Final Results - Part 3 of 4

Aviva PLC 01 March 2007 Part 3 of 4 ----------------------------------------------------------------------------------------------------------------------- Page 39 IFRS basis Summarised consolidated income statement - IFRS basis For the year ended 31 December 2006 Page 2006 2006 2005 â‚¬m Â£m Â£m Income 62,65 40,050 Premiums written net of reinsurance 27,234 24,982 ---------------------------------------------------------------------------------------------------------------------- 40,187 Net earned premiums 27,327 24,859 2,750 Fee and commission income 1,870 1,851 22,754 Net investment income 15,473 23,722 713 Share of profit after tax of joint ventures and associates 485 340 327 Profit on the disposal of subsidiaries and associates 222 153 ---------------------------------------------------------------------------------------------------------------------- 66,731 45,377 50,925 ---------------------------------------------------------------------------------------------------------------------- Expenses (34,476) Claims and benefits paid, net of recoveries from reinsurers (23,444) (19,706) (3,853) Change in insurance liabilities, net of reinsurance (2,620) (10,376) (8,826) Change in investment contract provisions (6,002) (7,814) (821) Change in unallocated divisible surplus (558) (1,474) (7,416) Fee and commission expense (5,043) (4,330) (5,231) Other expenses (3,557) (3,166) (1,221) Finance costs (830) (609) ---------------------------------------------------------------------------------------------------------------------- (61,844) (42,054) (47,475) ---------------------------------------------------------------------------------------------------------------------- 4,887 Profit before tax 3,323 3,450 (509) Tax attributable to policyholders' returns (346) (922) ---------------------------------------------------------------------------------------------------------------------- 4,378 Profit before tax attributable to shareholders' profits 2,977 2,528 ---------------------------------------------------------------------------------------------------------------------- Tax expense (704) United Kingdom tax (479) (1,150) (670) Overseas tax (455) (402) ---------------------------------------------------------------------------------------------------------------------- (1,374) (934) (1,552) 509 Less: tax attributable to policyholders' returns 346 922 ---------------------------------------------------------------------------------------------------------------------- (865) Tax attributable to shareholders' profits (588) (630) ---------------------------------------------------------------------------------------------------------------------- 3,513 Profit for the year 2,389 1,898 ====================================================================================================================== Attributable to: 3,257 Equity shareholders of Aviva plc 2,215 1,767 256 Minority interests 174 131 ---------------------------------------------------------------------------------------------------------------------- 3,513 2,389 1,898 ====================================================================================================================== All profit is from continuing operations. 2006 2006 2005 Earnings per share - IFRS basis 55 128.7c Basic (pence per share) 87.5p 73.5p 55 127.4c Diluted (pence per share) 86.6p 72.9p Subsequent to 31 December 2006, the directors proposed a final dividend for 2006 of 19.18p (final 2005: 17.44p) per ordinary share, amounting to Â£492 million (final 2005: Â£418 million) in total. Subject to the approval by shareholders at the AGM, the dividend will be paid on 17 May 2007 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2007. During 2006 the directors declared a final dividend for 2005 of 17.44p per ordinary share (final 2004: 16.00p) and an interim dividend for 2006 of 10.82p per ordinary share (interim 2005: 9.83p) totalling Â£418 million (2005: Â£364 million) and Â£275 million (2005: Â£233 million) respectively. ----------------------------------------------------------------------------------------------------------------------- Page 40 Proforma reconciliation of Group operating profit to profit before tax - IFRS basis For the year ended 31 December 2006 Page 2006 2006 2005 â‚¬m Â£m Â£m IFRS operating profit before tax attributable to shareholders' profits 50 2,788 Long-term business 1,896 1,065 50 228 Fund management 155 124 51 2,471 General insurance and health 1,680 1,551 Other: 52 (118) Other operations (80) (40) 53 (235) Corporate costs (160) (136) 53 (560) Unallocated interest charges (381) (436) ---------------------------------------------------------------------------------------------------------------------- IFRS operating profit before adjusting items and 4,574 tax attributable to shareholders' profits 3,110 2,128 Adjusted for the following: 61 (138) Impairment of goodwill (94) (43) (147) Amortisation and impairment of acquired value of in-force business (100) (73) (103) Amortisation and impairment of intangibles (70) (45) 9 Financial Services Compensation Scheme and other levies 6 - 51 219 Short-term fluctuation in return on investments backing general insurance and health business 149 517 48 326 Profit on the disposal of subsidiaries and associates 222 153 49 (362) Integration and restructuring costs (246) (109) ---------------------------------------------------------------------------------------------------------------------- 4,378 Profit before tax attributable to shareholders' profits 2,977 2,528 Tax attributable to shareholders' profits 53 (1,066) Operating profit (725) (536) 53 201 Other activities 137 (94) ---------------------------------------------------------------------------------------------------------------------- (865) (588) (630) ---------------------------------------------------------------------------------------------------------------------- 3,513 Profit for the year 2,389 1,898 ====================================================================================================================== 2006 2006 2005 Earnings per share - IFRS operating profit basis 55 127.8c Basic (pence per share) 86.9p 60.5p 55 126.5c Diluted (pence per share) 86.0p 60.0p ----------------------------------------------------------------------------------------------------------------------- Page 41 Consolidated statement of recognised income and expense - IFRS basis For the year ended 31 December 2006 2006 2006 2005 â‚¬m Â£m Â£m 550 Fair value gains/(losses) on AFS securities, 374 (52) owner-occupied properties and hedging instruments (238) Fair value (gains)/losses transferred to profit (162) 411 (3) Impairment losses on revalued assets (2) (45) - Share of fair value changes in joint ventures and associates taken to equity - 2 (168) Actuarial losses on pension schemes (114) (547) (509) Foreign exchange rate movements (346) (2) - Aggregate tax effect - policyholder tax - 3 (7) Aggregate tax effect - shareholder tax (5) 272 ---------------------------------------------------------------------------------------------------------------------- (375) Net income recognised directly in equity (255) 42 3,513 Profit for the year 2,389 1,898 ---------------------------------------------------------------------------------------------------------------------- 3,138 Total recognised income and expense for the year 2,134 1,940 ====================================================================================================================== Attributable to: 2,909 Equity shareholders of Aviva plc 1,978 1,827 229 Minority interests 156 113 ---------------------------------------------------------------------------------------------------------------------- 3,138 2,134 1,940 ====================================================================================================================== Reconciliation of movements in consolidated shareholders' equity - IFRS basis For the year ended 31 December 2006 2006 2006 2005 â‚¬m Â£m Â£m 16,555 Balance at 1 January 11,092 8,993 3,185 Total recognised income and expense for the year 2,134 1,940 (1,137) Dividends and appropriations (note 15) (762) (657) 1,331 Issue of share capital for the acquisition of AmerUs 892 530 Group Co. (2005: RAC plc), net of transaction costs 64 Other issues of share capital, net of transaction costs 43 59 303 Shares issued in lieu of dividends 203 100 593 Capital contributions from minority shareholders 397 212 (112) Minority share of dividends declared in the year (75) (70) 137 Minority interest in acquired / (disposed) subsidiaries 92 (36) 72 Reserves credit for equity compensation plans 48 22 - Other movements - (1) --------------------------------------------------------------------------------------------------------------------- 20,991 Total equity 14,064 11,092 (2,534) Minority interests (1,698) (1,128) --------------------------------------------------------------------------------------------------------------------- 18,457 Balance at 31 December 12,366 9,964 ===================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 42 Summarised consolidated balance sheet - IFRS basis As at 31 December 2006 2006 2006 2005 â‚¬m Â£m Â£m Assets 4,343 Goodwill 2,910 2,274 4,072 Acquired value of in-force business and intangible assets 2,728 803 4,172 Investments in joint ventures 2,795 2,129 1,336 Investments in associates 895 885 1,349 Property and equipment 904 885 22,572 Investment property 15,123 13,275 39,470 Loans 26,445 24,544 Financial investments 168,718 Debt securities 113,041 103,917 84,719 Equity securities 56,762 52,044 49,328 Other investments 33,050 26,427 11,679 Reinsurance assets 7,825 7,130 1,790 Deferred tax assets 1,199 1,018 513 Current tax assets 344 87 12,088 Receivables and other financial assets 8,098 7,706 5,188 Deferred acquisition costs and other assets 3,476 3,766 3,858 Prepayments and accrued income 2,585 2,363 21,704 Cash and cash equivalents 14,542 13,732 - Assets of operations classified as held for sale - 462 --------------------------------------------------------------------------------------------------------------------- 436,899 Total assets 292,722 263,447 ===================================================================================================================== Equity 957 Ordinary share capital 641 599 6,657 Capital reserves 4,460 4,438 1,482 Other reserves 993 1,140 7,585 Retained earnings 5,082 2,597 --------------------------------------------------------------------------------------------------------------------- 16,681 Equity attributable to ordinary shareholders of Aviva plc 11,176 8,774 1,776 Preference share capital and direct capital instrument 1,190 1,190 2,534 Minority interests 1,698 1,128 --------------------------------------------------------------------------------------------------------------------- 20,991 Total equity 14,064 11,092 ===================================================================================================================== Liabilities 215,269 Gross insurance liabilities 144,230 132,602 131,878 Gross liabilities for investment contracts 88,358 77,309 14,127 Unallocated divisible surplus 9,465 8,978 5,687 Net asset value attributable to unitholders 3,810 3,137 4,254 Provisions 2,850 2,875 4,593 Deferred tax liabilities 3,077 2,458 1,884 Current tax liabilities 1,262 1,033 18,115 Borrowings 12,137 11,013 13,784 Payables and other financial liabilities 9,235 9,485 6,317 Other liabilities 4,234 3,320 - Liabilities of operations classified as held for sale - 145 --------------------------------------------------------------------------------------------------------------------- 415,908 Total liabilities 278,658 252,355 ===================================================================================================================== 436,899 Total equity and liabilities 292,722 263,447 ===================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 43 Summarised consolidated cash flow statement - IFRS basis For the year ended 31 December 2006 The cash flows presented in this statement cover all the Group's activities and include flows from policyholder and shareholder activities. 