Final Results - Part 3

Aviva PLC 09 March 2005 PART 3 OF 4 -------------------------------------------------------------------------------------------------------------------- Page 20 Summarised consolidated profit and loss account - EEV basis For the year ended 31 December 2004 Restated* 2004 2004 2003 Page â‚¬m Â£m Â£m Operating profit 27 2,369 Life EEV operating return 1,611 1,496 47 86 Health 58 61 34 Fund management(1) 23 (4) 48 1,950 General insurance 1,326 911 (46) Non-insurance operations(2) (31) 8 50 (262) Corporate costs (178) (160) 50 (684) Unallocated interest charges (465) (406) ------------------------------------------------------------------------------------------------------------------ 3,447 Operating profit before tax, amortisation of goodwill and exceptional items** 2,344 1,906 (177) Amortisation of goodwill (120) (103) (72) Financial Services Compensation Scheme and other levies (49) - ------------------------------------------------------------------------------------------------------------------ 3,198 Operating profit before tax 2,175 1,803 831 Variation from longer-term investment return 565 779 (468) Effect of economic assumption changes (318) (55) (34) Change in the equalisation provision (23) (49) 45 (200) Net loss on the disposal of subsidiary and associated undertakings (136) (6) 44 (73) Exceptional costs for termination of operations (50) (19) ------------------------------------------------------------------------------------------------------------------ 3,254 Profit on ordinary activities before tax 2,213 2,453 (957) Tax on operating profit - before amortisation of goodwill and exceptional items (651) (563) 6 Tax on credit/(charge) on (loss)/profit on other ordinary activities 4 (176) ------------------------------------------------------------------------------------------------------------------ 2,303 Profit on ordinary activities after tax 1,566 1,714 (244) Minority interests (166) (121) ------------------------------------------------------------------------------------------------------------------ 2,059 Profit for the financial year 1,400 1,593 52 (25) Preference dividends (17) (17) 52 (9) Direct capital instrument appropriation (6) - ------------------------------------------------------------------------------------------------------------------ 2,025 Profit for the financial year attributable to equity shareholders 1,377 1,576 52 (845) Ordinary dividends (575) (545) ------------------------------------------------------------------------------------------------------------------ 1,180 Retained profit for the financial year 802 1,031 ================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. ** All operating profit is from continuing operations. (1) Excludes the proportion of the results of Morley's fund management businesses and of our French asset management operation Aviva Gestion d'Actifs (AGA) that arise from the provision of fund management services to our life businesses. These results are included within the life EEV operating return. (2) Excludes the results of Norwich Union Equity Release (NUER). Also excludes the proportion of the results of Norwich Union Life Services relating to the services provided to the UK life business. These results are included within the life EEV operating return. Other subsidiaries providing services to our life businesses do not significantly impact the Group results. -------------------------------------------------------------------------------------------------------------------- Page 21 Earnings per share - EEV basis For the year ended 31 December 2004 Restated* 2004 Earnings per share 2004 2003 Operating profit on an EEV basis before amortisation of goodwill and exceptional items, 98.8c after tax, attributable to equity shareholders** 67.2p 53.0p 89.7c Profit attributable to equity shareholders 61.0p 70.0p 88.8c Profit attributable to equity shareholders - diluted 60.4p 69.8p * Restated for the effect of implementing European Embedded Value principles. ** All operating profit is from continuing operations. Consolidated statement of total recognised gains and losses - EEV basis For the year ended 31 December 2004 Restated* 2004 2003 Â£m Â£m Profit for the financial year** 1,400 1,593 Foreign exchange gains 104 415 ------------------------------------------------------------------------------------------------------------------- Total recognised gains arising in the year 1,504 2,008 =================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. ** Stated before the effect of foreign exchange movements, which are reported within the foreign exchange line. Reconciliation of movements in consolidated shareholders' funds - EEV basis For the year ended 31 December 2004 Restated* 2004 2003 Â£m Â£m Shareholders' funds at the beginning of the year, as originally reported on an achieved profits basis 9,668 Prior year adjustment (364) -------------------------------------------------------------------------------------------------------------------- Shareholders' funds at the beginning of the year, as restated 10,752 9,304 Total recognised gains arising in the year 1,504 2,008 Dividends and appropriations (598) (562) Movement in shares held by employee trusts 1 - Increase in share capital 25 2 Issue of direct capital instrument 990 - Issue costs of direct capital instrument (9) - Shares issued in lieu of dividend 103 - Goodwill written back 169 - ------------------------------------------------------------------------------------------------------------------- Shareholders' funds at the end of the year on an EEV basis 12,937 10,752 =================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. -------------------------------------------------------------------------------------------------------------------- Page 22 Summarised consolidated balance sheet - EEV basis As at 31 December 2004 Restated* 31 December 31 December 2004 2003 Â£m Â£m Assets Goodwill 1,135 1,105 ------------------------------------------------------------------------------------------------------------------- Investments Land and buildings 637 637 Investments in associated undertakings and participating interests 178 279 Variable yield securities 3,149 2,967 Fixed interest securities 10,750 10,098 Mortgages and loans, net of non-recourse funding 1,387 929 Deposits 1,871 435 Other investments 29 34 ------------------------------------------------------------------------------------------------------------------- 18,001 15,379 Reinsurers' share of technical provisions 2,589 2,926 Reinsurers' share of provision for linked liabilities 852 579 Assets of the long-term business 148,209 136,709 Assets held to cover linked liabilities 51,144 40,665 Other assets 9,889 10,829 Acquired value of in-force long-term business 451 488 Additional value of in-force long-term business 4,875 4,340 ------------------------------------------------------------------------------------------------------------------- Total assets 237,145 213,020 =================================================================================================================== Capital, reserves and subordinated debt Shareholders' funds Equity 7,130 6,354 Non-equity 1,190 200 Minority interest 1,182 953 Additional retained profit on an EEV basis 4,617 4,198 Subordinated debt 2,823 2,814 ------------------------------------------------------------------------------------------------------------------- Total capital, reserves and subordinated debt 16,942 14,519 Liabilities Liabilities of the long-term business 131,099 121,125 Fund for future appropriations 9,218 8,443 Technical provision for linked liabilities 51,996 41,244 General insurance liabilities 18,155 17,515 Borrowings 1,423 1,720 Other creditors and provisions 8,312 8,454 ------------------------------------------------------------------------------------------------------------------- Total liabilities, capital, reserves and subordinated debt 237,145 213,020 =================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. -------------------------------------------------------------------------------------------------------------------- Page 23 Segmentation of summarised consolidated balance sheet - EEV basis As at 31 December 2004 Restated* Restated* Life and General Life and General related business related business Restated* businesses and other Group businesses and other Group 2004 2004 2004 2003 2003 2003 Â£m Â£m Â£m Â£m Â£m Â£m Total assets before acquired additional value of in-force long-term business 200,205 31,614 231,819 177,953 30,239 208,192 Acquired additional value of in-force long-term business 451 - 451 488 - 488 -------------------------------------------------------------------------------------------------------------------- Total assets included in the modified statutory balance sheet 200,656 31,614 232,270 178,441 30,239 208,680 ==================================================================================================================== Liabilities of the long-term business (192,313) - (192,313) (170,812) - (170,812) Liabilities of the general insurance business - (27,890) (27,890) - (27,689) (27,689) --------------------------------------------------------------------------------------------------------------------- Net assets on a modified statutory basis 8,343 3,724 12,067 7,629 2,550 10,179 Additional value of in-force long-term business(1) 4,875 - 4,875 4,340 - 4,340 -------------------------------------------------------------------------------------------------------------------- Net assets on an EEV basis(2) 13,218 3,724 16,942 11,969 2,550 14,519 ==================================================================================================================== Shareholders' capital, share premium, shares held by employee trusts and merger reserves 5,638 4,622 Modified statutory basis retained profit 2,682 1,932 Additional EEV basis retained profit 4,617 4,198 -------------------------------------------------------------------------------------------------------------------- Shareholders' funds on an EEV basis 12,937 10,752 Minority interests 1,182 953 -------------------------------------------------------------------------------------------------------------------- 14,119 11,705 Subordinated debt 2,823 2,814 -------------------------------------------------------------------------------------------------------------------- Total capital, reserves and subordinated debt on an EEV basis 16,942 14,519 ==================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. (1) The analysis between the Group's and the minority interest share of the additional value of in-force long-term business is as follows: 31 December 31 December Movement in 2004 2003 the year Â£m Â£m Â£m Group's share included in shareholders' funds 4,617 4,198 419 Minority interest share 258 142 116 ------------------------------------------------------------------------------------------------------------------- Balance at 31 December 4,875 4,340 535 =================================================================================================================== (2) Analysis of net assets on an EEV basis is as follows: 31 December 31 December 2004 2003 Â£m Â£m Embedded value 13,014 11,751 RBSG goodwill 204 218 ------------------------------------------------------------------------------------------------------------------- Long-term business net assets on an EEV basis 13,218 11,969 =================================================================================================================== -------------------------------------------------------------------------------------------------------------------- Page 24 Basis of preparation - EEV basis The consolidated profit and loss account and balance sheet statements on pages 20 to 23 present the Group's results and financial position for the life and related businesses on the European Embedded Value (EEV) basis and for its non-life businesses on the modified statutory solvency basis. The EEV methodology adopted is in accordance with the EEV Principles introduced by the CFO Forum in May 2004. The Group has replaced the Achieved Profits basis with the EEV basis of reporting as its main measure of performance for life and related businesses and comparative figures for the Group's 31 December 2003 supplementary financial statements have been restated accordingly. The impact on the Group's consolidated supplementary reporting is to reduce shareholders' funds as at 31 December 2003 by Â£413 million from Â£11,165 million to Â£10,752 million and to reduce the Group's consolidated profit after tax and minority interest for the 2003 financial year by Â£49 million to Â£1,593 million. The full impact of the adoption of the EEV principles on the Group's results for the periods ending 31 December 2003 and 30 June 2004 is shown in the release to the market on 13 January 2005, 'Restatement of Aviva's supplementary reporting to the European Embedded Value (EEV) basis'. The Group's revised approach to establishing economic assumptions (specifically investment returns, required capital and discount rates) has been reviewed by Tillinghast, a firm of actuarial consultants, as part of the restatement of 31 December 2003 and 30 June 2004 comparative figures. The approach is based on the well established capital asset pricing model theory and is in line with the EEV Principles and Guidance. In addition, the results of our equity release business have been reclassified from non-insurance operations to life insurance operations. This has resulted in assets, liabilities and operating profits being