Final Results - Part 4 of 4

Aviva PLC 01 March 2007 Part 4 of 4 ----------------------------------------------------------------------------------------------------------------------- Statistical supplement ----------------------------------------------------------------------------------------------------------------------- Page 66 Segmental analysis of the components of life EEV operating return Year ended 31 December 2006 Â£m UK France Ireland Italy Netherlands Poland Spain Other United Other Total Europe States New business contribution (after the effect of required capital) 263 110 9 50 25 25 168 (6) 8 31 683 Profit from existing business - expected return 474 142 41 26 158 52 53 9 29 27 1,011 - experience variances: Maintenance expenses 13 9 4 (1) (11) 5 (2) (2) - (2) 13 Exceptional expenses* (149) 1 (4) - (23) - (1) (2) - - (178) Mortality/ Morbidity** (13) 33 (2) 4 3 16 1 2 - 15 59 Lapses*** (66) 8 (9) (8) 2 21 (1) (2) (9) (3) (67) Other^ 75 20 (9) 6 20 3 11 (1) (2) - 123 ----------------------------------------------------------------------------------------------------------------------- (140) 71 (20) 1 (9) 45 8 (5) (11) 10 (50) - operating assumption changes: Maintenance expenses^^ 58 - (3) - 60 (3) - (11) (12) (6) 83 Exceptional expenses^^^ (46) (2) (22) - (9) - - (3) - - (82) Mortality/ Morbidity# 57 45 (13) - - 17 - (1) 3 11 119 Lapses## (224) (41) (47) - (14) 17 (21) (1) - 2 (329) Other### 215 9 - 2 19 1 2 3 - 2 253 ----------------------------------------------------------------------------------------------------------------------- 60 11 (85) 2 56 32 (19) (13) (9) 9 44 Expected return on shareholders'net worth 87 68 15 31 99 8 11 2 15 9 345 ------------------------------------------------------------------------------------------------------------------------ Life EEV operating return before tax 744 402 (40) 110 329 162 221 (13) 32 86 2,033 ======================================================================================================================= * Exceptional expenses in the UK reflect Â£32 million relating to the ongoing transformation of the life business and Â£117 million of other exceptional and project costs associated with strategic initiatives, including developments designed to improve the future new business volumes, and regulatory changes. In the Netherlands, exceptional expenses reflect higher project costs compared to allowances as well as the payment to ABN AMRO in respect of the joint venture operations. ** Mortality experience continues to be better than the assumptions set across many of our businesses. *** Lapse experience in the UK has been worse than assumed and primarily relates to bonds and pensions. In Poland, lapses for both life and pension products have been lower than assumed resulting in the favourable experience variance. ^ In the UK, other experience profits include better than assumed default experience on corporate bonds and mortgages, and the benefit of higher than expected performance fees in Morley. ^^ Maintenance expenses in UK relate to Morley's change in profit margin. The change in Delta Lloyd is also driven by improved asset management profitability. The adverse movement in the US is due to a reassessment of expenses in our Boston-based operations. ^^^ In the UK, exceptional expenses relate to short-term project costs and capitalisation of reorganisation costs. Ireland reflects changes in expense assumptions regarding the future attribution of investment income and expenses between policyholders and shareholders. # The change in mortality assumptions in the UK includes an alignment in the basis for internal business. Mortality assumptions in France were changed following improvements in mortality experience over the last few years. ## In the UK, the lapse assumption change relates to bonds and pension business while the change in Ireland relates to the Celebration Bond and unit-linked bonds. In France, lapse assumptions have been changed for non-AFER business in Aviva Vie.In Spain, lapse assumptions have been changed for risk business and some savings products. ### In the UK, the assumption changes reflect the beneficial impact of the with-profit funds sharing the pension scheme deficit funding (Â£126 million) and the impact of PS06/14, primarily in reducing the non-profit reserves (Â£50 million). In Delta Lloyd the impact is due to changes to management fee rebates. ------------------------------------------------------------------------------------------------------------------------ Page 67 Segmental analysis of the components of life EEV operating return Year ended 31 December 2005 Â£m UK France Ireland Italy Netherlands Poland Spain Other United Other Total Europe States New business contribution (after the effect of required capital) 217 91 13 36 58 14 155 (4) 7 25 612 Profit from existing business - expected return 425 122 29 30 148 50 48 10 13 20 895 - experience variances: Maintenance expenses 12 3 (2) (2) 3 5 (2) 1 (1) (3) 14 Exceptional expenses* (151) - (5) - (12) - (2) - - - (170) Mortality/ Morbidity** 86 29 (1) 2 16 16 5 - (1) 6 158 Lapses*** (78) (4) (9) (4) 2 5 1 (5) 5 4 (83) Other^ 36 4 (4) 4 (7) 10 2 (2) - (1) 42 ------------------------------------------------------------------------------------------------------------------------ (95) 32 (21) - 2 36 4 (6) 3 6 (39) - operating assumption changes: Maintenance expenses (20) - 1 (3) 25 3 1 (6) (12) 3 (8) Exceptional expenses (4) (3) - - (2) - - 1 - - (8) Mortality/ Morbidity^^ 19 1 (4) 4 (25) 8 - 1 - 5 9 Lapses^^^ (130) - (8) - (10) - (2) (2) - 4 (148) Other# 79 16 - - 67 11 (2) (1) 2 - 172 ----------------------------------------------------------------------------------------------------------------------- (56) 14 (11) 1 55 22 (3) (7) (10) 12 17 Expected return on shareholders' net worth 98 62 10 29 86 10 10 1 12 11 329 ------------------------------------------------------------------------------------------------------------------------ Life EEV operating return before tax 589 321 20 96 349 132 214 (6) 25 74 1,814 ======================================================================================================================= * Exceptional expenses in the UK reflect Â£47 million relating to ongoing transformation of the life business and Â£101 million of other exceptional and project costs associated with regulatory change and strategic initiatives. ** Mortality experience continues to be better than assumed across most of our businesses, and particularly for protection business in the UK, AFER and unit-linked business in France and group business in the Netherlands. *** Lapse experience in the UK has been worse than assumed and mainly relates to bonds and pension business. In Ireland, the adverse persistency has mainly arisen on unit-linked pensions business. ^ In the UK, other experience profits includes better than assumed default experience on corporate bonds and commercial mortgages. ^^ Mortality assumptions have been revised in the Netherlands following the publication of new annuitant mortality tables used for group business. ^^^ In the UK, the adverse lapse assumption change reflects a more prudent allowance for future persistency experience in the UK following recent experience. In Ireland, the lapse assumption change mainly relates to unit-linked pension business. Lapse assumption changes in the Netherlands largely relate to group business in the intermediary division. # Other operating assumption changes in the UK primarily relate to the change in annuitant required capital to 150% of required minimum margins which results in a Â£110 million one-off benefit. In France other operating assumptions represent an allowance for further tax benefits arising from dividends from subsidiaries. In the Netherlands, they reflect a variety of changes including increased annual management fees on unit-linked contracts, favourable change in asset mix, and the reduction of future guaranteed returns on group pensions business in Belgium. In Poland it was previously assumed that the introduction of new individual pension products would lead to significant conversion of existing policies. The prudent allowance made for this is no longer required. ------------------------------------------------------------------------------------------------------------------------ Page 68 Supplementary analyses (a) Analysis of service companies and fund management businesses within embedded value The EEV methodology incorporates the impact of profits and losses arising from subsidiary undertakings providing administration, investment management and other services where these arise in relation to covered business. The principal subsidiaries of the Aviva group providing such services include NU Life Services Limited (UK), Morley Fund Management (UK) and Aviva Gestion d'Actifs (France). The following table provides an analysis of the elements within the life and other related business embedded value: 2006 2005 --------------------------------------------------------- Fund Non-Insurance Total Total Management Â£m Â£m Â£m Â£m United Kingdom 154 (182) (28) (102) France 65 6 71 47 Netherlands 55 (48) 7 - Other Europe and Rest of the World 32 (2) 30 27 ----------------------------------------------------------------------------------------------------------------------- 306 (226) 80 (28) ======================================================================================================================== The 'look-through' value attributable to fund management is based on the level of after-tax profits expected to be earned in the future over the outstanding term of the covered business in respect of services provided to the Group's life operations. The EEV basis income statement excludes the actual statutory basis profits arising from the provision of fund management services to the Group's life businesses. The EEV income statement records the experience profit or loss compared to the assumed profitability, the return on the in-force value arising from the unwind at the relevant risk discount rate and the effect on the in-force value of changes to economic assumptions. NU Life Services Limited (NULS) is the main provider of administration services to the UK Life business. NULS incurs substantially all of the UK Life businesses operating expenditure, comprising acquisition, maintenance and project costs. Costs are recharged to the UK Life companies (the product companies) on the basis of a pre-determined Management Services Agreement (MSA) which will be reviewed in 2008. The EEV principles 'look-through' the contractual terms of the MSA to the underlying expenses of NULS. Accordingly the actual maintenance expenses and a 'normal' annual level of project expense allowances have been applied to the product companies. Under EEV, any further one-off project expenditure is reported as experience losses when incurred. The increases in fund management have arisen from changes in the assumed future profitability of these operations. In the Netherlands the non-insurance element reflects the 'look-through' to expenses that were previously recharged to the covered business. (b) Pension schemes (i) Pension scheme deficits in consolidated balance sheet On the consolidated balance sheet, the amount described as Provisions includes the pension scheme deficits and comprises: 2006 2005 Â£m Â£m Deficits in the staff pension schemes 1,029 1,471 Other obligations to staff pension schemes - Insurance policies issued by Group companies 1,086 875 ---------------------------------------------------------------------------------------------------------------------- Total IAS 19 obligations to staff pension schemes 2,115 2,346 Restructuring provisions 234 36 Other provisions 501 493 ---------------------------------------------------------------------------------------------------------------------- Provisions 2,850 2,875 ====================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 69 (b) Pension schemes (continued) (ii) Movements in the pension schemes' deficits comprise: 2006 2005 Â£m Â£m Deficits in the schemes at 1 January (1,471) (893) Employer contributions 554 383 Charge to net operating expenses (see (iii) below) (160) (130) Credit to investment income 77 32 Actuarial gains / (losses) 3 (547) Acquisitions (1) (313) Buy-outs and other transfers 18 - Exchange rate movements in foreign plans 7 (3) ----------------------------------------------------------------------------------------------------------------------- Deficits in the schemes at 31 December (973) (1,471) ======================================================================================================================== The current year surplus in the Irish scheme of Â£56 million is included in Other assets whilst the deficits in the other schemes of Â£1,029 million are included in provisions. The change in the net pension deficit during 2006 is mainly attributable to additional contribution into the schemes and an increase in the market value of their assets, partially offset by changes in assumptions underlying the present value of the schemes' liabilities. In the UK, the value of the liabilities has increased due to a strengthening to the post-retirement mortality assumptions and higher assumed inflation, partially offset by an increase in the corporate bond yields used for the valuation discount rate. The increase in scheme assets is primarily due to an improvement in equity values since the previous year end, partially offset by a reduction in bond values, together with deficit contribution payments made by the employing companies. Employer contributions included deficit funding payments amounting to Â£229 million (2005: Â£211 million). (iii)The pension expense for these schemes comprises: 2006 2005 Â£m Â£m Current service cost 196 158 Past service cost/(credit) 3 (7) Gain on curtailments* (39) (21) ----------------------------------------------------------------------------------------------------------------------- Charge to net operating expenses 160 130 ----------------------------------------------------------------------------------------------------------------------- Expected return on scheme assets (490) (439) Interest charge on scheme liabilities 