2006 2005 ------------------------------------ Long-term Non-long-term business business operations operations Group Group Â£m Â£m Â£m Â£m Cash flows from operating activities Cash generated from operations 1,985 470 2,455 2,784 Tax paid (512) (83) (595) (375) ---------------------------------------------------------------------------------------------------------------------- Net cash from operating activities 1,473 387 1,860 2,409 ---------------------------------------------------------------------------------------------------------------------- Cash flow from investing activities: Acquisition of subsidiaries, joint ventures and associates, net of cash acquired (96) (1,793) (1,889) (1,423) Disposal of subsidiaries, joint ventures and associates, net of cash transferred 102 514 616 464 Net loans to joint ventures and associates (113) 9 (104) (128) Purchases of property and equipment (55) (240) (295) (206) Proceeds on sale of property and equipment 10 146 156 50 Purchases of intangible assets (10) (48) (58) (60) ---------------------------------------------------------------------------------------------------------------------- Net cash from investing activities (162) (1,412) (1,574) (1,303) ---------------------------------------------------------------------------------------------------------------------- Cash flow from financing activities: Proceeds from issue of ordinary shares, net of transaction costs - 935 935 59 Net drawdown of borrowings (466) 1,367 901 856 Interest paid on borrowings (367) (458) (825) (609) Preference dividends paid - (17) (17) (17) Ordinary dividends paid - (490) (490) (498) Coupon payments on direct capital instrument - (52) (52) (42) Finance lease payments - (22) (22) (8) Capital contributions from minority shareholders 295 9 304 212 Dividends paid to minority interests of subsidiaries (53) (22) (75) (70) Non-trading cash flows between operations (288) 288 - - ---------------------------------------------------------------------------------------------------------------------- Net cash from financing activities (879) 1,538 659 (117) ---------------------------------------------------------------------------------------------------------------------- Total cash flow 432 513 945 989 ---------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 432 513 945 989 Cash and cash equivalents at 1 January 10,107 2,960 13,067 12,126 Effect of exchange rate changes on cash and cash equivalents (119) (47) (166) (48) ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at 31 December 10,420 3,426 13,846 13,067 ====================================================================================================================== Cash and cash equivalents at 31 December comprised: Cash at bank and in hand 2,790 1,297 4,087 3,530 Cash equivalents 7,896 2,559 10,455 10,227 ---------------------------------------------------------------------------------------------------------------------- 10,686 3,856 14,542 13,757 Bank overdrafts (266) (430) (696) (690) ---------------------------------------------------------------------------------------------------------------------- 10,420 3,426 13,846 13,067 ====================================================================================================================== Included within non-long-term business 'Cash flows from operating activities' of Â£470 million are cash outflows resulting from net purchases of financial investments. However the cash inflow from the issuance of securitised mortgage loan notes of Â£1,397 million is included within net drawdown of borrowings. The majority of the issuance has funded the purchase of financial investments included in operating activities. Of the total cash and cash equivalents shown for 2005, Â£25 million was classified as held for sale. ----------------------------------------------------------------------------------------------------------------------- Page 44 1. Basis of preparation - IFRS basis (a) From 2005, all European Union listed companies were required to prepare consolidated financial statements using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union. The results in this preliminary announcement have been prepared in accordance with IFRS applicable at 31 December 2006 and have been taken from the Group's Annual Report and Accounts. The preliminary announcement for the year ended 31 December 2006 does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The results on an IFRS basis for the full years 2006 and 2005 have been audited by Ernst & Young LLP. The auditors have reported on the 2005 and 2006 accounts and their reports were unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The Group's 2005 Report and Accounts have been filed with the Registrar of Companies. (b) In August 2005, the IASB issued IFRS 7, Financial Instruments: Disclosures, and an amendment to IAS 1, Capital Disclosures. Although their requirements are applicable for accounting periods beginning on or after 1 January 2007, the Group has decided to adopt IFRS 7 early and reflect its impact in the financial statements. The amendment to IAS 1 brings the capital disclosures into line with those already required by FRS 27 and, although the Group is not adopting it early, this is not expected to result in any material additional disclosures. (c) Items included in the financial statements of each of the Group's entities are measured in the currency of the primary economic environment in which that entity operates (the 'functional currency'). The consolidated financial statements are stated in sterling, which is the Company's functional and presentation currency. Unless otherwise noted, the amounts shown in the financial statements are in millions of pounds sterling (Â£m). As supplementary information, consolidated financial information is also presented in euros. (d) In accordance with Phase I IFRS 4, Insurance Contracts, the Group has applied existing accounting practices for insurance and participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards. (e) The results of the Group's fund management business in the Netherlands were previously reported within the results of our other operations but are now shown as part of our fund management operations. The result reclassified in the year ended 31 December 2006 is Â£37 million (2005: Â£32 million). The related assets and liabilities reclassified at 31 December 2006 are Â£63 million (31 December 2005: Â£54 million) and Â£18 million (31 December 2005: Â£15 million), respectively. 2. Exchange rates The Group's principal overseas operations during the year were located within the Eurozone and the United States. The euro rates employed in this announcement are an average rate of 1 euro = Â£0.68 (2005: 1 euro = Â£0.68) and a closing rate of 1 euro = Â£0.67 (2005: 1 euro = Â£0.69). The US dollar rates used for translation are an average of Â£1 = US$1.84 (2005: Â£1 = US$1.82) and a closing rate of Â£1 = US$1.96 (2005: Â£1 = US$1.72). ----------------------------------------------------------------------------------------------------------------------- Page 45 3. Acquisitions (a) Ark Life Assurance Company Limited On 27 January 2006, Hibernian Life Holdings Limited (HLH), the parent company of Hibernian Life & Pensions Limited, acquired all the shares of Ark Life Assurance Company Limited (Ark Life) from Allied Irish Banks plc (AIB) in exchange for a 24.99% stake in the enlarged HLH and a balancing cash payment of â‚¬196 million (Â£134 million) which also reflects the transfer of the management of Ark Life funds to Hibernian Investment Managers Limited, part of the Group's fund management business. The final consideration has not yet been agreed with AIB but is expected to be finalised in 2007. However, any adjustment to the above figures is not expected to be material. In addition, a further deferred cash payment of up to â‚¬10 million (Â£7 million) is payable, subject to the fulfilment of certain performance criteria. The results of Ark Life have been included in the consolidated financial statements of the Group with effect from 27 January 2006, and contributed Â£30 million to the consolidated EEV profit before tax and Â£40 million to the IFRS profit before tax. The transaction has been accounted for as the acquisition of 75.01% of Ark Life and the disposal of 24.99% of HLH. The realised gain on disposal of the Group's 24.99% interest in HLH was Â£25 million on an EEV basis and Â£86 million on an IFRS basis. The Ark Life acquisition has given rise to goodwill on acquisition of Â£57 million, calculated as follows: Purchase cost: Â£m Fair value of shares in Hibernian Life Holdings Limited 184 Cash paid 134 Attributable costs 4 --------------------------------------------------------------------------------------------------------------------- Total consideration 322 ===================================================================================================================== The assets and liabilities at the date of acquisition were: Fair value and accounting Book policy Fair value adjustments value Â£m Â£m Â£m Assets Acquired value of in-force business on insurance and investment contracts - 168 168 Other intangible assets 1 44 45 Investments 2,939 (74) 2,865 Other assets 1,225 (15) 1,210 ---------------------------------------------------------------------------------------------------------------------- Total assets 4,165 123 4,288 ====================================================================================================================== Liabilities