Final Results - Part 3 of 4

Aviva PLC 02 March 2006 PART 3 OF 4 ------------------------------------------------------------------------------------------------------------------ Page 37 IFRS basis Summarised consolidated income statement - IFRS basis For the year ended 31 December 2005 2005 2005 2004 Page â‚¬m Â£m Â£m Income 60,62 36,738 Premiums written net of reinsurance 24,982 23,351 ------------------------------------------------------------------------------------------------------------------- 36,557 Net premiums earned 24,859 23,175 2,716 Fee and commission income 1,847 1,268 34,886 Net investment income 23,722 15,733 526 Share of profit after tax of joint ventures and associates 358 242 225 Other income 153 34 ------------------------------------------------------------------------------------------------------------------- 74,910 50,939 40,452 Expenses (28,979) Claims and benefits paid, net of recoveries from reinsurers (19,706) (17,799) (15,259) Change in insurance liabilities, net of reinsurance (10,376) (6,104) (11,491) Change in investment contract provisions (7,814) (5,635) (2,168) Change in unallocated divisible surplus (1,474) (1,330) (6,362) Fee and commission expense (4,326) (4,471) (4,681) Other expenses (3,184) (2,566) (896) Finance costs (609) (522) -------------------------------------------------------------------------------------------------------------------- 5,074 Profit before tax 3,450 2,025 (1,356) Tax attributable to policyholders' returns (922) (383) -------------------------------------------------------------------------------------------------------------------- 3,718 Profit before tax attributable to shareholders' profits 2,528 1,642 ------------------------------------------------------------------------------------------------------------------- Tax expense (1,692) United Kingdom tax (1,150) (280) (591) Overseas tax (402) (374) ------------------------------------------------------------------------------------------------------------------- (2,283) (1,552) (654) 1,356 Less: tax attributable to policyholders' returns 922 383 ------------------------------------------------------------------------------------------------------------------ (927) Tax attributable to shareholders' profits (630) (271) ------------------------------------------------------------------------------------------------------------------- 2,791 Profit for the year 1,898 1,371 ================================================================================================================== Attributable to: 2,598 Equity shareholders of Aviva plc 1,767 1,275 193 Minority interests 131 96 ------------------------------------------------------------------------------------------------------------------ 2,791 1,898 1,371 ================================================================================================================== All profit is from continuing operations. 2005 2005 2004 Earnings per share - IFRS basis 53 108.1c Basic (pence per share) 73.5p 55.8p 53 107.2c Diluted (pence per share) 72.9p 55.3p Subsequent to 31 December 2005, the directors proposed a final dividend for 2005 of 17.44p (final 2004: 16.00p) per ordinary share, amounting to Â£418 million (final 2004: Â£364 million) in total. Subject to the approval by shareholders at the AGM, the dividend will be paid on 17 May 2006 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2006. During 2005 the directors declared a final dividend for 2004 of 16.00p per ordinary share (final 2003: 15.15p) and an interim dividend for 2005 of 9.83p per ordinary share (interim 2004: 9.36p) totalling Â£364 million (2004: Â£342 million) and Â£233 million (2004: Â£211 million) respectively. ------------------------------------------------------------------------------------------------------------------ Page 38 Proforma reconciliation of Group operating profit to retained profit for the year - IFRS basis For the year ended 31 December 2005 Page 2005 2005 2004 â‚¬m Â£m Â£m IFRS operating profit before tax attributable to shareholders' profits 47 1,566 Long-term business 1,065 1,116 48 135 Fund management 92 40 49 2,281 General insurance and health 1,551 1,259 Other: 50 (12) Other operations (8) (121) 51 (200) Corporate costs (136) (188) 51 (641) Unallocated interest charges (436) (437) ------------------------------------------------------------------------------------------------------------------- 3,129 IFRS operating profit before tax attributable to shareholders' profits 2,128 1,669 Adjusted for the following: 59 (63) Impairment of goodwill (43) (41) (107) Amortisation and impairment of acquired value of in-force business (73) (85) (66) Amortisation and impairment of intangibles (45) (7) - Financial Services Compensation Scheme and other levies - (49) Short-term fluctuation in return on investments backing 49 760 general insurance and health business 517 161 46 225 Profit on the disposal of subsidiaries and associates 153 34 45 (160) Integration costs (109) - - Exceptional costs for termination of operations - (40) ------------------------------------------------------------------------------------------------------------------- 3,718 Profit before tax attributable to shareholders' profits 2,528 1,642 Tax attributable to shareholders' profits 51 (790) Operating profit (536) (319) 51 (137) Other activities (94) 48 ------------------------------------------------------------------------------------------------------------------ 2,791 Profit after tax attributable to shareholders 1,898 1,371 ================================================================================================================== 2005 2005 2004 Earnings per share - IFRS operating profit basis 53 89.0c Basic (pence per share) 60.5p 54.1p 53 88.2c Diluted (pence per share) 60.0p 53.7p ------------------------------------------------------------------------------------------------------------------ Page 39 Summarised consolidated balance sheet - IFRS basis As at 31 December 2005 2005 2005 2004 â‚¬m Â£m Â£m Assets 3,296 Goodwill 2,274 1,184 1,164 Acquired value of in-force business and intangible assets 803 516 3,086 Investments in joint ventures 2,129 1,255 1,283 Investments in associates 885 873 1,283 Property and equipment 885 812 19,239 Investment property 13,275 11,057 35,571 Loans 24,544 22,055 Financial investments 150,604 Debt securities 103,917 98,719 75,426 Equity securities 52,044 47,291 38,300 Other investments 26,427 20,346 10,333 Reinsurance assets 7,130 8,503 1,475 Deferred tax assets 1,018 908 126 Current tax assets 87 - 11,168 Receivables and other financial assets 7,706 7,509 5,458 Deferred acquisition costs and other assets 3,766 3,189 3,425 Prepayments and accrued income 2,363 2,307 19,900 Cash and cash equivalents 13,732 12,779 670 Assets of operations classified as held for sale 462 - ------------------------------------------------------------------------------------------------------------------ 381,807 Total assets 263,447 239,303 ================================================================================================================== Equity 868 Ordinary share capital 599 570 6,432 Capital reserves 4,438 3,878 1,652 Other reserves 1,140 736 3,764 Retained earnings 2,597 1,709 ------------------------------------------------------------------------------------------------------------------ 12,716 Equity attributable to ordinary shareholders of Aviva plc 8,774 6,893 1,725 Preference share capital and direct capital instrument 1,190 1,190 1,634 Minority interests 1,128 910 ------------------------------------------------------------------------------------------------------------------ 16,075 Total equity 11,092 8,993 ================================================================================================================== Liabilities 192,177 Gross insurance liabilities 132,602 124,122 112,042 Gross liability for investment contracts 77,309 69,555 13,012 Unallocated divisible surplus 8,978 7,549 4,546 Net asset value attributable to unitholders 3,137 2,247 4,167 Provisions 2,875 2,125 3,562 Deferred tax liabilities 2,458 1,543 1,497 Current tax liabilities 1,033 922 15,961 Borrowings 11,013 10,090 13,746 Payables and other financial liabilities 9,485 7,240 4,812 Other liabilities 3,320 4,917 210 Liabilities of operations classified as held for sale 145 - ------------------------------------------------------------------------------------------------------------------ 365,732 Total liabilities 252,355 230,310 ================================================================================================================== 381,807 Total equity and liabilities 263,447 239,303 ================================================================================================================== ------------------------------------------------------------------------------------------------------------------ Page 40 Summarised consolidated statement of