453 407 ----------------------------------------------------------------------------------------------------------------------- Credit to investment income (37) (32) ----------------------------------------------------------------------------------------------------------------------- Total charge to income 123 98 ======================================================================================================================= Expected return on scheme assets 530 439 Actual return on these assets (800) (1,270) ----------------------------------------------------------------------------------------------------------------------- Actuarial gains on scheme assets (270) (831) Less: gains accounted for elsewhere 19 - Experience (gains)/losses arising on scheme liabilities (63) 86 Changes in assumptions underlying the present value of the scheme liabilities 430 1,292 Loss on acquisitions 1 - ----------------------------------------------------------------------------------------------------------------------- Actuarial losses on the pension schemes 117 547 Less: Recoveries from unallocated divisible surplus and other movements (3) - ----------------------------------------------------------------------------------------------------------------------- Actuarial losses recognised in the statement of recognised income and expense 114 547 ======================================================================================================================= * The current year credit mainly arises in the UK as a result of the remeasurement of pension liabilities in the RAC plc defined benefit scheme,following the MSS and LVL disposals (see note 4(a)). The cumulative amount of actuarial gains and losses on the pension scheme recognised in the statement of recognised income and expenses since 1 January 2004 (the date of transition to IFRS) is a loss of Â£809 million at 31 December 2006 (2005: loss of Â£692 million). ------------------------------------------------------------------------------------------------------------------------ Page 70 (c) Long-term savings new business Present value of new business premiums* Annual premium equivalent ---------------------------------------- -------------------------- 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Life and pensions France 3,552 3,530 391 384 Ireland 1,273 665 190 100 Italy 2,768 2,294 323 252 Netherlands (including Belgium,Germany and Luxembourg) 2,346 2,739 270 323 Poland 534 320 72 47 Spain 2,059 2,013 248 240 Other Europe 308 240 63 51 Continental Europe 12,840 11,801 1,557 1,397 Asia 685 397 107 66 Australia 297 337 58 63 United States 884 526 97 64 Rest of the World 1,866 1,260 262 193 International 14,706 13,061 1,819 1,590 United Kingdom 11,146 9,185 1,439 1,155 ---------------------------------------------------------------------------------------------------------------------- Total (before the effect of required capital) 25,852 22,246 3,258 2,745 Investment sales Netherlands 285 563 29 56 Poland 131 53 17 9 Other Europe 475 410 47 41 Continental Europe 891 1,026 93 106 Rest of the World (including Navigator sales) 1,564 1,151 156 115 International 2,455 2,177 249 221 United Kingdom 2,455 1,160 285 135 ---------------------------------------------------------------------------------------------------------------------- Total investment sales 4,910 3,337 534 356 ---------------------------------------------------------------------------------------------------------------------- Total long-term savings (including share of associates and joint ventures) 30,762 25,583 3,792 3,101 ====================================================================================================================== Germany has been reclassified from Other Europe to the Netherlands, Lithuania has been reclassified from Other Europe to Poland and Norwich Union's Dublin-based offshore life and savings business has been reclassified from Other Europe to the United Kingdom. Sales from the Navigator funds administration business, previously excluded from investment sales figures, are now included in the figures above. This change has increased the total investment sales for year ended 31 December 2006 by Â£1,371 million (2005: Â£938 million). * Investment sales are calculated as new single premiums plus annualised value of new regular premiums. ------------------------------------------------------------------------------------------------------------------------ Page 71 (d) Assets under management Life and related General business business and other Group Group 2006 2006 2006 2005 Â£m Â£m Â£m Â£m Total IFRS assets included in the balance sheet 254,761 37,961 292,722 263,447 Additional value of in-force long-term business 6,794 - 6,794 6,454 --------------------------------------------------------------------------------------------------------------------- Total EEV assets included in the balance sheet 261,555 37,961 299,516 269,901 Third party funds under management: Unit trusts,Oeics, Peps and Isas 20,574 16,188 Segregated funds 43,672 35,427 --------------------------------------------------------------------------------------------------------------------- Total assets under management 363,762 321,516 =====================================================================================================================- Third party funds under management now include funds administered under the Navigator platform. This change has increased the total assets under management at 31 December 2006 by Â£6,058 million (2005: Â£4,606 million). General insurance business only: geographical analysis (a) General insurance Longer-term Underwriting Operating profit investment return result ------------------ ------------------- ---------------- 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m France 47 26 45 44 2 (18) Ireland 172 171 51 55 121 116 Netherlands 128 97 45 42 83 55 Canada 148 147 121 112 27 35 Other 82 85 59 68 23 17 ---------------------------------------------------------------------------------------------------------------------- International 577 526 321 321 256 205 United Kingdom 1,075 970 692 668 383 302 ---------------------------------------------------------------------------------------------------------------------- Total 1,652 1,496 1,013 989 639 507 ======================================================================================================================- (b) Combined operating ratio analysis - geographical basis - general insurance business only Claims ratio Expense ratio Combined operating ratio ----------------------- ---------------- ------------------------ 2006 2005 2006 2005 2006 2005 % % % % % % France 73.0% 73.7% 10.4% 12.0% 99% 101% Ireland 55.8% 56.8% 11.2% 11.6% 77% 78% Netherlands 51.5% 60.0% 17.8% 12.0% 89% 93% Canada 66.7% 66.0% 12.4% 11.9% 98% 97% International 62.9% 64.3% 13.3% 12.2% 93% 94% United Kingdom 58.7% 61.8% 13.9% 10.9% 95% 96% ---------------------------------------------------------------------------------------------------------------------- Total 60.3% 62.7% 13.7% 11.4% 94% 95% ======================================================================================================================- Ratios are measured in local currency. The total Group ratios are based on average exchange rates applying to the respective periods. Definitions: Claims ratio - Incurred claims expressed as a percentage of net earned premiums. Expense ratio - Written expenses excluding commissions expressed as a percentage of net written premiums. Commission ratio - Written commissions expressed as a percentage of net written premiums. Combined operating ratio - Aggregate of claims ratio, expense ratio and commission ratio. ------------------------------------------------------------------------------------------------------------------------ Page 72 (c) General insurance business only: class of business analyses (i) United Kingdom Net written premiums Underwriting result Combined operating ratio -------------------- ------------------- ------------------------ 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m % % Personal Motor 1,631 1,641 (39) (40) 104% 102% Homeowner 1,262 1,300 23 69 98% 97% Other 694 772 50 8 100% 100% --------------------------------------------------------------------------------------------------------------------- 3,587 3,713 34 37 102% 100% --------------------------------------------------------------------------------------------------------------------- Commercial Motor 638 679 40 55 94% 94% Property 826 877 194 164 79% 84% Other 532 563 115 46 78% 93% -------------------------------------------------------------------------------------------------------------------- 1,996 2,119 349 265 83% 88% -------------------------------------------------------------------------------------------------------------------- 5,583 5,832 383 302 95% 96% ===================================================================================================================== During 2006, rating increases were as follows; personal motor: 5%; homeowners: 3% (including indexation); commercial motor: 2% decrease; commercial property: 3% decrease; and commercial liability: 6% decrease. (ii) France Net written premiums Underwriting result Combined operating ratio -------------------- ------------------- ------------------------ 2006 2005 2006 2005 2006 2005 â‚¬m â‚¬m â‚¬m â‚¬m % % Motor 377 378 - (10) 99% 102% Property and other 453 446 3 (16) 97% 101% ---------------------------------------------------------------------------------------------------------------------- â‚¬m 830 824 3 (26) 99% 101% ---------------------------------------------------------------------------------------------------------------------- Â£m 564 564 2 (18) 99% 101% ======================================================================================================================= (iii) Netherlands Net written premiums Underwriting result Combined operating ratio -------------------- ------------------- ------------------------ 2006 2005 2006 2005 2006 2005 â‚¬m â‚¬m â‚¬m â‚¬m % % Property 371 351 42 44 88% 88% Motor 350 370 20 (1) 96% 100% Liability 99 83 3 15 97% 84% Other 257 242 57 23 76% 91% ---------------------------------------------------------------------------------------------------------------------- â‚¬m 1,077 1,046 122 81 89% 93% ---------------------------------------------------------------------------------------------------------------------- Â£m 733 716 83 55 89% 93% ====================================================================================================================== (iv) Canada Net written premiums Underwriting result Combined operating ratio -------------------- ------------------- ------------------------ 2006 2005 2006 2005 2006 2005 C$m C$m C$m C$m % % Automobile 1,715 1,756 23 70 99% 96% Property 864 831 13 (2) 98% 100% Liability 278 281 6 (9) 98% 102% Other 45 43 15 18 60% 73% ---------------------------------------------------------------------------------------------------------------------- C$m 2,902 2,911 57 77 98% 97% ---------------------------------------------------------------------------------------------------------------------- Â£m 1,389 1,324 27 35 98% 97% ====================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Appendix A Capital 1 - Group capital structure 2 - FRS 27 disclosures ----------------------------------------------------------------------------------------------------------------------- Appendix A1 Group capital structure Page Capital employed by segment 73 Deployment of equity shareholders' funds 74 Return on capital employed 74 Sensitivity analysis 75 Shareholders' funds, including minority interests 76 Geographical analysis of return on capital employed 77 Group capital resources 79 ----------------------------------------------------------------------------------------------------------------------- Page 73 A1 Group capital structure The Group maintains an efficient capital structure from a combination of equity shareholders' funds, preference capital, subordinated debt and borrowings, consistent with the Group's risk profile and the regulatory and market requirements of its business. The European Embedded Value basis provides a more relevant reflection of the performance of the Group's life operations year on year than results under IFRS. Accordingly, the Group's capital structure is analysed on this basis. The Group's capital, from all funding sources, has been allocated such that the capital employed by trading operations is greater than the capital provided by its shareholders and its subordinated debt holders. As a result, the Group is able to enhance the returns earned on its equity capital. Capital employed by segment 2006 2005 Â£m Â£m Long-term savings 19,663 15,598 General insurance and health 5,344 5,581 Other business 1,425 1,876 Corporate (19) (36) --------------------------------------------------------------------------------------------------------------------- Total capital employed 26,413 23,019 --------------------------------------------------------------------------------------------------------------------- Financed by Equity shareholders' funds and minority interests 19,668 16,356 Direct capital instrument 990 990 Preference shares 200 200 Subordinated debt 2,937 2,808 External debt 1,258 1,002 Net internal debt 1,360 1,663 --------------------------------------------------------------------------------------------------------------------- 26,413 23,019 ===================================================================================================================== At 31 December 2006 the Group had Â£26.4 billion (31 December 2005: Â£23.0 billion) of total capital employed in our trading operations which is efficiently financed by a combination of equity shareholders' funds, preference capital, direct capital instruments, subordinated debt and internal and external borrowings. In 2006, the total capital employed increased by Â£3.4 billion reflecting growth in our long-term savings operations; these increased by Â£4.1 billion driven by the acquisition of AmerUs, operational results and the movement in equity markets in the year. In addition to its external funding