Gross insurance liabilities (1,767) (22) (1,789) Gross liability for investment contracts (2,066) (25) (2,091) Other liabilities (154) 96 (58) ---------------------------------------------------------------------------------------------------------------------- Total liabilities (3,987) 49 (3,938) ====================================================================================================================== Total net assets 178 172 350 ====================================================================================================================== Net assets acquired (Group share) 265 ====================================================================================================================== Goodwill arising on acquisition 57 ====================================================================================================================== The value of the agreement to distribute through AIB's networks has been identified as a separate intangible asset and valued by an independent third party at Â£45 million, using estimated post-tax cash flows and discount rates. It has been assessed as having a life of 25 years and is being amortised over that period, with a corresponding release of the applicable deferred tax provision. The residual goodwill of Â£57 million represents future synergies expected to arise in the combined life operations. The slight increase of Â£12 million in residual goodwill from the interim announcement reflects finalisation of values of the assets and liabilities which have been amended in accordance with paragraph 62 of IFR3, Business Combinations. As disclosed in the EEV section on page 29, the embedded value of the long-term business acquired was Â£310 million, representing the net assets adjusted for other intangible assets net of tax. ----------------------------------------------------------------------------------------------------------------------- Page 46 (b) Eagle Insurance Company Limited On 1 February 2006, the Group acquired a 51% interest in Eagle Insurance Limited (Eagle), the third largest insurer in Sri Lanka, by buying a majority shareholding in Eagle's immediate holding company, NDB Finance Lanka (Pvt) Limited. At the same time, Eagle entered into a 10-year bancassurance agreement with National Development Bank Limited (NDB), Sri Lanka's biggest development bank and Eagle's other major shareholder. The cash consideration, including purchase costs, was Â£15 million. The fair value of the Group's share of net assets acquired was Â£12 million including intangibles of Â£2 million, giving rise to Â£3 million of goodwill on acquisition. As disclosed in the EEV section on page 29, the embedded value of the long-term business acquired was Â£17 million, representing the net assets adjusted for other intangible assets net of tax. (c) Canadian Brokers On 28 April 2006, the Group acquired a 20% holding in Dale-Parizeau L.M. Inc, a Canadian insurance broker, for a consideration of Â£16 million including purchase costs. The allocation of the risks and rewards of ownership between the Group and third party investors in the broker has led the Group to consolidate its results for the period since acquisition to 31 December 2006. The fair value of the net assets acquired, including intangibles of Â£10 million, was Â£9 million, giving rise to Â£7 million of goodwill on acquisition. On 4 December 2006, the Group acquired a 20% holding in a second Canadian insurance broker, Morris & Mackenzie Inc (M&M), for a consideration of Â£28 million including purchase costs. The allocation of the risks and rewards of ownership between the Group and third party investors in the broker has led the Group to consolidate its results for the period since acquisition to 31 December 2006. Due to the proximity of the acquisition date to the year end, provisional fair values have been used and will be adjusted within 12 months. The provisional fair value of the net assets acquired, including intangibles of Â£14 million, was Â£12 million, giving rise to Â£16 million of goodwill on acquisition. On 31 December 2006, the Group completed the disposal of M&M's non-Quebec based operations for Â£9 million. The sale did not give rise to any gain or loss. Net assets at disposal represented goodwill, intangible assets and deferred tax liabilities. (d) AmerUs Group Co. On 15 November 2006, the Group acquired 100% of the common stock of AmerUs Group Co. (AmerUs) for US$69 in cash per common share of AmerUs. AmerUs is a leading provider of equity-indexed life and annuity products to the United States retirement and savings markets, and the acquisition establishes a leading presence for the Group in these selected high-growth segments. The total purchase price of US$3.1 billion (Â£1.7 billion) represents cash consideration for AmerUs shares and stock options, and stock-based compensation vesting on change of control. The purchase consideration was partly financed by a Â£903 million placing of the Company's ordinary shares, with the balance of funding being provided by internal resources and external debt. The share placing was completed on 13 July 2006, with 129 million shares issued on 18 July, at Â£7 per share. The issue of new shares in the company to fund the acquisition of AmerUs was effected by a share placing and attracted merger relief under section 131 of the Companies Act 1985. The placing structure utilised attracted merger relief under section 131 of the Companies Act 1985, resulting in a credit to the merger reserve of Â£871 million. Subsequent internal transactions required to complete the placing structure have resulted in this part of the merger reserve being realised. Consequently, a transfer of Â£871 million has been made from the merger reserve to retained earnings. Expenses of Â£11 million have been charged to the share premium account. The AmerUs acquisition has given rise to goodwill on acquisition of Â£669 million, calculated as follows: Purchase cost: Â£m Cash paid 1,669 Attributable costs 11 --------------------------------------------------------------------------------------------------------------------- Total consideration 1,680 ===================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 47 The assets and liabilities at the date of acquisition were: Fair value and Accounting Policy Book Value Adjustments Fair value Â£m Â£m Â£m ---------------------------------------------------------------------------------------------------------------------- Assets Acquired value of in-force business on insurance and investment contracts 179 1,387 1,566 Other intangible assets 126 165 291 Investments 11,539 5 11,544 Other assets 2,717 (1,270) 1,447 ---------------------------------------------------------------------------------------------------------------------- Total assets 14,561 287 14,848 ====================================================================================================================== Liabilities Gross insurance liabilities 11,055 (50) 11,005 Gross liability for investment contracts 1,137 5 1,142 Other liabilities 1,503 187 1,690 ---------------------------------------------------------------------------------------------------------------------- Total liabilities 13,695 142 13,837 ====================================================================================================================== Total net assets acquired 866 145 1,011 ====================================================================================================================== Goodwill arising on acquisition 669 ====================================================================================================================== The largest fair value adjustments above relate to the recognition of a value for the in-force business on insurance and investment contracts acquired by the Group (the AVIF) and to a reduction in other assets. The AVIF adjustment of Â£1,387 million represents the excess of the value of the acquired in-force life insurance contracts over their IFRS net asset value, and is calculated as the difference between the acquired net tangible assets on an EEV value basis and the same net assets on an IFRS basis. Deferred acquisition costs (DAC) totalling Â£1,297 million included in other assets in the book value column above, are not recognised in the IFRS fair value balance sheet as they have no fair value at acquisition. As DAC is reflected in the calculation of AVIF, its write-off in the fair value adjustments is offset by the recognition of a fair value for the AVIF. Other intangible assets of Â£291 million are represented by AmerUs' distribution channels and have been valued by an independent third party, using estimated post-tax cash flows and discount rates. The distribution channels have been assessed as having a life of between six and nine years and their value is being amortised over that period, with a corresponding release of the applicable deferred tax provision. The residual goodwill of Â£669 million represents future synergies expected to arise in the combined life operations, the value of new business from new distribution channels and customers going forward, and the value of the workforce and management, related know-how and other future business value not included in the intangibles and the AVIF. As disclosed in the EEV section on page 29, the embedded value of the long-term business acquired was Â£1,107 million, representing the net assets acquired, adjusted for other intangible assets net of tax and corporate debt. (e) Total goodwill arising on the above acquisitions Â£m Total net assets 1,405 Less: Minority interests (96) --------------------------------------------------------------------------------------------------------------------- Net assets acquired 1,309 Goodwill arising on acquisition 752 --------------------------------------------------------------------------------------------------------------------- Total consideration 2,061 ===================================================================================================================== The total consideration comprised: Fair value of shares 184 Cash paid 1,862 Attributable costs 15 --------------------------------------------------------------------------------------------------------------------- Total consideration 2,061 ===================================================================================================================== (f) Other In addition to the goodwill arising on the above acquisitions, the Group also made a number of smaller acquisitions giving rise to additional goodwill of Â£9 million. Total goodwill arising in the year was Â£761 million. On 1 January 2006, following the introduction of a new Health Insurance Act, a Netherlands subsidiary acquired 100% of the share capital of O.W.M. Delta Lloyd and OHRA Zorgverzekeringen U.A. for nil consideration. Assets and liabilities acquired amounted to Â£272 million and Â£258 million, respectively, giving rise to Â£14 million of negative goodwill which has been recognised in the income statement. ----------------------------------------------------------------------------------------------------------------------- Page 48 Unaudited pro forma combined revenues and profit Shown below are unaudited pro forma figures for the Group's combined revenues and profit as though the acquisition date for all business combinations effected during the year had been 1 January 2006, after giving effect to purchase accounting adjustments and the elimination of intercompany transactions. The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at 1 January 2006, nor is it necessarily indicative of future results. 