recognised income and expense - IFRS basis For the year ended 31 December 2005 2005 2004 Â£m Â£m Fair value gains on AFS securities and owner-occupied properties, net of transfers to the income statement 314 130 Actuarial losses on pension schemes (547) (145) Foreign exchange rate movements (2) 59 Reserves credit for equity compensation plans 22 21 Share of fair value changes in joint ventures and associates taken to equity 2 - Aggregate tax effect - policyholder tax 3 - Aggregate tax effect - shareholder tax 272 (15) ------------------------------------------------------------------------------------------------------------------ Net income recognised directly in equity 64 50 Profit for the year* 1,898 1,371 ------------------------------------------------------------------------------------------------------------------ Total recognised income and expense for the year 1,962 1,421 ================================================================================================================== * Stated before the effect of foreign exchange rate movements, which are reported within the foreign exchange rate movements line. Reconciliation of movements in consolidated shareholders' funds - IFRS basis For the year ended 31 December 2005 2005 2004 Â£m Â£m Balance at 1 January 8,993 7,024 Total recognised income and expense for the year 1,962 1,421 Dividends and appropriations (note 15) (657) (570) Issue of share capital for the acquisition of RAC plc 530 - Other issues of share capital, net of transaction costs 59 25 Shares issued in lieu of dividends 100 103 Issue of direct capital instrument, net of transaction costs of Â£9 million - 981 Capital contributions from minority shareholders 212 4 Minority share of dividends declared in the year (70) (41) Minority interest in (disposed)/acquired subsidiaries (36) 45 Movement in shares held by employee trusts - 1 Other movements (1) - ------------------------------------------------------------------------------------------------------------------- Total equity 11,092 8,993 Minority interests (1,128) (910) -------------------------------------------------------------------------------------------------------------------- Balance at 31 December 9,964 8,083 =================================================================================================================== ------------------------------------------------------------------------------------------------------------------ Page 41 Summarised consolidated cash flow statement - IFRS basis For the year ended 31 December 2005 The cash flows presented in this statement cover all the Group's activities and include flows from policyholder and shareholder activities. 2005 2004 --------------------------------- ------ Non-long- Long-term term business business operations operations Group Group Â£m Â£m Â£m Â£m Cash flows from operating activities: Cash generated from operations 1,717 1,067 2,784 2,050 Tax paid (352) (23) (375) (195) ------------------------------------------------------------------------------------------------------------------- Net cash from operating activities 1,365 1,044 2,409 1,855 ------------------------------------------------------------------------------------------------------------------ Cash flow from investing activities: Acquisition of subsidiaries, joint ventures and associates, net of cash acquired (629) (794) (1,423) (540) Disposal of subsidiaries, joint ventures and associates, net of cash transferred 50 414 464 308 Loans to joint ventures and associates (128) - (128) - Purchases of property and equipment (26) (180) (206) (127) Proceeds on property and equipment 41 9 50 122 Purchases of intangible assets (44) (16) (60) (5) ------------------------------------------------------------------------------------------------------------------- Net cash from investing activities (736) (567) (1,303) (242) ------------------------------------------------------------------------------------------------------------------- Cash flow from financing activities: Proceeds from issue of shares, net of transaction costs - 59 59 3 Proceeds from issue of direct capital instrument, net of transaction costs - - - 981 Net drawdown of borrowings 150 706 856 1,526 Interest paid on borrowings (203) (406) (609) (522) Preference dividends paid - (17) (17) (17) Ordinary dividends paid - (498) (498) (450) Coupon payments on direct capital instrument - (42) (42) - Finance lease payments - (8) (8) (26) Capital contributions from minority shareholders 204 8 212 4 Dividends paid to minority interests of subsidiaries - (70) (70) (41) Non-trading cash flows between operations 302 (302) - - ------------------------------------------------------------------------------------------------------------------ Net cash from financing activities 453 (570) (117) 1,458 ------------------------------------------------------------------------------------------------------------------ Total cash flow 1,082 (93) 989 3,071 ------------------------------------------------------------------------------------------------------------------ Net increase/(decrease) in cash and cash equivalents 1,082 (93) 989 3,071 Cash and cash equivalents at 1 January 9,087 3,039 12,126 9,023 Effect of exchange rate changes on cash and cash equivalents (62) 14 (48) 32 ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at 31 December 10,107 2,960 13,067 12,126 ================================================================================================================== Cash and cash equivalents at 31 December comprised: Cash at bank and in hand 2,346 1,184 3,530 1,631 Cash equivalents 7,875 2,352 10,227 11,148 ------------------------------------------------------------------------------------------------------------------ 10,221 3,536 13,757 12,779 Bank overdrafts (114) (576) (690) (653) ------------------------------------------------------------------------------------------------------------------- 10,107 2,960 13,067 12,126 =================================================================================================================== Of the total cash and cash equivalents shown above, Â£25 million has been classified as held for sale. ------------------------------------------------------------------------------------------------------------------ Page 42 1. Basis of preparation - IFRS basis (a) From 2005, all European Union listed companies are 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. Accordingly, the results for the year ended 31 December 2005 have been prepared in accordance with IFRS accounting policies and have been taken from the Group's Annual Report and Accounts. The Group's previously reported 2004 consolidated financial statements have accordingly been restated to comply with IFRS, with the date of transition to IFRS being 1 January 2004 as detailed in the market release of 5 July 2005, 'Impact of International Financial Reporting Standards on the results for 31 December 2004'. The preliminary announcement has been prepared in accordance with the IFRS applicable at 31 December 2005. The IASB issued amendments to IAS 19, Employee Benefits and IAS 39, The Fair Value Option, in December 2004 and June 2005 respectively and its Interpretation Committee (IFRIC) issued IFRIC Interpretation 4, Determining whether an Arrangement contains a Lease, in December 2004. The requirements are applicable for accounting periods beginning on or after 1 January 2006, but the Group has decided to adopt them early and reflect their impact within this preliminary announcement. (b) In line with the requirements of International Financial Reporting Standard 1, First-Time Adoption of International Financial Reporting Standards (IFRS 1), Aviva has applied the Group's accounting policies under IFRS retrospectively at the date of transition, being 1 January 2004, with the exception of a number of permitted exemptions. These are detailed in the market release of 5 July 2005, 'Impact of International Financial Reporting Standards on the results for 31 December 2004'. (c) Aviva has chosen to revisit its longer-term investment return (LTIR) methodology from 2005 as part of a discretionary change not required by IFRS. This change in accounting policy was adopted and detailed in the market release of 5 July 'Impact of International Financial Reporting Standards on the results for 31 December 2004'. (d) The requirements of International Financial Reporting Standard 5, Non-current Assets Held for Sale and Discontinued Operations, have been applied prospectively from 1 January 2005. (e) Financial Reporting Standard 27, Life Assurance (FRS 27) was issued by the UK's Accounting Standards Board (ASB) in December 2004, following the Penrose inquiry. Aviva, along with other major insurance companies and the Association of British Insurers (ABI), has signed a Memorandum of Understanding (MoU) with the ASB relating to FRS 27. Under this MoU, Aviva has agreed to adopt