reclassified out of non-insurance segments and into life segments. Comparatives for 2003 have been restated accordingly and the impact of the reclassification on consolidated shareholders' funds and consolidated profit for the 2003 financial year end is nil. In the Directors' opinion, the EEV basis provides a more accurate reflection of the performance of the Group's life and related operations year on year than results presented under the modified statutory basis. The Directors consider that the EEV methodology is a refinement to the Achieved Profits basis previously adopted by the Group and represents the most meaningful basis of reporting the underlying value in our life business and the underlying drivers of performance. This basis allows for the impact of uncertainty in the future investment returns more explicitly and is consistent with the way the business is priced and managed. The results for 2004 and 2003 have been audited by the auditors, Ernst & Young LLP. Their report in respect of 2004 is included in the Report and Accounts on page 146 of that document. Covered business The EEV calculations cover the following lines of business: 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 associated undertakings and joint ventures, as well as the equity release business written in the UK. Covered business includes the Group's share of our joint venture operations including our arrangement with The Royal Bank of Scotland Group (RBSG) and our operations in India and China. For our joint venture with RBSG, the goodwill arising on the acquisition of the associate company, RBS Life Investments Limited, is included within the 'Amortisation of goodwill' on page 20. In addition, the results of Group companies providing administration, investment management and other services and of Group holding companies have been included to the extent that they relate to covered business. Together these businesses are referred to as 'Life and related businesses'. New business premiums New business premiums include: â€¢ premiums arising from the sales of new contracts during the period; â€¢ non-contractual additional premiums, including future Department of Work and Pensions (DWP) rebate premiums; and â€¢ expected renewals on new contracts and expected future contractual alterations to new contracts. For products sold to individuals, premiums are generally considered to represent new business in certain circumstances, including where a new contract has been signed, or where underwriting has been performed. Renewal premiums include contractual renewals, non-contractual variations that are reasonably predictable and recurrent single premiums that are pre-defined and reasonably predictable. For group products, new business includes new contracts and increases to aggregate premiums under existing contracts. Renewal premiums are based on the level of premium received during the reporting period and allow for premiums expected to be received beyond the expiry of any guaranteed premium rates. Foreign exchange adjustments Embedded value and other balance sheet items denominated in foreign currencies have been translated to sterling using the appropriate closing exchange rate. New business contribution and other profit and loss items have been translated using an average exchange rate for the relevant period. The exchange rates adopted in this announcement are shown on page 44. -------------------------------------------------------------------------------------------------------------------- Page 25 EEV methodology Overview Under the EEV methodology, profit is recognised as it is earned over the life of products defined within covered business. The total profit recognised over the lifetime of a policy is the same as under the modified statutory basis of reporting, but the timing of recognition is different. Calculation of the embedded value The shareholders' interest in the life and related businesses is represented by the embedded value. The embedded value is the total of the net worth of the life and related businesses and the value of in-force covered business. Calculations are performed separately for each business and are based on the cash flows of that business, after allowing for both external and intra-group reinsurance. Where one life business has an interest in another life business, the net worth of that business excludes the interest in the dependent company. The embedded value is calculated on an after-tax basis applying current legislation and practice together with future known changes. Profits are then grossed up for tax at the full rate of corporation tax for the UK and at an appropriate rate for each of the other countries based on opening year tax rates. Net worth The net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in the non-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets, and consists of the required capital and free surplus. The level of required capital for each business, which ranges between 100% and 200% of the EU minimum solvency requirement for our main European businesses, reflects the level of capital considered by the Directors to be appropriate to manage the business, allowing for our internal assessment of the level of market, insurance and operating risk inherent in the underlying products. The same definition of required capital is used for both existing and new business. The free surplus comprises the market value of shareholder assets in excess of local statutory reserves and required capital. Value of in-force covered business The value of in-force covered business is the present value at the appropriate risk discount rate (which incorporates a risk margin) of the distributable profits to shareholders arising from the in-force covered business projected on a best estimate basis, less a deduction for the cost of holding the required level of capital. In the UK, shareholders' distributable profits arise when they are released following actuarial valuations. These valuations are carried out in accordance with statutory requirements designed to ensure and demonstrate solvency in long-term business funds. Future distributable profits will depend on experience in a number of areas such as investment return, discontinuance rates, mortality, administration costs, as well as management and policyholder actions. Releases to shareholders arising in future years from the in-force covered business and associated required capital can be projected using best estimate assumptions of future experience. In overseas businesses generally, there are similar requirements restricting payments to shareholders from life businesses. The value of in-force covered business includes an allowance for the impact of financial options and guarantees arising from best estimate assumptions (the intrinsic value) and from additional costs related to the variability of investment returns (the time value). The intrinsic value is included in the underlying value of the in-force covered business using deterministic assumptions. The time value of financial options and guarantees has been determined using stochastic modelling techniques. Stochastic modelling involves projecting the future cash flows of the business under thousands of economic scenarios that are representative of the possible future outcomes for market variables such as interest rates and equity returns. Allowance is made, where appropriate, for the effect of management and/or policyholder actions in different economic conditions on future assumptions such as asset mix, bonus rates and surrender rates. The time value is determined by deducting the average value of shareholder cash flows under these economic scenarios from the deterministic shareholder value under best estimate assumptions. The cost of holding required capital is the difference between the required capital and the present value at the appropriate risk discount rate of the projected release of the required capital and investment earnings on the assets deemed to back the required capital. Where the required capital is covered by policyholder assets, for example in the UK with-profit funds, there is no impact of cost of capital on shareholder value. The assets regarded as covering the required capital are those that the operation deems appropriate. The value of in-force covered business includes the capitalised value of profits and losses arising from subsidiary companies providing administration, investment management and other services to the extent that they relate to covered business. This is referred to as the 'look through' into service company expenses. In addition, expenses arising in holding companies that relate directly to acquiring or maintaining covered business have been allowed for. Where external companies provide services to the life and related businesses, their charges have been allowed for in the underlying projected cost base. -------------------------------------------------------------------------------------------------------------------- Page 26 Risk discount rates Under the EEV methodology, a risk discount rate (RDR) is required to express a stream of expected future distributable profits as a single value at a particular date (the present value). It is the interest rate that an investment equal to the present value would have to earn in order to replicate exactly the stream of future profits. The RDR is a combination of a risk free rate to reflect the time value of money plus a risk margin to make prudent allowance for the risk that experience in future years may differ from that assumed. In particular, a risk margin is added to allow for the risk that expected additional returns on certain asset classes (e.g. equities) are not achieved. Risk discount rates for our life businesses have been calculated using a risk margin based upon a Group Weighted Average Cost of Capital (WACC). The Group WACC is calculated using a gross risk free interest rate, an equity risk margin, a market assessed risk factor (beta), and an allowance for the gearing impact of debt financing (including subordinated debt). The market assessed risk factor captures the market's view of the effect of all types of risk on our business, including operational and other non-economic risk. The RDR is only one component of the overall allowance for risk in EEV calculations. Risk is also allowed for in the cost of holding statutory reserving margins, additional required capital and in the time value of options and guarantees. Hence to derive an RDR the Group WACC is adjusted to reflect the average level of required capital assumed to be held, and to reflect the explicit valuation of the time value of options and guarantees. In order to derive risk discount rates for each of our life businesses, the adjusted Group WACC is expressed as a risk margin in excess of the gross risk free interest rate used in the WACC calculation as described above. Business-specific discount rates are then calculated as the sum of this risk margin and the appropriate local gross risk free rate at the valuation date, based on returns on government bonds. A common risk free rate, and hence a common RDR, is used for all of our businesses within the Eurozone. Additional country-specific risk margins are applied to smaller businesses to reflect additional economic, political and business-specific risk. Within each business, a constant RDR has been applied in all future time periods and in each of the economic scenarios underlying the calculation of the time value of options and guarantees. At each valuation date, the risk margin is reassessed based on current economic factors and is updated only if a significant change has occurred. In particular, changes in risk profile arising from movements in asset mix are allowed for via the updated risk margin calculation. Participating business Future regular bonuses on participating business are projected in a manner consistent with current bonus rates and expected future returns on assets deemed to back the policies. For with-profit funds in the UK and Ireland, for the purpose of recognising the value of the estate, it is assumed that terminal bonuses are increased to exhaust all of the assets in the fund over the future lifetime of the in-force with-profit policies. However, under stochastic modelling there may be some extreme economic scenarios when the total assets in the group's with-profit funds are not sufficient to pay all policyholder claims. The average additional shareholder cost arising from this shortfall has been included in the time value of options and guarantees. For profit sharing business in continental Europe, where policy benefits and shareholder value depend on the timing of realising gains, apportionment of unrealised gains between policyholders' benefits and shareholders reflect contractual requirements as well as existing practice. Where under certain economic scenarios additional shareholder injections required to meet policyholder payments, the average additional cost has been included in the time value of options and guarantees. Consolidation adjustments The effect of transactions between our life companies such as loans and reinsurance arrangements has been included in results split by territory in a consistent manner. No elimination is required on consolidation. As the EEV methodology incorporates the impact of profits and losses arising from subsidiary companies providing administration, investment management and other services to the Group's life companies, the equivalent profits and losses have been removed from the relevant segment (non insurance or fund management) and are instead