2006 Â£m Revenues (net earned premiums and fee income) 30,670 Profit before tax attributable to shareholders 3,076 Of the above pre-tax profit, Â£83 million has arisen since acquisition. No adjustments have been made to the profit figure above for any additional borrowing costs, integration costs or other synergies that might arise had the acquisitions been completed at 1 January 2006. (g) Non-adjusting post-balance sheet events On 1 January 2007, the Group acquired 100% of the shares of the Eurolloyd companies (Eurolloyd Nederland BV and Eurolloyd Belgie NV) for cash of Â£11 million. In view of the very recent timing of this transaction, it is currently impractical to comply with the requirements of paragraph 67 of IFRS 3, Business Combinations, and to state with any certainty the fair value of assets and liabilities acquired, and therefore to estimate the goodwill arising on this acquisition. In addition to the above transaction, subsequent to year end, the Group has announced it will acquire two of the units of the Malaysian business Bumiputra-Commerce Holdings Berhad (BCHB) - 49% of each of a Life and a Takaful business - for approximately Â£75 million. The transaction is subject to signature and regulatory approval but completion is expected to occur by the second quarter of 2007. On 8 February 2007, the Group announced that it planned to acquire 100% of the shares in Erasmus Groep BV in the Netherlands. Erasmus writes both general insurance and long-term business and, at 31 December 2005, had gross assets of Â£648 million and net assets of Â£29 million. The acquisition, when completed, will be effective from 1 January 2007, subject to the approval of the Dutch regulator, the relevant works council and notification to the relevant competition authorities. 4. Profit on the disposal of subsidiaries and associates The profit on the disposal of subsidiaries and associates comprises: 2006 2005 Â£m Â£m United Kingdom (see (a) below) 69 10 Ireland (see note 3(a)) 86 - France (see (b) below) 79 - Asia - 165 Other small operations (12) (22) ---------------------------------------------------------------------------------------------------------------------- Profit on disposal before tax 222 153 Tax credit/(charge) on profit on disposal 13 (43) ---------------------------------------------------------------------------------------------------------------------- Profit on disposal after tax 235 110 ====================================================================================================================== The tax credit on the profit on disposal in 2006 reflects the benefit of prior year tax credits against charges on disposals in earlier years. On an EEV basis, the profit on disposal before tax for 2006 falls to Â£161 million because, on that basis, the gain on disposal in Ireland was Â£25 million (see note 3(a)). The EEV profit on disposal after tax for the same period was Â£174 million. There is no difference between IFRS and EEV figures for the comparative period. (a) Sale of RAC non-core businesses During 2006, the Group completed the disposal of the Manufacturer Support Services (MSS), Lex Vehicle Leasing (LVL) divisions and the Lex Brand, which had been acquired with the RAC Group in 2005. The decision to sell was part of the Group's wider strategy to integrate RAC and exit non-core operations. 2006 Â£m Proceeds from sale 358 Net assets disposed of (310) Transaction costs (15) --------------------------------------------------------------------------------------------------------------------- Profit before tax and pension curtailment gain 33 Pension curtailment gain 36 --------------------------------------------------------------------------------------------------------------------- Profit on disposal before tax 69 Tax attributable to profit on disposal (11) --------------------------------------------------------------------------------------------------------------------- Profit on disposal after tax 58 ===================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 49 The net assets disposed of, which total Â£310 million, comprised investment in joint ventures of Â£239 million, tangible assets of Â£102 million, other assets of Â£95 million and other liabilities of Â£126 million. The pension curtailment gain arose from the remeasurement of pension liabilities in the RAC plc defined benefit pension scheme, following the MSS and LVL disposals. (i) Sale of MSS The MSS disposal was completed in three stages during the first six months of 2006, following the disposals of certain operational assets and liabilities of Hyundai Cars (UK) and the commercial fleet business of Lex Transfleet in 2005. On 10 January 2006, the Group sold Hyundai Car Finance Limited, which provides vehicle instalment finance and leasing, to Lloyds TSB. On 14 February 2006, the Group sold Lex Autologistics Limited, Lex Commercials Limited and associated properties to Imperial Holdings. On 27 April 2006, the Group completed the sale of the remaining vehicle solutions businesses, comprising Lex Transfleet Limited, Lex Defence Limited, Lex Defence Management Limited and RAC Software Solutions Limited, to VT Group plc. Receipts from the completion of the disposal of the MSS division totalled Â£111 million, resulting in a profit of Â£12 million before tax. In 2005, the Group sold certain operational assets and liabilities of Hyundai Cars (UK) and the commercial fleet business of Lex Transfleet for total consideration of Â£139 million. The sale resulted in a profit of Â£5 million which is included in the 2005 figures above. Of the total consideration of Â£250 million received for MSS disposals in 2005 and 2006, Â£73 million was in respect of liabilities to be settled by the Group. (ii) Sale of LVL On 31 May 2006, the sale of Aviva's 50% stake in Lex Vehicle Leasing (Holdings) Limited to HBOS plc was completed. Under the terms of the joint venture agreement, the change of control of RAC provided HBOS with the right to acquire Aviva's interest in LVL which HBOS chose to exercise. The proceeds consisted of a net cash receipt of Â£227 million, from which Aviva's estimated contribution of Â£16 million to the statutory debt funding of the RAC plc defined benefit pension scheme had been deducted. The gross consideration was therefore Â£243 million. In addition to the disposal of the investment in the joint venture of Â£239 million, HBOS will make an equivalent contribution to the statutory debt funding of the defined benefit pension scheme estimated at Â£16 million. The sale resulted in a profit of Â£18 million before tax. A further Â£3 million profit arose on the sale of the Lex brand. (b) In July 2006, our French operation, Aviva France, sold its associate holding in ProCapital SA, an online brokerage company, to Credit Mutuel for Â£98 million. The sale resulted in a profit on disposal of Â£79 million. No other disposal is considered material for further disclosure. 5. Integration and restructuring costs Â£246 million of integration and restructuring costs have been included in the results to 31 December 2006. Â£21 million related to the restructuring of the combined Norwich Union Insurance and RAC businesses. This completes the integration spend on the RAC business. Â£205 million relates to Norwich Union's restructuring to reduce duplication and improve efficiency. The remainder relates to the integration of Ark Life into the Hibernian business and the integration of AmerUs. 6. Operations classified as held for sale There were no operations held for sale at 31 December 2006. The table below sets out the RAC businesses which were held for sale at 31 December 2005 and which completed in the first half of 2006. 2005 Â£m Intangible assets 9 Investments and property and equipment 320 Receivables and other financial assets 68 Deferred acquisition costs and other assets 40 Cash and cash equivalents 25 --------------------------------------------------------------------------------------------------------------------- Total assets 462 --------------------------------------------------------------------------------------------------------------------- Payables and financial liabilities (96) Other liabilities (49) --------------------------------------------------------------------------------------------------------------------- Total liabilities (145) --------------------------------------------------------------------------------------------------------------------- Net assets 317 ===================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 50 7. Geographical analysis of life IFRS operating profit 2006 2005 Â£m Â£m France 273 258 Ireland 60 28 Italy 79 53 Netherlands (including Belgium, Germany and Luxembourg) 458 172 Poland 108 91 Spain 126 89 Other Europe (16) (6) Continental Europe 1,088 685 United States 71 (4) Other 54 2 Rest of the World 125 (2) International 1,213 683 With-profit 147 99 Non-profit 536 283 United Kingdom 683 382 ---------------------------------------------------------------------------------------------------------------------- Total 1,896 1,065 ====================================================================================================================== 8. Geographical analysis of fund management operating profit (a) IFRS basis 2006 2005 Â£m Â£m UK business 62 36 International business 14 13 ---------------------------------------------------------------------------------------------------------------------- Morley 76 49 France 33 26 Netherlands 37 32 Other Europe 3 2 Other 12 7 ---------------------------------------------------------------------------------------------------------------------- International 85 67 Royal Bank of Scotland (7) (1) Norwich Union investment funds 1 9 ---------------------------------------------------------------------------------------------------------------------- United Kingdom (6) 8 ---------------------------------------------------------------------------------------------------------------------- Total 