voluntarily in full the standard from 2005 within the Group's IFRS financial statements. Within FRS 27, the ASB acknowledged the difficulty of applying the requirements retrospectively and indeed it is the Group's view that it would be impractical to do so in accordance with IAS 8. This has no impact on net assets or profit for the year ended 31 December 2004, as the adjustments reflect changes in balance sheet presentation between the unallocated divisible surplus and insurance liabilities. Therefore, only the balance sheet at 31 December 2004 has been restated for the impact of FRS 27. No adjustments have been made, nor are any required, to the balance sheet at 1 January 2004 or the income statement for the year ended 31 December 2004. (f) In accordance with Phase I of International Financial Reporting Standard 4, Insurance Contracts (IFRS 4), 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. (g) 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. (h) The preliminary announcement for the year to 31 December 2005 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 2004 and 2005 have been audited by Ernst & Young LLP. The auditors have reported on the 2004 and 2005 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 Report and Accounts incorporating the restated 2004 financial information will be available from 29 March 2006. The Group's 2004 Report and Accounts, prepared under the previous accounting basis, have been filed with the Registrar of Companies. ------------------------------------------------------------------------------------------------------------------ Page 43 2. First time adoption of International Financial Reporting Standards The Group has adopted International Financial Reporting Standards (IFRS) in preparing these financial statements for the year ended 31 December 2005. The date of transition to IFRS is 1 January 2004. During 2005, the Group has already published the following restated UK GAAP financial information onto an IFRS basis: â€¢ Restated preliminary opening balance sheet as at 1 January 2004 under International Financial Reporting Standards, published in Appendix B to Aviva plc preliminary announcement 2004 on 9 March 2005 and also on pages 114 to 126 of the Aviva plc Annual Report and Accounts for 2004, including auditors' opinion on page 127. â€¢ Release to the market on 5 July 2005, 'Impact of International Financial Reporting Standards on the results for 31 December 2004', including the auditors' opinion on pages 30 and 31, containing restated 31 December 2004 financial information as follows: - summarised consolidated pro-forma operating profit statement and notes to the analysis of adjustments as a result of the transition to IFRS; - summarised consolidated statement of recognised income and expense; - summarised consolidated statement of changes in equity; - summarised consolidated balance sheet and notes to the analysis of adjustments as a result of the transition to IFRS; - summarised consolidated income statement - EEV basis; - summarised consolidated balance sheet - EEV; and - the Group's IFRS accounting policies. In addition, a further update was given on the opening summarised consolidated balance sheet as at 1 January 2004, to take into account changes in IFRS since the publication of the Aviva plc preliminary announcement 2004 on 9 March 2005. 3. Exchange rates The euro rates employed in this announcement are an average rate of 1 euro = Â£0.68 (2004: 1 euro = Â£0.68) and a closing rate of 1 euro = Â£0.69 (2004: 1 euro = Â£0.71). ------------------------------------------------------------------------------------------------------------------ Page 44 4. Acquisitions (a) RAC plc On 4 May 2005, the Group acquired 100% of the share capital of RAC plc. The results of RAC plc's operations have been included in the consolidated financial statements of the Group with effect from 4 May 2005, and contributed Â£15 million to the consolidated profit before tax. Â£m Purchase cost Cash paid 566 Fair value of 88 million shares issued, based on their published price at date of exchange (average of Â£6.03 per share) 530 Costs attributable 17 ------------------------------------------------------------------------------------------------------------------- Total 1,113 =================================================================================================================== The issue of new shares in the Company in exchange for shares in RAC plc has attracted merger relief under section 131 of the Companies Act 1985. Of the Â£530 million above, Â£22 million has been credited to share capital and Â£508 million has been credited to the merger reserve, increasing that reserve from Â£2,763 million to Â£3,272 million. The assets and liabilities at the date of acquisition were: Fair value and accounting Intangible Pension scheme policy Book value revaluation valuation adjustments Fair value Â£m Â£m Â£m Â£m Â£m Assets Intangible assets other than goodwill 59 333 - - 392 Tax assets 58 - - (58) - Other assets 608 - - 38 646 ------------------------------------------------------------------------------------------------------------------- Total assets 725 333 - (20) 1,038 =================================================================================================================== Liabilities Provisions Pension deficit (257) - (56) - (313) Other (8) - - (14) (22) Tax liabilities - (118) 17 83 (18) Other liabilities (708) - - (3) (711) -------------------------------------------------------------------------------------------------------------------- Total liabilities (973) (118) (39) 66 (1,064) ==================================================================================================================== Net assets acquired (248) 215 (39) 46 (26) -------------------------------------------------------------------------------------------------------------------- Goodwill (including Â£118 million arising from the creation of the deferred tax liability on intangibles) 1,139 Intangible assets 392 ------------------------------------------------------------------------------------------------------------------- Total goodwill and intangible assets 1,531 Less: deferred tax liability (118) -------------------------------------------------------------------------------------------------------------------- Total value of goodwill and intangible assets net of associated tax included on balance sheet 1,413 ==================================================================================================================== Separable intangible assets have been identified and valued by an independent third party at Â£392 million, using estimated post-tax cash flows and post-tax discount rates. The Group has assessed the useful economic lives of these intangibles, considering relevant factors such as usage of the asset, typical product lifecycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position, and the period of control over the assets. In the case of the RAC and BSM brands, it has been determined that the existing lives of the assets, their competitive position in and the stability of their respective markets indicate that the brands have indefinite useful lives, and thus no amortisation has been charged in the period since acquisition. Of the total Â£392 million, Â£260 million has been assessed as having an indefinite life, with the remaining Â£132 million, mainly contractual customer relationships, being amortised over nine to 22 years. A deferred tax liability of Â£118 million has been provided against these intangible assets, resulting in an increase in residual goodwill by this amount. Although this liability has been recognised in accordance with IAS 12, and a proportion will be amortised to the income statement as the related intangible asset is amortised, this liability is only payable if the intangible asset is sold separately and this is not expected to happen. The pension scheme valuation adjustment and associated deferred taxation represents the effect of aligning the assumptions of the RAC plc schemes to those of Aviva. The fair value of the RAC pension deficit at the date of acquisition amounted to Â£313 million (Â£219 million after deferred tax). ------------------------------------------------------------------------------------------------------------------ Page 45 The residual goodwill of Â£1,139 million essentially represents synergies, both in increased revenues and in reduced costs, expected to arise in RAC plc and our UK general insurance business as a result of the acquisition. Â£109 million of integration costs for the restructuring of the combined Norwich Union Insurance and RAC businesses has been included in the results to 31 December 2005. (b) Gresham Insurance Company Limited On 31 March 2005, the Group acquired 100% of the share capital of Gresham Insurance Company Limited. The cash consideration including purchase costs was Â£75 million. The fair value of the net assets acquired, including intangibles of Â£14 million, was Â£75 million, giving rise to no goodwill on acquisition. (c) Solus Automotive Limited On 11 May 2005, the Group acquired 100% of the share capital of Solus Automotive Limited. The cash consideration including purchase costs was Â£20 million, including Â£12 million of cash and Â£8 million of deferred consideration. The fair value of the net assets acquired was nil, giving rise to Â£20 million of goodwill on acquisition. (d) Unaudited pro-forma combined revenues and profit Shown below are unaudited pro-forma figures for combined revenues and profit as though the acquisition date for all business combinations effected during the period had been 1 January 2005, after giving effect to purchase accounting adjustments and the elimination of inter-company 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 2005, nor is it necessarily indicative of future results. 