Final Results - Part 4 of 4

Aviva PLC 02 March 2006 Part 4 of 4 ---------------------------------------------------------------------------------------------------------------------- Page 63 Statistical supplement 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 International Total Europe New business contribution (after the effect of required capital) 213 91 13 36 57 13 155 2 32 612 Profit from existing business - expected return 424 122 29 30 139 48 48 22 33 895 - experience variances: Maintenance expenses 12 3 (2) (2) 3 5 (2) 1 (4) 14 Exceptional expenses* (148) - (5) - (12) - (2) (3) - (170) Mortality/Morbidity** 86 29 (1) 2 16 16 5 - 5 158 Lapses*** (78) (4) (9) (4) 2 6 1 (6) 9 (83) Other^ 35 4 (4) 4 (17) 8 2 11 (1) 42 -------------------------------------------------------------------------------------------------------------------- (93) 32 (21) - (8) 35 4 3 9 (39) - operating assumption changes: Maintenance expenses (21) - 1 (3) 25 2 1 (4) (9) (8) Exceptional expenses (4) (3) - - (2) - - 1 - (8) Mortality/Morbidity^^ 19 1 (4) 4 (25) 7 - 2 5 9 Lapses# (130) - (8) - (10) - (2) (2) 4 (148) Other## 79 16 - - 59 13 (2) 5 2 172 -------------------------------------------------------------------------------------------------------------------- (57) 14 (11) 1 47 22 (3) 2 2 17 Expected return on shareholders' net worth 98 62 10 29 83 10 10 4 23 329 -------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 585 321 20 96 318 128 214 33 99 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 64 Segmental analysis of the components of life EEV operating return Year ended 31 December 2004 Â£m UK France Ireland Italy Netherlands Poland Spain Other International Total Europe New business contribution (after the effect of required capital) 215 54 16 34 43 9 121 - 24 516 Profit from existing business - expected return 367 112 30 29 141 45 40 24 31 819 - experience variances: Maintenance expenses* 31 (2) (1) 2 (9) 5 - 1 1 28 Exceptional expenses** (153) - - - (12) - (1) (3) (1) (170) Mortality/Morbidity*** 49 21 7 - 17 8 1 2 5 110 Lapses^ (50) 5 (1) (5) (2) 5 2 (4) 6 (44) Other^^ 42 (2) - 3 18 - 2 - (2) 61 ---------------------------------------------------------------------------------------------------------------------- (81) 22 5 - 12 18 4 (4) 9 (15) - operating assumption changes: Maintenance expenses^^^ 77 - (6) (3) - 14 3 1 4 90 Exceptional expenses# (34) (2) - - (72) - - - - (108) Mortality/Morbidity 2 - (2) 7 5 (2) - 1 (1) 10 Lapses## (110) - (16) (3) 9 - 1 1 (1) (119) Other### 7 37 - 1 79 2 3 (6) (3) 120 ---------------------------------------------------------------------------------------------------------------------- (58) 35 (24) 2 21 14 7 (3) (1) (7) Expected return on shareholders' net worth 108 63 13 14 60 7 8 5 20 298 ---------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 551 286 40 79 277 93 180 22 83 1,611 =====================================================================================================================- * Maintenance expenses in the UK reflect the benefit of cost saving initiatives undertaken. ** Exceptional expenses in the UK reflect costs of Â£65 million for the restructuring of the business services division and one-off project costs of Â£88 million associated with the pace of regulatory change. *** Mortality experience across our major businesses continues to be better than our assumptions for protection and annuity business in the UK and protection business in Continental Europe. ^ Lapse experience in the UK has been adverse and mainly relates to bonds, protection schemes and pension products. ^^ In the UK, other experience profits include Â£29 million of profits arising from better than assumed default experience on corporate bonds and commercial mortgages. ^^^ Maintenance expense assumption changes in the UK reflect the benefit of cost saving initiatives coming through. # The UK and the Netherlands include capitalised additional future project expenses. ## Adverse lapse assumption changes in the UK relates to unitised with-profit bonds and unit-linked bonds. In Ireland, lapse assumption changes have been made on unit-linked pensions business following recent experience. ### Other operating assumptions in the Netherlands relates to positive changes in asset mix and tax reflecting, in part, the fact that the embedded value of Delta Lloyd was previously assessed using a blended average tax rate of 25%, which is below the local corporation tax rate. The calculation has been refined to tax all future profits at the full corporation tax rate at the beginning of the year of 34.5% and to allow explicitly for the tax benefit arising from investing in the '5% holdings' (investments in Dutch companies where at least 5% of the share capital is owned), on which all investment income is tax free. This change results in a Â£53 million one-off benefit. France includes the benefit of tax assumption changes. France has historically recorded favourable tax operating experience as a result of better than assumed tax on dividend income. Previously the tax assumptions had been set at full corporation tax for all future profits, whereas in fact dividend income from subsidiaries