155 124 ====================================================================================================================== (b) EEV basis 2006 2005 Â£m Â£m UK business 35 17 International business 9 9 --------------------------------------------------------------------------------------------------------------------- Morley 44 26 France 10 8 Netherlands 33 32 Other Europe 3 2 Other 12 7 --------------------------------------------------------------------------------------------------------------------- International 58 49 Royal Bank of Scotland (7) (1) Norwich Union investment funds 1 9 --------------------------------------------------------------------------------------------------------------------- United Kingdom (6) 8 --------------------------------------------------------------------------------------------------------------------- Total 96 83 ===================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 51 9. Geographical analysis of general insurance and health (a) Operating result Operating profit Underwriting result ---------------- ------------------- 2006 2005 2006 2005 Â£m Â£m Â£m Â£m France 63 35 6 (21) Ireland 172 171 121 116 Netherlands 139 137 50 54 Other 43 47 12 15 Continental Europe 417 390 189 164 Canada 148 147 27 35 Other 40 40 11 3 Rest of the World 188 187 38 38 International 605 577 227 202 United Kingdom 1,075 974 380 303 ---------------------------------------------------------------------------------------------------------------------- Total 1,680 1,551 607 505 ---------------------------------------------------------------------------------------------------------------------- Analysed by: General insurance 1,652 1,496 639 507 Health 28 55 (32) (2) ---------------------------------------------------------------------------------------------------------------------- Total 1,680 1,551 607 505 ====================================================================================================================== (b) Investment return information Actual investment return credited Longer-term to income investment return ----------------- ----------------- 2006 2005 2006 2005 Â£m Â£m Â£m Â£m France 35 54 57 56 Ireland 41 43 51 55 Netherlands 72 88 89 83 Other 17 17 31 32 Continental Europe 165 202 228 226 Canada 98 95 121 112 Other 27 27 29 37 Rest of the World 125 122 150 149 International 290 324 378 375 United Kingdom 625 646 695 671 --------------------------------------------------------------------------------------------------------------------- Total longer-term investment return 1,073 1,046 ================== Total actual investment income 915 970 Realised gains 281 216 Unrealised/gains 26 377 ------------------------------------------------------------------------------------------- Total actual investment return 1,222 1,563 =========================================================================================== The total short-term fluctuation in investment return of Â£149 million (2005: Â£517 million) is the difference between the total actual investment return of Â£1,222 million (2005: Â£1,563 million) and the total longer-term investment return of Â£1,073 million (2005: Â£1,046 million). Actual income and longer-term investment return both contain the amortisation of the discount/premium arising on the acquisition of fixed income securities. ----------------------------------------------------------------------------------------------------------------------- Page 52 9. Geographical analysis of general insurance and health (continued) The longer-term investment return is calculated separately for each principal general insurance and health business unit. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the period, by the longer-term rate of investment return. The longer-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer-term return for other investments is the actual income receivable for the period. The Group has calculated the longer-term investment return for its general insurance and health business using the same start of year economic assumptions for equities and properties as those used for EEV reporting as shown on page 33 of this announcement. The principal assumptions underlying the calculation of the longer-term investment return are: Longer-term rates of return Longer-term rates of return Equities Properties --------------------------- --------------------------- 2006 2005 2006 2005 % % % % United Kingdom 7.1% 7.6% 6.1% 6.6% France 6.3% 6.7% 5.3% 5.7% Ireland 6.3% 6.7% 5.3% 5.7% Netherlands 6.3% 6.7% 5.3% 5.7% Canada 7.0% 7.4% 6.0% 6.4% --------------------------------------------------------------------------------------------------------------------- The table below shows the sensitivity of the Group's general insurance and health operating profit before tax to changes in the longer-term rates of return: 2006 2005 Â£m Â£m Movement in investment return for By Change in By By Equities 1% higher/lower Group operating profit 31 29 Properties 1% higher/lower Group operating profit 4 4 --------------------------------------------------------------------------------------------------------------------- 10. Analysis of other operations' operating profit (a) IFRS basis 2006 2005 Â£m Â£m RAC 45 30 UK Life - Personal finance subsidiaries - 4 - Norwich Union Life Services (50) (66) - Lifetime and SIPP (29) (14) Other (46) 6 ---------------------------------------------------------------------------------------------------------------------- Total (80) (40) ====================================================================================================================== (b) EEV basis 2006 2005 Â£m Â£m RAC 45 30 UK Life - Personal finance subsidiaries - 4 - Norwich Union Life Services 5 3 - Lifetime and SIPP (29) (14) Other (44) 5 --------------------------------------------------------------------------------------------------------------------- Total (23) 28 ===================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 53 11. Corporate costs 2006 2005 Â£m Â£m Staff profit share and other incentive schemes (17) (7) Central costs (143) (101) Global finance transformation programme - (28) --------------------------------------------------------------------------------------------------------------------- Total (160) (136) -==================================================================================================================== 12. Unallocated interest charges 2006 2005 Â£m Â£m External Subordinated debt (169) (169) Other (61) (79) Internal (228) (220) Net finance income on pension schemes 77 32 --------------------------------------------------------------------------------------------------------------------- Total (381) (436) ===================================================================================================================== 13. Tax (a) Tax charged to the income statement 2006 2005 Â£m Â£m Current tax: For the year 1,022 799 Prior year adjustments (287) (212) --------------------------------------------------------------------------------------------------------------------- Total current tax 735 587 --------------------------------------------------------------------------------------------------------------------- Deferred tax: Origination and reversal of timing differences 221 881 Changes in tax rates or tax laws (7) (5) Write down of deferred tax assets (15) 89 --------------------------------------------------------------------------------------------------------------------- Total deferred tax 199 965 --------------------------------------------------------------------------------------------------------------------- Total tax charged to income statement 934 1,552 ===================================================================================================================== Tax charge analysed between 2006 2005 Â£m Â£m Tax charge attributable to policyholders' returns 346 922 Tax charge on IFRS operating profit before tax attributable to shareholders' profits from continuing operations 725 536 Tax (credit)/charge on profit on other activities (137) 94 --------------------------------------------------------------------------------------------------------------------- Total tax charged to income statement 934 1,552 ===================================================================================================================== The Group, as a proxy for policyholders in the UK, Ireland and Australia, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Irish and Australian life insurance policyholder returns is included in the tax charge. (b) Tax charged to equity (i) The total tax charge/(credit) comprises: 2006 2005 Â£m Â£m Current tax credit (9) (13) Deferred tax charge / (credit) 14 (262) --------------------------------------------------------------------------------------------------------------------- Total tax charged / (credited) to equity 5 (275) ===================================================================================================================== (ii) The tax expense attributable to policyholders' returns included in the charge above is nil (2005: Â£3 million). ----------------------------------------------------------------------------------------------------------------------- Page 54 (c) Tax reconciliation The tax on the Group's net profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows: 2006 2005 Â£m Â£m Net profit before tax 3,323 3,450 ===================================================================================================================== Tax calculated at standard UK corporation tax rate of 30% (2005: 30%) 997 1,035 Different basis of tax for UK life insurance 209 616 Adjustment to tax charge in respect of prior years (287) (253) Non-assessable dividends (55) (26) Non-taxable profit on sale of subsidiaries and associates (80) (4) Disallowable expenses 46 55 Different local basis of tax on overseas profits 201 168 Deferred tax assets not recognised (60) (25) Other (37) (14) --------------------------------------------------------------------------------------------------------------------- Tax charge for the year 934 1,552 ===================================================================================================================== 14. Earnings per share (a) Basic earnings per share (i) The profit attributable to ordinary shareholders is: 2006 2005 Â£m Â£m Profit for the year 2,389 1,898 Amount attributable to minority interests (174) (131) Cumulative preference dividends for the year (17) (17) Coupon payments on direct capital instrument net of tax (37) (29) -------------------------------------------------------------------------------------------------------------------- Profit attributable to ordinary shareholders 2,161 1,721 ==================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 55 