2005 Â£m Revenues (premiums and fee income) 27,842 IFRS profit before tax attributable to shareholders 2,578 =================================================================================================================== Of the above pre-tax profit, Â£21 million has arisen since acquisition. (e) Non-adjusting post-balance sheet events: (i) Irish bancassurance agreement On 22 November 2005, the Group announced a new bancassurance agreement in Ireland between its wholly-owned subsidiary, Hibernian Group plc (Hibernian) and Allied Irish Banks plc (AIB). This will create a leading force in the Irish life and pensions market and bring further opportunities for growth in this market. The transaction completed on 27 January 2006, following the receipt of regulatory and European Commission approval. Under the terms of the agreement, Hibernian Life Holdings Limited (HLH), the parent company of Hibernian Life & Pensions Limited, has acquired all the shares of Ark Life Assurance Company Limited (Ark Life) from AIB in exchange for a 24.99% stake in the enlarged HLH and a balancing cash payment of â‚¬195.4 million which also reflects the management of Ark Life funds by Hibernian Investment Managers Limited, part of the Group's fund management business. A further deferred payment of up to â‚¬10 million is payable, subject to the fulfilment of certain performance criteria. AIB calculate embedded value on a different basis to that used by the Group and, in particular, do not use EEV principles. In view of the very recent timing of completion, 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 values of the assets and liabilities acquired, and therefore to estimate the goodwill arising on this acquisition and the unrealised gain on disposal of the Group's 24.99% interest in HLH. The gain or loss on disposal of this interest in HLH will be calculated in accordance with SIC 13, Jointly Controlled Entities - Non-Monetary Contributions by Venturers, and will be recognised in 2006. (ii) Acquisition in Sri Lanka 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, for cash of Â£15 million. At the same time, Eagle has entered into a bancassurance agreement with National Development Bank Limited (NDB), Sri Lanka's biggest development bank and Eagle's other major shareholder. Eagle calculates embedded value on a different basis to that used by the Group and, in particular, do not use EEV principles. In view of the very recent timing of completion, 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 values of the assets and liabilities acquired, and therefore to estimate the goodwill arising on this acquisition. ------------------------------------------------------------------------------------------------------------------ Page 46 5. Profit on the disposal of subsidiaries and associates The net profit on the disposal of subsidiary and associated undertakings comprises: 2005 2004 Â£m Â£m General insurance businesses United Kingdom 10 28 France - 6 Asia (a) 122 - Other small operations (22) - ------------------------------------------------------------------------------------------------------------------ 110 34 ================================================================================================================== (a) Sale of Asian general insurance businesses During 2005, the Group completed the disposal of its Asian general insurance businesses to Mitsui Sumitomo Insurance (MSI) for a total of US$450 million in cash. Under the terms of the agreement, MSI acquired all of Aviva's general insurance businesses in Asia. These comprised the general insurance business of Aviva Limited and the general insurance assets of Aviva Asia Pte Limited in Singapore; Aviva Insurance Berhad in Malaysia (including its branch in Brunei); Aviva Insurance (Thai) Company Limited in Thailand; PT Aviva Insurance in Indonesia; Dah Sing General Insurance Co Limited in Hong Kong; and Aviva's branch operations in Hong Kong, the Philippines, Marianas, Macau and Taiwan. The transaction was achieved through share purchase of Aviva's interests in joint venture operations, business purchase and asset purchase in Singapore, and transfer of Aviva's general insurance branch operations in Hong Kong, the Philippines, Marianas, Macau and Taiwan. The transaction completed in two phases. Phase I completed on 28 February 2005 and included all businesses above except for Malaysia, Indonesia, Macau, Marianas, Taiwan, Dah Sing and the Philippines. Phase II completed in December 2005 when the last of these businesses was sold, with the exception of Taiwan which completed in February 2006. Due to its immateriality, this last disposal has been treated as a 2005 transaction. The total sale proceeds were fixed by reference to the net assets of the businesses as at 31 December 2003 and were not adjusted to reflect the results in the period from 1 January 2004 to completion. The Group therefore hedged its exposure to the sale proceeds of US$450 million through the purchase of foreign currency forward contracts. The Group did not bear any continuing operating risk from 31 December 2003. The results of the Asian general insurance business have been consolidated with those of the Group's ongoing operations until the completion of each transaction. Although the Group retained no economic interest in the operations of this business beyond 31 December 2003, the post-tax operating profits have been incorporated in the Group's consolidated income statement from 1 January 2004 to the date of completion. There is a corresponding offset in the final accounting profit on sale. Total profit on sale was Â£165 million (Â£122 million after tax) and is summarised below: 2005 Â£m Net assets as at 31 December 2003 60 Post-tax operating profit to disposal 14 Dividends paid (5) FX movements on net assets 4 ------------------------------------------------------------------------------------------------------------------- Net assets at disposal 73 =================================================================================================================== Proceeds 256 Less: Net assets (73) Transaction costs (18) -------------------------------------------------------------------------------------------------------------------- Pre-tax profit on sale 165 Tax attributable to profit on sale (43) -------------------------------------------------------------------------------------------------------------------- Post-tax profit on sale 122 =================================================================================================================== The net assets at disposal of Â£73 million, comprised financial investments (Â£220 million) and other assets (Â£95 million), less insurance liabilities (Â£207 million) and other liabilities (Â£35 million). (b) Other In July 2005, the Group completed the sale of the business and certain operational assets and liabilities of Hyundai Cars (UK), which was acquired as part of the RAC group, to Hyundai Motor UK Limited for a total of Â£70 million. This sale did not give rise to any gain or loss. In December 2005, the Group sold its commercial fleet business in Lex Transfleet Limited to Fraikin Limited for a total of Â£69 million, of which Â£10 million is deferred consideration. The Group acquired 50% of Lex Transfleet Limited with the RAC group, and this company became a wholly-owned subsidiary after the Group acquired the remaining 50% of its share capital in November 2005. The sale resulted in a gain of Â£5 million. No other disposal is considered material for further disclosure. ------------------------------------------------------------------------------------------------------------------ Page 47 6. Operations classified as held for sale The assets and liabilities of operations held for sale as at 31 December 2005 were as follows: 2005 2004 Â£m 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 - =================================================================================================================== In