sources, the Group has a number of internal debt arrangements in place. These have allowed the assets supporting technical liabilities to be invested into the pool of central assets for use across the Group. They have also enabled the shareholders to deploy cash from some parts of the business to others in order to fund growth. Although intra-group loans in nature, they are counted as part of the capital base for the purpose of capital management. All internal loans satisfy arms length criteria and all interest payments have been made when due. The presentation of internal debt depicts a net debt position which represents the upstream of internal loans from business operations to corporate and holding entities net of tangible assets held by these entities. The corporate net liabilities represent the element of the pension scheme deficit held centrally. The ratio of the Group's external debt plus subordinated debt to shareholders' funds was 20% (31 December 2005: 22%). Fixed charged cover on an EEV basis, which measures the extent to which external interest costs are covered by EEV operating profit, was 10.3 times (2005: 9.6 times). At 31 December 2006 the market value of the Group's external debt, subordinated debt, preference shares, including both the Aviva plc preference shares and the General Accident plc preference shares of Â£250 million, within minority interests, and direct capital instrument was Â£5,991 million (31 December 2005: Â£5,868 million), with a weighted average cost of 3.9% (31 December 2005: 3.8%). The Group WACC is 7.0% and has been calculated by reference to the cost of equity and cost of debt at the relevant date. The cost of equity at 31 December 2006 was 7.8%, based on a risk free rate of 4.7%, an equity market premium of 3% and a market beta of 1.0. ----------------------------------------------------------------------------------------------------------------------- Page 74 A1 Group capital structure (continued) Deployment of equity shareholders' funds 2006 2005 ----------------------------------------------------------- ------- Fixed income Other Other net Equities securities investments assets Total Total Â£m Â£m Â£m Â£m Â£m Â£m Assets Long-term savings 892 2,878 1,775 3,708 9,253 7,874 General insurance, health, and other business 3,980 948 2,587 (3,004) 4,511 5,397 -------------------------------------------------------------------------------------------------------------------- 4,872 3,826 4,362 704 13,764 13,271 Goodwill 3,127 2,491 Additional and acquired value of in-force long-term business and intangible assets 9,522 7,257 -------------------------------------------------------------------------------------------------------------------- Assets backing total capital employed in continuing operations 26,413 23,019 External debt (1,258) (1,002) Net Internal debt (1,360) (1,663) Subordinated debt (2,937) (2,808) -------------------------------------------------------------------------------------------------------------------- 20,858 17,546 Minority interests (2,137) (1,457) Direct capital instrument (990) (990) Preference capital (200) (200) -------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 17,531 14,899 ==================================================================================================================== Return on equity shareholders' funds 2006 2005 ----------------------------------- ---------- Opening After-tax equity Return Return return capital on equity on capital Â£m Â£m % % Long-term savings 1,403 15,598 9.0% 9.0% General insurance and health 1,090 5,581 19.5% 20.0% Other business 51 1,876 2.7% 9.3% Corporate (112) (36) 311.1% 30.6% --------------------------------------------------------------------------------------------------------------------- 2,432 23,019 10.6% 11.5% Borrowings (215) (5,473) 3.9% 4.5% --------------------------------------------------------------------------------------------------------------------- 2,217 17,546 12.6% 14.1% Minority interests (208) (1,457) 14.3% 16.1% Direct capital instrument (37) (990) 3.7% 2.9% Preference capital (17) (200) 8.5% 8.5% --------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 1,955 14,899 13.1% 15.0% ===================================================================================================================== The return on capital is calculated as the after-tax return on opening equity capital, based on Group operating profit, including Life EEV operating return, on continuing operations. ----------------------------------------------------------------------------------------------------------------------- Page 75 Sensitivity analysis The sensitivity of the Group's shareholders' funds on an EEV basis at 31 December 2006 to a 10% fall in global equity markets or a rise of 1% in global interest rates is as follows: 31 December 31 December Equities Interest rates 2005 2006 down 10% up 1% Â£bn Â£bn Â£bn Â£bn 15.6 Long-term savings* 19.7 18.8 19.2 7.4 General insurance and other 6.8 6.3 6.6 (5.5) Borrowings** (5.6) (5.6) (5.6) -------------------------------------------------------------------------------------------------------------------- 17.5 Shareholders' funds 20.9 19.5 20.2 ==================================================================================================================== These sensitivities assume a full tax charge/credit on market value assumptions. * Assumes EEV assumptions adjusted to reflect revised bond yields. ** Comprising internal, external and subordinated debt, net of corporate tangible net assets. The table above incorporates the effect on the value of the pension scheme assets of a 10% decrease in equity and a 1% increase in fixed income bond yields. The latter sensitivity also assumes an equivalent movement in both inflation and discount rate (i.e. no change to real interest rates) and, therefore, incorporates the offsetting effects of these items on the pension scheme liabilities. A 1% increase in the discount rate only has the effect of reducing the pension scheme liability by Â£1.7 billion thereby enhancing shareholders' funds by Â£1.2 billion (after deducting tax). ----------------------------------------------------------------------------------------------------------------------- Page 76 A1 Group capital structure (continued) Shareholders' funds, including minority interests. 31 December 2006 31 December 2005 Closing shareholders' funds Closing shareholders' funds ------------------------------ ---------------------------- Internally Internally Note IFRS net generated Total IFRS net generated Total assets AVIF Equity assets AVIF Equity Â£m Â£m Â£m Â£m Â£m Â£m Life assurance 1 France 1,221 1,070 2,291 1,177 890 2,067 Ireland 971 48 1,019 410 72 482 Italy 688 115 803 639 88 727 Netherlands (including Belgium, Germany and Luxembourg) 2,860 977 3,837 2,229 826 3,055 Poland 202 517 719 193 465 658 Spain 845 530 1,375 790 438 1,228 Other Europe 64 42 106 56 102 158 United States 5 2,315 (27) 2,288 357 (25) 332 Other 380 116 496 345 85 430 International 9,546 3,388 12,934 6,196 2,941 9,137 United Kingdom 3,323 3,406 6,729 2,948 3,513 6,461 ---------------------------------------------------------------------------------------------------------------------- 12,869 6,794 19,663 9,144 6,454 15,598 ====================================================================================================================== General insurance and health 1,2 France 3 33 - 333 362 - 362 Ireland 423 - 423 545 - 545 Netherlands 684 - 684 553 - 553 Other Europe 286 - 286 302 - 302 Canada 666 - 666 848 - 848 Other 250 - 250 246 - 246 International 2,642 - 2,642 2,856 - 2,856 United Kingdom 2,702 - 2,702 2,725 - 2,725 ---------------------------------------------------------------------------------------------------------------------- 5,344 - 5,344 5,581 - 5,581 ---------------------------------------------------------------------------------------------------------------------- Other business 1,2 1,425 - 1,425 1,876 - 1,876 Corporate (19) - (19) (36) - (36) External debt (1,258) - (1,258) (1,002) - (1,002) Internal debt (1,360) - (1,360) (1,663) - (1,663) Subordinated debt (2,937) - (2,937) (2,808) - (2,808) ---------------------------------------------------------------------------------------------------------------------- (4,149) - (4,149) (3,633) - (3,633) ---------------------------------------------------------------------------------------------------------------------- Shareholders' funds, including minority interests 14,064 6,794 20,858 11,092 6,454 17,546 ====================================================================================================================== Comprising Equities 4,872 - 4,872 4,503 - 4,503 Debt and fixed income securities 3,826 - 3,826 6,130 - 6,130 Property 2,610 - 2,610 957 - 957 Deposits and other investments 1,752 - 1,752 1,190 - 1,190 Intangible assets 3 5,855 6,794 12,649 3,294 6,454 9,748 Other net assets 704 - 704 491 - 491 Borrowings (5,555) - (5,555) (5,473) - (5,473) ---------------------------------------------------------------------------------------------------------------------- 14,064 6,794 20,858 11,092 6,454 17,546 ====================================================================================================================== Notes Germany has been reclassified from Other Europe to the Netherlands, Lithuania has been reclassified from Other Europe to Poland and Norwich Union's Dublin-based offshore life and savings business has been reclassified from Other Europe to the United Kingdom. IFRS net assets shown above include the allocation of tax assets and liabilities and hence differ from segmental net assets disclosed on pages 63 and 65. 1. Goodwill of Â£3,127 million (31 December 2005: Â£2,491 million) has been allocated as follows: life assurance Â£1,533 million (31 December 2005: Â£848 million); general insurance and health Â£390 million (31 December 2005: Â£398 million); other businesses Â£1,204 million (31 December 2005: Â£1,245 million). 2. Intangibles of Â£638 million (31 December 2005: Â£379 million) have been allocated as follows: life assurance Â£211 million (31 December 2005: nil); general insurance and health Â£287 million (31 December 2005: Â£265 million); other businesses Â£140 million (31 December 2005: Â£114 million). ----------------------------------------------------------------------------------------------------------------------- Page 77 A1 Group capital structure (continued) Notes (continued) 3. Total intangible assets of Â£12,649 million (31 December 2005: Â£9,748 million) comprise goodwill of Â£3,127 million (31 December 2005: Â£2,491 million); acquired value of in-force long-term business and intangibles of Â£2,728 million (31 December 2005: Â£803 million) and additional value of in-force long-term business of Â£6,794 million (31 December 2005: Â£6,454 million). The associated deferred tax liability on the intangibles of Â£224 million (31 December 2005: Â£123 million) is included within other net assets. 4. The post-tax pension fund deficit of Â£673 million (31 December 2005: Â£989 million) has been allocated as follows: life operations Â£179 million (31 December 2005: Â£363 million), general insurance and health: Â£458 million (31 December 2005: Â£532 million), other business Â£17 million (31 December 2005: Â£58 million) and corporate of Â£19 million (31 December 2005: Â£36 million). 5. AVIF is negative for the US life business due to the embedded value being below its balance sheet value on an IFRS basis. This is due to the cost of locked-in required capital under EEV which is not recognised under IFRS. Geographical analysis of return on capital employed For the year ended 31 December 2006 Opening shareholders' funds Operating return including minority Return on (Note 1) interests Capital ----------------------- ------------------- ---------- Note Before tax After tax Â£m Â£m Â£m % Life assurance France 402 264 2,067 12.8% Ireland (40) (35) 482 (7.3)% Italy 110 68 727 9.3% Netherlands (including Belgium, Germany and Luxembourg) 329 235 3,055 7.7% Poland 162 132 658 20.0% Spain 221 143 1,228 11.7% Other Europe (13) (10) 158 (6.3)% United States 32 21 332 6.3% Other 86 64 430 14.9% International 1,289 882 9,137 9.7% United Kingdom 744 521 6,461 8.1% -------------------------------------------------------------------------------------------------------------------- 2,033 1,403 15,598 9.0% General insurance and health France 63 41 362 11.3% Ireland 172 150 545 27.5% Netherlands 139 98 553 17.7% Other Europe 43 30 302 9.9% Canada 148 96 848 11.3% Other 40 28 246 11.4% International 605 443 2,856 15.5% United Kingdom 924 647 2,725 23.7% -------------------------------------------------------------------------------------------------------------------- 1,529 1,090 5,581 19.5% Other business 73 51 1,876 2.7% Corporate (83) (112) (36) 311.1% External debt (61) (43) (1,002) 4.3% Net internal debt 2 (77) (54) (1,663) 3.2% Subordinated debt (169) (118) (2,808) 4.2% -------------------------------------------------------------------------------------------------------------------- 3,245 2,217 17,546 12.6% ==================================================================================================================== Notes 1. The operating return is based upon Group operating profit, which is stated before impairment of goodwill, amortisation of additional value of in-force business, exceptional items and tax including policyholder tax, adjusted for the short-term fluctuation in investment return. 