14. Earnings per share (continued) (ii) Basic earnings per share is calculated as follows: 2006 2005 --------------------------------- ------------------------------ Net of tax, Net of tax, minorities minorities and and preference preference dividends and dividends and Before DCI Per Before DCI Per tax appropriation share tax appropriation share Â£m Â£m p Â£m Â£m p Operating profit attributable to ordinary shareholders 3,110 2,146 86.9 2,128 1,415 60.5 Adjusted for the following: - Impairment of goodwill (94) (94) (3.8) (43) (43) (1.8) - Amortisation and net impairment of acquired value of in-force business (100) (83) (3.4) (73) (73) (3.1) - Amortisation and net impairment of intangibles (70) (48) (1.9) (45) (42) (1.8) - Financial Services Compensation Scheme and other levies 6 4 0.2 - - - - Short-term fluctuation on return on investments backing general insurance and health business 149 189 7.7 517 430 18.2 - Profit on the disposal of subsidiaries and associates 222 235 9.5 153 110 4.7 - Integration and restructuring costs (246) (188) (7.7) (109) (76) (3.2) ---------------------------------------------------------------------------------------------------------------------- Profit attributable to ordinary shareholders 2,977 2,161 87.5 2,528 1,721 73.5 ====================================================================================================================== Earnings per share has been calculated based on the operating profit before impairment of goodwill and other non-operating items, after tax, attributable to ordinary shareholders, as well as on the profit attributable to ordinary shareholders. The directors believe the former earnings per share figures provide a better indication of operating performance. The calculation of basic earnings per share uses a weighted average of 2,469 million (2005: 2,340 million) ordinary shares in issue, after deducting shares owned by the employee share trusts. The actual number of shares in issue at 31 December 2006 was 2,566 million (2005: 2,396 million). (b) Diluted earnings per share: Diluted earnings per share is calculated as follows: 2006 2005 -------------------------- ------------------------- Weighted Weighted average average number of Per number of Per Total shares share Total shares share Â£m m p Â£m m p Profit attributable to equity shareholders 2,161 2,469 87.5 1,721 2,340 73.5 Dilutive effect of share awards and options - 27 (0.9) - 20 (0.6) --------------------------------------------------------------------------------------------------------------------- Diluted earnings per share 2,161 2,496 86.6 1,721 2,360 72.9 ===================================================================================================================== Diluted earnings per share on an operating profit attributable to ordinary shareholders is 86.0p (2005: 60.0p). ----------------------------------------------------------------------------------------------------------------------- Page 56 15. Dividends and appropriations 2006 2005 Â£m Â£m Ordinary dividends declared and charged to equity in the year Final 2004 - 16.00p per share, paid on 17 May 2005 - 364 Interim 2005 - 9.83p per share, paid on 17 November 2005 - 234 Final 2005 - 17.44p per share, paid on 17 May 2006 418 - Interim 2006 - 10.82p per share, paid on 17 November 2006 275 - --------------------------------------------------------------------------------------------------------------------- 693 598 Preference dividends declared and charged to equity in the year 17 17 Coupon payments on direct capital instrument - gross of tax 52 42 --------------------------------------------------------------------------------------------------------------------- Total 762 657 ===================================================================================================================== Subsequent to 31 December 2006, the directors proposed a final dividend for 2006 of 19.18 pence per ordinary share, Â£492 million in total, making a total dividend for the year of 30.00 pence per share (2005: 27.27 pence). Subject to approval by shareholders at the AGM, the dividend will be paid on 17 May 2007 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2007. Interest on the direct capital instrument issued in November 2004 is treated as an appropriation of retained profits and, accordingly, it is accounted for when paid. Tax relief will be obtained at a rate of 30%. Irish shareholders who are due to be paid a dividend denominated in euros will receive a payment at the exchange rate prevailing on 28 February 2007. 16. Segmental information (a) Segmental results - primary reporting format - business segments The principal activity of the Group is financial services, which is managed using the following reportable segments: long-term business, fund management, general insurance and health. Long-term business Our long-term business comprises life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries including managed pension fund business and our share of the other life and related business written in our associates and joint ventures, as well as the lifetime mortgage business written in the United Kingdom. Fund management activities Our fund management business invests policyholders' and shareholders' funds, provides investment management services for institutional pension fund mandates and manages a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. Clients include Aviva group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors. General insurance and health Our general insurance and health business provides insurance cover to individuals and to small and medium-sized businesses, for risks associated mainly with motor vehicles, property and liability, such as employers' liability and professional indemnity liability, and medical expenses. Other Other activities not related to the core business segments or which are not reportable segments due to their immateriality, such as the RAC non-insurance operations, our banking businesses and service companies are included as 'Other' in the following tables. Head office expenses, such as Group treasury and finance functions are also reported as 'Other', together with eliminations and any other reconciling items. Certain financing costs and taxes are not allocated among the segments. The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms and market conditions. Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet but excluding items such as tax and certain borrowings. ----------------------------------------------------------------------------------------------------------------------- Page 57 16. Segmental information (continued) (b) Segmental results of the income statement - primary reporting format - business segments for the year ended 31 December 2006 General Long-term Fund insurance business management and health Other Total Â£m Â£m Â£m Â£m Â£m Segment income from external customers: Net written premiums 16,532 - 10,702 - 27,234 ---------------------------------------------------------------------------------------------------------------------- Net earned premiums 16,532 - 10,795 - 27,327 Fee and commission income 630 452 172 616 1,870 ---------------------------------------------------------------------------------------------------------------------- 17,162 452 10,967 616 29,197 Net investment income 13,928 17 1,299 229 15,473 Inter-segment revenue - 199 - - 199 Profit on the disposal of subsidiaries and associates 12 - 88 122 222 ---------------------------------------------------------------------------------------------------------------------- Segment income 31,102 668 12,354 967 45,091 ====================================================================================================================== Claims and benefits paid, net of recoveries from reinsurers (16,523) - (6,921) - (23,444) Change in insurance liabilities, net of reinsurance (2,594) - (26) - (2,620) Change in investment contract provisions (6,002) - - - (6,002) Change in unallocated divisible surplus (558) - - - (558) Fee and commission expense (2,125) (111) (2,742) (65) (5,043) Other operating expenses Depreciation (12) (3) (19) (89) (123) Amortisation of acquired value of in-force business (58) - - - (58) Net impairment of acquired value of in-force business (28) - - - (28) Amortisation and net impairment of intangible assets (32) (1) (18) (19) (70) Impairment of goodwill - - - (94) (94) Other impairment losses recognised in the income statement 6 - (5) (1) - Inter-segment expense (190) - (8) (1) (199) Other expenses (990) (392) (806) (996) (3,184) Finance costs (367) - (3) (230) (600) ---------------------------------------------------------------------------------------------------------------------- Segment expenses (29,473) (507) (10,548) (1,495) (42,023) ====================================================================================================================== Segment result before share of profit/(loss) of joint ventures and associates 1,629 161 1,806 (528) 3,068 Share of profit/(loss) of joint ventures and associates 471 (7) 5 16 485 ---------------------------------------------------------------------------------------------------------------------- Segmental result before tax 2,100 154 1,811 (512) 3,553 -------------------------------------------------------------------------------------------------------------- Unallocated costs: Finance costs on central borrowings (230) Tax attributable to policyholders' returns (346) Tax attributable to shareholders' profits (588) ---------------------------------------------------------------------------------------------------------------------- Total unallocated expenses (1,164) ---------------------------------------------------------------------------------------------------------------------- Profit for the year 2,389 ====================================================================================================================== Finance costs on central borrowings comprise interest payable on borrowings by holding companies within the Group which are not allocated to operating companies. ----------------------------------------------------------------------------------------------------------------------- Page 58 16. Segmental information (continued) (b) Segmental results of the income statement - primary reporting format - business segments for the year ended 31 December 2006 (continued) Proforma reconciliation to operating profit before tax attributable to shareholders' profits General Long-term Fund insurance business management and health Other Total Â£m Â£m Â£m Â£m Â£m Segment result before tax 2,100 154 1,811 (512) 3,553 Finance costs on central borrowings - - (2) (228) (230) Adjusted for the following items: Impairment of goodwill - - - 94 94 Amortisation and impairment of acquired value of in-force business 