included within the results of life and related businesses. In addition, the underlying basis of calculation for these profits has changed from the modified statutory basis to the EEV basis. The capitalised value of the future profits and losses from such service companies are included in the embedded value and new business contribution calculations for the relevant territory, but the net assets (representing historical profits and other amounts) remain under non insurance or fund management. In order to reconcile the profits arising in the financial period within each segment with the assets on the opening and closing balance sheets, a transfer of modified statutory profits from life and related business to the appropriate segment is deemed to occur. An equivalent approach has been adopted for expenses within our holding companies. -------------------------------------------------------------------------------------------------------------------- Page 27 Components of life EEV return The life EEV return comprises the following components: â€¢ new business contribution written during the period including value added between the point of sale and end of the period; â€¢ profit from existing business equal to: - the expected return on the value of the in-force covered business at the beginning of the period, - experience variances caused by the differences between the actual experience during the period and expected experience based on the operating assumptions used to calculate the start of year value, and - the impact of changes in operating assumptions including risk margins; â€¢ expected investment return on the shareholders' net worth, based upon assumptions applying at the start of the year; â€¢ investment return variances caused by differences between the actual return in the period and the expected return based on economic assumptions used to calculate the start of year value; and â€¢ the impact of changes in economic assumptions in the period. The life EEV operating return comprises the first three of these components and is calculated using economic assumptions as at the start of the year and operating (demographic, expenses and other) assumptions as at the end of the year. Life EEV return Restated* 2004 2003 Â£m Â£m New business contribution (after the effect of required capital) 516 474 Profit from existing business - expected return 819 761 - experience variances (15) (31) - operating assumption changes (7) 19 Expected return on shareholders' net worth 298 273 ------------------------------------------------------------------------------------------------------------------ Life EEV operating return before tax 1,611 1,496 Investment return variances 501 696 Effect of economic assumption changes (318) (55) ------------------------------------------------------------------------------------------------------------------- Life EEV return before tax 1,794 2,137 Tax on operating profit (490) (457) Tax charge on other ordinary activities (58) (175) ------------------------------------------------------------------------------------------------------------------ Life EEV return after tax 1,246 1,505 =================================================================================================================== There were no separate development costs reported in either period. * Restated for the effect of implementing European Embedded Value principles. -------------------------------------------------------------------------------------------------------------------- Page 28 New business contribution The following tables set out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out on page 24. The contribution generated by new business written during the period is the present value of the projected stream of after tax distributable profit from that business. New business contribution before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at appropriate rates of tax for other countries. New business contribution has been calculated using the same economic assumptions as those used to determine the embedded value as at the start of the year and operating assumptions used to determine the embedded value as at the end of the year, and is rolled forward to the end of the financial period. New business sales are expressed on two bases: annual premium equivalent (APE), the UK life industry's standard measure, and the present value of future new business premiums (PVNBP). The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate new business contribution, so the components of the new business margin are on a consistent basis. New business contribution is shown before and after the effect of required capital, calculated on the same basis as for in-force covered business. New business New business contribution before contribution after Annual premium Present value of new the effect of the effect of equivalent(1) business premiums required capital required capital -------------- -------------------- ------------------- ------------------ Restated* Restated* 2004 2003 2004 2003 2004 2003 2004 2003 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Life and pensions business United Kingdom 1,166 1,118 9,172 8,516 269 250 215 212 Europe (excluding UK) France 307 241 2,782 2,224 95 72 54 39 Ireland 86 81 561 529 19 28 16 26 Italy 198 194 1,799 1,752 48 45 34 27 Netherlands (including Belgium and Luxembourg) 261 224 2,168 1,821 80 69 43 29 Poland 37 35 241 226 11 5 9 3 Spain 248 246 2,110 1,964 143 141 121 122 Other Europe 124 101 804 587 5 (1) - (6) International 171 187 1,050 1,190 36 37 24 22 -------------------------------------------------------------------------------------------------------------------- Total (before the effect of required capital) 2,598 2,427 20,687 18,809 706 646 Effect of required capital (190) (172) ---------------------------------------------------------------------------------------------- Total (after the effect of required capital) 516 474 516 474 ===================================================================================================================== (1) APE has been restated to include NUER volumes of Â£478 million (2003: Â£501 million). * Restated for the effect of implementing European Embedded Value principles. New business contribution before the effect of required capital includes minority interests in 2004 of Â£121 million (2003: Â£109 million). This comprises minority interests in France of Â£7 million (2003: Â£3 million), Italy Â£27 million (2003: Â£25 million), Netherlands Â£10 million (2003: Â£8 million), Poland Â£2 million (2003: Â£1 million) and Spain Â£75 million (2003: Â£72 million). New business contribution after the effect of required capital includes minority interests in 2004 of Â£94 million (2003: Â£86 million). This comprises minority interests in France of Â£1 million (2003: nil), Italy Â£19 million (2003: Â£15 million), Netherlands Â£8 million (2003: Â£7 million), Poland Â£2 million (2003: Â£1 million) and Spain Â£64 million (2003: Â£63 million). -------------------------------------------------------------------------------------------------------------------- Page 29 EEV basis - new business contribution before the effect of required capital, tax and minority interest Annual premium Present value of New business equivalent(1) new business premiums contribution -------------- --------------------- ------------- Restated* 2004 2003 2004 2003 2004 2003 Â£m Â£m Â£m Â£m Â£m Â£m Analysed between: - Bancassurance channels 587 542 4,967 4,440 242 224 - Other distribution channels 2,011 1,885 15,720 14,369 464 422 -------------------------------------------------------------------------------------------------------------------- Total 2,598 2,427 20,687 18,809 706 646 ==================================================================================================================== (1) APE has been restated to include NUER volumes. * Restated for the effect of implementing European Embedded Value principles. EEV basis - new business contribution after the effect of required capital, tax and minority interest Annual premium Present value of New business equivalent(1) new business premiums contribution(2) -------------- --------------------- --------------- Restated* 2004 2003 2004 2003 2004 2003 Â£m Â£m Â£m Â£m Â£m Â£m Analysed between: - Bancassurance channels 328 312 2,728 2,499 74 66 - Other distribution channels 1,978 1,846 15,379 14,148 223 206 --------------------------------------------------------------------------------------------------------------------- Total 2,306 2,158 18,107 16,647 297 272 ===================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. (1) APE has been restated to include NUER volumes. (2) Contribution stated after deducting the effect of required capital, tax and minority interests. Post tax internal rate of return on life and pensions new business The internal rate of return (IRR) on life and pensions new business for the Group was 12.3% for the year to 31 December 2004 (31 December 2003: 12.4%). The internal rate of return is equivalent to the discount rate at which the present value of the post tax cash flows expected to be earned over the life time of the business written is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is the initial capital required to pay acquisition costs and set up statutory reserves in excess of premiums received, plus required capital at the same level as for the calculation of new business contribution post cost of capital. 2004 ------------------------------------------------------------------- Internal rate Total invested of return Initial capital Required capital capital % Â£m Â£m Â£m UK 11% 421 148 569 Continental Europe France 11% 23 85 108 Ireland 12% 32 18 50 Italy 15% 10 39 49 Netherlands (including Belgium and Luxembourg) 9% 42 66 108 Poland 18% 9 3 12 Spain 24% 15 53 68 Other Europe 8% 28 16 44 International 15% 20 30 50 ------------------------------------------------------------------------------------------------------------------ Total 12% 600 458 1,058 ================================================================================================================== The total initial capital for life and pensions new business for 31 December 2004 of Â£600 million (2003: Â£655 million) shown above is expressed at the point of sale. Hence it is higher than the impact of writing that new business on net worth of Â£520 million (2003: Â£581 million) shown on page 31, because the latter amount includes expected profits from the point of sale to the end of the reporting period, partly offset by the expected return on the initial capital. -------------------------------------------------------------------------------------------------------------------- Page 30 Experience variances Experience variances include the impact of the difference between expense, demographic and persistency assumptions, and actual experience incurred in the year. Also included are variances arising from tax, where such variances are due to management action. Restated* 2004 2003 Â£m Â£m United Kingdom (81) (41) France 22 56 Netherlands (including Belgium and Luxembourg) 12 (60) Europe 23 9 International 9 5 ------------------------------------------------------------------------------------------------------------------ (15) (31) ================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. Operating assumption changes Changes in operating assumptions are made when the assumed future levels of expenses, mortality or other operating assumptions are expected to change permanently. Restated* 2004 2003 Â£m Â£m United Kingdom (58) 1 France 35 (27) Netherlands (including Belgium and Luxembourg) 21 28 Europe (4) 23 International (1) (6) ------------------------------------------------------------------------------------------------------------------ (7) 19 ================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. Further disclosures on experience variances and operating assumption changes are provided on page 54 and 55. Geographical analysis of life EEV operating return Restated* 2004 2003 Â£m Â£m United Kingdom 551 597 Europe (excluding UK) France 286 228 Ireland 40 57 Italy 79 70 Netherlands (including Belgium and Luxembourg) 277 198 Poland 93 99 Spain 180 165 Other Europe 22 18 International 83 64 ------------------------------------------------------------------------------------------------------------------ 1,611 1,496 ================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. Life EEV operating return includes minority interests in 2004 of Â£186 million (2003: Â£157 million). This comprises minority interests in France of Â£9 million (2003: Â£4 million), Italy Â£43 million (2003: Â£37 million), Netherlands Â£26 million (2003: Â£13 million), Poland Â£16 million (2003: Â£21 million), Spain Â£90 million (2003: Â£81 million) and Other Europe Â£2 million (2003: Â£1 million). Analysis of life EEV operating return 2004 2003 Â£m Â£m Life businesses 1,569 1,522 Equity release 51 31 Non-insurance service and holding companies (34) (75) Fund management service companies 25 18 ----------------------------------------------------------------------------------------------------------------- 1,611 1,496 ================================================================================================================= --------------------------------------------------------------------------------------------------------------------- Page 31 Analysis of movement in life and related businesses embedded value The following tables provide an analysis of the movement in embedded value for the life and