October 2005, the Group announced its decision to sell its 50% stake in Lex Vehicle Leasing (Holdings) Limited (LVL), a joint venture with HBOS, as a result of HBOS exercising an option under the JV shareholder's agreement. LVL provides vehicle leasing, supply, management, maintenance and incident support for companies who outsource the day-to-day operations of their fleets, and was acquired as a part of the Group's acquisition of RAC. Completion of the sale of the investment in LVL is expected in the second quarter of 2006 and so the relevant assets and liabilities have been classified as held for sale in the consolidated balance sheet. At year end, the Group held for sale certain divisions of Manufacturer Support Services (MSS), part of the RAC group. The decision to sell is part of the Group's wider strategy to integrate RAC and exit non-core operations. The divisions being sold primarily comprise Lex Transfleet Limited, Multipart Holdings Limited and Lex Commercials Limited, both wholly-owned subsidiaries, and Hyundai Car Finance Limited, an associate in which the Group holds 49.99%. Lex Transfleet is a provider of complex fleet solutions, Multipart Holdings provides logistics and aftermarket services to the automotive sector and Lex Commercials is a leading UK commercial vehicles dealership group, while Hyundai Car Finance Limited provides vehicle instalment finance and leasing. The disposal groups have also been treated as held for sale and are expected to be sold by the second quarter of 2006. 7. Geographical analysis of life IFRS operating profit 2005 2004 Â£m Â£m United Kingdom With-profit 99 97 Non-profit 285 256 Continental Europe France 258 213 Ireland 28 31 Italy 53 49 Netherlands (including Belgium and Luxembourg) 168 214 Poland 91 80 Spain 89 72 Other (4) 5 International (2) 99 ------------------------------------------------------------------------------------------------------------------- Total 1,065 1,116 =================================================================================================================== ------------------------------------------------------------------------------------------------------------------ Page 48 8. Geographical analysis of fund management operating profit (a) IFRS basis 2005 2004 Â£m Â£m Morley - UK business 36 10 - European and International business 13 8 Other fund management operations UK - Royal Bank of Scotland (1) (6) - Norwich Union investment funds 9 4 France 26 15 Other Europe 2 2 International 7 7 ------------------------------------------------------------------------------------------------------------------ Total 92 40 ================================================================================================================== (b) EEV basis 2005 2004 Â£m Â£m Morley - UK business 17 4 - European and International business 9 5 Other fund management operations UK - Royal Bank of Scotland (1) (6) - Norwich Union investment funds 9 4 France 8 5 Other Europe 2 1 International 7 7 ------------------------------------------------------------------------------------------------------------------ Total 51 20 ================================================================================================================== ------------------------------------------------------------------------------------------------------------------ Page 49 9. Geographical analysis of general insurance and health (a) Operating result Operating profit Underwriting result ---------------- ------------------- 2005 2004 2005 2004 Â£m Â£m Â£m Â£m United Kingdom 974 797 303 146 Continental Europe France 35 33 (21) (16) Ireland 171 135 116 82 Netherlands 137 88 54 10 Other 47 32 15 6 International Canada 147 133 35 37 Other 40 41 3 6 ------------------------------------------------------------------------------------------------------------------ Total 1,551 1,259 505 271 ================================================================================================================== Analysed by: General insurance 1,496 1,205 507 276 Health 55 54 (2) (5) (b) Investment return information Actual investment return credited to income Longer-term investment return ------------------------------------- ----------------------------- 2005 2004 2005 2004 Â£m Â£m Â£m Â£m United Kingdom 646 569 671 651 Continental Europe France 54 48 56 49 Ireland 43 39 55 53 Netherlands 88 83 83 78 Other 17 20 32 26 International Canada 95 83 112 96 Other 27 33 37 35 ------------------------------------------------------------------------------------------------------------------- Total longer-term investment return 1,046 988 =============================== Total actual investment income 970 875 Realised gains 216 47 Unrealised gains 377 227 ----------------------------------------------------------------------------------- Total actual investment return 1,563 1,149 =================================================================================== The total short-term fluctuation in investment return of Â£517 million (2004: Â£161 million) is the difference between the total actual investment return of Â£1,563 million (2004: Â£1,149 million) and the total longer-term investment return of Â£1,046 million (2004: Â£988 million). Actual income and longer-term investment return both contain the amortisation of the discount/premium arising on the acquisition of fixed income securities. 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 year. ------------------------------------------------------------------------------------------------------------------ Page 50 9. Geographical analysis of general insurance and health (continued) 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 --------------------------- --------------------------- 2005 2004 2005 2004 % % % % United Kingdom 7.6% 7.8% 6.6% 6.8% France 6.7% 7.3% 5.7% 6.3% Ireland 6.7% 7.3% 5.7% 6.3% Netherlands 6.7% 7.3% 5.7% 6.3% Canada 7.4% 7.7% 6.4% 6.7% ------------------------------------------------------------------------------------------------------------------ For 2006, the Group intends to calculate 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 31 of this announcement. 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: 2005 2004 Â£m Â£m Movement in investment return for By Change in By By Equities 1% higher/lower Group operating profit 29 25 Properties 1% higher/lower Group operating profit 4 3 ------------------------------------------------------------------------------------------------------------------ 10. Analysis of other operations' operating profit (a) IFRS basis 2005 2004 Â£m Â£m RAC 30 - Hill House Hammond - (8) UK Life - Personal finance subsidiaries 4 (1) - Your Move - 9 - Norwich Union Life Services (66) (80) - Lifetime (14) - Other (including a Â£40 million one-off vacant property provision in 2004) 38 (41) -------------------------------------------------------------------------------------------------------------------- (8) (121) ==================================================================================================================== (b) EEV basis 2005 2004 Â£m Â£m RAC 30 - Hill House Hammond - (8) UK Life - Personal finance subsidiaries 4 (1) - Your Move - 9 - Norwich Union Life Services 3 (3) - Lifetime (14) - Other (including a Â£40 million one-off vacant property provision in 2004) 37 (38) -------------------------------------------------------------------------------------------------------------------- 60 (41) ==================================================================================================================== ------------------------------------------------------------------------------------------------------------------ Page 51 11. Corporate costs 2005 2004 Â£m Â£m Global finance transformation programme (28) (85) Central costs and sharesave schemes (108) (103) -------------------------------------------------------------------------------------------------------------------- (136) (188) ==================================================================================================================== 12. Unallocated interest charges 2005 2004 Â£m Â£m External subordinated debt (169) (169) other (79) (77) Internal (220) (219) Net finance income on pension schemes 32 28 -------------------------------------------------------------------------------------------------------------------- (436) (437) ===================================================================================================================== 13. Tax (a) Tax charged to the income statement 2005 2004 Â£m Â£m Current tax: For the year 799 475 Prior year adjustments (212) (92) -------------------------------------------------------------------------------------------------------------------- Total current tax 587 383 ------------------------------------------------------------------------------------------------------------------- Deferred tax: Origination and reversal of timing