not change the fair value significantly. 7.5.1. Debt Instruments Fair Value measurement Fair Value Hierarchy ------------------------------------------ Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Debt Securities - Total UK government 18,747 20 - 18,767 Non-UK government 27,054 1,535 74 28,663 Corporate - UK 12,988 282 4 13,274 Corporate - non-UK 27,483 8,993 669 37,145 Other 12,775 7,880 513 21,168 ---------------------------------------------------------------------------------------------------------------------- Total Debt Securities 99,047 18,710 1,260 119,017 ====================================================================================================================== 83.2% 15.7% 1.1% ------------------------------------------------------------------------------------------------------------------------ Page 118 This data shows that the majority of debt securities are valued on a level 1 or 2 basis Fair Value Hierarchy ------------------------------------------ Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Debt Securities - Policyholder assets UK government 3,573 5 - 3,578 Non-UK government 2,613 41 - 2,654 Corporate - UK 2,450 76 4 2,530 Corporate - non-UK 2,116 1,919 - 4,035 Other 761 1,499 8 2,268 ----------------------------------------------------------------------------------------------------------------------- Debt Securities - Policyholder assets 11,513 3,540 12 15,065 ======================================================================================================================= 76.4% 23.5% 0.1% Fair Value Hierarchy ------------------------------------------ Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Debt Securities - Participating Fund assets UK government 12,692 15 - 12,707 Non-UK government 13,935 1,287 74 15,296 Corporate - UK 4,823 101 - 4,924 Corporate - non-UK 18,492 6,221 642 25,355 Other 1,924 862 481 3,267 ----------------------------------------------------------------------------------------------------------------------- Debt Securities - Participating Fund assets 51,866 8,486 1,197 61,549 ======================================================================================================================= 84.3% 13.8% 1.9% Fair Value Hierarchy ------------------------------------------ Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Debt Securities - Shareholder assets UK government 2,482 - - 2,482 Non-UK government 10,506 207 - 10,713 Corporate - UK 5,715 105 - 5,820 Corporate - non-UK 6,875 853 27 7,755 Other 10,090 5,519 24 15,633 ---------------------------------------------------------------------------------------------------------------------- Debt Securities - Shareholder assets 35,668 6,684 51 42,403 ====================================================================================================================== 84.1% 15.8% 0.1% Over 84% of shareholder exposure to debt securities are based on quoted prices in an active market. Ratings / Products The tables below provide further details of the products included within debt securities and their ratings. The overall quality of the Book is very good. 40% of total holdings are in government bonds. A further 48% of holdings are in corporate bonds with an average rating between AA and A. Where shareholder risk is skewed toward the lower rating categories in the tables below, this is typically to back specific product lines and the risk is commensurate with the investment objectives. The Group has extremely limited exposure to 'Sub-prime' debt securities and also limited exposure to CDOs and CLOs. 'Wrapped credit' is credit exposure that has been insured with monoline insurers to achieve a better credit rating. Aviva is a long-term holder of this debt and will not be a forced seller in the event that the monolines are downgraded. The exposure is diversified across several monolines and the underlying bonds are diversified across many different counterparties. Consequently, this is believed to represent a small level of risk in relation to the size of the Group. The majority of the Residential Mortgage-Backed Securities (RMBS) are US investments and the bulk of these are backed by one of the US Government Sponsored Entities such as Fannie Mae and Freddie Mac. The majority of the remaining US RMBS are backed by fixed rate loans originated in 2005 or before. ------------------------------------------------------------------------------------------------------------------------ Page 119 Ratings -------------------------------------------- Less than AAA AA A BBB BBB Not-Rated Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Debt Securities - Total UK government 18,732 21 - - - 14 18,767 Non-UK government 17,492 3,610 6,349 381 - 831 28,663 Corporate - UK 2,030 4,046 3,204 1,892 58 77 11,307 Corporate - non-UK 9,831 13,725 12,582 6,134 1,013 2,295 45,580 Sub-prime RMBS 75 5 1 3 1 - 85 Sub-prime CDO 5 - - 2 - - 7 Sub-prime ABS 56 - - 1 - - 57 Alt-A 209 5 - - - - 214 CDO 187 65 155 83 - 128 618 CLO 75 14 - 3 - 32 124 RMBS 2,653 141 21 16 4 6 2,841 ABS 1,159 75 80 13 15 102 1,444 CMBS 1,245 317 100 75 - - 1,737 ABCP - conduit 309 - - - - 126 435 ABCP - SIV 40 - - - - - 40 ABFRN 107 26 2 2 1 7 145 Wrapped credit 748 16 25 - - - 789 Certificates of Deposit - 514 98 - - - 612 Private Placements 124 370 959 929 40 897 3,319 Other 146 347 1,239 297 137 715 2,881 Less Debt Securities reported as Cash equivalents (524) - - - - (124) (648) ----------------------------------------------------------------------------------------------------------------------- Total Debt Securities 54,699 23,297 24,815 9,831 1,269 5,106 119,017 ======================================================================================================================= 46.0% 19.6% 20.7% 8.3% 1.1% 4.3% Ratings ------------------------------------------------ Less than AAA AA A BBB BBB Not-Rated Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Debt Securities - Policyholder assets UK government 3,565 - - - - 13 3,578 Non-UK government 1,430 192 757 47 - 228 2,654 Corporate - UK 1,350 371 313 167 12 13 2,226 Corporate - non-UK 292 2,145 923 282 61 411 4,114 Sub-prime RMBS 30 1 - 1 1 - 33 Sub-prime CDO - - - - - - - Sub-prime ABS 7 - - - - - 7 Alt-A - - - - - - - CDO 24 10 1 5 - 16 56 CLO 37 2 - - - 6 45 RMBS 320 10 1 2 - 1 334 ABS 94 4 2 1 - 16 117 CMBS 33 36 4 1 - - 74 ABCP - conduit 220 - - - - 35 255 ABCP - SIV 21 - - - - - 21 ABFRN 37 15 2 - - 1 55 Wrapped credit 61 16 - - - - 77 Certificates of Deposit - 409 98 - - - 507 Private Placements - 10 15 17 - - 42 Other 22 58 1,051 17 - 112 1,260 Less Debt Securities reported as Cash equivalents (355) - - - - (35) (390) ----------------------------------------------------------------------------------------------------------------------- Debt Securities - Policyholder assets 7,188 3,279 3,167 540 74 817 15,065 ====================================================================================================================== 47.7% 21.8% 21.0% 3.6% 0.5% 5.4% ------------------------------------------------------------------------------------------------------------------------ Page 120 Ratings ---------------------------------------------- Less than AAA AA A BBB BBB Not-Rated Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Debt Securities - Participating Fund assets UK government 12,707 - - - - - 12,707 Non-UK government 8,948 1,466 4,486 184 - 212 15,296 Corporate - UK 256 1,495 1,557 988 46 - 4,342 Corporate - non-UK 7,931 8,850 6,752 2,632 141 356 26,662 Sub-prime RMBS 17 4 - 1 - - 22 Sub-prime CDO - - - - - - - Sub-prime ABS 3 - - - - - 3 Alt-A - - - - - - - CDO 25 7 - 4 - 14 50 CLO 3 2 - - - 5 10 RMBS 329 11 7 2 - - 349 ABS 212 5 14 1 15 13 260 CMBS 107 110 17 1 - - 235 ABCP - conduit 24 - - - - 51 75 ABCP - SIV 3 - - - - - 3 ABFRN 48 9 - 2 - 6 65 Wrapped credit 168 - - - - - 168 Certificates of Deposit - 88 - - - - 88% Private Placements 124 16 168 101 21 63 493 Other 69 226 31 52 4 425 807 Less Debt Securities reported as Cash equivalents (35) - - - - (51) (86) ----------------------------------------------------------------------------------------------------------------------- Debt Securities - Participating Fund assets 30,939 12,289 