related businesses for 2004 and 2003. The analysis is shown separately for net worth and the value of in-force covered business, and includes amounts transferred between these categories. The transfer from life and related businesses to other segments consists of service company profits and losses during the reported period that have emerged from the value of in-force. Since the 'look through' into service companies includes only future profits and losses, these amounts must be eliminated from the closing embedded value. All figures are shown net of tax. 2004 ----------------------------------------------- Net worth Value of in-force Total Â£m Â£m Â£m Embedded value at the beginning of the period - Free surplus 1,721 - Required capital(1) 4,114 Total 5,835 5,916 11,751 ------------------------------------------------------------------------------------------------------------------ New business contribution (after the effect of required capital) (520) 875 355 Expected return on existing business - return on VIF - 576 576 Expected return on existing business - transfer to net worth 738 (738) - Experience variances and operating assumption changes (98) 79 (19) Expected return on shareholders' net worth 208 - 208 Investment return variances and economic assumption changes 167 (41) 126 ================================================================================================================== Life EEV return after tax 495 751 1,246 Exchange rate movements 51 68 119 Embedded value of businesses acquired 79 23 102 Amounts injected into life and related businesses 324 - 324 Amounts released from life and related businesses (576) - (576) Transfer to life and related businesses from other segments 48 - 48 ------------------------------------------------------------------------------------------------------------------ Embedded value at the end of the period - Free surplus 1,894 - Required capital(1) 4,362 Total 6,256 6,758 13,014 ================================================================================================================== The embedded value of business acquired in 2004 of Â£102 million represents the total embedded value of Antarius, the bancassurance joint venture with Credit du Nord in France. 2003 ----------------------------------------------- Net worth Value of in-force Total Â£m Â£m Â£m Embedded value at the beginning of the year 4,616 5,169 9,785 ------------------------------------------------------------------------------------------------------------------ New business contribution (after the effect of required capital) (581) 908 327 Expected return on existing business - return on VIF - 533 533 Expected return on existing business - transfer to net worth 774 (774) - Experience variances and operating assumption changes 147 (157) (10) Expected return on shareholders' net worth 190 - 190 Investment return variances and economic assumption changes 395 70 465 ------------------------------------------------------------------------------------------------------------------ Life EEV return after tax 925 580 1,505 Exchange rate movements 222 120 342 Embedded value of businesses acquired 17 47 64 Amounts injected into life and related businesses 231 - 231 Amounts released from life and related businesses (205) - (205) Transfer to life and related businesses from other segments 29 - 29 ------------------------------------------------------------------------------------------------------------------ Embedded value at the end of the year - Free surplus 1,721 - Required capital(1) 4,114 Total 5,835 5,916 11,751 ================================================================================================================== (1) Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. The embedded value of businesses acquired in 2003 of Â£64 million represents the embedded value of Delta Lloyd ABN AMRO Verzekeringen Holding BV, the insurance company acquired as part of the bancassurance agreement entered into with ABN AMRO NV in the Netherlands. The embedded value at the end of the 2004 includes minority interests of Â£796 million (2003: Â£568 million). This comprises minority interests in France of Â£120 million (2003: Â£51 million), Italy Â£276 million (2003: Â£222 million), Netherlands Â£59 million (2003: Â£44 million), Poland Â£90 million (2003: Â£72 million), Spain Â£244 million (2003: Â£176 million) and Other Europe Â£7 million (2003: Â£3 million). -------------------------------------------------------------------------------------------------------------------- Page 32 Segmental analysis of life and related businesses embedded value Value of in-force Net worth covered business ------------------- -------------------- Present Cost of Required Free value of required capital(1) surplus in-force capital Embedded value 31 December 2004 Â£m Â£m Â£m Â£m Â£m United Kingdom 1,360 573 4,084 (403) 5,614 Continental Europe France 1,064 57 908 (210) 1,819 Ireland 86 195 352 (18) 615 Italy 237 187 166 (52) 538 Netherlands (including Belgium and Luxembourg) 945 509 1,355 (332) 2,477 Poland 99 89 401 (32) 557 Spain 194 28 415 (53) 584 Other 97 52 92 (28) 213 International 280 204 180 (67) 597 ------------------------------------------------------------------------------------------------------------------ 4,362 1,894 7,953 (1,195) 13,014 ================================================================================================================== (1) Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. Value of in-force Net worth covered business Embedded value ---------------------- -------------------------- ------------------------ Restated* Restated* Restated* 31 December 31 December 31 December 31 December 31 December 31 December 2004 2003 2004 2003 2004 2003 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom(1) 1,933 1,995 3,681 3,205 5,614 5,200 Europe (excluding UK) France 1,121 1,012 698 547 1,819 1,559 Ireland 281 270 334 307 615 577 Italy 424 348 114 87 538 435 Netherlands (including Belgium and Luxembourg) 1,454 1,267 1,023 1,087 2,477 2,354 Poland 188 148 369 306 557 454 Spain 222 187 362 259 584 446 Other 149 140 64 44 213 184 International 484 468 113 74 597 542 ------------------------------------------------------------------------------------------------------------------ 6,256 5,835 6,758 5,916 13,014 11,751 ================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. (1) The UK net worth shown above is Â£146 million lower than that previously reported under achieved profits and relates to the reclassification of NUER's VIF from net worth to the present value of future in-force. The shareholders' net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in the non-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets. Required capital, net of implicit items, of Â£4,362 million at 31 December 2004 (31 December 2003: Â£4,114 million) is included within the net worth. The value of in-force covered business includes the effect of holding shareholders' capital to support the level of required capital and allowing for projected future releases. This impact reduces the value of in-force covered business at 31 December 2004 by Â£1,195 million (31 December 2003: Â£1,049 million). -------------------------------------------------------------------------------------------------------------------- Page 33 Time value of options and guarantees The following table sets out the reductions to embedded value to allow for the time value of options and guarantees relating to covered business at 31 December 2004 and 31 December 2003 by business units. 2004 2003 Â£m Â£m United Kingdom 44 36 Europe (excluding UK) France 79 71 Ireland 4 6 Italy 14 10 Netherlands (including Belgium and Luxembourg) 92 76 Poland 5 4 Spain 9 10 Other Europe 18 10 International 9 9 ------------------------------------------------------------------------------------------------------------------- 274 232 =================================================================================================================== The time value of options and guarantees is most significant in the United Kingdom, France and the Netherlands. In the United Kingdom, this relates mainly to non-market value adjustment (MVA) guarantees on unitised with-profit business and guaranteed annuity rates. In France, this relates mainly to guaranteed crediting rates and surrender values on the AFER product. In the Netherlands, this relates mainly to maturity guarantees on unit-linked products and interest rate guarantees on traditional individual and group profit sharing business. The increase in the time value of options and guarantees from Â£232 million at 31 December 2003 to Â£274 million at 31 December 2004 is primarily due to the 60bp fall in bond yields in continental Europe during the second half of 2004. The overall impact of the lower yields was an increase of Â£39 million. The increased allowance in the UK largely reflected the new business written in Norwich Union Equity Release. In France, the allowance included in new business contribution of Â£10 million together with the impact of lower assumed bond yields of Â£7 million and a small allowance from Antarius in the acquired embedded value were partially offset by favourable investment variances, which reduced the time value of options and guarantees by Â£13 million. In the Netherlands, the key impacts were the increase due to lower assumed bond yields of Â£21 million and reduction arising from the tax assumption change of Â£10 million. The increase in Other Europe arose in our German business and reflects the impact of lower assumed bond yields. Minority interest in life and related businesses EEV results Restated* 2004 2003 ------------------------------------ --------- Shareholders' Minority interest interest Group Group Â£m Â£m Â£m Â£m New business contribution before effect of required capital 585 121 706 646 Effect of required capital (163) (27) (190) (172) -------------------------------------------------------------------------------------------------------------------- New business contribution including effect of required capital 422 94 516 474 ==================================================================================================================== Life EEV operating return before tax 1,425 186 1,611 1,496 ==================================================================================================================== Life EEV return before tax 1,592 202 1,794 2,137 Attributed tax (479) (69) (548) (632) --------------------------------------------------------------------------------------------------------------------- Life EEV return after tax 1,113 133 1,246 1,505 ==================================================================================================================== Closing life and related businesses embedded value 12,218 796 13,014 11,751 ==================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. -------------------------------------------------------------------------------------------------------------------- Page 34 Principal economic assumptions - deterministic calculations Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting period. The same margins are applied on a consistent basis across the Group to gross risk-free yields to obtain investment return assumptions for ordinary shares and property and to produce risk discount rates. Expense inflation is derived as a fixed margin above a local measure of long-term price inflation. Risk-free rates and price inflation have been harmonised across territories within the Euro currency zone, except for expense inflation in Ireland where significant differences remain. Required capital is shown as a multiple of the EU statutory minimum solvency margin. Investment return assumptions are generally derived by major product class, based on hypothecating the assets at the valuation date. Assumptions about future investment mix are consistent with long-term plans. In most cases, the investment mix is assumed to continue unchanged throughout the projection period. The changes in assumptions between reporting dates reflect the actual movements in risk-free yields in the United Kingdom, the Eurozone and other territories. The principal economic assumptions used are as follows: United Kingdom France --------------------------------- ----------------------------- 2004 2003 2002 2004 2003 2002 Risk discount rate 7.3% 7.5% 7.2% 6.4% 7.0% 7.0% Pre-tax investment returns: Base government fixed interest 4.6% 4.8% 4.5% 3.7% 4.3% 4.3% Ordinary shares 7.6% 7.8% 7.5% 6.7% 7.3% 7.3% Property 6.6% 6.8% 6.5% 5.7% 6.3% 6.3% Future expense inflation 3.3% 3.4% 2.8% 2.5% 2.5% 2.5% Tax rate 30.0% 30.0% 30.0% 34.9% 35.4% 35.4% Required Capital (% EU minimum) 200%/100% 200%/100% 200%/100% 115% 115% 115% Ireland Italy --------------------------------- ----------------------------- 2004 2003 2002 2004 2003 2002 Risk discount rate 6.4% 7.0% 7.0% 6.4% 7.0% 7.0% Pre-tax investment returns: Base government fixed interest 3.7% 4.3% 4.3% 3.7% 4.3% 4.3% Ordinary shares 6.7% 7.3% 7.3% 6.7% 7.3% 7.3% Property 5.7% 6.3% 6.3% 5.7% 6.3% 6.3% Future expense inflation 4.0% 4.0% 4.0% 2.5% 2.5% 2.5% Tax rate 12.5% 12.5% 12.5% 38.3% 38.3% 39.8% Required Capital (% EU minimum) 150% 150% 150% 115% 115% 115% Netherlands Poland --------------------------------- ----------------------------- 2004 2003 2002 2004 2003 2002 Risk discount rate 6.4% 7.0% 7.0% 9.7% 9.7% 11.7% Pre-tax investment returns: Base government fixed interest 3.7% 4.3% 4.3% 6.0% 6.0% 8.0% Ordinary shares 6.7% 7.3% 7.3% 9.0% 9.0% 11.0% Property 5.7% 6.3% 6.3% n/a n/a n/a Future expense inflation 2.5% 2.5% 2.5% 3.4% 3.4% 5.4% Tax rate 31.5%* 25.0% 25.0% 19.0% 19.0% 27.0% Required Capital (% EU minimum) 150% 150% 150% 150% 150% 150% Spain --------------------------------- 2004 2003 2002 Risk discount rate 6.4% 7.0% 7.0% Pre-tax investment returns: Base government fixed interest 3.7% 4.3% 4.3% Ordinary shares 6.7% 7.3% 7.3% Property 5.7% 6.3% 6.3% Future expense inflation 2.5% 2.5% 2.5% Tax rate 35.0% 35.0% 35.0% Required Capital (% EU minimum) 125%/110% 125%/110% 125%/110% * In the Netherlands, the tax rate assumed in determining the embedded value as at 31 December 2004 has been changed from 25%, which was the average rate of tax assumed by the intermediary division, to the full rate of corporation tax in the Netherlands. This change reflects the calculation refinements now adopted for the intermediary division, described on page 54, and the reduction in corporation tax from 34.5% to 31.5%, which was effective from 1 January 2005. In 2005, profits will be grossed up at the local corporation tax rate of 31.5% in the Netherlands, reflecting the economic basis at the start of the year, increasing both reported pre-tax profits and the corresponding tax charge. -------------------------------------------------------------------------------------------------------------------- Page 35 Where there are service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company. Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for credit risk. Required capital in the United Kingdom is 200% EU minimum for Norwich Union Annuities Ltd and 100% for other companies. Required capital in Spain is 125% EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies. Other economic assumptions Required capital relating to with-profit business is assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders. Bonus rates on participating business have been set at levels consistent with the economic assumptions and Aviva's medium-term bonus plans. The distribution of profit between policyholders and shareholders within the with-profit funds assumes that the shareholder interest in conventional with-profit business in the United Kingdom and Ireland continues at the current rate of one-ninth of the cost of bonus. Principal economic assumptions - stochastic calculations The time value of options and guarantees calculation allows for expected management and policyholder actions in response to varying future investment conditions. The management actions modelled include changes to asset mix and bonus rates. Modelled policyholder actions are described under 'Other assumptions'. This section describes the models used to generate future investment simulations, and gives some sample statistics for the simulations used. Two separate models have been used, for the UK businesses and for the Europe and International businesses, as these models better reflect the characteristics of the businesses. United Kingdom Model Overall asset returns have been generated assuming that the portfolio total return has a lognormal distribution. The mean and standard deviation of the overall asset return have been calculated using the asset mix of the fund and assumptions over the mean and standard deviation of each asset class, together with correlations between them. Asset Classes The significant asset classes for UK participating business are equities, property and long-term fixed rate bonds. Summary Statistics The following table sets out the means and standard deviations (StDev) of future returns at 31 December 2004 for the three most significant asset classes. Mean(1) StDev(2) ------------------ Equities 7.6% 20.0% Property 6.6% 15.0% Government Bonds 4.6% 2.5% (1) Means have been calculated by accumulating a unit investment for the required number of years in each simulation, averaging the accumulation across all simulations, and converting the result to an equivalent annual rate (by taking the nth root of the average accumulation minus 1). (2) Standard deviations have been calculated by accumulating a unit investment for the required number of years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by the projection period (n years) and taking the square root. This makes the result comparable to implied volatilities quoted in investment markets. For the UK, the statistics are the same over all projection horizons. The low assumed volatility for bonds reflects the degree of matching, by duration, with the liabilities. Assumptions are also required for correlations between asset classes. These have been set based on an internal assessment of historical data. Returns for corporate fixed interest investments in each scenario are equal to the return on Government bonds plus a fixed additional amount, based on current spreads less a margin for credit risk. Europe and International Model (Excluding UK) Government nominal interest rates are generated by a model that projects a full yield curve at annual intervals. The model assumes that the logarithm of the short rate follows a mean reverting process subject to two normally distributed random shocks. This ensures that nominal interest rates are always positive, the distribution of future interest rates remains credible, and the model can be calibrated to give a good fit to the initial yield curve. The total annual return on equities is calculated as the return on 1 year bonds plus an excess return. The excess return is assumed to have a lognormal distribution. The model also generates property total returns and real yield curves, although these are not significant asset classes for Aviva outside the UK. Asset Classes The most important assets are fixed rate bonds of various durations. In some businesses equities are also an important asset class. -------------------------------------------------------------------------------------------------------------------- Page 36 Summary Statistics The following table sets out the means and standard deviations of future euro returns at 31 December 2004 for the three most significant asset classes: equities, short-term bonds (defined to be of 1 year duration) and long-term bonds (defined to be 10 year zero coupon bonds). In the accumulation of 10 year bonds, it is assumed that these are held for one year, sold as 9 year bonds then the proceeds are reinvested in 10 year bonds, although in practice businesses follow more complex asset strategies or tend to adopt a buy and hold strategy. Correlations between asset classes have been set using the same approach as described for the United Kingdom. 5- year return 10- year return 20- year return ----------------- ------------------ ------------------ Mean(1) StDev(2) Mean(1) StDev(2) Mean(1) StDev(2) -------------------------------------------------------------------------------------------------------------------- Short Government Bonds 2.9% 1.6% 3.5% 3.5% 4.2% 6.8% Long Government Bonds 3.5% 4.7% 4.1% 3.7% 4.6% 4.1% Equities 6.2% 19.7% 6.7% 19.4% 7.1% 19.2% (1) Means have been calculated by accumulating a unit investment for the required number of years in each simulation, averaging the accumulation across all simulations, and converting the result to an equivalent annual rate (by taking the nth root of the average accumulation minus 1). (2) Standard deviations have been calculated by accumulating a unit investment for the required number of years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by the projection period (n years) and taking the square root. This makes the result comparable to implied volatilities quoted in investment markets. Other assumptions Taxation Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have been announced. Demographic assumptions Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva's recent operating experience. Where appropriate, surrender and option take up rate assumptions that vary according to the investment scenario under consideration have been used in the calculation of the time value of options and guarantees, based on our assessment of likely policyholder behaviour in different investment scenarios. Expense assumptions Management expenses and operating expenses of holding companies attributed to life and related businesses have been included in the EEV calculations and split between expenses relating to the acquisition of new business, the maintenance of business in-force and project expenses. Future expense assumptions include an allowance for maintenance expenses and a proportion of recurring project expenses. Certain expenses of an exceptional nature, when they occur, are identified separately and are generally charged as incurred. No future productivity gains have been anticipated. Where subsidiary companies provide administration, investment management or other services to businesses included in the European Embedded Value calculations, the value of profits or losses arising from these services have been included in the embedded value and new business contribution. Other It has been assumed that there will be no changes to the methods and bases used to calculate the statutory technical provisions and current surrender values, except where driven by varying future investment conditions under stochastic economic scenarios. -------------------------------------------------------------------------------------------------------------------- Page 37 Sensitivity analysis - economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2004 and the new business contribution before the effect of required capital for the full year 2004 to: â€¢ one percentage point increase and decrease in the discount rates; â€¢ one percentage point increase and decrease in interest rates, including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates); â€¢ one percentage point increase and decrease in the assumed investment returns for equity and property investments, excluding any consequential changes to the risk discount rate; â€¢ 10% rise and fall in market value of equity and property assets (not applicable for new business contribution); and â€¢ decrease in the level of required capital to 100% EU minimum (or equivalent) (not applicable for new business contribution). In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns. Embedded value As 1% increase 1% decrease 1% increase 1% decrease (net of tax) reported in discount in discount in interest in interest 31 December 2004 on page 32 rates rates rates rates Â£m Â£m Â£m Â£m Â£m United Kingdom 5,614 (375) 400 (225) 240 Europe (excluding UK) France 1,819 (110) 120 (60) 55 Ireland 615 (25) 30 (5) - Italy 538 (20) 20 15 (30) Netherlands (including Belgium and Luxembourg) 2,477 (160) 190 190 (290) Poland 557 (30) 30 (5) 5 Spain 584 (30) 35 (20) 15 Other 213 (5) 5 10 (25) International 597 (25) 30 (25) 15 ---------------------------------------------------------------------------------------------------------------------- 13,014 (780) 860 (125) (15) ====================================================================================================================== 1% increase 1% decrease 10% rise in 10% fall EU As in equity/ in equity/ equity/ in equity/ minimum Embedded value reported property property property property capital (or (net of tax) on page 32 returns returns market values market values equivalent) 31 December 2004 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom 5,614 200 (210) 370 (370) 150 Europe (excluding UK) France 1,819 60 (60) 110 (130) 35 Ireland 615 20 (20) 15 (15) 5 Italy 538 15 (15) 10 (10) 10 Netherlands (including Belgium and Luxembourg) 2,477 250 (230) 310 (310) 85 Poland 557 5 (5) 5 (5) 10 Spain 584 - - 5 (5) 5 Other 213 10 (10) 10 (10) 10 International 597 - - 5 (5) 20 ---------------------------------------------------------------------------------------------------------------------- 13,014 560 (550) 840 (860) 330 ====================================================================================================================== -------------------------------------------------------------------------------------------------------------------- Page 38 In general, the magnitude of the sensitivities will reflect the size of the embedded values, though this will vary as the sensitivities have different impacts on the different components of the embedded value. In addition, other factors can have a material impact, such as the nature of options and guarantees, as well as the types of investments held. The interest rate sensitivity will vary significantly by territory, depending on the type of business written: for example, where non-profit business is well matched by backing assets, the favourable impact of reducing the risk discount rate is the dominant factor. Sensitivities will also vary according to the current economic assumptions, mainly due to the impact of changes to both the intrinsic cost and time value of options and guarantees. Options and guarantees are the main reason for the asymmetry of the sensitivities, where the guarantee impacts to different extents under the different scenarios. This can be seen in the sensitivity of a 1% movement in the interest rate for the Netherlands, where there is a significant amount of business with investment return guarantees. The reduction of 60 basis points to the assumed pre-tax investment returns at 31 December 2004 has significantly increased this sensitivity, reflecting the level of the guarantees relative to the interest rate assumption. Sensitivities to a 1% movement in the equity/property return will only impact the value of the in-force covered business, whereas a 10% movement in equity/property values may impact both the net worth and the value of in-force, depending