2. The return before tax of Â£(77) million comprises investment return of Â£151 million and unallocated interest of Â£(228) million. ----------------------------------------------------------------------------------------------------------------------- Page 78 A1 Group capital structure (continued) Geographical analysis of return on capital employed (continued) For the year ended 31 December 2005 Opening Shareholders' funds Operating return including minority Return on (Note 1) interests Capital ----------------------- ------------------- ---------- Note Before tax After tax Â£m Â£m Â£m % Life assurance France 321 209 1,819 11.5% Ireland 20 17 651 2.6% Italy 96 60 550 10.9% Netherlands (including Belgium, Germany and Luxembourg) 348 236 2,485 9.5% Poland 132 107 557 19.2% Spain 214 139 1,040 13.4% Other Europe (5) (4) 196 (2.0)% United States 25 16 379 4.2% Other 74 55 267 20.6% International 1,225 835 7,944 10.5% United Kingdom 589 413 5,882 7.0% -------------------------------------------------------------------------------------------------------------------- 1,814 1,248 13,826 9.0% General insurance and health France 35 23 416 5.5% Ireland 171 150 498 30.1% Netherlands 137 94 461 20.4% Other Europe 47 32 162 19.8% Canada 147 95 687 13.8% Other 40 28 277 10.1% International 577 422 2,501 16.9% United Kingdom 827 580 2,504 23.2% -------------------------------------------------------------------------------------------------------------------- 1,404 1,002 5,005 20.0% Other business 111 78 838 9.3% Corporate (104) (114) (372) 30.6% External debt (79) (67) (1,452) 4.6% Net internal debt 2 (73) (52) (987) 5.3% Subordinated debt (169) (118) (2,847) 4.1% -------------------------------------------------------------------------------------------------------------------- 2,904 1,977 14,011 14.1% ==================================================================================================================== Notes Germany has been reclassified from Other Europe to the Netherlands, Lithuania has been reclassified from Other Europe to Poland and Norwich Union's Dublin-based offshore life and savings business has been reclassified from Other Europe to the United Kingdom. 1. The operating return is based upon Group operating profit, which is stated before impairment of goodwill, amortisation of additional value of in-force business, exceptional items and tax including policyholder tax, adjusted for the short-term fluctuation in investment return. 2. The return before tax of Â£(73) million comprises investment return of Â£147 million and unallocated interest of Â£(220) million. ----------------------------------------------------------------------------------------------------------------------- Page 79 Group Capital Resources From 1 January 2005 insurance groups are required to report the capital adequacy to the FSA. UK insurers are required to disclose in respect of its ultimate insurance parent undertaking the Group Capital Resources (GCR), the Capital Resources Requirement (CRR) and the resulting surplus or deficit. From 31 December 2006 Prudential sourcebook for insurers INSPRU 6.1.15R requires UK insurers to meet this requirement at the ultimate EEA insurance parent level. The statement for 2006 is given in the table below. This information represents the group solvency surplus calculated in accordance with the INSPRU 6.1. 31 December 2006 --------------------------------- UK Life Other Group Funds business Total Â£bn Â£bn Â£bn Group Capital Resources 7.9 8.1 16.0 Less: Capital Resources Requirement (7.9) (4.5) (12.4) -------------------------------------------------------------------------------------------------------------------- Group surplus - 3.6 3.6 ==================================================================================================================== In 2006, the FSA further extended the requirement to reconcile Group capital resources on regulatory basis to the Group's capital resources on a statutory reporting basis. In addition, this reconciliation provides further analysis of differences between the Group capital resources and the amounts included in the capital statement made in accordance with FRS 27 and disclosed in the Group consolidated accounts. This reconciliation is given in the second table below. The Group Capital Adequacy Report is prepared in accordance with the FSA's valuation rules (Peak 1) and brings in capital in respect of the UK life funds equal to the UK Life Capital Resources Requirement. The FRS 27 disclosure brings in the realistic value of with-profit capital resources (Peak 2). As the two bases differ greatly, the reconciliation below is presented by removing the restricted regulatory assets and then replacing them with the unrestricted realistic assets. PS06/14 does not have a significant impact on the solvency result in 2006 on a regulatory basis. Although excess assets increased in the individual UK life entities, there is a minimal effect for Group solvency as the capital resources are restricted to the value of the capital resources requirement. 31 December 2006 Â£bn Total capital and reserves (IFRS basis) 14.1 Plus: other qualifying capital 3.1 Plus: UK Life Funds 7.9 Less: Goodwill, acquired AVIF and intangible assets (5.6) Less: adjustments onto a regulatory basis (3.5) --------------------------------------------------------------------------------------------------------------------- Group Capital Resources on regulatory basis 16.0 ===================================================================================================================== The Group Capital Resources can be analysed as follows: Core Tier 1 Capital 14.9 Innovative Tier 1 Capital 1.0 --------------------------------------------------------------------------------------------------------------------- Total Tier 1 Capital 15.9 Upper Tier 2 Capital 1.7 Lower Tier 2 Capital 1.9 Group Capital Resources Deductions (3.5) --------------------------------------------------------------------------------------------------------------------- Group Capital Resources on regulatory basis (Tier 1 & Tier 2 Capital) 16.0 ===================================================================================================================== Less: UK life restricted regulatory assets (7.9) Add: UK life unrestricted realistic assets 8.8 Add: Overseas UDS - restricted asset 2.6 --------------------------------------------------------------------------------------------------------------------- Total FRS 27 capital 19.5 ===================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Appendix A2 FRS 27 disclosures Page Capital statement Available capital resources 80 Analysis of liabilities 80 Analysis of movements in capital 81 Financial guarantees and options a) UK Life with-profits business 83 b) UK Life non-profits business 84 c) Overseas life business i) France 84 ii) Netherlands 84 iii) Ireland 85 iv) Spain and Italy 85 v) United States 85 ----------------------------------------------------------------------------------------------------------------------- Page 80 A2 FRS 27 disclosures Capital statement FRS 27 requires us to produce a capital statement which sets out the financial strength of our Group entities and provides an analysis of the disposition and constraints over the availability of capital to meet risks and regulatory requirements. The capital statement also provides a reconciliation of shareholders' funds to regulatory capital. The analysis below sets out the Group's available capital resources. Available capital resources 2006 2005 ------------------------------------------------------------------------------------------------- ----- Total CGNU CULAC NUL&P UK life Other UK Total UK Overseas Total with-profit with-profit with-profit with-profit life life life life Other fund fund fund*** funds opr's opr's opr's opr's opr's^ Total Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Total shareholders' funds 35 34 35 104 3,219 3,323 9,546 12,869 1,195 14,064 11,092 Total other sources of capital* - - - - 200 200 153 353 2,737 3,090 2,941 Unallocated divisible surplus 2,211 2,264 2,303 6,778 - 6,778 2,687 9,465 - 9,465 8,978 Adjustments onto a regulatory basis: Shareholders' share of accrued bonus (79) (87) (564) (730) - (730) - (730) - (730) (700) Goodwill, acquired value of in-force long-term business and intangibles - - - - (68) (68) (3,549) (3,617) (2,021) (5,638) (3,077) Regulatory valuation and admissibility restrictions** 381 268 49 698 (1,438) (740) 453 (287) (459) (746) (1,211) ---------------------------------------------------------------------------------------------------------------------- Total available capital 2,548 2,479 1,823 6,850 1,913 8,763 9,290 18,053 1,452 19,505 18,023 ====================================================================================================================== Analysis of liabilities: Participating insurance liabilities 9,755 9,116 18,258 37,129 2,853 39,982 23,723 63,705 - 63,705 59,958 Unit-linked liabilities - - - - 6,221 6,221 14,783 21,004 - 21,004 17,999 Other non-participating life insurance 1,157 1,857 705 3,719 13,557 17,276 24,239 41,515 - 41,515 36,219 ---------------------------------------------------------------------------------------------------------------------- Total insurance liabilities 10,912 10,973 18,963 40,848 22,631 63,479 62,745 126,224 - 126,224 114,176 Participating investment liabilities 2,001 2,413 7,833 12,247 2,817 15,064 34,336 49,400 - 49,400 47,258 Non-participating investment liabilities 53 18 - 71 22,840 22,911 16,047 38,958 - 38,958 30,051 ---------------------------------------------------------------------------------------------------------------------- Total investment liabilities 2,054 2,431 7,833 12,318 25,657 37,975 50,383 88,358 - 88,358 77,309 ---------------------------------------------------------------------------------------------------------------------- Total liabilities 12,966 13,404 26,796 53,166 48,288 101,454 113,128 214,582 - 214,582 191,485 ====================================================================================================================== * Other sources of capital include subordinated debt of Â£2,937 million issued by Aviva and Â£153 million of other qualifying capital issued by Dutch, Italian and US subsidiary undertakings ** Including adjustments for minorities *** Includes the Provident Mutual with-profit fund ^ Other operations include general insurance and fund management business The regulatory and valuation admissibility restrictions for 2005 have been changed following a revised application of the technical rules. This has increased total capital resources by Â£4.4 billion, all attributable to life operations. ----------------------------------------------------------------------------------------------------------------------- Page 81 A2 FRS 27 disclosures (continued) Analysis of movements in capital For the year ended 31 December 2006 CGNU CULAC NUL&P Total UK Other UK Total UK Overseas Total with-profit with-profit with-profit life with- life life life life fund fund fund profit funds operations operations operations operations Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Opening available capital resources 2,103 1,941 1,249 5,293 2,044 7,337 8,677 16,014 Effect of new business (56) (49) - (105) (351) (456) (163) (619) Expected change in available capital resources 106 185 404 695 338 1,033 471 1,504 Variance between actual and expected experience 293 288 (4) 577 4 581 (490) 91 Effect of operating assumption changes 75 159 51 285 478 763 (27) 736 Effect of economic assumption changes 136 151 383 670 54 724 48 772 Effect of changes in management policy (53) (83) (143) (279) - (279) (7) (286) Transfers, acquisitions and disposals - - - - - - 617 617 Foreign exchange movements - - - - - - (202) (202) Other movements (56) (113) (117) (286) (654) (940) 366 (574) ---------------------------------------------------------------------------------------------------------------------- Closing available capital resources 2,548 2,479 1,823 6,850 1,913 8,763 9,290 18,053 ====================================================================================================================== The analysis of movements in capital provides an explanation of the movement in available capital of the Group's life assurance business for the year. This analysis is intended to give an understanding of the underlying causes of the changes in the available capital of the Group's life assurance business, and provides a distinction between some of the key factors affecting the available capital. For the UK with-profit funds, the increase in available capital in the year has been driven by the favourable economic environment. Equity performance was positive, which had a direct effect on the equity content of the estate assets and an indirect impact from the reduction in maturity guarantee costs. Fixed interest yields have generally increased. Although this led to a reduction in the market value of fixed interest assets, it also resulted in a reduction of guarantee costs, with the increase in yield having a net benefit to the estates of all the funds. Also, the implied market volatility for equities has reduced lowering the assumed future asset share volatility particularly in CGNU and CULAC, and consequently guarantee costs are reduced. The changes in management policy relate to the review of bonus rates for with-profit business. The capital position of the other UK life operations was augmented by changes to reserving for UK non-profit business permitted under the FSA Policy Statement 06 /14 Prudential Changes for Insurers which are included in operating assumption changes. For the overseas life operations, the negative variance between the actual and expected experience is driven mainly by the increase in market interest rates, which has led to a reduction in the market value of fixed interest assets and consequential reduction of the unallocated divisible surplus in France and other European businesses. ---------------------------------------------------------------------------------------------------------------------- Page 82 A2 FRS 27 disclosures (continued) In aggregate, the Group has at its disposal total available capital of Â£19.5 billion (2005: Â£18.0 billion), representing the aggregation of the solvency capital of all of our businesses. This capital is available to meet risks and regulatory requirements set by reference to local guidance and EU directives. After effecting the year end transfer to shareholders the UK with-profit funds' available capital of Â£6.9 billion (2005: Â£5.2 billion) can only be used to provide support for UK with-profits business and is not available to cover other shareholder risks. This is comfortably in excess of the required capital margin and, therefore, the shareholders are not required to provide further capital support to this business. For the