13,032 3,968 227 1,094 61,549 ======================================================================================================================= 50.3% 20.0% 21.2% 6.4% 0.4% 1.8% Ratings ---------------------------------------------- Less than AAA AA A BBB BBB Not-Rated Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Debt Securities - Shareholder assets UK government 2,460 21 - - - 1 2,482 Non-UK government 7,114 1,952 1,106 150 - 391 10,713 Corporate - UK 424 2,180 1,334 737 - 64 4,739 Corporate - non-UK 1,608 2,730 4,907 3,220 811 1,528 14,804 Sub-prime RMBS 28 - 1 1 - - 30 Sub-prime CDO 5 - - 2 - - 7 Sub-prime ABS 46 - - 1 - - 47 Alt-A 209 5 - - - - 214 CDO 138 48 154 74 - 98 512 CLO 35 10 - 3 - 21 69 RMBS 2,004 120 13 12 4 5 2,158 ABS 853 66 64 11 - 73 1,067 CMBS 1,105 171 79 73 - - 1,428 ABCP - conduit 65 - - - - 40 105 ABCP - SIV 16 - - - - - 16 ABFRN 22 2 - - 1 - 25 Wrapped credit 519 - 25 - - - 544 Certificates of Deposit - 17 - - - - 17 Private Placements - 344 776 811 19 834 2,784 Other 55 63 157 228 133 178 814 Less Debt Securities reported as Cash equivalents (134) - - - - (38) (172) ----------------------------------------------------------------------------------------------------------------------- Debt Securities - Shareholder assets 16,572 7,729 8,616 5,323 968 3,195 42,403 ======================================================================================================================= 39.1% 18.2% 20.3% 12.6% 2.3% 7.5% ------------------------------------------------------------------------------------------------------------------------ Page 121 7.5.2. Equity Instruments Fair Value Measurement Fair Value Hierarchy ------------------------------------------ Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Equity securities - Total - UK 26,023 116 - 26,139 Non-UK 25,290 4,193 632 30,115 ----------------------------------------------------------------------------------------------------------------------- Total Equity securities 51,313 4,309 632 56,254 ======================================================================================================================= 91.2% 7.7% 1.1% All equities have been fair valued with over 91% having quoted prices in active markets. Fair Value Hierarchy ------------------------------------------ Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Equity securities - Policyholder assets UK 11,486 3 - 11,489 Non-UK 13,650 2,604 - 16,254 ----------------------------------------------------------------------------------------------------------------------- Equity securities -Policyholder assets 25,136 2,607 - 27,743 ======================================================================================================================= 90.6% 9.4% 0.0% Fair Value Hierarchy ------------------------------------------ Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Equity securities - Participating Fund assets UK 14,336 66 - 14,402 Non-UK 8,041 335 48 8,424 ----------------------------------------------------------------------------------------------------------------------- Equity securities - Participating Fund assets 22,377 401 48 22,826 ======================================================================================================================= 98.0% 1.8% 0.2% Fair Value Hierarchy ------------------------------------------ Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Equity securities - Shareholder assets UK 201 47 - 248 Non-UK 3,599 1,254 584 5,437 ----------------------------------------------------------------------------------------------------------------------- Equity securities - Shareholder assets 3,800 1,301 584 5,685 ======================================================================================================================= 66.8% 22.9% 10.3% In 2007, a decision was taken to reduce shareholder exposure by selling Â£3.4 billion of equities during the second half of the year. The remaining shareholder investments include a strategic holding in Unicredito (Â£574 million) and holdings in other Italian banks (Â£256 million), the latter being unquoted and subject to level 3 valuation. Otherwise, shareholder equities are principally held in our Netherlands business and are a mix of diversified European equities, and Netherlands equities with a beneficial tax treatment. ------------------------------------------------------------------------------------------------------------------------ Page 122 7.5.3. Other Investments Fair Value Measurement Fair Value Hierarchy ------------------------------------------ Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Other investments - Total Unit trusts and other investment vehicles 29,890 5,383 276 35,549 Derivative financial instruments 122 1,461 26 1,609 Deposits with credit institutions 36 580 - 616 Minority holdings in property management undertakings - 977 - 977 Other 902 743 17 1,662 ---------------------------------------------------------------------------------------------------------------------- Total Other Investments 30,950 9,144 319 40,413 ====================================================================================================================== 76.6% 22.6% 0.8% Fair Value Hierarchy ------------------------------------------ Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Other investments - Policyholder assets Unit trusts and other investment vehicles 22,536 3,259 16 25,811 Derivative financial instruments 12 76 - 88 Deposits with credit institutions - - - - Minority holdings in property management undertakings - 149 - 149 Other 233 3 - 236 ----------------------------------------------------------------------------------------------------------------------- Other investments - Policyholder assets 22,781 3,487 16 26,284 ======================================================================================================================= 86.7% 13.3% 0.1% Fair Value Hierarchy ------------------------------------------ Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Other investments - Participating Fund assets Unit trusts and other investment vehicles 6,825 1,297 253 8,375 Derivative financial instruments 27 888 - 915 Deposits with credit institutions 6 - - 6 Minority holdings in property management undertakings - 778 - 778 Other 597 691 - 1,288 ----------------------------------------------------------------------------------------------------------------------- Other investments - Participating Fund assets 7,455 3,654 253 11,362 ======================================================================================================================= 65.6% 32.2% 2.2% Fair Value Hierarchy ------------------------------------------ Level 1 Level 2 Level 3 Total Â£m Â£m Â£m Â£m Other investments - Shareholder assets Unit trusts and other investment vehicles 529 827 7 1,363 Derivative financial instruments 83 497 26 606 Deposits with credit institutions 30 580 - 610 Minority holdings in property management undertakings - 50 - 50 Other 72 49 17 138 ---------------------------------------------------------------------------------------------------------------------- Other investments - Shareholder assets 714 2,003 50 2,767 ====================================================================================================================== 25.8% 72.4% 1.8% Other investments primarily represents Unit trusts and other investment vehicles. Nearly 77% of other investments are fair valued with reference to quoted prices in an active market with a further 22% fair valued using market observable information. These unit trusts and other investment vehicles invest in a variety of assets with the majority of the value being invested in Property and Equity securities in the UK and overseas, with a smaller portion being invested in Debt Securities. 7.6. Reinsurance Assets The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract. If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises that impairment loss in the income statement. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. ------------------------------------------------------------------------------------------------------------------------ Page 123 Arrears Financial assets that are past due but not impaired ------------------------------------------------------------ Financial Neither past Greater assets that due nor than 1 have been impaired 0-3months 3-6months 6months-1year year impaired Total ----------------------------------------------------------------------------------------------------------------------- Total Reinsurance Assets 8,107 - - - - 2 8,109 ======================================================================================================================= 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ratings Ratings ----------------------------------------------------------------------- AAA AA A BBB Less than BBB Not-Rated Total ----------------------------------------------------------------------------------------------------------------------- Total Reinsurance Assets 3,106 2,733 616 16 49 1,589 8,109 ======================================================================================================================= 38.3% 33.7% 7.6% 0.2% 0.6% 19.6% As shown in the table above, there are no amounts of reinsurance asset past due but not impaired and only Â£2 million of reinsurance assets are being carried where the exposure to the counterparty has already resulted in an impairment. 7.7 Receivables and other financial assets Financial assets that are past due but not impaired ------------------------------------------------------------ Financial Neither past Greater assets that due nor than 1 have been impaired 0-3months 3-6months 6months-1year year impaired Total ---------------------------------------------------------------------------------------------------------------------- Receivables and other financial assets - Total 8,901 200 21 13 2 46 9,183 ====================================================================================================================== 96.9% 2.2% 0.2% 0.1% 0.0% 0.5% Policyholder assets 457 1 - - - - 458 Participating Fund assets 2,167 1 - - - 38 2,206 Shareholder assets 6,277 198 21 13 2 8 6,519 ---------------------------------------------------------------------------------------------------------------------- Total Receivables and other financial assets 8,901 200 21 13 2 46 9,183 ====================================================================================================================== Credit terms vary from subsidiary to subsidiary, and from country to country, and are set locally within overall credit limits prescribed by the Group Credit Committee, and within the framework of the Group Credit Policy. The credit quality of receivables and other financial assets is managed at the local business unit level. Where assets classed as 'past due and impaired' exceed local credit limits, and are also deemed at sufficiently high risk of default, an analysis of the asset is performed and a decision is made whether to seek sufficient collateral from the counterparty or to write down the value of the asset as impaired. The Group reviews the carrying value of its receivables at each reporting period. If the carrying value of a receivable or other financial asset is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. 7.8. Cash and cash equivalents Cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three months maturity from the date of acquisition, and include certificates of deposit. Cash and cash equivalents are carried at their face value which by their nature is essentially equal to their fair value. The Group's Credit Risk Policy includes specific requirements in relation to aggregate counterparty exposures and money market exposure limits which cover assets reported as cash and cash equivalents in the Group's balance sheet. The responsibility for monitoring of these limits falls with the Group Credit Committee and the Business Unit Credit Committee. The aggregate counterparty exposure limits are determined based on the credit rating of the counterparty. The money market exposure limits are determined based on the credit rating of the counterparty and the term of the intended exposure. ------------------------------------------------------------------------------------------------------------------------ Page 124 8. Pension Fund Assets In addition to the assets recognised directly on the Group's balance sheet outlined in the disclosures above, the Group is also exposed to the 'Plan Assets' that are shown net of the present value of scheme liabilities within the IAS 19 net pension deficit. The net pension deficit is recognised within Provisions on the Group's balance sheet. Plan Assets include investments in Group-managed funds in the consolidated balance sheet of Â£150 million in the UK scheme, and insurance policies of Â£143 million and Â£1,025 million in the UK and Dutch schemes respectively. Where the investment and insurance policies are in segregated funds with specific asset allocations, they are included in the appropriate lines in the table below, otherwise they appear in 'Other'. The Dutch insurance policies are considered non-transferable under the terms of IAS 19 and so have been excluded as assets of the relevant scheme in this table. The total strict IAS 19 assets (ie excluding the non-transferable insurance policies) of the schemes are analysed as follows: UK Netherlands Canada Ireland Total 2007 2007 2007 2007 2007 Â£m Â£m Â£m Â£m Â£m Equities 4,347 - 144 225 4,716 Bonds 3,059 - 85 175 3,319 Property 562 - - 27 589 Other 135 3 2 50 190 ------------------------------------------------------------------------------------------------------------------- Total fair value of assets 8,103 3 231 477 8,814 -------------------------------------------------------------------------------------------------------------------= Risk management and asset allocation strategy The long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes. To meet these objectives, each scheme's assets are invested in a diversified portfolio, consisting primarily of equity and debt securities. These reflect the current long-term asset allocation ranges chosen, having regard to the structure of liabilities within the schemes. Main UK scheme Both the Group and the trustees regularly review the asset/liability management of the main UK scheme. It is fully understood that, whilst the current asset mix is designed to produce appropriate long-term returns, this introduces a material risk of volatility in the scheme's surplus or deficit of assets compared with its liabilities. The principal asset risks to which the scheme is exposed are:- â€¢ Equity market risk - the effect of equity market falls on the value of plan assets, â€¢ Inflation risk - the effect of inflation rising faster than expected on the value of the plan liabilities. â€¢ Interest rate risk - falling interest rates leading to an increase in liabilities significantly exceeding the increase in the value of assets. During 2007, there has been a reduction in the proportion of assets invested in equities, thereby mitigating the equity risk. There is also an exposure to currency risk where assets are not denominated in the same currency as the liabilities. The majority of this exposure has been removed by the use of hedging instruments. Other schemes The other schemes are considerably less material but their risks are managed in a similar way to those in the main UK scheme. 