on the allocation of assets. New business As 1% increase 1% decrease 1% increase 1% decrease contribution reported in discount in discount in interest in interest Full year 2004 on page 28 rates rates rates rates Â£m Â£m Â£m Â£m Â£m United Kingdom 269 (50) 55 (20) 20 Europe (excluding UK) France 95 (9) 11 1 (1) Ireland 19 (5) 5 - - Italy 48 (2) 2 1 (2) Netherlands (including Belgium and Luxembourg) 80 (15) 20 10 (35) Poland 11 (1) 1 - - Spain 143 (10) 11 (3) 2 Other 5 (1) 3 1 1 International 36 (4) 5 (1) 1 ---------------------------------------------------------------------------------------------------------------------- 706 (97) 113 (11) (14) ====================================================================================================================== New business As reported 1% increase in equity/ 1% decrease in equity/ contribution on page 28 property returns property returns Full year 2004 Â£m Â£m Â£m United Kingdom 269 25 (30) Europe (excluding UK) France 95 3 (4) Ireland 19 3 (3) Italy 48 - - Netherlands (including Belgium and Luxembourg) 80 22 (18) Poland 11 - - Spain 143 - - Other 5 - - International 36 - - --------------------------------------------------------------------------------------------------------------------- 706 53 (55) ===================================================================================================================== -------------------------------------------------------------------------------------------------------------------- Page 39 Sensitivity analysis - non-economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2004 and the new business contribution before the effect of required capital for the full year 2004 to the following changes in non-economic assumptions: â€¢ 10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of Â£10 p.a. would represent an expense assumption of Â£9 p.a.). Where there is a 'look through' into service company expenses, the fee charged by the service company is unchanged while the underlying expense decreases; â€¢ 10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% p.a. would represent a lapse rate of 4.5% p.a.); â€¢ 10% decrease in both mortality and morbidity rates. In each sensitivity calculation, all other assumptions remain unchanged. 10% decrease in 10% decrease in As reported on maintenance 10% decrease in mortality/ page 32 expenses lapse rates morbidity rates Embedded value (net of tax) Â£m Â£m Â£m Â£m 31 December 2004 United Kingdom 5,614 140 40 (100) Europe (excluding UK) France 1,819 30 25 30 Ireland 615 15 5 5 Italy 538 5 5 - Netherlands (including Belgium and Luxembourg) 2,477 70 10 (30) Poland 557 15 25 15 Spain 584 10 20 10 Other 213 - - - International 597 10 10 10 --------------------------------------------------------------------------------------------------------------------- 13,014 295 140 (60) ===================================================================================================================== 10% decrease in 10% decrease in As reported on maintenance 10% decrease in mortality/ page 28 expenses lapse rates morbidity rates New business contribution (gross of tax) Â£m Â£m Â£m Â£m Full year 2004 United Kingdom 269 13 15 15 Europe (excluding UK) France 95 4 4 4 Ireland 19 2 1 1 Italy 48 1 1 - Netherlands (including Belgium and Luxembourg) 80 10 5 3 Poland 11 1 2 2 Spain 143 4 14 8 Other 5 1 3 2 International 36 2 2 3 ---------------------------------------------------------------------------------------------------------------------- 706 38 47 38 ====================================================================================================================== The demographic sensitivities shown above represent a standard change to the assumptions for all products. Different products will be more or less sensitive to the change, and impacts may partially offset. -------------------------------------------------------------------------------------------------------------------- Page 40 Summarised consolidated profit and loss account - modified statutory basis For the year ended 31 December 2004 Page 2004 2004 2003 â‚¬m Â£m Â£m Premium income (after reinsurance) and investment sales Continuing operations 46 29,713 Life premiums, including share of associates' premiums 20,205 19,035 46 2,396 Investment sales 1,629 1,141 47 1,462 Health premiums 994 1,066 --------------------------------------------------------------------------------------------------------------------- 33,571 22,828 21,242 48 12,963 General insurance premiums 8,815 8,524 --------------------------------------------------------------------------------------------------------------------- 46,534 Total 31,643 29,766 ===================================================================================================================== Operating profit 47 1,743 Modified statutory life profit(1) 1,185 1,122 47 86 Health 58 61 50 63 Fund management 43 10 48 1,950 General insurance 1,326 911 50 (159) Non-insurance operations(1) (108) (48) 50 (262) Corporate costs (178) (160) 50 (684) Unallocated interest charges (465) (406) --------------------------------------------------------------------------------------------------------------------- Operating profit before tax, amortisation of goodwill, amortisation of 2,737 acquired additional value of in-force long-term business and exceptional items* 1,861 1,490 (177) Amortisation of goodwill (120) (103) (185) Amortisation of acquired additional value of in-force long-term business (126) (135) (72) Financial Services Compensation Scheme and other levies (49) - -------------------------------------------------------------------------------------------------------------------- 2,303 Operating profit before tax 1,566 1,252 192 Short-term fluctuation in investment return 131 212 (34) Change in the equalisation provision (23) (49) 45 (200) Net loss on the disposal of subsidiary and associated undertakings (136) (6) 44 (73) Exceptional costs for termination of operations (50) (19) -------------------------------------------------------------------------------------------------------------------- 2,188 Profit on ordinary activities before tax 1,488 1,390 (522) Tax on profit on ordinary activities (355) (367) -------------------------------------------------------------------------------------------------------------------- 1,666 Profit on ordinary activities after tax 1,133 1,023 (112) Minority interests (76) (74) -------------------------------------------------------------------------------------------------------------------- 1,554 Profit for the financial year 1,057 949 52 (25) Preference dividends (17) (17) 52 (9) Direct capital instrument appropriation (6) - -------------------------------------------------------------------------------------------------------------------- 1,520 Profit for the financial year attributable to equity shareholders 1,034 932 52 (845) Ordinary dividends (575) (545) -------------------------------------------------------------------------------------------------------------------- 675 Retained profit transferred to reserves 459 387 ==================================================================================================================== * All operating profit is from continuing operations. (1) The results of our UK equity release business have been reclassified from non-insurance to the life insurance profits. -------------------------------------------------------------------------------------------------------------------- Page 41 Earnings per share - modified statutory basis For the year ended 31 December 2004 Page 2004 2003 Operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax, attributable to equity shareholders* 57.2p 44.0p 52 Profit attributable to equity shareholders 45.8p 41.4p 53 Profit attributable to equity shareholders - diluted 45.4p 41.3p 52 Dividend per share 25.36p 24.15p * All operating profit is from continuing operations. Consolidated statement of total recognised gains and losses For the year ended 31 December 2004 Page 2004 2003 Â£m Â£m 40 Profit for the financial year* 1,057 949 Foreign exchange gains 28 329 -------------------------------------------------------------------------------------------------------------------- Total recognised gains arising in the year 1,085 1,278 ==================================================================================================================== * Stated before the effect of foreign exchange movements, which are reported within the foreign exchange line. Reconciliation of movements in consolidated shareholders' funds For the year ended 31 December 2004 Page 2004 2003 Â£m Â£m Shareholders' funds at the beginning of the year 6,554 5,836 Total recognised gains arising in the year 1,085 1,278 52 Dividends and appropriations (598) (562) Movement in shares held by employee trusts 1 - Increase in share capital 25 2 Issue of direct capital instrument 990 - Issue costs of direct capital instrument (9) - Shares issued in lieu of dividends 103 - Goodwill written back 169 - -------------------------------------------------------------------------------------------------------------------- Shareholders' funds at the end of the year 8,320 6,554 ==================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 42 Summarised consolidated balance sheet - modified statutory basis As at 31 December 2004 2004 2003 Â£m Â£m Assets Goodwill 1,135 1,105 -------------------------------------------------------------------------------------------------------------------- Investments Land and buildings 637 637 Investments in associated undertakings and participating interests 178 279 Variable yield securities 3,149 2,967 Fixed interest securities 10,750 10,098 Mortgages and loans, net of non-recourse funding 1,387 929 Deposits 1,871 435 Other investments 29 34 -------------------------------------------------------------------------------------------------------------------- 18,001 15,379 Reinsurers' share of technical provisions 2,589 2,926 Reinsurers' share of provision for linked liabilities 852 579 Assets of the long-term business 148,209 136,709 Assets held to cover linked liabilities 51,144 40,665 Other assets 9,889 10,829 Acquired value of in-force long-term business 451 488 -------------------------------------------------------------------------------------------------------------------- Total assets 232,270 208,680 ==================================================================================================================== Liabilities Shareholders' funds Equity 7,130 6,354 Non-equity 1,190 200 Minority interests 924 811 -------------------------------------------------------------------------------------------------------------------- 9,244 7,365 Subordinated debt 2,823 2,814 -------------------------------------------------------------------------------------------------------------------- Total capital, reserves and subordinated debt 12,067 10,179 Liabilities of the long-term business 131,099 121,125 Fund for future appropriations 9,218 8,443 Technical provision for linked liabilities 51,996 41,244 General insurance liabilities 18,155 17,515 Borrowings 1,423 1,720 Other creditors and provisions 8,312 8,454 -------------------------------------------------------------------------------------------------------------------- Total liabilities 232,270 208,680 ==================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 43 Consolidated cash flow statement For the year ended 31 December 2004 The cash flows presented in this statement relate to non-long-term business transactions only. Long-term business profits are included as net cash inflows/(outflows) from operating activities only to the extent that they have been remitted to shareholders by way of dividends from life operations. 2004 2003 Â£m Â£m Net cash inflow from operating activities, excluding exceptional items* 2,364 1,202 Exceptional items* (56) (522) Net cash outflow from servicing of finance (309) (256) Corporation tax received/(paid) 63 (179) Net purchases of tangible fixed assets (111) (101) Acquisitions and disposals of subsidiary and associated undertakings** 59 600 Equity dividends paid (450) (523) Proceeds from issue of subordinated debt - 1,567 Direct capital instrument (net of issue costs) 981 - Net cash inflow/(outflow) from other financing activities: Issue of share capital 3 2 Net (repayment)/drawdown of loans (312) (366) -------------------------------------------------------------------------------------------------------------------- Net cash flows 2,232 1,424 ==================================================================================================================== Cash flows were invested as follows: Increase/(decrease) in cash holdings (161) (173) Net (sales)/purchases of investments 2,468 1,672 Non-trading cash outflow to long-term business operations (75) (75) -------------------------------------------------------------------------------------------------------------------- Net investment of cash flows 2,232 1,424 ==================================================================================================================== The 2003 comparatives reflect the reclassification of our equity release business in the UK. * Included within exceptional items is Â£23 million in respect of the disposal of Hill House Hammond and Â£33 million of other levies. 