100 - - - 100 Amortisation and impairment of intangible assets 32 1 18 19 70 Financial Services Compensation Scheme and other levies - - (6) - (6) Short-term fluctuation in return on investments backing general insurance and health business - - (149) - (149) Profit on the disposal of subsidiaries and associates (12) - (88) (122) (222) Integration and restructuring costs 21 - 95 130 246 Unallocated interest and corporate costs reallocation 1 - 1 (2) - ---------------------------------------------------------------------------------------------------------------------- 2,242 155 1,680 (621) 3,456 Less: Tax attributable to policyholders' returns (346) - - - (346) ---------------------------------------------------------------------------------------------------------------------- Operating profit before tax attributable to shareholders' profits 1,896 155 1,680 (621) 3,110 ====================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 59 16. Segmental information (continued) (c) Segmental results of the income statement - primary reporting format - business segments for the year ended 31 December 2005 General Long-term Fund insurance business management and health Other Total Â£m Â£m Â£m Â£m Â£m Segment income from external customers: Net written premiums 14,671 - 10,311 - 24,982 ---------------------------------------------------------------------------------------------------------------------- Net earned premiums 14,671 - 10,188 - 24,859 Fee and commission income 598 318 218 717 1,851 ---------------------------------------------------------------------------------------------------------------------- 15,269 318 10,406 717 26,710 Net investment income 21,985 15 1,603 119 23,722 Inter-segment revenue - 112 - - 112 (Loss)/profit on the disposal of subsidiaries and associates (10) - 41 122 153 ---------------------------------------------------------------------------------------------------------------------- Segment income 37,244 445 12,050 958 50,697 ====================================================================================================================== Claims and benefits paid, net of recoveries from reinsurers (13,482) - (6,224) - (19,706) Change in insurance liabilities, net of reinsurance (10,004) - (372) - (10,376) Change in investment contract provisions (7,814) - - - (7,814) Change in unallocated divisible surplus (1,474) - - - (1,474) Fee and commission expense (1,481) (78) (2,756) (15) (4,330) Other operating expenses Depreciation (11) (6) (17) (78) (112) Amortisation of acquired value of in-force business (27) - - - (27) Net impairment of acquired value of in-force business (28) - - - (28) Amortisation and net impairment of intangible assets (24) - (5) (16) (45) Impairment of goodwill (14) - - (29) (43) Other impairment losses recognised in the income statement (37) - - - (37) Inter-segment expense (103) - (9) - (112) Other expenses (999) (236) (615) (1,024) (2,874) Finance costs (203) - (58) (100) (361) ---------------------------------------------------------------------------------------------------------------------- Segment expenses (35,701) (320) (10,056) (1,262) (47,339) ====================================================================================================================== Segment result before share of profit/(loss) of joint ventures and associates 1,543 125 1,994 (304) 3,358 Share of profit/(loss) of joint ventures and associates 322 (1) 1 18 340 ---------------------------------------------------------------------------------------------------------------------- Segmental result before tax 1,865 124 1,995 (286) 3,698 -------------------------------------------------------------------------------------------------------------- Unallocated costs: Finance costs on central borrowings (248) Tax attributable to policyholders' returns (922) Tax attributable to shareholders' profits (630) ---------------------------------------------------------------------------------------------------------------------- Total unallocated costs (1,800) ---------------------------------------------------------------------------------------------------------------------- Profit for the year 1,898 ====================================================================================================================== Finance costs on central borrowings comprise interest payable on borrowings by holding companies within the Group which are not allocated to operating companies. ----------------------------------------------------------------------------------------------------------------------- Page 60 16. Segmental information (continued) (c) Segmental results of the income statement - primary reporting format - business segments for the year ended 31 December 2005 (continued) Proforma reconciliation to operating profit before tax attributable to shareholders' profits General Long-term Fund insurance business management and health Other Total Â£m Â£m Â£m Â£m Â£m Segment result before tax 1,865 124 1,995 (286) 3,698 Finance costs on central borrowings - - - (248) (248) Adjusted for the following items: Impairment of goodwill 14 - - 29 43 Amortisation and impairment of acquired value of in-force business 73 - - - 73 Amortisation and impairment of intangible assets 24 - 5 16 45 Short-term fluctuation on investment return - - (517) - (517) Loss/(Profit) on the disposal of subsidiaries and associates 10 - (41) (122) (153) Integration costs - - 77 32 109 Unallocated interest - (1) 25 (24) - Corporate costs reallocation 1 1 7 (9) - ---------------------------------------------------------------------------------------------------------------------- 1,987 124 1,551 (612) 3,050 Less: Tax attributable to policyholders' returns (922) - - - (922) ---------------------------------------------------------------------------------------------------------------------- Operating profit before tax attributable to shareholders' profits 1,065 124 1,551 (612) 2,128 ====================================================================================================================== (d) Segmental balance sheet - primary reporting format - business segments as at 31 December 2006 General Long-term Fund insurance business management and health Other Total Â£m Â£m Â£m Â£m Â£m Goodwill 1,316 9 390 1,195 2,910 Acquired value of in-force business and intangible assets 2,301 18 287 122 2,728 Investments in joint ventures and associates 3,526 44 39 81 3,690 Property and equipment 416 4 94 390 904 Investment property 14,714 - 384 25 15,123 Loans 18,805 - 735 6,905 26,445 Financial investments Debt securities 102,815 3 7,933 2,290 113,041 Equity securities 52,782 19 2,858 1,103 56,762 Other investments 32,453 8 457 132 33,050 Other assets 24,383 534 9,755 1,854 36,526 ---------------------------------------------------------------------------------------------------------------------- Segment assets 253,511 639 22,932 14,097 291,179 ------------------------------------------------------------------------------------------------------------- Unallocated assets - tax assets 1,543 ---------------------------------------------------------------------------------------------------------------------- Total assets 292,722 ====================================================================================================================== Insurance liabilities 126,224 - 18,006 - 144,230 Liability for investment contracts 88,358 - - - 88,358 Unallocated divisible surplus 9,465 - - - 9,465 Net asset value attributable to unitholders 3,786 1 23 - 3,810 External borrowings 3,894 - 11 4,037 7,942 Other liabilities, including inter-segment liabilities 6,999 313 (712) 9,719 16,319 ---------------------------------------------------------------------------------------------------------------------- Segment liabilities 238,726 314 17,328 13,756 270,124 ------------------------------------------------------------------------------------------------------------- Unallocated liabilities Central borrowings 4,195 Tax liabilities 4,339 ---------------------------------------------------------------------------------------------------------------------- Total liabilities 278,658 ====================================================================================================================== Total equity 14,064 ====================================================================================================================== Total equity and liabilities 292,722 ====================================================================================================================== Central borrowings are borrowings by holding companies within the Group which are not allocated to operating companies. In 2006, there has been a reclassification of Amstelhuys loans into 'Other' business from our general insurance and health segment. ----------------------------------------------------------------------------------------------------------------------- Page 61 16. Segmental information (continued) (e) Segmental balance sheet - primary reporting format - business segments as at 31 December 2005 General Long-term Fund insurance business management and health Other Total Â£m Â£m Â£m Â£m Â£m Goodwill 631 - 398 1,245 2,274 Acquired value of in-force business and intangible assets 424 - 265 114 803 Investments in joint ventures and associates 2,815 46 39 114 3,014 Property and equipment 367 4 126 388 885 Investment property 12,895 - 338 42 13,275 Loans 18,240 - 3,661 2,643 24,544 Financial investments Debt securities 91,926 2 9,390 2,599 103,917 Equity securities 48,365 12 2,647 1,020 52,044 Other investments 25,920 8 459 40 26,427 Other assets 23,185 490 9,425 2,059 35,159 ---------------------------------------------------------------------------------------------------------------------- Segment assets 224,768 562 26,748 10,264 262,342 ------------------------------------------------------------------------------------------------------------- Unallocated assets - tax assets 1,105 ---------------------------------------------------------------------------------------------------------------------- Total assets 263,447 ====================================================================================================================== Insurance liabilities 114,176 - 18,426 - 132,602 Liability for investment contracts 77,309 - - - 77,309 Unallocated divisible surplus 8,978 - - - 8,978 Net asset value attributable to unitholders 3,137 - - - 3,137 External borrowings 4,060 - 2,565 578 7,203 Other liabilities, including inter-segment liabilities 6,149 293 (224) 9,607 15,825 ---------------------------------------------------------------------------------------------------------------------- Segment liabilities 213,809 293 20,767 10,185 245,054 ------------------------------------------------------------------------------------------------------------- Unallocated liabilities Central borrowings 3,810 Tax liabilities 3,491 ---------------------------------------------------------------------------------------------------------------------- Total liabilities 252,355 ====================================================================================================================== Total equity 11,092 ====================================================================================================================== Total equity and liabilities 263,447 ====================================================================================================================== Central borrowings are borrowings by holding companies within the Group which are not allocated to operating companies. (f) Goodwill allocation and impairment testing IFRS requires formal impairment testing to be carried out annually. 