9.Available Funds To ensure access to liquidity as and when needed, the Group maintains over Â£2 billion of undrawn committed central borrowing facilities with various highly rated banks. Â£1 billion of this is allocated to support the credit rating of Aviva plc's Â£2 billion commercial paper programme. The expiry profile of the undrawn committed central borrowing facilities is as follows: 2007 Â£m --------- Expiring within one year 500 Expiring beyond one year 1,575 --------- 2,075 ========= ------------------------------------------------------------------------------------------------------------------------ Page 125 10. Guarantees As a normal part of their operating activities, various Group companies have given guarantees and options, including investment return guarantees, in respect of certain long term insurance and fund management products. For the UK Life with-profit business, provisions in respect of these guarantees and options are calculated on a market consistent basis, in which stochastic models are used to evaluate the level of risk (and additional cost) under a number of economic scenarios, which allow for the impact of volatility in both interest rates and equity prices. For UK Life non-profit business, provisions do not materially differ from those determined on a market consistent basis. In all other Businesses, provisions for guarantees and options are calculated on a local basis with sensitivity analysis undertaken where appropriate to assess the impact on provisioning levels of a movement in interest rates and equity levels (typically a 1% increase in interest rates and a 10% decline in equity markets). Refer to section A2 for further details. ----------------------------------------------------------------------------------------------------------------------- Page 126 APPENDIX D - Audit Opinion REPORT TO DIRECTORS OF AVIVA PLC ONLY INDEPENDENT AUDITOR'S ASSURANCE REPORT TO THE DIRECTORS OF AVIVA PLC ON EXAMINATION OF THE ANALYSIS OF THE ASSET DISCLOSURE REPORT We have examined the accompanying Analysis of Asset Disclosure report of Aviva plc ('Company'), on pages 103 to 132, as at 31 December 2007 ('Asset Disclosure report'). The Asset Disclosure report has been prepared in accordance with the attached accounting policies set out on pages 127 and 131. This report is made solely to the Company's directors, as a body. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's directors as a body, for our examination, for this report, or for the opinions we have formed. The Asset Disclosure report is the responsibility of the Company's directors. Our responsibility is to provide conclusions on this report based on our examination. Scope of our examination We conducted our examination in accordance with the International Standard on Assurance Engagements (ISAE 3000). We planned and performed our examination so as to obtain all the information and explanations which we considered necessary in order to provide limited assurance about whether the Asset Disclosure report has been properly prepared, in all material respects, in accordance with the accounting policies set out on pages 127 and 131. Our examination includes agreeing on a test basis the amounts and disclosures of the Asset Disclosure report to underlying accounting records, inquiries of company personnel and analytical procedures applied to financial data in the Asset Disclosures report. Conclusions Based on our work described in this report, nothing has come to our attention that causes us to believe that the Asset Disclosure report has not been properly prepared, in all material respects, in accordance with the attached accounting policies set out on pages 127 and 131. This report relates only to the Asset Disclosure Report and does not extend to any financial statements of Aviva plc, or its subsidiaries, taken as a whole. Ernst & Young LLP Registered auditor London 27 February 2008 ----------------------------------------------------------------------------------------------------------------------- Page 127 APPENDIX D - APPLICABLE ACCOUNTING POLICIES The following accounting policies are applicable to this disclosure (full details of the principal accounting policies adopted in the Group's financial statements are included in the Report and Accounts). (A) Reinsurance The Group accepts and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies, using assumptions consistent with those used to account for these policies. Gains or losses on buying retroactive reinsurance are recognised in the income statement immediately at the date of purchase and are not amortised. Premiums ceded and claims reimbursed are presented on a gross basis in the consolidated income statement and balance sheet as appropriate. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract. Reinsurance contracts that principally transfer financial risk are accounted for directly through the balance sheet and are not included in reinsurance assets or liabilities. A deposit asset or liability is recognised, based on the consideration paid or received less any explicitly identified premiums or fees to be retained by the reinsured. If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises that impairment loss in the income statement. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. (B) Goodwill, AVIF and intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets of the acquired subsidiary, associate or joint venture at the date of acquisition. Goodwill on acquisitions prior to 1 January 2004 (the date of transition to IFRS) is carried at its book value (original cost less cumulative amortisation) on that date, less any impairment subsequently incurred. Goodwill arising before 1 January 1998 was eliminated against reserves and has not been reinstated. Goodwill arising on the Group's investments in subsidiaries since that date is shown as a separate asset, whilst that on associates and joint ventures is included within the carrying value of those investments. Acquired value of in-force business (AVIF) The present value of future profits on a portfolio of long-term insurance and investment contracts, acquired either directly or through the purchase of a subsidiary, is recognised as an asset. In most cases, this is classified as AVIF but, for non-participating investment contracts, it is included within intangibles. If this results from the acquisition of an investment in a joint venture or an associate, the AVIF is held within the carrying amount of that investment. In all cases, the AVIF is amortised over the useful lifetime of the related contracts in the portfolio on a systematic basis. The rate of amortisation is chosen by considering the profile of the additional value of in-force business acquired and the expected depletion in its value. The value of the acquired in-force long-term business is reviewed annually for any impairment in value and any reductions are charged as expenses in the income statement. Intangible assets Intangibles consist primarily of brands, certain of which have been assessed as having indefinite useful lives, and contractual relationships such as access to distribution networks and customer lists. The economic lives of the latter are determined by considering relevant factors such as usage of the asset, typical product life cycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position, and the period of control over the assets. These intangibles are amortised over their useful lives, which range from 5 to 22 years, using the straight-line method. The amortisation charge for the year is included in the income statement under 'Other operating expenses'. For intangibles with finite lives, a provision for impairment will be charged where evidence of such impairment is observed. Intangibles with indefinite lives are subject to regular impairment testing, as described below. Impairment testing For impairment testing, goodwill and intangibles with indefinite useful lives have been allocated to cash generating units by geographical reporting unit and business segment. The carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. Goodwill and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support its carrying value. Further details on goodwill allocation and impairment testing are given in note 16(b). (C) Property and equipment Owner-occupied properties are carried at their revalued amounts, which are supported by market evidence, and movements are taken to a separate reserve within equity. ------------------------------------------------------------------------------------------------------------------------ Page 128 When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. These properties are depreciated down to their estimated residual values over their useful lives. All other items classed as property and equipment within the balance sheet are carried at historical cost less accumulated depreciation. Investment properties under construction are included within property and equipment until completion, and are stated at cost less any provision for impairment in their values. Depreciation is calculated on the straight-line method to write down the cost of other assets to their residual values over their estimated useful lives as follows: - Land No depreciation - Properties under construction No depreciation - Owner-occupied properties 25 years - Motor vehicles Three years, or lease term if longer - Computer equipment Three to five years - Other assets Three to five years The assets' residual values, useful lives and method of depreciation are reviewed regularly, and at least at each financial year end, and adjusted if appropriate. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount. All borrowing costs and repairs and maintenance costs are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the most recently assessed standard of performance of the existing asset will flow to the Group and the renovation replaces an identifiable part of the asset. Major renovations are depreciated over the remaining useful life of the related asset. (D) Investment property Investment property is held for long-term rental yields and is not occupied by the Group. Completed investment property is stated at its fair value, which is supported by market evidence, as assessed by qualified external valuers or by local qualified staff of the Group in overseas operations. Changes in fair values are recorded in the income statement in net investment income. (E) Impairment of non-financial assets Property and equipment and other non-financial assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset's net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. (F) Derecognition and offset of financial assets and financial liabilities A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: - The rights to receive cash flows from the asset have expired; - The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third-party under a 'pass-through' arrangement; or - The Group has transferred its rights to receive cash flows from the asset and has either transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (G) Financial investments The Group classifies its investments as either financial assets at fair value through profit or loss (FV) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. The FV category has two subcategories - those that meet the definition as being held for trading and those the Group chooses to designate as FV (referred to in this accounting policy as 'other than trading'). In general, the FV category is used as, in most cases, the Group's investment or risk management strategy is to manage its financial investments on a fair value basis. Debt securities and equity securities, which the Group buys with the intention to resell in the short term, are classified as trading, as are non-hedge derivatives (see policy S below). All other securities in the FV category are classified as other than trading. The AFS category is used where the relevant long-term business liability (including shareholders' funds) is passively managed. Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. ------------------------------------------------------------------------------------------------------------------------ Page 129 Debt securities are initially recorded at their fair value, which is taken to be amortised cost, with amortisation credited or charged to the income statement. Investments classified as trading, other than trading and AFS are subsequently carried at fair value. Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS, except for impairment losses and relevant foreign exchange gains and losses, are recorded in a separate investment valuation reserve within equity. The fair values of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Securities, for which fair values cannot be measured reliably, are recognised at cost less impairment. When securities classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve to the income statement. Financial guarantees are recognised initially at their fair value. They are subsequently measured at the higher of the expected receivable or liability under the guarantee and the amount initially recognised less any cumulative amortisation. Impairment The Group reviews the carrying value of its investments on a regular basis. If the carrying value of an investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. The following policies are used to determine the level of any impairment: Listed AFS securities: The Group performs an objective review of the current financial position and prospects of the issuer on a regular basis, to identify whether any impairment provision is required. This review takes into account the likelihood of the current market price recovering to former levels. Unlisted AFS securities: The Group considers the current financial position of the issuer and the future prospects in identifying the requirement for an impairment provision. For both listed and unlisted AFS securities identified as being impaired, the cumulative unrealised net loss previously recognised within the AFS reserve is transferred to realised losses for the year. Mortgages, investment property and securitised loans: Impairment is measured based on the present value of expected future cash flows discounted at the effective rate of interest of the loan, subject to the fair value of the underlying collateral. When a loan is considered to be impaired, the income statement is charged with the difference between the carrying value and the estimated recoverable amount. Interest income on impaired loans is recognised based on the estimated recoverable amount. Reversals of impairments are only recognised where the decrease in the impairment can be objectively related to an event occurring after the write-down (such as an improvement in the debtor's credit rating), and are not recognised in respect of equity instruments. (H) Derivative financial instruments and hedging Derivative financial instruments include foreign exchange contracts, interest rate futures, currency and interest rate swaps, currency and interest rate options (both written and purchased) and other financial instruments that derive their value mainly from underlying interest rates, foreign exchange rates,commodity values or equity instruments. All derivatives are initially recognised in the balance sheet at their fair value, which usually represents their cost. They are subsequently remeasured at their fair value, with the method of recognising movements in this value depending on whether they are designated as hedging instruments and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset on the balance sheet at the date of purchase, representing their fair value at that date. Derivative contracts may be traded on an exchange or over-the-counter (OTC). Exchange-traded derivatives are standardised and include certain futures and option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards, swaps, caps and floors. Derivatives are subject to various risks including market, liquidity and credit risk, similar to those related to the underlying financial instruments. The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities on the balance sheet as they do not represent the fair value of these transactions. Interest rate and currency swaps Interest rate swaps are contractual agreements between two parties to exchange periodic payments in the same currency, each of which is computed on a different interest rate basis, on a specified notional amount. Most interest rate swaps involve the net exchange of payments calculated as the difference between the fixed and floating rate interest payments. Currency swaps, in their simplest form, are contractual agreements that involve the exchange of both periodic and final amounts in two different currencies. Exposure to gain or loss on both types of swap contracts will increase or decrease over their respective lives as a function of maturity dates, interest and foreign exchange rates, and the timing of payments. ------------------------------------------------------------------------------------------------------------------------ Page 130 Interest rate futures, forwards and options contracts Interest rate futures are exchange-traded