2003 includes payments to the Berkshire Hathaway Group for reinsurance purchased in December 2000, to secure protection against any adverse impact of the run-off of London Market claims reserves. The final instalment was paid on 2 January 2003. ** The 2003 figure includes Â£651 million of consideration received on 2 January 2003 in relation to the disposal of the Australia and New Zealand general insurance businesses. ---------------------------------------------------------------------------------------------------------------------- Page 44 1. Basis of preparation - modified statutory solvency basis (a) The preliminary announcement for the year to 31 December 2004 does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The results on the modified statutory basis for 2004 have been taken from the Group's 2004 Annual Report and Accounts. The auditor has reported on the 2004 accounts and the report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The Group's 2003 Annual Report and Accounts have been filed with the Registrar of Companies. (b) The contribution from the Group's share of the partnership with The Royal Bank of Scotland Group (RBSG) is incorporated within the modified statutory life profit. Goodwill amortised in the year in respect of the Group's holding in the associated company, RBS Life Investments Limited, is included within 'Amortisation of goodwill' on page 41. (c) In November 2000, the Accounting Standards Board issued Financial Reporting Standard 17 (FRS17) 'Retirement Benefits', the accounting provisions, which are not required to be adopted by the Group until 1 January 2005. FRS17 requires certain transitional disclosures to be made in the statutory accounts and the table shown in the supplementary analyses on page 55 shows the balance sheet effect of these memorandum disclosures. The Group has continued to account for pension costs in accordance with SSAP24. (d) Changes in accounting policy Presentational changes The results of our UK equity release business have been reclassified from non-insurance operations to the life insurance operations. This has resulted in assets, liabilities and operating profits being reclassified out of non-insurance segments and into life segments. 2003 comparatives have been restated accordingly and the result on consolidated shareholders' funds and consolidated profit for the 2003 financial year is nil. (e) FRS27 'Life Assurance' In December 2004, the UK Accounting Standards Board (ASB) issued FRS27 'Life Assurance', which requires certain disclosure to be made in relation to with-profit funds, capital and guarantees and options. Preparation of accounts in accordance with the standard is mandatory for accounting periods ending on or after 23 December 2005, and the Group will make these disclosures in its 2005 financial statements, produced under International Financial Reporting Standards. In accordance with the Memorandum of Understanding signed by Aviva, along with the ASB and other major insurance companies in relation to this standard's application to insurers' 2004 Report and Accounts, the required disclosures are made on pages 10 to 18 of this document. 2. Exchange rates The euro rates employed in this announcement are an average rate of 1 euro = Â£0.68 (2003: 1 euro = Â£0.69) and a closing rate of 1 euro = Â£0.71 (31 December 2003: 1 euro = Â£0.70). 3. Acquisitions (a) Life businesses: France On 1 October 2004, as part of its bancassurance partnership with Credit du Nord, the Group acquired 50% of the issued share capital and one share of Antarius, the life insurance company of Credit du Nord, for an estimated cash consideration of Â£62 million. The Group's share of Antarius' estimated embedded value and net assets acquired was Â£51 million, giving rise to provisional goodwill of Â£11 million. The acquisition is still subject to the completion accounts process during the next 12 months, upon which goodwill estimates will be finalised. (b) Non-insurance businesses: UK On 16 August 2004, the Group's general insurance subsidiary, Norwich Union Insurance (NUI) acquired the entire share capital of HPI Holdings Limited (HPI). Total cash consideration including purchase costs was Â£122 million, comprising Â£118 million cash and Â£2 million of loan notes and Â£2 million of acquisition costs. The net assets acquired were Â£8 million, giving rise to goodwill of Â£114 million. 4. Exceptional costs for termination of operations In February 2004, the Group announced the closure of its UK national broker subsidiary, Hill House Hammond (HHH) by the end of 2004 together with the sale of its commercial business. The associated pre-tax costs of the closure of HHH were Â£50 million and the exceptional costs relate to termination activities, including redundancy costs and closure provisions. During 2003, the Group incurred costs on the closure of its general insurance operations in Belgium. These exceptional costs relate to termination activities, including redundancy costs and closure provisions. ----------------------------------------------------------------------------------------------------------------------- Page 45 5. Disposals The reported net loss on the disposal of subsidiary and associated undertakings comprises: 2004 2003 Note Â£m Â£m UK (a) (141) - France (b) 5 - Other minor operations - (6) -------------------------------------------------------------------------------------------------------------------- (136) (6) ==================================================================================================================== (a) Non-insurance businesses: UK In July 2004, the Group completed the disposal of its Your Move estate agency and e.surveying business. Total consideration was Â£42 million and the net assets at the disposal date were Â£12 million. The loss on disposal was Â£141 million after deducting the associate costs of disposal and after writing back goodwill of Â£167 million, previously written off to reserves, as required by FRS10 'Goodwill and Intangible Assets'. The same goodwill amount is also credited directly to the profit and loss account reserve and therefore has a neutral effect on shareholders' funds. (b) Non-insurance businesses: France In June 2004, our French operations, Aviva France, sold its 31.4% holding in Societe Fonciere Lyonnaise (SFL) a French listed property company for â‚¬427 million (Â£285 million) and after sale expenses recorded a gain of Â£5 million. These shares were owned by both our French life and non-life operations. Cumulative investment gains in the life company of Â£22 million have been transferred to a French GAAP statutory provision forming part of the fund for future appropriations under UK GAAP, and will be attributed to policyholders and shareholders as bonuses are declared to policyholders within the next eight years. (c) Non-adjusting post balance sheet event: Sale of general insurance businesses in Asia On 7 September 2004, the Group announced the disposal of its Asian general insurance businesses to Mitsui Sumitomo Insurance (MSI) for a total of US$450 million in cash. The sale was subject to obtaining regulatory clearance and approval from other shareholders in the Asian businesses. Under the terms of the agreement, MSI will acquire all of Aviva's general insurance businesses in Asia. These comprise 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 will be 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 is expected to complete 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 which will be included as part of the completion of Phase II, expected in the second half of 2005. Subject to the receipt of regulatory approval, the total proceeds for the sale of these businesses were fixed by reference to the net assets of the businesses as at 31 December 2003 and are not adjusted to reflect the results in the period from 1 January 2004 to completion. The Group does not bear any continuing operating risk from 31 December 2003. Financial Reporting Standard 2 'Accounting for subsidiary undertakings' requires the results of the Asian general insurance business to be consolidated with those of the Group's ongoing operations until the completion of the transaction. Although the Group has retained no economic interest in the operations of this business beyond 31 December 2003, the post-tax operating profits are incorporated in the Group's consolidated profit and loss account from 1 January 2004 to the date of completion. This will be offset by a corresponding change to the final profit on sale. Consequently, had the transaction been completed on 31 December 2004, the post-tax profit on sale would have been Â£129 million and is summarised below: Â£m US$m Net assets at 31 December 2003 60 108 Post-tax operating profit to 31 December 2004 13 24 -------------------------------------------------------------------------------------------------------------------- Net assets as at 31 December 2004 73 132 -------------------------------------------------------------------------------------------------------------------- Proceeds 250 450 Less: Net assets (73) (132) Transaction costs (8) (14) -------------------------------------------------------------------------------------------------------------------- Pre-tax profit on sale 169 304 Tax attributable to profit on sale (40) (72) -------------------------------------------------------------------------------------------------------------------- Post-tax profit on sale 129 232 ==================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 46 The Group has hedged its exposure to the sale proceeds of US$450 million through the purchase of foreign currency forward contracts. Operating profit before tax, amortisation of goodwill and exceptional items for the Asian general insurance businesses included in these results is Â£21 million comprising of Â£15 million underwriting profit and Â£6 million of long-term investment return. 6. Geographical analysis of life and pensions and investment sales - new business and total income New business sales -------------------------------------- Premium income New single New regular (after reinsurance) premiums premiums and investment sales -------------- --------------- -------------------- Restated* 2004 2003 2004 2003 2004 2003 Â£m Â£m Â£m Â£m Â£m Â£m Life and pensions sales United Kingdom - group** 6,297 5,685 499 511 8,530 8,688 - associates 205 152 17 23 297 254 ---------------------------------------------------------------------------------------------------------------------- 6,502 5,837 516 534 8,827 8,942 Europe (excluding UK) France 2,454 1,950 62 46 2,892 2,300 Ireland 203 188 66 62 454 442 Italy 1,529 1,399 45 54 1,806 1,662 Netherlands (including Belgium and Luxembourg) 1,131 850 148 139 1,990 1,722 Poland - Life 40 24 15 17 263 263 - Pensions 20 8 16 15 500 440 Spain 1,566 1,353 91 111 1,795 1,641 Other 336 280 90 73 724 616 International 660 740 105 113 954 1,007 ---------------------------------------------------------------------------------------------------------------------- Total life and pension sales (including share of associates) 14,441 12,629 1,154 1,164 20,205 19,035 Investment sales United Kingdom 840 664 19 16 859 680 Netherlands 196 204 - - 196 204 Poland 75 109 2 1 77 110 Other Europe 254 49 - - 254 49 International 243 98 - - 243 98 ---------------------------------------------------------------------------------------------------------------------- Total investment sales 1,608 1,124 21 17 1,629 1,141 ---------------------------------------------------------------------------------------------------------------------- Total long-term savings (including share of associates) 16,049 13,753 1,175 1,181 21,834 20,176 ====================================================================================================================== 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. * United Kingdom new business sales shown in the table have been restated to include new business sales through Norwich Union Equity Release. Total new single premium mortgage completion sales amounted to Â£478 million (2003: Â£501 million). ** Included within premium income (after reinsurance) and investment sales of Â£8,530 million (2003: Â£8,688 million) are transfers of institutional business into Morley Pooled Pensions of Â£334 million (2003: Â£1,247 million) which, since they are institutional in nature, are excluded from new business sales. ----------------------------------------------------------------------------------------------------------------------- Page 47 7. Geographical analysis of modified statutory life operating profit 2004 2003 Â£m Â£m United Kingdom With-profit 107 145 Non-profit* 478 433 Europe (excluding UK) France 182 179 Ireland 35 41 Italy 43 30 Netherlands (including Belgium and Luxembourg) 166 107 Poland 84 103 Spain 61 50 Other (5) (4) International 34 38 -------------------------------------------------------------------------------------------------------------------- Total modified statutory life operating profit 1,185 1,122 ==================================================================================================================== * Included within non profit result is the operating profit of the equity release business, NUER, which is now being classified as a life business. Operating profit for 2004 was nil (2003: Â£16 million loss) on a modified statutory solvency basis. 