differences 881 272 Changes in tax rates or tax laws (5) (1) Write down of deferred tax assets 89 - ------------------------------------------------------------------------------------------------------------------- Total deferred tax 965 271 ------------------------------------------------------------------------------------------------------------------- Total tax charged to income statement 1,552 654 =================================================================================================================== The tax expense attributable to policyholders' returns in the UK, Ireland and Australia included in the above charge is Â£922 million (2004: Â£383 million). Tax charge analysed between 2005 2004 Â£m Â£m Tax charge attributable to policyholders' returns 922 383 Tax charge on IFRS operating profit before tax attributable to shareholders' profits from continuing operations 536 319 Tax charge/(credit) on profit on other activities 94 (48) -------------------------------------------------------------------------------------------------------------------- Total tax charged to income statement 1,552 654 ==================================================================================================================== (b) Tax charged to equity (i) The total tax charge comprises: 2005 2004 Â£m Â£m Current tax credit (13) - Deferred tax (credit)/charge (262) 15 ------------------------------------------------------------------------------------------------------------------- Total tax (credited)/charged to equity (275) 15 =================================================================================================================== (ii) The tax expense attributable to policyholders' returns included in the charge above is Â£3 million (2004: nil). ------------------------------------------------------------------------------------------------------------------ Page 52 (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: 2005 2004 Â£m Â£m Net profit before tax 3,450 2,025 =================================================================================================================== Tax calculated at standard UK corporation tax rate of 30% (2004: 30%) 1,035 608 Different basis of tax for UK life insurance 616 217 Adjustment to tax charge in respect of prior years (253) (88) Non-assessable dividends (26) (30) Non-taxable (profit)/loss on sale of subsidiaries and associates (4) 12 Disallowable expenses 55 65 Different local basis of tax on overseas profits/(losses) 168 (13) Deferred tax assets not recognised (25) (120) Other (14) 3 ------------------------------------------------------------------------------------------------------------------- Tax charge for the year 1,552 654 =================================================================================================================== 14. Earnings per share (a) Basic earnings per share (i) The profit attributable to ordinary shareholders is: 2005 2004 Â£m Â£m Profit for the year 1,898 1,371 Amount attributable to minority interests (131) (96) Cumulative preference dividends for the year (17) (17) Coupon payments on direct capital instrument net of tax (29) - -------------------------------------------------------------------------------------------------------------------- Profit attributable to ordinary shareholders 1,721 1,258 ==================================================================================================================== ------------------------------------------------------------------------------------------------------------------ Page 53 14. Earnings per share (continued) (ii) Basic earnings per share is calculated as follows: 2005 2004 ----------------------------------- ------------------------------- Net of tax, Net of tax, minorities and minorities 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 from continuing operations 2,128 1,415 60.5 1,669 1,221 54.1 Adjusted for the following: - Impairment of goodwill (43) (43) (1.8) (41) (41) (1.8) - Amortisation and net impairment of acquired value of in-force business (73) (73) (3.1) (85) (85) (3.8) - Amortisation and net impairment of intangibles (45) (42) (1.8) (7) (7) (0.3) - Financial Services Compensation - - - (49) (29) (1.3) Scheme and other levies - Short-term fluctuation on return on investments backing general insurance and health business 517 430 18.2 161 195 8.7 - Profit on the disposal of subsidiaries and associates 153 110 4.7 34 34 1.5 - Integration costs (109) (76) (3.2) - - - - Exceptional costs for termination of operations - - - (40) (30) (1.3) ------------------------------------------------------------------------------------------------------------------- Profit attributable to ordinary shareholders 2,528 1,721 73.5 1,642 1,258 55.8 =================================================================================================================== 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 2,340 million (2004: 2,256 million) ordinary shares in issue, after deducting shares owned by the employee share trusts. The actual number of shares in issue at 31 December 2005 was 2,396 million (2004: 2,282 million). (b) Diluted earnings per share: Diluted earnings per share is calculated as follows: 2005 2004 ----------------------------- ------------------------- 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 1,721 2,340 73.5 1,258 2,256 55.8 Dilutive effect of share awards and options - 20 (0.6) - 18 (0.5) -------------------------------------------------------------------------------------------------------------------- Diluted earnings per share 1,721 2,360 72.9 1,258 2,274 55.3 =================================================================================================================== Diluted earnings per share on an operating profit attributable to ordinary shareholders is 60.0p (2004: 53.7p). ------------------------------------------------------------------------------------------------------------------ Page 54 15. Dividends and appropriations 2005 2004 Â£m Â£m Ordinary dividends declared and charged to equity in the year Final 2003 - 15.15p per share, paid on 17 May 2004 - 342 Interim 2004 - 9.36p per share, paid on 17 November 2004 - 211 Final 2004 - 16.00p per share, paid on 17 May 2005 364 - Interim 2005 - 9.83p per share, paid on 17 November 2005 234 - ------- ------ 598 553 Preference dividends declared and charged to equity in the year 17 17 Coupon payments on direct capital instrument-gross of tax 42 - ------- ------ 657 570 ======= ====== Subsequent to 31 December 2005, the directors proposed a final dividend for 2005 of 17.44p per ordinary share, amounting to Â£418 million in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 17 May 2006 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2006. 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 1 March 2006. 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 equity release 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 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 borrowings. ------------------------------------------------------------------------------------------------------------------ Page 55 16. Segmental information (continued) (b) 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 revenue from external customers: Net earned premiums 14,671 - 10,188 - 24,859 Fee and commission income 598 264 214 771 1,847 -------------------------------------------------------------------------------------------------------------------- 15,269 264 10,402 771 26,706 Net investment income 21,985 11 1,603 123 23,722 Inter-segment revenue - 112 - - 112 Other income (10) - 41 122 153 -------------------------------------------------------------------------------------------------------------------- Segment income 37,244 387 12,046 1,016 50,693 ==================================================================================================================== 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) (55) (2,752) (38) (4,326) Other operating expenses Depreciation (11) (6) (17) (78) (112) Amortisation of acquired value of in-force business (45) - - - (45) 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) (233) (615) (1,027) (2,874) Finance costs (203) - (58) (100) (361) --------------------------------------------------------------------------------------------------------------------- Segment expenses (35,719) (294) (10,052) (1,288) (47,353) ===================================================================================================================== Segment result before share of profit/(loss) of joint ventures and associates 1,525 93 1,994 (272) 3,340 Share of profit/(loss) of joint ventures and associates 340 (1) 1 18 358 -------------------------------------------------------------------------------------------------------------------- Segmental result before tax 1,865 92 1,995 (254) 3,698 ----------------------------------------------------------------------------------------------------------- Unallocated costs: Finance costs on central borrowings (248) Tax attributable to policyholders' returns (922) Tax attributable to shareholders' profits (630) --------------------------------------------------------------------------------------------------------------------- Total unallocated expenses (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 56 16. Segmental information (continued) (b) 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 92 1,995 (254) 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) (Profit)/loss 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 92 1,551 (580) 3,050 Less: Tax attributable to policyholders' returns (922) - - - (922) -------------------------------------------------------------------------------------------------------------------- Operating profit before tax attributable to shareholders' profits 1,065 92 1,551 (580) 2,128 =================================================================================================================== ------------------------------------------------------------------------------------------------------------------ Page 57 16. Segmental information (continued) (c) Segmental results of the income statement - primary reporting format - business segments for the year ended 31 December 2004 General Long-term Fund insurance business management and health Other Total Â£m Â£m Â£m Â£m Â£m Segment revenue from external customers Net earned premiums 13,533 - 9,642 - 23,175 Fee and commission income 534 203 197 334 1,268 ------------------------------------------------------------------------------------------------------------------- 14,067 203 9,839 334 24,443 Net investment income 14,503 8 1,176 46 15,733 Inter-segment revenue - 114 - - 114 Other income - - 13 21 34 ------------------------------------------------------------------------------------------------------------------- Segment income 28,570 325 11,028 401 40,324 =================================================================================================================== Claims and benefits paid, net of recoveries from reinsurers (12,015) - (5,784) - (17,799) Change in insurance liabilities, net of reinsurance (5,393) - (711) - (6,104) Change in investment contract provisions (5,635) - - - (5,635) Change in unallocated divisible surplus (1,330) - - - (1,330) Fee and commission expense (1,865) (70) (2,482) (54) (4,471) Other operating expenses Depreciation (14) (4) (19) (60) (97) Amortisation of acquired value of in-force business (72) - - - (72) Net impairment of acquired value of in-force business (13) - - - (13) Amortisation and net impairment of intangible assets (7) - - - (7) Impairment of goodwill (18) - (2) (21) (41) Other impairment losses recognised in the income statement (4) - - (24) (28) Inter-segment expense (105) - (9) - (114) Other expenses (788) (218) (610) (692) (2,308) Finance costs (161) - (43) (72) (276) -------------------------------------------------------------------------------------------------------------------- Segment expenses (27,420) (292) (9,660) (923) (38,295) ==================================================================================================================== Segmental result before share of profit/(loss) of joint ventures and associates 1,150 33 1,368 (522) 2,029 Share of profit/(loss) of joint ventures and associates 235 (6) - 13 242 ------------------------------------------------------------------------------------------------------------------- Segmental results before tax 1,385 27 1,368 (509) 2,271 ---------------------------------------------------------------------------------------------------------- Unallocated costs: Finance costs on central borrowings (246) Tax attributable to policyholders' returns (383) Tax attributable to shareholders' profits (271) -------------------------------------------------------------------------------------------------------------------- Total unallocated expenses (900) -------------------------------------------------------------------------------------------------------------------- Profit for the year 1,371 ==================================================================================================================== 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) (c) Segmental results of the income statement - primary reporting format - business segments for the year ended 31 December 2004 (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 from continuing operations 1,385 27 1,368 (509) 2,271 Finance costs on central borrowings - - - (246) (246) Adjusted for the following: Impairment of goodwill 18 - 2 21 41 Amortisation and impairment of acquired value of in-force business 85 - - - 85 Amortisation and impairment of intangible assets 7 - - - 7 Financial Services Compensation Scheme and other levies - 9 40 - 49 Short-term fluctuation on investment return - - (161) - (161) Profit on the disposal of subsidiaries and associates - - (12) (22) (34) Exceptional costs for termination of operations - - - 40 40 Corporate costs reallocation 4 4 22 (30) - ------------------------------------------------------------------------------------------------------------------- 1,499 40 1,259 (746) 2,052 ------------------------------------------------------------------------------------------------------------------- Less: Tax attributable to policyholders' returns (383) - - - (383) ==================================================================================================================== Operating profit before tax attributable to shareholders' profits 1,116 40 1,259 (746) 1,669 =================================================================================================================== (d) Segmental balance sheet - primary reporting format - on 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 23,185 436 9,425 2,113 35,159 ------------------------------------------------------------------------------------------------------------------- Segment assets 224,768 508 26,748 10,318 262,342 --------------------------------------------------------------------------------------------------------- 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 6,149 278 (224) 9,622 15,825 ------------------------------------------------------------------------------------------------------------------- Segment liabilities 213,809 278 20,767 10,200 245,054 --------------------------------------------------------------------------------------------------------- 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. ------------------------------------------------------------------------------------------------------------------ Page 59 16. Segmental information (continued) (e) Segmental balance sheet - primary reporting format - business segments as at 31 December 2004 General Long-term Fund insurance business management and health Other Total Â£m Â£m Â£m Â£m Â£m Goodwill 595 - 308 281 1,184 Acquired value of in-force business and intangible assets 451 - 19 46 516 Investments in joint ventures and associates 1,995 40 13 80 2,128 Property and equipment 404 7 133 268 812 Investment property 10,639 - 362 56 11,057 Loans 17,090 - 2,635 2,330 22,055 Financial investments Debt securities 86,897 2 9,255 2,565 98,719 Equity securities 44,269 1 2,449 572 47,291 Other investments 20,067 6 224 49 20,346 Other assets 23,455 311 9,786 735 34,287 ------------------------------------------------------------------------------------------------------------------- Segment assets 205,862 367 25,184 6,982 238,395 --------------------------------------------------------------------------------------------------------- Tax 908 ------------------------------------------------------------------------------------------------------------------- Total assets 239,303 =================================================================================================================== Insurance liabilities 106,329 - 17,793 - 124,122 Liability for investment contracts 69,555 - - - 69,555 Unallocated divisible surplus 7,549 - - - 7,549 Net asset value attributable to unitholders 2,247 - - - 2,247 External borrowings 4,082 - 1,439 270 5,791 Other liabilities, including inter-segment liabilities 6,250 191 474 7,367 14,282 ------------------------------------------------------------------------------------------------------------------- Segment liabilities 196,012 191 19,706 7,637 223,546 ========================================================================================================= Unallocated liabilities Central borrowings 4,299 Tax liabilities 2,465 ------------------------------------------------------------------------------------------------------------------- Total liabilities 230,310 =================================================================================================================== Total equity 8,993 =================================================================================================================== Total equity and liabilities 239,303 =================================================================================================================== 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 life cash-generating unit in Germany was tested for impairment. Following the impairment test, an impairment charge of Â£21 million has been recognised in the income statement. The impairment charge arose as a result of the low interest rate environment in which the cash-generating unit operates in and the further decline in interest rates during the year. The recoverable amount for the cash-generating unit has been measured based on a value in use calculation. A pre-tax discount rate of 6.75% was used in the value in use calculation and cash flows beyond the plan period have been extrapolated using a steady 4.85% growth rate. The remaining Â£14 million related to other small European businesses. The 2004 impairment charge of Â£41 million comprised Â£21 million on one non-insurance Dutch operation, Â£17 million on other small European businesses and Â£3 million on other operations. Other long lived assets such as acquired additional value of in-force, and intangibles are not subject to formal impairment testing but are amortised on an annual basis. ------------------------------------------------------------------------------------------------------------------ Page 60 16. Segmental information (continued) (g) Long-term business summary analysis by geographical segment (i) Income statement For the year ended 31 December 2005 Fee and commission Net written premiums income Profit before tax ---------------------- -------------------- --------------------- 2005 2004 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom 4,459 4,768 169 219 1,210 654 France 3,553 2,892 160 142 234 196 Ireland 182 195 23 15 56 52 Italy 1,357 1,084 66 45 35 28 Netherlands 2,582 1,859 57 28 164 220 Poland 312 267 45 16 90 80 Spain 1,248 1,206 39 29 75 61 Other Europe 152 565 12 25 (7) (8) ------------------------------------------------------------------------------------------------------------------- Continental Europe 9,386 8,068 402 300 647 629 International 826 697 27 15 8 102 ------------------------------------------------------------------------------------------------------------------ Total 14,671 13,533 598 534 1,865 1,385 ================================================================================================================== 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. 2005 2004 Â£m Â£m RBSG 217 319 India 14 6 China 30 3 ------------------------------------------------------------------------------------------------------------------ 261 328 ================================================================================================================== (ii) Balance sheet At 31 December 2005 Segmental total assets Net assets ------------------------ ---------------- 2005 2004 2005 2004 Â£m Â£m Â£m Â£m United Kingdom 117,803 107,495 2,929 3,162 France 44,109 41,827 1,177 1,175 Ireland 6,054 5,108 410 403 Italy 10,805 9,492 639 478 Netherlands (including Belgium and Luxembourg) 28,826 27,357 2,229 1,858 Poland 1,860 1,564 191 176 Spain 6,355 5,638 790 761 Other Europe 1,527 1,104 77 60 ------------------------------------------------------------------------------------------------------------------ Continental Europe 99,536 92,090 5,512 4,911 International 7,429 6,277 702 735 ------------------------------------------------------------------------------------------------------------------ Total 224,768 205,862 9,144 8,808 ================================================================================================================== ------------------------------------------------------------------------------------------------------------------ Page 61 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 equity release 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 New single premiums regular premiums Total income --------------- ----------------- ---------------- 2005 2004 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Â£m Â£m Life and pensions: United Kingdom 6,573 6,502 485 516 4,676 5,087 France 3,077 2,454 76 62 3,553 2,892 Ireland 372 203 63 66 182 195 Italy 1,940 1,529 58 45 1,357 1,084 Netherlands (including Belgium and Luxembourg) 1,245 1,131 146 148 2,582 1,859 Poland 120 60 30 31 312 267 Spain 1,395 1,566 100 91 1,248 1,206 Other Europe 406 336 80 90 152 565 ------------------------------------------------------------------------------------------------------------------ Continental Europe 8,555 7,279 553 533 9,386 8,068 International 798 660 113 105 870 706 ------------------------------------------------------------------------------------------------------------------ Total life and pensions (including share of associates) 15,926 14,441 1,151 1,154 14,932 13,861 Retail sales of mutual fund type products: United Kingdom 1,139 840 21 19 1,160 859 Netherlands 563 196 - - 563 196 Poland 49 75 4 2 53 77 Other Europe 410 254 - - 410 254 International 213 243 - - 213 243 ------------------------------------------------------------------------------------------------------------------ Total investment sales 2,374 1,608 25 21 2,399 1,629 ------------------------------------------------------------------------------------------------------------------ Total long-term savings (including share of associates) 18,300 16,049 1,176 1,175 17,331 15,490 ================================================================================================================== * Included within new business sales is Â£5,071 million single premiums and Â£357 million regular premiums (2004: Â£4,338 million single premiums and Â£410 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. ------------------------------------------------------------------------------------------------------------------ Page 62 16. Segmental information (continued) (i) General insurance and health business summary analysis by geographical segment (i) Income statement For the year ending 31 December 2005 Fee and commission Net written premiums income Profit before tax -------------------- ------------------- ------------------- 2005 2004 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom 6,127 5,715 180 125 1,294 778 France 726 670 11 23 68 71 Ireland 499 545 - 1 181 142 Netherlands 1,270 1,286 7 21 171 145 Other Europe 259 230 5 9 17 44 ------------------------------------------------------------------------------------------------------------------ Continental Europe 2,754 2,731 23 54 437 402 Canada 1,324 1,202 11 11 178 153 Other 106 170 - 7 86 35 ------------------------------------------------------------------------------------------------------------------ International 1,430 1,372 11 18 264 188 ------------------------------------------------------------------------------------------------------------------ Total 10,311 9,818 214 197 1,995 1,368 ================================================================================================================== (ii) Balance sheet As at 31 December 2005 Segmental total assets Net assets ---------------------- ---------------- 2005 2004 2005 2004 Â£m Â£m Â£m Â£m United Kingdom 13,114 12,927 2,725 2,504 France 1,698 1,741 362 416 Ireland 1,916 1,989 545 498 Netherlands 5,038 3,677 553 461 Other Europe 860 914 302 162 ------------------------------------------------------------------------------------------------------------------ Continental Europe 9,512 8,321 1,762 1,537 Canada 3,742 3,111 848 687 Other 380 825 246 277 ------------------------------------------------------------------------------------------------------------------ International 4,122 3,936 1,094 964 ------------------------------------------------------------------------------------------------------------------ Total 26,748 25,184 5,581 5,005 ================================================================================================================== (iii) General insurance, fund management and other investments mix at 31 December 2005 United Continental Kingdom Europe International Total Â£m Â£m Â£m Â£m Equity securities - fair value 1,965 1,140 574 3,679 Debt and fixed income securities at market value 4,478 5,176 2,337 11,991 Loans secured by mortgages and other loans 693 5,592 19 6,304 Other investments 32 474 1 507 Investments in joint ventures and associates 135 42 22 199 Investment property 268 109 3 380 ------------------------------------------------------------------------------------------------------------------ Total investments 7,571 12,533 2,956 23,060 ================================================================================================================== 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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