instruments and represent commitments to purchase or sell a designated security or money market instrument at a specified future date and price. Interest rate forward agreements are OTC where two-parties agree on an interest rate and other terms that will become a reference point in determining, in concert with an agreed notional principal amount, a net payment to be made by one-party to the other, depending what rate in fact prevails at a future point in time. Interest rate options, which consist primarily of caps and floors, are interest rate protection instruments that involve the potential obligation of the seller to pay the buyer an interest rate differential in exchange for a premium paid by the buyer. This differential represents the difference between current rate and an agreed rate applied to a notional amount. Exposure to gain or loss on all interest rate contracts will increase or decrease over their respective lives as interest rates fluctuate. Foreign exchange contracts Foreign exchange contracts, which include spot, forward and futures contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed price and settlement date. Foreign exchange option contracts are similar to interest rate option contracts, except that they are based on currencies, rather than interest rates. Exposure to gain or loss on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate. Derivative instruments for hedging On the date a derivative contract is entered into, the Group designates certain derivatives as either: (i) a hedge of the fair value of a recognised asset or liability (fair value hedge); (ii) a hedge of a future cash flow attributable to a recognised asset or liability, a highly probable forecast transaction or a firm commitment (cash flow hedge); or (iii) a hedge of a net investment in a foreign operation (net investment hedge). Hedge accounting is used for derivatives designated in this way, provided certain criteria are met. At the inception of the transaction, the Group documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the strategy for undertaking the hedge transaction. The Group also documents its assessment of whether the hedge is expected to be, and has been, highly effective in offsetting the risk in the hedged item, both at inception and on an ongoing basis. Changes in the fair value of derivatives that are designated and qualify as net investment or cash flow hedges, and that prove to be highly effective in relation to the hedged risk, are recognised in a separate reserve within equity. Gains and losses accumulated in this reserve are included in the income statement on disposal of the relevant investment or occurrence of the cash flow as appropriate. For a variety of reasons, certain derivative transactions, while providing effective economic hedges under the Group's risk management positions, do not qualify for hedge accounting under the specific IFRS rules and are therefore treated as derivatives held for trading. Their fair value gains and losses are recognised immediately in other trading income. (I) Loans Loans with fixed maturities, including policyholder loans, mortgage loans on investment property, securitised mortgages and collateral loans, are recognised when cash is advanced to borrowers. The majority of these loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method. Loans with indefinite future lives are carried at unpaid principal balances or cost. For certain mortgage loans, the Group has taken advantage of the revised fair value option under IAS 39 to present the mortgages, associated borrowings, other borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these three items. The fair values of mortgages classified as FV are estimated using discounted cash flow forecasts, based on a risk-adjusted discount rate which reflects the risks associated with these products. They are revalued at each period end, with movements in their fair values being taken to the income statement. To the extent that a loan is uncollectable, it is written-off as impaired. Subsequent recoveries are credited to the income statement. (J) Collateral The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, certain derivative contracts and loans in order to reduce the credit risk of these transactions. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Collateral received in the form of cash, which is not legally segregated from the Group, is recognised as an asset on the balance sheet with a corresponding liability for the repayment. Non-cash collateral received is not recognised on the balance sheet unless the Group either sells or repledges these assets in the absence of default, at which point the obligation to return this collateral is recognised as a liability. Collateral pledged in the form of cash, which is legally segregated from the Group, is derecognised from the balance sheet with a corresponding receivable for its return. Non-cash collateral pledged is not derecognised from the balance sheet unless the Group defaults on its obligations under the relevant agreement, and therefore continues to be recognised on the balance sheet within the appropriate asset classification. ------------------------------------------------------------------------------------------------------------------------ Page 131 (K) Deferred acquisition costs and other assets The costs directly attributable to the acquisition of new business for insurance and participating investment contracts (excluding those written in the UK) are deferred to the extent that they are expected to be recoverable out of future margins in revenues on these contracts. For participating contracts written in the UK, acquisition costs are generally not deferred as the liability for these contracts (are) calculated in accordance with the FSA's realistic capital regime and FRS 27. For non-participating investment and investment fund management contracts, incremental acquisition costs and sales enhancements that are directly attributable to securing an investment management service are also deferred. Where such business is reinsured, an appropriate proportion of the deferred acquisition costs is attributed to the reinsurer, and is treated as a separate liability. Long-term business deferred acquisition costs are amortised systematically over a period no longer than that in which they are expected to be recoverable out of these margins. Deferrable acquisition costs for non-participating investment and investment fund management contracts are amortised over the period in which the service is provided. General insurance and health deferred acquisition costs are amortised over the period in which the related revenues are earned. The reinsurers' share of deferred acquisition costs is amortised in the same manner as the underlying asset. Deferred acquisition costs are reviewed by category of business at the end of each reporting period and are written-off where they are no longer considered to be recoverable. Other assets include vehicles which are subject to repurchase agreements and inventories of vehicle parts. The former are carried at the lower of their agreed repurchase price or net realisable value, whilst the latter are carried at the lower of cost and net realisable value, where cost is arrived at on the weighted average cost formula or 'first in first out' (FIFO) basis. Provision is made against inventories which are obsolete or surplus to requirements. (L) Cash and cash equivalents Cash and cash equivalents Cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three months' maturity from the date of acquisition, and include certificates of deposit. ------------------------------------------------------------------------------------------------------------------------ Page 132 APPENDIX D - GLOSSARY OF TERMS ABS: Asset Backed Security. A financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. For investors, asset-backed securities are an alternative to investing in corporate debt. MBS: Mortgage Backed Security. A type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by an accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorised financial institution. RMBS: Residential Mortgage Backed Securitiy. A type of