remaining life and general insurance operations, the total available capital amounting to Â£12.6 billion (2005: Â£12.8 billion) is significantly higher than the minimum requirements established by regulators and, in principle, the excess is available to shareholders. In practice, management will hold higher levels of capital within each business operation to provide appropriate cover for risk. As the total available capital of Â£19.5 billion is arrived at on the basis of local regulatory guidance, which evaluates assets and liabilities prudently, it understates the economic capital of the business which is considerably higher. This is a limitation of the Group Capital Statement which, to be more meaningful, needs to evaluate available capital on an economic basis and compare it with the risk capital required for each individual operation, after allowing for the considerable diversification benefits that exist in our Group. Within the Aviva group there exist intra-group arrangements to provide capital to particular business units. Included within these arrangements is a subordinated loan of Â£200 million from Aviva plc to the NUL&P non-profit fund to provide capital to support the writing of new business. The available capital of the Group's with-profit funds is determined in accordance with the 'Realistic balance sheet' regime prescribed by the FSA's regulations, under which liabilities to policyholders include both declared bonuses and the constructive obligation for future bonuses not yet declared. The available capital resources include an estimate of the value of their respective estates, included as part of the unallocated divisible surplus. The estate represents the surplus in the fund that is in excess of any constructive obligation to policyholders. It represents capital resources of the individual with-profit fund to which it relates and is available to meet regulatory and other solvency requirements of the fund and, in certain circumstances, additional liabilities may arise. The liabilities included in the balance sheet for the with-profit funds do not include the amount representing the shareholders' portion of future bonuses. However, the shareholders' portion is treated as a deduction from capital that is available to meet regulatory requirements and is therefore shown as a separate adjustment in the capital statement. In accordance with the FSA's realistic capital regime, the Group is required to hold sufficient capital in its UK life with-profit funds to meet the FSA capital requirements, based on the risk capital margin (RCM). The determination of the RCM depends on various actuarial and other assumptions about potential changes in market prices, and the actions management would take in the event of particular adverse changes in market conditions. The table below provides the information on the UK with-profits funds on a realistic basis. 31 December 31 December 2006 2005 -------------------------------------------------------------------------- Realistic Risk Realistic Realistic inherited capital assets liabilities estate margin Excess Excess Â£bn Â£bn Â£bn Â£bn Â£bn Â£bn CGNU Life 14.3 (11.8) 2.5 (0.5) 2.0 1.6 CULAC 14.1 (11.6) 2.5 (0.5) 2.0 1.3 NUL&P 27.7 (25.9) 1.8 (0.6) 1.2 0.4 ----------------------------------------------------------------------------------------------------------------------- Aggregate 56.1 (49.3) 6.8 (1.6) 5.2 3.3 ======================================================================================================================- * These realistic liabilities include the shareholders' share of future bonuses of Â£0.7 billion (31 December 2005: Â£0.7 billion). Realistic liabilities adjusted to eliminate the shareholders' share of future bonuses are Â£48.6 billion (31 December 2005: Â£50.5 billion). ** These realistic liabilities make provision for guarantees and promises on a market consistent stochastic basis. The value of the provision included within the realistic liabilities is Â£0.5 billion, Â£0.7 billion and Â£3.0 billion for CGNU Life, CULAC and NUL&P, respectively (31 December 2005: Â£0.7 billion, Â£0.9 billion and Â£3.4 billion for CGNU Life, CULAC and NUL&P respectively). *** The risk capital margin (RCM) is 4.2 times covered by the inherited estate (31 December 2005: 2.7 times). ----------------------------------------------------------------------------------------------------------------------- Page 83 A2 FRS 27 disclosures (continued) Under the FSA regulatory regime, UK with-profit funds are required to hold capital equivalent to the greater of their regulatory requirement based on EU Directive ('regulatory peak') and the FSA realistic basis ('realistic peak') described above. For UK non-participating business, the relevant capital requirement is the minimum solvency requirement determined in accordance with FSA regulations. For overseas life businesses, the amount shown is the minimum requirement under the locally applicable regulatory regimes. For UK general insurance businesses, the relevant capital requirement is the minimum solvency requirement determined in accordance with the FSA requirements. For overseas business in the EEA, US, Canada, Australia, Hong Kong and Singapore, the available capital and the minimum capital requirement are calculated under the locally applicable regulatory regimes. The businesses outside these territories are subject to the FSA rules for the purposes of calculation of available capital and capital resource requirement. For fund management and other businesses, the relevant capital requirement is the minimum solvency requirement determined in accordance with the local regulator's requirements for the specific class of business. All businesses hold sufficient available capital to meet their minimum capital requirement. The available capital resources in each regulated entity are generally subject to restrictions as to their availability to meet requirements that may arise elsewhere in the Group. The principal restrictions are: (i) UK with-profit funds (CGNU Life, CULAC and NUL&P) - any available surplus held in each fund can only be used to meet the requirements of the fund itself or be distributed to policyholders and shareholders. With-profit policyholders are entitled to at least 90% of the distributed profits while the shareholders receive the balance. The latter distribution would be subject to a tax charge, which is met by the fund in the case of CGNU Life, CULAC and NUL&P. (ii) UK non-participating funds - any available surplus held in these is attributable to shareholders. Capital within the non-profit funds may be made available to meet requirements elsewhere in the Group subject to meeting the regulatory requirements of the fund. Any transfer of the surplus may give rise to a tax charge subject to availability of tax relief elsewhere in the Group. (iii) Overseas life operations - the capital requirements and corresponding regulatory capital held by overseas businesses are calculated using the locally applicable regulatory regime. The available capital resources in all these businesses are subject to local regulatory restrictions which may constrain management's ability to utilise these in other parts of the Group. Any transfer of available capital may give rise to a tax charge subject to availability of tax relief elsewhere in the Group. (iv) General insurance operations - the capital requirements and corresponding regulatory capital held by overseas businesses are calculated using the locally applicable regulatory regime. The available capital resources in all these businesses are subject to local regulatory restrictions which may constrain management's ability to utilise these in other parts of the Group. Any transfer of available capital may give rise to a tax charge, subject to availability of tax relief elsewhere in the Group. Financial guarantees and options As a normal part of their operating activities, various Group companies have given guarantees and options, including investment return guarantees, in respect of certain long-term insurance and fund management products. (a) UK Life with-profits business In the UK, life insurers are required to comply with the FSA's realistic reporting regime for their with-profit funds for the calculation of FSA liabilities. Under the FSA's rules, provision for guarantees and options within realistic liabilities must be measured at fair value, using market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising from uncertainty surrounding future economic conditions. The material guarantees and options to which this provision relates are: (i) Maturity value guarantees - Substantially all of the conventional with-profit business and a significant proportion of unitised with-profit business have minimum maturity values reflecting the sums assured plus declared annual bonus. In addition, the guarantee fund has offered maturity value guarantees on certain unit-linked products. (ii) No market valuation reduction (MVR) guarantees - For unitised business, there are a number of circumstances where a 'no MVR' guarantee is applied, for example on certain policy anniversaries, guaranteeing that no market value reduction will be applied to reflect the difference between the accumulated value of units and the market value of the underlying assets. (iii) Guaranteed annuity options - The Group's UK with-profit funds have written individual and group pensions which contain guaranteed annuity rate options (GAOs), where the policyholder has the option to take the benefits from a policy in the form of an annuity based on guaranteed conversion rates. The Group also has exposure to GAOs and similar options on deferred annuities. (iv) Guaranteed minimum pension - The Group's UK with-profit funds also have certain policies which contain a guaranteed minimum level of pensions as part of the condition of the original transfer from state benefits to the policy. In addition, while these do not constitute guarantees, the with-profit fund companies made promises to certain policyholders in relation to their with-profit mortgage endowments. Subject to certain conditions, top-up payments will be made on these policies at maturity to meet the mortgage value up to a maximum of the 31 December 1999 illustrated shortfall. ---------------------------------------------------------------------------------------------------------------------- Page 84 A2 FRS 27 disclosures (continued) (b) UK Life non-profit business The Group's UK non-profit funds are evaluated by reference to local statutory reserving rules, including changes introduced in 2006 under the FSA Policy Statement 06/14 Prudential Changes for insurers. (i) Guaranteed annuity options - Similar options to those written in the with-profit fund have been written in relation to non-profit products. Provision for these guarantees does not materially differ from a provision based on a market-consistent stochastic model, and amounts to Â£39 million at 31 December 2006 (2005: Â£44 million). (ii) Guaranteed unit price on certain products - Certain unit-linked pension products linked to long-term life insurance funds provide policyholders with guaranteed benefits at retirement or death. No additional provision is made for this guarantee as the investment management strategy for these funds is designed to ensure that the guarantee can be met from the fund, mitigating the impact of large falls in investment values and interest rates. (c) Overseas life businesses In addition to guarantees written within the Group's UK life businesses, our overseas businesses have also written contracts containing guarantees and options. Details of the significant guarantees and options provided by overseas life businesses are set out below. (i) France Guaranteed surrender value and guaranteed minimum bonuses Aviva France has written a number of contracts with such guarantees. The guaranteed surrender value is the accumulated value of the contract including accrued bonuses. Bonuses are based on accounting income from amortised bond portfolios, where the duration of bond portfolios is set in relation to the expected duration of the policies, plus income and releases from realised gains on equity-type investments. Policy reserves are equal to guaranteed surrender values. Local statutory accounting envisages the establishment of a reserve, 'Provision pour Aleas Financiers' (PAF), when accounting income is less than 125% of guaranteed minimum credited returns. No PAF was established at the end of 2006. The most significant of these contracts is the AFER Euro fund which has total liabilities of Â£21 billion at 31 December 2006 (2005: Â£22 billion). The guaranteed bonus on this contract equals 65% of the average of the last two years' declared bonus rates (or 60% of the TME index rates if higher) and was 3.30% for 2006 (2005: 3.51%) compared with an accounting income from the fund of 4.81% (2005: 4.91%). Non-AFER contracts with guaranteed surrender values had liabilities of Â£6 billion (2005: Â£7 billion) at 31 December 2006 and guaranteed annual bonus rates are between 0% and 4.5% on 98.3% of liabilities. For non-AFER business, the accounting income return exceeded guaranteed bonus rates in 2006. Guaranteed death and maturity benefits In France, the Group has also sold unit-linked policies where the death and/or maturity benefit is guaranteed to be at least equal to the premiums paid. The reserve held in the Group's consolidated balance sheet at the end of 2006 for this guarantee is Â£8 million (2005: Â£14 million). The reserve is calculated on a prudent basis and is in excess of the economic liability. At the end of 2006, total sums at risk for these contracts were Â£38 million (2005: Â£73 million) out of total unit-linked funds of Â£13 billion (2005: Â£8 billion). The average age of policyholders was approximately 53. It is estimated that the economic liability would increase by Â£3 million (2005: Â£1 million) if yields were to decrease by 1% per annum and by Â£2 million (2005: Â£0.1 million) if equity markets were to decline by 10% from year end 2006 levels. These figures do not reflect our ability to review the tariff for this option. (ii)Netherlands Guaranteed minimum return at maturity In the