8. Geographical analysis of health premiums after reinsurance and operating result (a) Premiums after reinsurance: 2004 2003 Â£m Â£m United Kingdom 280 270 France 147 134 Netherlands 567 662 -------------------------------------------------------------------------------------------------------------------- 994 1,066 ==================================================================================================================== (b) Operating result: Operating profit Underwriting result ---------------- ------------------- 2004 2003 2004 2003 Â£m Â£m Â£m Â£m United Kingdom 12 13 8 9 France 8 9 (2) (2) Netherlands 38 39 (8) (20) ------------------------------------------------------------------------------------------------------------------- 58 61 (2) (13) =================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 48 9. Geographical analysis of general insurance premiums after reinsurance and operating result (a) General insurance premiums after reinsurance: 2004 2003 Â£m Â£m United Kingdom 5,434 5,135 Europe (excluding UK) France 524 515 Ireland 545 611 Netherlands 719 563 Other 230 226 International Canada 1,202 1,208 Other 161 266 -------------------------------------------------------------------------------------------------------------------- 8,815 8,524 ==================================================================================================================== (b) Operating result: Operating profit* Underwriting result* ---------------- ------------------- 2004 2003 2004 2003 Â£m Â£m Â£m Â£m United Kingdom 832 676 158 50 Europe (excluding UK) France 32 35 (8) (9) Ireland 153 91 79 26 Netherlands 71 35 26 (5) Other 39 32 2 (6) International Canada 152 12 37 (98) Other 47 30 7 (12) ------------------------------------------------------------------------------------------------------------------- 1,326 911 301 (54) =================================================================================================================== * The general insurance operating profit and underwriting result are stated before the change in the equalisation provision of Â£23 million (2003: Â£49 million). (c) General business - investment return information Actual Longer-term investment return investment return ---------------- ------------------- 2004 2003 2004 2003 Â£m Â£m Â£m Â£m United Kingdom 587 585 674 626 Europe (excluding UK) France 33 37 40 44 Ireland 61 58 74 65 Netherlands 69 71 45 40 Other 21 20 37 38 International Canada 98 94 115 110 Other 36 36 40 42 -------------------------------------------------------------------------------------------------------------------- Total longer-term investment return 1,025 965 Total actual investment income 905 901 Realised (losses)/gains (65) 47 Unrealised gains 287 136 -------------------------------------------------------------------------------------------------------------------- 1,127 1,084 1,025 965 ==================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 49 9. Geographical analysis of general insurance premiums after reinsurance and operating result continued (d) Reconciliation between general business investment return information and short-term fluctuation in investment return incorporated in the summarised consolidated profit and loss account - modified statutory basis For the year to 31 December 2004 Short-term Actual Longer-term fluctuation investment investment in investment return return return Â£m Â£m Â£m General business 1,127 1,025 102 Health business 22 60 (38) --------------------------------------------------------------------------------------------------------------------- 1,149 1,085 64 --------------------------------------------------------------------------------------------------------------------- Life business 67 --------------------------------------------------------------------------------------------------------------------- Total short-term fluctuation in investment return 131 ===================================================================================================================== (e) Longer-term investment return The longer-term investment return is calculated separately for each principal general insurance business and certain long-term business operations. 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 year, 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. The principal assumptions underlying the calculation of the longer-term investment return are: Longer-term rates of return Equities Properties ----------- ----------- 2004 2003 2004 2003 % % % % United Kingdom 8.1% 8.1% 6.6% 6.6% France 7.5% 7.5% 6.5% 6.5% Ireland 8.7% 8.7% 6.7% 6.7% Netherlands 8.4% 8.4% 6.5% 6.5% Canada 9.3% 9.3% 7.3% 7.3% The table below shows the sensitivity of the full year 2004 operating profit to changes in the longer-term rates of return: Movement in investment return By Change in By --------------- --------------------------------- ----- Equities 1% higher/lower Group operating profit before tax Â£32m Properties 1% higher/lower Group operating profit before tax Â£12m For 2005, the Group intends to apply the same economic assumptions for equities and properties as those used under EEV principles to calculate the longer-term investment return for its general insurance and health business for both UK GAAP and IFRS accounts. ----------------------------------------------------------------------------------------------------------------------- Page 50 10. Fund management operating result 2004 2003 Â£m Â£m Morley - UK business 12 3 - European and International business 8 4 -------------------------------------------------------------------------------------------------------------------- 20 7 Other fund management operations UK - Royal Bank of Scotland (7) (6) - Norwich Union Investment funds 5 (3) France 17 13 Other Europe 1 - International 7 (1) -------------------------------------------------------------------------------------------------------------------- 43 10 ==================================================================================================================== 11. Non-insurance operations 2004 2003 Â£m Â£m Hill House Hammond 2 4 Personal finance subsidiaries (1) - Your Move 9 1 Norwich Union Life Services (76) (54) Other (42) 1 -------------------------------------------------------------------------------------------------------------------- (108) (48) ==================================================================================================================== Norwich Union Equity Release has been reclassified as a life company and therefore its operating result of nil (2003: Â£16 million loss) previously included within non-insurance operating profit on an MSSB basis are included with life MSSB operating profit. 12. Corporate costs 2004 2003 Â£m Â£m Global finance transformation programme (85) (60) Central costs and sharesave schemes (93) (100) -------------------------------------------------------------------------------------------------------------------- (178) (160) ==================================================================================================================== 13. Unallocated interest 2004 2003 Â£m Â£m External - subordinated debt 169 101 - other 77 109 Internal 219 196 -------------------------------------------------------------------------------------------------------------------- 465 406 ==================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 51 14. Tax The tax charge in the profit and loss account comprises: (a) Tax on profit/(loss) on ordinary activities: 2004 2003 Â£m Â£m Current tax UK corporation tax - current year 22 (60) - prior year 124 17 Overseas tax - current year (84) (1) - prior year 2 3 Tax attributable to balance on technical account (345) (310) -------------------------------------------------------------------------------------------------------------------- (281) (351) ==================================================================================================================== Deferred tax Origination and reversal of timing differences (27) (19) Changes in tax rates or law 2 (11) (Decrease)/increase in discount (49) 14 -------------------------------------------------------------------------------------------------------------------- (74) (16) -------------------------------------------------------------------------------------------------------------------- Total tax charged in the profit and loss account (355) (367) ==================================================================================================================== (b) Tax charge analysed between: 2004 2003 Â£m Â£m Operating profit before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items Continuing operations (456) (403) Profit on other ordinary activities 101 36 -------------------------------------------------------------------------------------------------------------------- (355) (367) ==================================================================================================================== (c) Factors affecting current tax charge for the year: 2004 2003 Â£m Â£m Profit on ordinary activities before tax 1,488 1,390 Current tax (charge) at standard UK corporation tax rate of 30% (2003: 30%) (446) (417) Adjustment to tax charge in respect of prior years 87 20 Non-assessable dividends (48) 5 Non-taxable loss on the sale of subsidiaries and associates (73) (10) Non-taxable amortisation of goodwill (22) (5) Other disallowable expenses (16) (33) Non-utilisation of current year tax losses 6 (10) Different local basis of tax on overseas profits 87 53 Deferred tax charge arising from movement in unrealised gains and losses 18 20 Other deferred tax movements 38 10 Deferred tax liabilities not recognised 134 38 Other items (46) (22) -------------------------------------------------------------------------------------------------------------------- Current tax charge for the year (281) (351) ==================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 52 15. Dividends (a) The preference dividends in the profit and loss account comprise: 2004 2003 Â£m Â£m Preference dividends 17 17 ==================================================================================================================== The preference dividends are in respect of the cumulative irredeemable preference shares of Â£1 each in issue. (b) The ordinary dividends in the profit and loss account comprise: 2004 2003 Â£m Â£m Ordinary dividends Interim 9.36 pence (2003: 9 pence) 211 203 Final 16.00 pence (2003: 15.15 pence) 364 342 -------------------------------------------------------------------------------------------------------------------- Total ordinary dividends 575 545 ==================================================================================================================== Irish shareholders who are due to be paid a dividend denominated in euros will receive a payment at the exchange rate prevailing on 8 March 2005. (c) The direct capital instrument appropriation in the profit and loss account comprise: 2004 2003 Â£m Â£m Direct capital instrument 6 - ==================================================================================================================== 16. Earnings per share (a) Basic earnings per share 2004 2003 ------------------------------ ---------------------------- Net of tax, Net of tax, minorities minorities and and Before preference Per Before preference Per tax dividend share tax dividend share Â£m Â£m p Â£m Â£m p Operating profit* 1,861 1,291 57.2 1,490 991 44.0 Adjusted for the following items: - Amortisation of goodwill (120) (120) (5.3) (103) (103) (4.6) - Amortisation of acquired additional value of in-force long-term business (126) (89) (3.9) (135) (98) (4.4) - Financial Services Compensation Scheme and other levies (49) (29) (1.3) - - - - Exceptional costs for termination of operations (50) (40) (1.8) (19) (16) (0.7) - Short-term fluctuation in investment return 131 173 7.6 212 198 8.9 - Change in the equalisation provision (23) (16) (0.7) (49) (34) (1.5) - Loss on the disposal of subsidiary and associated undertakings (136) (136) (6.0) (6) (6) (0.3) --------------------------------------------------------------------------------------------------------------------- Profit attributable to equity shareholders 1,488 1,034 45.8 1,390 932 41.4 ===================================================================================================================== * All operating profit is from continuing activities. ----------------------------------------------------------------------------------------------------------------------- Page 53 16. Earnings per share continued Earnings per share has been calculated based on the operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax, attributable to equity shareholders, for continuing and for total operations, as well as on the profit attributable to equity shareholders. The directors believe the former two earnings per share figures provide a better indication of operating performance. The calculation of basic earnings per share uses a weighted average of 2,256 million (2003: 2,251 million) ordinary shares in issue, after deducting shares owned by the employee share trusts as required by FRS14 'Earnings per share'. The actual number of shares in issue at 31 December 2004 was 2,282 million (31 December 2003: 2,257 million). (b) Diluted earnings per share: 2004 2003 ------------------------------ ---------------------------- 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 1,034 2,256 45.8 932 2,251 41.4 Dilutive effect of share awards and options - 22 (0.4) - 8 (0.1) --------------------------------------------------------------------------------------------------------------------- Diluted earnings per share 1,034 2,278 45.4 932 2,259 41.3 ===================================================================================================================== END PART 3 OF 4 This information is provided by RNS The company news service from the London Stock Exchange

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