security whose cash flows come from residential debt such as mortgages, home-equity loans and subprime mortgages. This is a type of mortgage-backed security that focuses on residential instead of commercial debt. Holders of an RMBS receive interest and principal payments that come from the holders of the residential debt. CMBS: Commercial Mortgage Backed Security. A type of mortgage backed security that is secured by the loan on a commercial property. Sub-prime: Lowest grade of US mortgage lending. A type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. Quite often, subprime borrowers are turned away from traditional lenders because of their low credit ratings or other factors that suggest that they have a reasonable chance of defaulting on the debt repayment. Alt-A: Mid grade US mortgage lending. A classification of mortgages where the risk profile falls between prime and subprime. The borrowers behind these mortgages will typically have clean credit histories, but the mortgage itself will generally have some issues that increase its risk profile. These issues include higher loan-to-value and debt-to- income ratios or inadequate documentation of the borrower's income. CDO: Collateralised Debt Obligation. An investment-grade security backed by a pool of bonds, loans and other assets. CDOs do not specialise in one type of debt but are often non-mortgage loans or bonds. CDOs are unique in that they represent different types of debt and credit risk. These different types of debt are often referred to as 'tranches' or 'slices'. Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays. CLO: Collateralised Loan Obligation. A special purpose vehicle (SPV) with securitisation payments in the form of different tranches. Financial institutions back this security with receivables from loans. ABCP: Asset backed commercial paper. This is typically one of two types of vehicle - conduits and SIVs: Conduits Vehicles that invest in debt assets and finance them in the short-term market through issuing commercial paper (CP). The types of assets purchased by these vehicles include, inter alia, debt securities, trade receivables, credit card receivables, loans and equipment leases. The CP programme achieves a high short-term rating as a consequence of the credit quality of the assets, and the existence of a 100% bank liquidity line that will fund the vehicle if CP cannot be issued. If the quality of the underlying assets is not sufficiently high,then the ratings agencies will require credit enhancement to be built into the structure. This may be in the form of over-collateralisation, letters of credit,guarantees etc. The liquidity provider is required to lend to the vehicle all that is needed to repay maturing CP (regardless of the value of the assets in the vehicle). The only circumstance in which the bank is not required to provide funding is where defaults have occurred in the asset portfolios which are greater in size than the available credit enhancement. In that situation, the bank need only lend against the non defaulted assets. Consequently, an investor in CP issued by a conduit is only likely to take a loss in the event that the liquidity provider will not lend to the vehicle (because of defaults in the asset portfolio) or cannot because it is having problems of its own. SIVs Structured investment vehicles. They buy long-term securities and typically finance them from a mixture of short-term debt (i.e. CP), medium term debt and subordinated debt (capital notes). Given the different capital structure, these vehicles do not have the same level of liquidity support as conduits. In times of stress, the expectation is that these vehicles will need to liquidate their portfolios as the size of the liquidity lines in place is not sufficient to cover all outstanding debt. Given this, lenders to SIVs are potentially more vulnerable to falls in the value of the vehicle's investments than is the case with a conduit. ABFRN: Asset backed floating rate notes (FRNs). These are bonds backed by pools of assets such as mortgages, credit card or loan receivables. The pool of assets generates the cash flows that are used to repay principal and interest on the notes. The FRNs are normally structured in such a way that some notes are subordinated to others. Consequently, as a result of this structure, and the existence of cash reserve funds and over-collateralisation, the most senior tranches of notes are generally highly rated (typically AAA). Wrapped credit: Where a monoline insurer or other entity with a AAA rating has provided a guarantee (wrapper) around a credit risk that might otherwise be rated, say, BBB. ------------------------------------------------------------------------------------------------------------------------ Page 133 Shareholder services Managing your shareholding: Shareholders who have any queries in respect of their shareholding should contact the Company's Registrar, Equiniti. Contact details can be found below. In addition to assisting with general queries, the Registrar can also help with the following: Amalgamating different share accounts - If shareholders received more than one copy of the Company's communications, it could be because there is more than one record for the shareholder on the share register. To avoid duplicate mailings the Registrar can arrange for accounts to be amalgamated. Dividend payments direct to your bank account - As an alternative to having dividends paid by cheque, shareholders can, if they wish, have them credited directly into their bank or building society account on the dividend payment date. Having the dividend paid directly into their bank or building society account avoids the risk of cheques being lost or intercepted in the post and is more convenient as payment is credited automatically on the payment date. Shareholders wishing to set up a dividend mandate can do so by completing the dividend mandate form attached to the dividend cheque, via the Company's website www.aviva.com/dividendmandate or by contacting the Registrar. For overseas shareholders, an overseas payments service is available, which allows shareholders in over 30 countries worldwide to have dividends credited directly to their bank accounts in local currencies, normally costing less than paying in a sterling cheque. Dividend mandate forms for overseas shareholders can be obtained via the Company's website at www.aviva.com/ shareholders or by contacting the Registrar. Consolidated Tax Vouchers - Private shareholders who have dividends paid directly into their bank or building society account receive one consolidated tax voucher each year instead of a voucher with each dividend payment, unless they have requested otherwise. Scrip Dividend - The Aviva Scrip Dividend Scheme (the 'Scheme') provides shareholders with the opportunity to receive their dividends in the form of new ordinary shares in the Company instead of cash. Shareholders who have not joined the Scheme but wish to do so should contact the Registrar, Equiniti, and request a mandate form. The completed mandate form will need to be received by Equiniti no later than 17 April 2008 in order to be effective for the 2007 final dividend. Further details are included on the Company's website www.aviva.com/scripdividend. It is the Company's intention that following the payment of the 2007 final dividend on 16 May 2008 the Aviva Scrip Dividend Scheme will be withdrawn and shareholders will be offered the opportunity to participate in a Dividend Reinvestment Plan. Full details of the new plan will be communicated to shareholders at this time. Share Dealing Shareholders who hold their shares in the Aviva Share Account will need to use one of the services detailed below to buy or sell Aviva shares. Those who hold a share certificate can use the services below or any bank, building society or stockbroker offering share dealing facilities. Shareholders in any doubt about buying or selling Aviva shares should seek professional financial advice. Share dealing facilities for UK shareholders/share account members â€¢ You can buy or sell shares via the internet or by telephone through Shareview Dealing, a share dealing service provided by