Netherlands, it is market practice to guarantee a minimum return at maturity on traditional savings and pensions contracts. Guarantees on older lines of business are 4% per annum while, for business written since 1 September 1999, the guarantee is 3% per annum. On group pensions business, it is often possible to recapture guarantee costs through adjustments to surrender values or to premium rates. On transition to IFRS, Delta Lloyd changed the reserving basis for most traditional contracts to reflect current market interest rates, for consistency with the reporting of assets at market value. The cost of meeting interest rate guarantees is allowed for directly in the liabilities. Although most traditional contracts are valued at market interest rate, the split by level of guarantee shown below is according to the original underlying guarantee. The total liabilities for traditional business at 31 December 2006 are Â£8 billion (2005: Â£8 billion) analysed as follows: Liabilities Liabilities Liabilities Liabilities 3% guarantee 3% guarantee 4% guarantee 4% guarantee 31 December 2006 31 December 2005 31 December 2006 31 December 2005 Â£m Â£m Â£m Â£m Individual 1,222 1,148 2,989 3,074 Group pensions 518 408 3,180 3,333 ---------------------------------------------------------------------------------------------------------------------- Total 1,740 1,556 6,169 6,407 ====================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 85 A2 FRS 27 disclosures (continued) Delta Lloyd has certain unit-linked contracts which provide a guaranteed minimum return at maturity from 4% pa to 2% pa. Provisions consist of unit values plus an additional reserve for the guarantee. The additional provision for the guarantee was Â£76 million (2005: Â£127 million). An additional provision of Â£43 million (2005: Â£77 million) in respect of investment return guarantees on group segregated fund business is held. It is estimated that the provision would increase by Â£163 million (2005: Â£293 million) if yields were to reduce by 1% pa and by Â£25 million (2005: Â£44 million) if equity markets were to decline by 10% from year end 2006 levels. (iii) Ireland Guaranteed annuity options Products with similar GAOs to those offered in the UK have been issued in Ireland. The current net of reinsurance provision for such options is Â£152 million (2005: Â£145 million). This has been calculated on a deterministic basis, making conservative assumptions for the factors which influence the cost of the guarantee, principally annuitant mortality and long-term interest rates. These GAOs are 'in the money' at current interest rates but the exposure to interest rates under these contracts has been hedged through the use of reinsurance, using derivatives (swaptions). The swaptions effectively guarantee that an interest rate of 5% will be available at the vesting date of these benefits so there is no exposure to a further decrease in interest rates. 'No MVR' guarantees Certain unitised with-profit policies containing 'no MVR' guarantees, similar to those in the UK, have been sold in Ireland. These guarantees are currently 'out-of-the-money' by Â£69 million (2005: Â£84 million). This has been calculated on a deterministic basis as the excess of the current policy surrender value over the discounted value (excluding terminal bonus) of the guarantees. The value of these guarantees is sensitive to the performance of investments held in the with-profit fund. Amounts payable under these guarantees are determined by the bonuses declared on these policies. It is estimated that the guarantees would be out-of-the-money by Â£74 million (2005: Â£74 million) if yields were to increase by 1% per annum and by Â£31 million (2005: Â£39 million) if equity markets were to decline by 10% from year end 2006 levels. Return of premium guarantee In 2005 Hibernian Life wrote two tranches of linked bonds with a return of premium guarantee after five or six years. The provision for these at the end of 2006 is Â£nil (2005: Â£3 million). It is expected that the provision would not increase if equity markets were to decline by 10% from year end 2006 levels. We would not expect any significant impact on this provision as a result of interest movements. (iv)Spain and Italy Guaranteed investment returns and guaranteed surrender values The Group has also written contracts containing guaranteed investment returns and guaranteed surrender values in both Spain and Italy. Traditional profit-sharing products receive an appropriate share of the investment return, assessed on a book value basis, subject to a guaranteed minimum annual return of up to 6% in Spain and 4% in Italy on existing business, while on new business the maximum guaranteed rate is lower. Liabilities are generally taken as the face value of the contract plus, if required, an explicit provision for guarantees calculated in accordance with local regulations. At 31 December 2006, total liabilities for the Spanish business were Â£3 billion (2005: Â£2 billion) with a further reserve of Â£18 million (2005: Â£20 million) for guarantees. Total liabilities for the Italian business were Â£5 billion (2005: Â£4 billion), with a further provision of Â£46 million (2005: Â£55 million) for guarantees. Liabilities are most sensitive to changes in the level of interest rates. It is estimated that provisions for guarantees would need to increase by Â£66 million (2005: Â£66 million) in Spain and Â£9 million (2005: Â£12 million) in Italy if interest rates fell by 1% from end 2006 values. Under this sensitivity test, the guarantee provision in Spain is calculated conservatively, assuming a long-term market interest rate of 1.42% and no lapses or premium discontinuances. (v) United States Indexed and total return strategy products In the United States, the Group writes indexed life and deferred annuity products. These products guarantee the return of principal to the policyholder and credit interest based on certain indices, primarily the Standard & Poor's 500 Composite Stock Price Index. A portion of each premium is used to purchase call options to hedge the growth in interest credited to the policyholder. The call options held by the Group and the options embedded in the policy are both carried at fair value. At 31 December 2006, the total liabilities for indexed products were Â£5.4 billion. If interest rates were to increase by 1%, the provision for embedded options would decrease by Â£51 million and, if interest rates were to decrease by 1%, the provision would increase by Â£56 million. The Group has certain products that credit interest based on a total return strategy, whereby policyholders are allowed to allocate their premium payments to different asset classes within the general account. The Group guarantees a minimum return of premium plus approximately 3% interest over the term of the contracts. The linked general account assets are fixed maturity securities, and both the securities and the contract liabilities are carried at fair value. At 31 December 2006, the liabilities for total return strategy products were valued at Â£408 million. (d) Sensitivity In providing these guarantees and options, the Group's capital position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, real estate prices and equity prices. Interest rate guaranteed returns, such as those available on guaranteed annuity options (GAOs), are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made. ----------------------------------------------------------------------------------------------------------------------- Appendix B Additional disclosures The following additional disclosures have been extracted from the Group's 2006 Report and Accounts: Page Movements in insurance liabilities 86 (i) Movements in long-term business provisions 86 (ii) Movements in general insurance and health claims provisions 86 Long-term business investment liabilities 87 Movements in the year: (i) Participating investment contracts 87 (ii) Non-participating investment contracts 88 Loss development tables 88 Sensitivity analysis and capital management 90 Long-term business - impact on profit before tax 90 Long-term business - impact before tax on shareholders' equity 91 General insurance and health business - impact on profit before tax 91 General insurance and health business - impact before tax on shareholders' equity 91 Fund management and non-insurance businesses - impact on profit before tax 92 Fund management and non-insurance businesses - impact before tax on shareholders' equity 92 ----------------------------------------------------------------------------------------------------------------------- Page 86 Movements in insurance liabilities (i) Movements in long-term business provisions The long-term business provision is calculated separately for each of the Group's life operations. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, mainly using the net premium method, modified where necessary to reflect the requirements of the Companies Acts. Material judgement is required in calculating the provisions and is exercised particularly through the choice of assumptions where there is discretion over these. In turn, the assumptions used depend on the circumstances prevailing in each of the life operations. Provisions are most sensitive to assumptions regarding discount rates and mortality/ morbidity rates. Bonuses paid during the year are reflected in claims paid, whilst those allocated as part of the bonus declaration are included in the movements in the long-term business provision, as detailed below. The following movements have occurred in the long-term business provisions during the year: 2006 2005 Â£m Â£m Carrying amount at 1 January 114,430 106,491 Provisions in respect of new business 8,750 6,589 Expected change in existing business provisions (5,678) (2,703) Variance between actual and expected experience 1,209 3,784 Effect of adjusting to PS06/14 realistic basis (800) - Impact of other operating assumption changes (333) (1,034) Impact of economic assumption changes (1,727) 2,411 Other movements 314 340 ----------------------------------------------------------------------------------------------------------------------- Change in liability recognised as an expense 1,735 9,387 Effect of portfolio transfers, acquisitions and disposals 12,454 (360) Foreign exchange rate movements (2,005) (684) Other movements - (404) ----------------------------------------------------------------------------------------------------------------------- Carrying amount at 31 December 126,614 114,430 ======================================================================================================================= The impact on existing business of implementing FSA Policy Statement 06/14, Prudential Changes for Insurers, in 2006 is Â£132 million, arising mainly on expenses and persistency rates in both insurance and investment contracts. This is reflected in reductions in insurance contract liabilities of Â£800 million, investment contract liabilities of Â£105 million, reinsurance recoveries of Â£502 million and deferred acquisition costs of Â£271 million. The impact on new business in 2006 is Â£17 million, giving a total increase in pre-tax profit for the year of Â£149 million. (ii) Movements in general insurance and health claims provisions Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the balance sheet date. The reserves for general insurance and health are based on information currently available; however, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments. The following changes have occurred in the general insurance and health claims provisions during the year: 2006 2005 Â£m Â£m Carrying amount at 1 January 12,965 12,750 Impact of changes in assumptions 2 (6) Claim losses and expenses incurred in the current year 7,639 7,124 Decrease in estimated claim losses and expenses incurred in prior years (550) (372) ----------------------------------------------------------------------------------------------------------------------- Incurred claims losses and expenses 7,091 6,746 Less: Payments made on claims incurred in the current year (3,765) (3,379) Payments made on claims incurred in prior years (3,771) (3,407) Recoveries on claim payments 304 263 ----------------------------------------------------------------------------------------------------------------------- Claims payments made in the year, net of recoveries (7,232) (6,523) Other movements in the claims provisions (7) (9) ----------------------------------------------------------------------------------------------------------------------- Changes in claims reserve recognised as an expense (148) 214 Gross portfolio transfers, acquisitions and disposals 207 (153) Foreign exchange rate movements (306) 146 Other gross movements - 8 ----------------------------------------------------------------------------------------------------------------------- Carrying amount at 31 December 12,718 12,965 ======================================================================================================================= ------------------------------------------------------------------------------------------------------------------------ Page 87 Long-term business investment liabilities Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer, and are therefore treated as financial instruments under IFRS. Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits and are referred to as participating contracts. They are not measured at fair value as there is currently no agreed definition of fair valuation for discretionary features under IFRS. In the absence of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB has deferred consideration of participating contracts to Phase ll of its insurance contracts project. For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus. Investment contracts that do not contain a discretionary participation feature are referred to as non-participating contracts and the liability is measured at either fair value or amortised cost. Most non-participating investment contracts measured at fair value are unit-linked in structure and the fair value liability is equal to the unit reserve plus additional non-unit reserves if required on a fair value basis. For this business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term. In the United States, funding agreements consist of one to ten year fixed rate contracts. These contracts may not be cancelled by the holders unless there is a default under the agreement, but may be terminated by Aviva at any time. The weighted average interest rates for fixed-rate and floating-rate funding agreements in 2006 were 5.07% and 5.55%, respectively. The funding agreements are measured at fair value equal to the present value of contractual cash flows. There is a small volume of annuity certain business for which the liability is measured at amortised cost using the effective interest method. The fair value of contract liabilities measured at amortised cost is not materially different from the amortised cost liability. Movements in the year The following movements have occurred in the year: (i) Participating investment contracts 2006 2005 Â£m Â£m Carrying amount at 1 January 47,258 43,974 Provisions in respect of new business 3,001 3,467 Expected change in existing business provisions (2,237) (1,720) Variance between actual and expected experience 2,131 2,034 Effect of adjusting to PS06/14 realistic basis (105) - Impact of other operating assumption changes (43) 5 Impact of economic assumption changes (125) 513 Other movements 51 (153) ---------------------------------------------------------------------------------------------------------------------- Change in liability 2,673 4,146 Effect of portfolio transfers, acquisitions and disposals 125 4 Foreign exchange rate movements (656) (856) Other movements - (10) ---------------------------------------------------------------------------------------------------------------------- Carrying amount at 31 December 49,400 47,258 ====================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 88 (ii) Non-participating investment contracts 2006 2005 Â£m Â£m Carrying amount at 1 January 30,051 25,581 Provisions in respect of new business 5,695 5,247 Expected change in existing business provisions (163) 936 Variance between actual and expected experience 265 (1,732) Impact of operating assumption changes 15 2 Impact of economic assumption changes (5) - Other movements 56 93 ---------------------------------------------------------------------------------------------------------------------- Change in liability 5,863 4,546 Effect of portfolio transfers, acquisitions and disposals 3,396 - Foreign exchange rate movements (352) (76) ---------------------------------------------------------------------------------------------------------------------- Carrying amount at 31 December 38,958 30,051 ====================================================================================================================== Loss development tables The following table presents the development of claim payments and the estimated ultimate cost of claims for the accident years 2001 to 2006. The upper half of the table shows the cumulative amounts paid during successive years related to each accident year. For example, with respect to the accident year 2002, by the end of 2006 Â£5,297 million had actually been paid in settlement of claims. In addition, as reflected in the lower section of the table, the original estimated ultimate cost of claims of Â£6,037 million was re-estimated to be Â£5,912 million at 31 December 2006. This decrease from the original estimate is due to the combination of a number of factors. The original estimates will be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity. In 2005, the year of adoption of IFRS, only five years were required to be disclosed. This will be increased in each succeeding additional year, until ten years of information is included. The Group aims to maintain strong reserves in respect of its non-life and health business in order to protect against adverse future claim experience and development. As claims develop and the ultimate cost of claims become more certain, the absence of adverse claims experience will then result in a release of reserves from earlier accident years, as shown in the loss development table. However, in order to maintain strong reserves the Group transfers much of this release to current accident year (2006) reserves where the development of claims is less mature and there is much greater uncertainty attaching to the ultimate cost of claims. The release from prior accident year reserves during 2006 is also due to an improvement in the estimated ultimate cost of claims. ------------------------------------------------------------------------------------------------------------------------ Page 89 After the effect of reinsurance the loss development table is: All prior years 2001 2002 2003 2004 2005 2006 Total Accident Year Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Net cumulative claim payments At end of accident year (2,970) (2,913) (2,819) (2,870) (3,281) (3,612) One year later (4,624) (4,369) (4,158) (4,378) (4,925) Two years later (5,088) (4,779) (4,565) (4,712) Three years later (5,436) (5,064) (4,924) Four years later (5,648) (5,297) Five years later (5,763) Estimate of net cumulative claims At end of accident year 6,186 6,037 6,218 6,602 6,982 7,430 One year later 6,333 6,038 6,093 6,266 6,818 Two years later 6,321 5,997 6,037 6,082 Three years later 6,329 5,973 5,942 Four years later 6,286 5,912 Five years later 6,219 Estimate of cumulative claims 6,219 5,912 5,942 6,082 6,818 7,430 Cumulative payments (5,763) (5,297) (4,924) (4,712) (4,925) (3,612) ----------------------------------------------------------------------------------------------------------------------- 1,884 456 615 1,018 1,370 1,893 3,818 11,054 Effect of discounting (15) (4) (4) (5) (3) (4) (8) (43) ----------------------------------------------------------------------------------------------------------------------- Present value 1,869 452 611 1,013 1,367 1,889 3,810 11,011 Cumulative effect of foreign exchange movements - (7) (7) (10) (15) (53) - (92) Effect of acquisitions - - 1 4 7 34 15 61 ----------------------------------------------------------------------------------------------------------------------- Present value recognised in the balance sheet 1,869 445 605 1,007 1,359 1,870 3,825 10,980 ======================================================================================================================= In the loss development table shown above, the cumulative claim payments and estimates of cumulative claims for each accident year are translated into sterling at the exchange rates that applied at the end of that accident year. The impact of using varying exchange rates is shown at the bottom of the table. Disposals are dealt with by treating all outstanding and IBNR claims of the disposed of entity as 'paid' at the date of disposal. The table also includes information on asbestos and environmental pollution claims provisions from business written before 2001. The claims provisions, net of reinsurance, in respect of this business were Â£312 million (2005: Â£289 million). The movement in the year reflects strengthening of the provisions by Â£9 million (2005: Â£83 million) and timing differences between claim payments and reinsurance recoveries. ------------------------------------------------------------------------------------------------------------------------ Page 90 Sensitivity analysis and capital management The Group uses a number of sensitivity test-based risk management tools to understand the volatility of earnings, the volatility of its capital requirements, and to manage its capital more efficiently. Primarily EEV,Financial Condition Reporting (a medium term projection of the financial health of the business under a variety of economic and operating scenarios), and increasingly Individual Capital Assessment (ICA) are used. Sensitivities to economic and operating experience are regularly produced on all of the Group's financial performance measurements as part of the Group's decision making and planning process, and as part of the framework for identifying and quantifying the risks that each of its business units, and the Group as a whole are exposed to. For long-term business in particular, sensitivities of EEV performance indicators to changes in both economic and non-economic experience are continually used to manage the business and to inform the decision making process. More information on EEV sensitivities can be found in the presentation of results in the EEV section of this announcement. Life insurance and investment contracts The nature of long-term business is such that a number of assumptions are made in compiling the financial statements. Assumptions are made about investment returns, expenses, mortality rates, and persistency in connection with the in-force policies for each business unit. Assumptions are best estimates based on historic and expected experience of the business. General insurance and health business General insurance and health claim liabilities are estimated by using standard actuarial claims projection techniques. These methods extrapolate the claims development for each accident year based on the observed development of earlier years. In most cases, no explicit assumptions are made as projections are based on assumptions implicit in the historic claims development on which the projections are based. As such, in the analysis below, the sensitivity of general insurance claim liabilities is primarily based on the financial impact of changes to the reported loss ratio. Some results of sensitivity testing for long-term business and general insurance and health business are set out below. For each sensitivity test the impact of a change in a single factor is shown, with other assumptions left unchanged. Sensitivity Factor Description of sensitivity factor applied ---------------------------------------------------------------------------------------------------------------------- Interest rate & investment return The impact of a change in market interest rates by +/- 1% (e.g. if a current interest rate is 5%, the impact of an immediate change to 4% and 6%). The test allows consistently for similar changes to investment returns and movements in the market value of backing fixed interest securities. Equity / property market values The impact of a change in equity/property market values by +/- 10% Expenses The impact of an increase in maintenance expenses by 10% Assurance mortality/morbidity (life insurance only) The impact of an increase in mortality/morbidity rates for assurance contracts by 5% Annuitant mortality (life insurance only) The impact of a reduction in mortality rates for annuity contracts by 5% Gross loss ratios (non-life insurance only) The impact of an increase in gross loss ratios for general insurance and health business by 5% The above sensitivity factors are applied using actuarial and statistical models, with the following pre-tax impacts on profit and shareholders' equity at 31 December 2006: Long-term business Impact on profit before tax (Â£m) Interest Interest Equity/ Equity/ Assurance Annuitant rates rates property property Expenses mortality mortality +1% -1% +10% -10% +10% +5% -5% Insurance participating (5) - 35 (35) (5) - (5) Insurance non-participating 25 (210) 110 (130) - (20) (295) Investment participating (30) (35) 10 (10) (5) - - Investment non-participating (15) 15 40 (40) - - - Assets backing life shareholders'funds (280) 305 60 (60) - - - ---------------------------------------------------------------------------------------------------------------------- Total (305) 75 255 (275) (10) (20) (300) ====================================================================================================================== ------------------------------------------------------------------------------------------------------------------------ Page 91 Sensitivity analysis and capital management (continued) Impact before tax on shareholders' equity (Â£m) Interest Interest Equity/ Equity/ Assurance Annuitant rates rates property property Expenses mortality mortality +1% -1% +10% -10% +10% +5% -5% Insurance participating (25) 25 35 (35) (5) - (5) Insurance non-participating (240) 60 125 (140) - (20) (295) Investment participating (30) (35) 10 (10) (5) - - Investment non-participating (70) 70 40 (40) - - - Assets backing life shareholders'funds (320) 345 95 (95) - - - ---------------------------------------------------------------------------------------------------------------------- Total (685) 465 305 (320) (10) (20) (300) ====================================================================================================================== Sensitivities as at 31 December 2005 Impact on profit before tax (Â£m) Interest Interest Equity/ Equity/ Assurance Annuitant rates rates property property Expenses mortality mortality +1% -1% +10% -10% +10% +5% -5% Insurance participating 5 (35) 35 (35) (5) - - Insurance non-participating 60 (350) 105 (120) (5) (30) (295) Investment participating 10 (50) 10 (10) - - - Investment non-participating - - 35 (35) - - - Assets backing life shareholders'funds (225) 240 65 (65) - - - ---------------------------------------------------------------------------------------------------------------------- Total (150) (195) 250 (265) (10) (30) (295) ====================================================================================================================== Impact before tax on shareholders' equity (Â£m) Interest Interest Equity/ Equity/ Assurance Annuitant rates rates property property Expenses mortality mortality +1% -1% +10% -10% +10% +5% -5% Insurance participating (10) (20) 35 (35) (5) - - Insurance non-participating 20 (305) 120 (135) (5) (30) (295) Investment participating (10) (25) 10 (10) - - - Investment non-participating (5) - 35 (35) - - - Assets backing life shareholders'funds (240) 255 90 (90) - - - ---------------------------------------------------------------------------------------------------------------------- Total (245) (95) 290 (305) (10) (30) (295) ====================================================================================================================== Changes in sensitivities between 2005 and 2006 arise