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. During the year, goodwill allocated to a long-term cash-generating unit in Germany, Berlinische, was tested for impairment. Following the impairment test, an impairment charge of Â£94 million has been recognised in the income statement. The impairment charge arose as a result of the fall off in contribution from new business in 2006 and current adverse experience within the in-force portfolio. As a result of this, no goodwill remains allocated to this cash-generating unit. The 2005 impairment charge of Â£43 million comprised Â£21 million relating to goodwill allocated to a life cash-generating unit in Germany and Â£22 million on other small European businesses. ----------------------------------------------------------------------------------------------------------------------- Page 62 16. Segmental information (continued) (g) Long-term business summary analysis by geographical segment Germany has been reclassified from Other Europe to the Netherlands, Lithuania has been reclassified from Other Europe to Poland and Norwich Union's Dublin-based offshore life and savings business has been reclassified from Other Europe to the United Kingdom. (i) Income statement For the year ended 31 December 2006 Fee and commission Net written premiums income Profit before tax ---------------------- -------------------- --------------------- 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m France 3,573 3,553 179 160 259 234 Ireland 397 182 64 23 52 56 Italy 1,919 1,357 69 66 76 35 Netherlands (including Belgium, Germany and Luxembourg) 2,079 2,582 21 57 453 164 Poland 395 312 55 45 108 90 Spain 1,266 1,248 56 39 113 75 Other Europe 159 152 3 4 (16) (5) Continental Europe 9,788 9,386 447 394 1,045 649 United States 932 517 4 - 17 (4) Other 512 309 39 27 68 12 Rest of the World 1,444 826 43 27 85 8 International 11,232 10,212 490 421 1,130 657 United Kingdom 5,300 4,459 140 177 970 1,208 ------------------------------------------------------------------------------------------------------------------ Total 16,532 14,671 630 598 2,100 1,865 ================================================================================================================== The following analysis shows the net written premiums from associates and joint ventures on insurance and participating investment contracts which are not included in the analysis above. 2006 2005 Â£m Â£m RBSG 236 217 India 31 14 China 38 30 -------------------------------------------------------------------------------------------------------------------- 305 261 ==================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 63 16. Segmental information (continued) (ii) Balance sheet As at 31 December 2006 Segmental total assets Segmental net assets ---------------------- -------------------- 2006 2005 2006 2005 Â£m Â£m Â£m Â£m France 46,547 44,109 1,355 1,318 Ireland 10,951 6,054 1,040 628 Italy 11,828 10,805 613 570 Netherlands (including Belgium, Germany and Luxembourg) 28,340 28,826 2,922 2,344 Poland 2,232 1,860 216 203 Spain 6,641 6,355 862 805 Other Europe 483 515 65 59 Continental Europe 107,022 98,524 7,073 5,927 United States 18,828 3,866 2,470 365 Other 3,687 3,563 433 387 Rest of the World 22,515 7,429 2,903 752 International 129,537 105,953 9,976 6,679 United Kingdom 123,974 118,815 4,809 4,280 ---------------------------------------------------------------------------------------------------------------------- Total 253,511 224,768 14,785 10,959 ====================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 64 16. Segmental information (continued) (h) Geographical analysis of life and pensions and investment sales - new business and total income For the purpose of recording life and pensions new business premiums, the Group's policy is to include life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of the other life and related business written in our associates and joint ventures as well as the lifetime mortgage business written in the UK. This includes both insurance and investment contracts as defined under IFRS 4, Insurance Contracts and is consistent with the definition of covered business used for our supplementary embedded value reporting. An analysis of new long-term business sales is provided below. In this table, single premiums are those relating to products issued by the Group, which provide for the payment of one premium only. Regular premiums are those where there is a contractual obligation to pay on an ongoing basis. Life and pensions total income represents all net written premiums in the year for insurance contracts and investment contracts, excluding non-participating investment contracts which are required to be accounted for under IAS 39, Financial Instruments: Recognition and Measurement and IAS 18, Revenue. New single premiums New regular premiums Total income ------------------- -------------------- --------------- 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m Life and pensions: France 3,090 3,077 82 76 3,573 3,553 Ireland 809 372 109 63 397 182 Italy 2,216 1,940 101 58 1,919 1,357 Netherlands (including Belgium, Germany and Luxembourg) 1,224 1,441 148 179 2,079 2,582 Poland 238 120 48 34 395 312 Spain 1,410 1,395 107 100 1,266 1,248 Other Europe 83 78 55 43 159 152 Continental Europe 9,070 8,423 650 553 9,788 9,386 United States 767 448 20 20 931 517 Other 490 350 116 93 582 353 Rest of the World 1,257 798 136 113 1,513 870 International 10,327 9,221 786 666 11,301 10,256 United Kingdom 8,312 6,705 608 485 5,536 4,676 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions (including share of associates) 18,639 15,926 1,394 1,151 16,837 14,932 Retail sales of mutual fund type products: Netherlands 285 563 - - 285 563 Poland 127 49 4 4 131 53 Other Europe 475 410 - - 475 410 Other 1,564 1,151 - - 1,564 1,151 International 2,451 2,173 4 4 2,455 2,177 United Kingdom 2,411 1,139 44 21 2,455 1,160 ---------------------------------------------------------------------------------------------------------------------- Total investment sales 4,862 3,312 48 25 4,910 3,337 ---------------------------------------------------------------------------------------------------------------------- Total long-term savings (including share of associates) 23,501 19,238 1,442 1,176 21,747 18,269 ====================================================================================================================== Included within new business sales is Â£6,365 million single premiums and Â£615 million regular premiums (2005: Â£5,071 million single premiums and Â£357 million regular premiums), in respect of contracts that meet the definition of 'non-participating investment' contracts under IFRS 4 'Insurance Contracts'. Under IFRS, the premiums on these contracts are not included in the Group income statement under earned premiums, but are included on the balance sheet as a deposit. Sales from the Navigator funds administration business, previously excluded from investment sales figures, are now included in the new single premiums figures above. This change has increased total investment sales for 2006 by Â£1,371 million (2005: Â£938 million). ----------------------------------------------------------------------------------------------------------------------- Page 65 16. Segmental information (continued) (i) General insurance and health business summary analysis by geographical segment (i) Income statement For the year ending 31 December 2006 Fee Net written premiums and commission income Profit before tax -------------------- -------------------- ----------------- 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m France 735 726 - - 77 68 Ireland 519 499 1 - 297 181 Netherlands 1,755 1,270 - 22 107 171 Other Europe 278 259 3 5 26 17 Continental Europe 3,287 2,754 4 27 507 437 Canada 1,389 1,324 10 11 169 178 Other 86 106 1 - 48 86 Rest of the World 1,475 1,430 11 11 217 264 International 4,762 4,184 15 38 724 701 United Kingdom 5,940 6,127 157 180 1,087 1,294 ---------------------------------------------------------------------------------------------------------------------- Total 10,702 10,311 172 218 1,811 1,995 ====================================================================================================================== (ii) Balance sheet As at 31 December 2006 Segmental total assets Segmental net assets ---------------------- -------------------- 2006 2005 2006 2005 Â£m Â£m Â£m Â£m France 1,731 1,698 376 414 Ireland 1,765 1,916 444 564 Netherlands 2,775 5,038 630 530 Other Europe 803 860 266 284 Continental Europe 7,074 9,512 1,716 1,792 Canada 3,250 3,742 647 850 Other 405 380 255 249 Rest of the World 3,655 4,122 902 1,099 International 10,729 13,634 2,618 2,891 United Kingdom 12,203 13,114 2,986 3,090 ---------------------------------------------------------------------------------------------------------------------- Total 22,932 26,748 5,604 5,981 ====================================================================================================================== (iii) General insurance, fund management and other investments mix at 31 December 2006 United Continental Rest of Kingdom Europe the World Total Â£m Â£m Â£m Â£m Equity securities - fair value 2,256 1,214 510 3,980 Debt and fixed income securities at market value 3,261 4,737 2,228 10,226 Loans secured by mortgages and other loans 612 7,018 10 7,640 Other investments 13 583 1 597 Investments in joint ventures and associates 112 28 24 164 Investment property 303 106 - 409 ---------------------------------------------------------------------------------------------------------------------- Total investments 6,557 13,686 2,773 23,016 ====================================================================================================================== End of part 3 of 4 This information is provided by RNS The company news service from the London Stock Exchange

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