Equiniti. For internet purchases and sales log on to www.shareview.co.uk/dealing and for telephone purchases and sales call 08456 037 037 between 8.00am and 4.30pm, Monday to Friday. â€¢ Equiniti Financial Services Limited also offers a postal share dealing service.For further information and a postal share dealing form telephone 0871 384 2953*. â€¢ Equiniti Financial Services Limited is authorised and regulated by the Financial Services Authority, registered number 6208699. â€¢ To buy or sell shares over the telephone, shareholders can contact Barclays Stockbrokers on 0870 549 3002 (for shareholders with a share certificate) or 0870 549 3001 (for shareholders with an Aviva Share account statement). To check instructions and maintain high quality service standards, Barclays Stockbrokers may record and monitor calls. New Business Development hours are 8.00am to 6.00pm Monday to Friday, excluding Bank Holidays. Barclays Stockbrokers is authorised and regulated by the Financial Services Authority, registered number 124247. â€¢ Barclays Stockbrokers also offers a postal share dealing service. For further information and a postal share dealing form telephone 0870 514 3263. â€¢ NatWest Stockbrokers provide a Share Dealing Service either over the telephone or at certain NatWest branches for Aviva Share Account holders only. For more information contact NatWest Stockbrokers on 0845 122 0689. NatWest Stockbrokers Limited ('NWS') is a member of the London Stock Exchange and PLUS. NWS is authorised and regulated by the Financial Services Authority, registered number 124395. Registered Office: Waterhouse Square, 138-142 Holborn, London EC1N 2TH. Registered Number 1959479, England. NWS is operated by a joint venture between The Royal Bank of Scotland Group plc and The Toronto-Dominion Bank. Share dealing facilities for overseas shareholders To sell Aviva shares over the telephone, shareholders can contact Barclays Stockbrokers on +44 (0)141 352 3959. Non-UK residents will need to provide various documents in order to use this service and details will be provided on registration. Please note that regulations prevent this service from being offered to the residents of the United States, Canada and Australia. Settlement proceeds will be sent to either a UK sterling bank account or by sterling cheque. ------------------------------------------------------------------------------------------------------------------------ Page 134 Shareholder Information Share price Shareholders can access the current share price of Aviva plc ordinary shares at www.aviva.com/shareprice or alternatively can call FT Cityline on 0906 843 2197. Calls are currently charged at 60 pence per minute on a per second basis from a BT landline. Charges from other networks and mobile networks may vary. The average time to access a share price is approximately one minute. The current share price of Aviva's preference shares can be found on the London Stock Exchange website at www.londonstockexchange.com/en-gb/pricenews. ShareGift - The Orr Mackintosh Foundation operates a purely voluntary charity share donation scheme for shareholders who wish to dispose of small numbers of shares when the dealing costs or minimum fee makes it uneconomical to sell them. Details of the scheme are available from ShareGift at www.sharegift.org or can be obtained from the Company's Registrar. Group financial calendar for 2008 Online publication of Aviva plc Annual Report and Accounts 2007 26 March Announcement of first quarter long-term savings new business figures 25 April Annual General Meeting 1 May Announcement of unaudited six months' interim results 30 July Announcement of third quarter long-term savings new business figures 22 October Ordinary Shares Ex-dividend date* 26 March Record date 28 March Scrip dividend price available* 2 April Last date for scrip dividend forms to be received in order to be effective for 2007 final dividend 17 April Dividend payment date 16 May Preference Shares 8 3/8% cumulative irredeemable preference shares First payment date 31 March Second payment date 30 September 8 3/4% cumulative irredeemable preference shares First payment date 30 June Second payment date 31 December Useful contact details Detailed below are the contact details that shareholders may find useful if they have a query in respect of their shareholding. Please quote Aviva plc, as well as the name and address in which the shares are held, in all correspondence. If you have a shareholder reference, please have this available as well. General shareholding, administration Individual Savings Accounts (ISA's) An Aviva Share Account queries: Equiniti (ISA) Manager Equiniti Aspect House, Spencer Road Aspect House, Spencer Road Lancing, West Sussex BN99 6DA Lancing, West Sussex BN99 6DA 0871 384 2244* Barclays Stockbrokers (ISA) Manager www.shareview.co.uk Tay House, 300 Bath Street e-mail: Aviva@equiniti.com Glasgow G2 4RJ 0871 384 2953* 0870 514 3263 *Calls to these numbers are charged at 8 pence per minute from a BT landline. Charges from other telephone providers may vary. ---------------------------------------------------------------------------------------------------------------------- Internet sites Aviva owns various internet sites, most of which interlink with each other. Aviva Group www.aviva.com ---------------------------------------------------------------------------------------------------------------------- UK long-term savings and general insurance www.norwichunion.com ---------------------------------------------------------------------------------------------------------------------- Fund management www.morleyfm.com ---------------------------------------------------------------------------------------------------------------------- Aviva worldwide internet sites www.aviva.com/websites ------------------------------------------------------------------------------------------------------------------------ Page 135 E-Communications At the 2007 Annual General Meeting, a resolution was passed to amend the Company's Articles of Association to take full advantage of the provisions in the Companies Act 2006 in relation to electronic communications. In particular, the provisions enable all communications between the shareholder and the Company to be made in electronic form. Documents will be supplied via the Company's website to shareholders who have not requested a hard copy or provided an e-mail address to which documents or information may be sent. If you wish to continue to receive hard copy documents and have previously not elected to do so, you should write to the Registrar. The wider use of electronic communications enables faster receipt of documents, reduces the Company's printing, paper and postage costs and has a positive impact on the environment. If you have not already done so, to receive communications electronically, log onto www.aviva.com/shareholders and register for shareholder e-communications. Corporate social responsibility (CSR) Aviva's CSR policy and programme continues to take firmer roots within the business and to generate support with staff, shareholders and customers. For Aviva, CSR is defined as embracing corporate performance in respect of standards of business conduct, human rights, the environment and health and safety, as well as the promotion of good and fair relations with employees, customers, suppliers and the community. Trust and integrity are integral to the wellbeing of a financial services company and therefore the Group sees CSR as presenting a vital business opportunity. Aviva's CSR performance is also highly ranked by growing numbers of research agencies and investment houses. More details can be found on our website at www.aviva.com/csr Aviva plc Registered Office: St Helen's, 1 Undershaft, London EC3P 3DQ Telephone +44 (0)20 7283 2000 www.aviva.com Registered in England Number: 2468686 End of Part 5 of 5 A PDF version of this announcement can be found at www.aviva.com End of announcement This information is provided by RNS The company news service from the London Stock Exchange FUWSASELE

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Aviva (AV.)

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