primarily from the acquisitions of Ark Life and AmerUs, and the effect of increases in market interest rates. The different impacts of the economic sensitivities on profit and shareholders' equity arise from classification of certain assets as available for sale in some business units, for which movements in unrealised gains or losses would be taken directly to shareholders' equity. The economic impacts on profit before tax for insurance contracts relate mainly to the effect of minimum return guarantees in the Netherlands. However in the case of the interest rate sensitivities, the impacts on shareholders' equity are more than offset by the effect of changes in the market value of fixed interest securities in the United States that are classified as available for sale. The mortality sensitivities relate primarily to the UK and Ireland. The impact on the Group's results from sensitivity to these assumptions can also be found in the EEV sensitivities included in the EEV section of this announcement. General insurance and health business Sensitivities as at 31 December 2006 Impact on profit before tax (Â£m) Interest Interest Equity/ Equity/ Gross loss rates rates property property Expenses ratios +1% -1% +10% -10% +10% +5% Net of reinsurance (270) 290 370 (370) (140) (325) Impact before tax on shareholders' equity (Â£m) Interest Interest Equity/ Equity/ Gross loss rates rates property property Expenses ratios +1% -1% +10% -10% +10% +5% Net of reinsurance (270) 290 370 (370) (35) (325) ----------------------------------------------------------------------------------------------------------------------- Page 92 Sensitivities as at 31 December 2005 Impact on profit before tax (Â£m) Interest Interest Equity/ Equity/ Gross loss rates rates property property Expenses ratios +1% -1% +10% -10% +10% +5% Net of reinsurance (275) 285 330 (330) (115) (305) Impact before tax on shareholders' equity (Â£m) Interest Interest Equity/ Equity/ Gross loss rates rates property property Expenses ratios +1% -1% +10% -10% +10% +5% Net of reinsurance (275) 285 330 (330) (30) (305) For general insurance, the impact of the expense sensitivity on profit also includes the increase in ongoing administration expenses, in addition to the increase in the claims handling expense provision. Fund management and non-insurance businesses Sensitivities as at 31 December 2006 Impact on profit before tax (Â£m) Interest Interest Equity/ Equity/ rates rates property property +1% -1% +10% -10% Total (26) 26 44 (44) Impact before tax on shareholders' equity (Â£m) Interest Interest Equity/ Equity/ rates rates property property +1% -1% +10% -10% Total (52) 51 78 (78) Sensitivities as at 31 December 2005 Impact on profit before tax (Â£m) Interest Interest Equity/ Equity/ rates rates property property +1% -1% +10% -10% Total (35) 35 26 (26) Impact before tax on shareholders' equity (Â£m) Interest Interest Equity/ Equity/ rates rates property property +1% -1% +10% -10% Total (70) 70 60 (60) Limitations of sensitivity analysis The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The sensitivity analyses do not take into consideration that the Group's assets and liabilities are actively managed. Additionally, the financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group's financial risk management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation, adjusting bonuses credited to policyholders, and taking other protective action. A number of the business units use passive assumptions to calculate their long-term business liabilities. Consequently, the actual impact of a change in the assumptions may not have any impact on the liabilities, whereas assets are held at market value on the balance sheet. In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in shareholder equity. Similarly, for general insurance liabilities, the interest rate sensitivities only affect profit and equity where explicit assumptions are made regarding interest (discount) rates or future inflation. Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Group's view of possible near-term market changes that cannot be predicted with any certainty; and the assumption that all interest rates move in an identical fashion. ----------------------------------------------------------------------------------------------------------------------- Page 93 Shareholder services Scrip dividend The Aviva Scrip Dividend Scheme (the 'Scheme') provides shareholders with the option of receiving new ordinary shares instead of cash dividends. Shareholders who have not already joined the Scheme but wish to do so should contact Lloyds TSB Registrars at the address on page 94 and request a mandate form. The mandate form will need to be received by Lloyds TSB Registrars no later than 18 April 2007 in order to be effective for the 2006 final dividend. Dividend payments direct to your bank account As an alternative to having dividends paid by cheque, shareholders can, if they wish, have them credited directly into their bank or building society account on the dividend payment date. For overseas shareholders, Transcontinental Account Payment Service (TAPS) is available, which allows shareholders in many countries to have dividends credited direct to their bank accounts in local currencies. To obtain further details and a mandate form please contact the Company's registrar at the address on page 94. For those private shareholders who currently receive dividends paid directly into their bank or building society account, it is now the Company's practice to issue one consolidated tax voucher each year instead of a voucher with each dividend payment. Shareholders who do not wish to receive this service and wish to continue to receive tax vouchers with each dividend may elect to do so by contacting the Company's registrar at the address on page 94. E-Communications Shareholders can receive communications electronically by logging onto www.aviva.com/shareholders and registering for shareholder e-communications. Shareholders will be able to access details of their Aviva shareholding online,elect to receive the Report and Accounts and other shareholder documentation electronically, update their address details online and elect to have their dividends paid directly into their bank or building society account. Share price Shareholders can access the current share price of Aviva ordinary shares at www.aviva.com or alternatively can call 0906 843 2197*. Share dealing facilities The Company has arranged the following services that can be used to buy or sell Aviva shares. Alternatively, if shareholders hold a share certificate they can also use any bank, building society or stockbroker offering share dealing facilities. If shareholders are in any doubt about buying or selling their shares they should seek professional financial advice. Share dealing facilities for UK shareholders/share account members To buy and sell shares over the telephone or internet shareholders can contact Shareview Dealing, arranged through Lloyds TSB Registrars. For telephone purchases or sales call 0870 850 0852** between 8.00am and 4.30pm, Monday to Friday and for internet purchases or sales log on to www.shareview.co.uk/dealing To buy or sell shares over the telephone, shareholders can contact Barclays Stockbrokers on 0870 549 3002** (if they hold a share certificate) or 0870 549 3001** (if they hold a share account statement). NatWest Stockbrokers provide a Share Dealing Service at certain branches for Aviva Share Account holders only. For more information contact NatWest Stockbrokers on 0845 122 0689. NatWest Stockbrokers Limited is operated by a joint venture between The Royal Bank of Scotland Group plc and The Toronto-Dominion Bank. Registered Number: 1959479 England. Registered Office: Waterhouse Square, 138-142 Holborn, London EC1N 2TH. Member of the London Stock Exchange and OFEX. Authorised and regulated by the Financial Services Authority. Share dealing facilities for overseas shareholders To sell Aviva shares over the telephone, shareholders can contact Barclays Stockbrokers on +44 (0)141 352 3959. Non UK residents will need to provide various documentation in order to use this service and details will be provided on registration. Please note that regulations prevent this service being offered to US residents. Settlement proceeds will be sent to either a UK sterling bank account or by sterling cheque. Amalgamating your shares If shareholders receive more than one copy of any shareholder communication, it may be because Aviva has more than one record of shareholdings in their name. To ensure that shareholders do not receive duplicate mailings in future, they can have all their shares amalgamated into one account by contacting Lloyds TSB Registrars at the address on page 94. ShareGift The Orr Mackintosh Foundation operates a purely voluntary charity share donation scheme for shareholders who wish to dispose of small numbers of shares whose value makes it uneconomical to sell them. Details of the scheme are available from ShareGift at www.sharegift.org or can be obtained from the Company's registrar. Shareholders with disabilities Alternative versions of this publication (including braille, large print and audio-tape) are available on request from the Company's registrar. *Calls are currently charged at 60 pence per minute at all times. The average time to access the share price is approximately one minute. ** All 0870 numbers are charged at national rates, and are only available if you are calling from the UK. For your protection and ours, to check instructions and maintain high quality service standards, we may record and monitor calls made to or from Barclay's Stockbrokers. New Business Development hours are 8.00am - 6.00pm Monday -Friday, excluding Bank Holidays. ------------------------------------------------------------------------------------------------------------------------ Page 94 Group financial calendar for 2007 ------------------------------------------------------------------------------------------------------------------------ Online publication of Aviva plc Annual Report and Accounts 2006 22 March Announcement of first quarter long-term savings new business figures 24 April Annual General Meeting 26 April Announcement of unaudited six months' interim results 9 August Announcement of third quarter long-term savings new business figures 25 October Ordinary Shares Ex-dividend date 7 March Record date 9 March Scrip dividend price available 14 March Last date for scrip dividend mandate forms to be received in order to be effective for 2006 final dividend 18 April Dividend payment date 17 May Preference Shares First dividend payment for 8 3/8% cumulative irredeemable preference shares 31 March First dividend payment for 8 3/4% cumulative irredeemable preference shares 30 June Second dividend payment for 8 3/8% cumulative irredeemable preference shares 30 September Second dividend payment for 8 3/4% cumulative irredeemable preference shares 31 December ----------------------------------------------------------------------------------------------------------------------- Useful contact details Detailed below are various addresses that shareholders may find useful if they have a query in respect of their shareholding. Please quote Aviva plc, as well as the name and address in which the shares are held, in all correspondence. ---------------------------------------------------------------------------------------------------------------------- The Causeway Worthing General shareholding queries Lloyds TSB Registrars West Sussex BN99 6DA 0870 600 3952 ---------------------------------------------------------------------------------------------------------------------- Tay House 300 Bath Street Corporate and single company Peps Barclays Stockbrokers Limited Glasgow G2 4LH 0870 514 3263 ---------------------------------------------------------------------------------------------------------------------- The Causeway Individual Savings Accounts(ISAs) Lloyds TSB Registrars Worthing (ISA Manager) West Sussex BN99 6DA 0870 242 4244 ---------------------------------------------------------------------------------------------------------------------- Internet sites Aviva owns various internet sites, most of which interlink with each other. ---------------------------------------------------------------------------------------------------------------------- Aviva Group www.aviva.com ---------------------------------------------------------------------------------------------------------------------- UK long-term savings and general insurance www.norwichunion.com ---------------------------------------------------------------------------------------------------------------------- Fund management www.morleyfm.com ---------------------------------------------------------------------------------------------------------------------- Aviva worldwide internet sites www.aviva.com/websites ---------------------------------------------------------------------------------------------------------------------- Corporate social responsibility (CSR) Aviva's CSR policy and programme continues to take firmer roots within the business and to generate support with staff, shareholders and customers. For Aviva, CSR is defined as embracing corporate performance in respect of standards of business conduct, human rights, the environment and health and safety, as well as the promotion of good and fair relations with employees, customers, suppliers and the community. Trust and integrity are integral to the wellbeing of a financial services company and therefore the Group sees CSR as presenting a vital business opportunity. Aviva's CSR performance is also highly ranked by growing numbers of research agencies and investment houses. More details can be found on our website at www.aviva.com/csr Aviva plc Registered Office: St Helen's, 1 Undershaft, London EC3P 3DQ Telephone +44 (0)20 7283 2000 www.aviva.com Registered in England Number: 2468686 End of Part 4 of 4 A PDF version of this announcement can be found at www.aviva.com END OF ANNOUNCEMENT This information is provided by RNS The company news service from the London Stock Exchange

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