is tax exempt. In 2004, the calculation has been refined such that the future tax benefit arising from dividend from subsidiaries has now been recognised. This change results in a Â£39 million benefit. ---------------------------------------------------------------------------------------------------------------------- Page 65 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 are 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: 2005 2004 ---------------------------------- Fund Management Non-Insurance Total Total Â£m Â£m Â£m Â£m United Kingdom* 77 (179) (102) (343) France 53 (6) 47 32 Other Europe and International 35 (8) 27 (15) ------------------------------------------------------------------------------------------------------------------- 165 (193) (28) (326) =================================================================================================================== * Reflecting Additional Guidance on EEV Disclosures published by the CFO Forum, the pension scheme deficit is now accounted for on an IAS 19 basis. Consequently, the element that had previously been included within the embedded value of service companies, being the present value of agreed deficit funding arrangements, has been removed. 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 was negotiated in 1998 and 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. (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: 2005 2004 Â£m Â£m Deficits in the staff pension schemes 1,471 893 Other obligations to staff pension schemes - Insurance policies issued by Group companies 875 813 --------------------------------------------------------------------------------------------------------------------- Total IAS 19 obligations to staff pension schemes 2,346 1,706 Other provisions 529 419 --------------------------------------------------------------------------------------------------------------------- Provisions 2,875 2,125 ===================================================================================================================== ---------------------------------------------------------------------------------------------------------------------- Page 66 (ii) Movements in the pension schemes' deficits comprise: 2005 2004 Â£m Â£m Deficits in the schemes at 1 January (893) (838) Employer contributions 383 220 Charge to net operating expenses (see (iii) below) (130) (157) Credit to investment income (see (iii) below) 32 28 Actuarial losses (see (iii) below) (547) (145) Acquisition (313) - Exchange rate movements in foreign plans (3) (1) --------------------------------------------------------------------------------------------------------------------- Deficits in the schemes at 31 December (1,471) (893) ===================================================================================================================== The change in the net pension deficit during 2005 is mainly attributable to changes in assumptions underlying the present value of the schemes' liabilities, partially offset by an increase in the market value of their assets. In the United Kingdom, the value of the liabilities has increased due to lower corporate bond yields, which are used to set the valuation discount rate, a higher assumed inflation rate and a strengthening to the post-retirement mortality future improvements allowed for in the basis. The increase in scheme assets is primarily due to an improvement in equity and bond values since the previous year end, together with deficit contribution payments made by the employing companies. The deficit has further increased by Â£313 million as a result of the acquisition of RAC plc in May 2005. Employer contributions included deficit funding payments amounting to Â£211 million (2004: Â£50 million). (iii) The pension expense for these schemes comprises: 2005 2004 Â£m Â£m Current service cost 158 148 Past service (credit)/cost (7) 1 Gain / (loss) on curtailments* (21) 8 --------------------------------------------------------------------------------------------------------------------- Charge to net operating expenses 130 157 --------------------------------------------------------------------------------------------------------------------- Expected return on scheme assets (439) (390) Interest charge on scheme liabilities 407 362 --------------------------------------------------------------------------------------------------------------------- Credit to investment income (32) (28) --------------------------------------------------------------------------------------------------------------------- Total charge to income 98 129 ===================================================================================================================== Expected return on scheme assets 439 390 Actual return on these assets (1,270) (595) --------------------------------------------------------------------------------------------------------------------- Actuarial gains on scheme assets (831) (205) Experience losses/(gains) arising on scheme liabilities 86 (12) Changes in assumptions underlying the present value of the scheme libilities 1,292 362 --------------------------------------------------------------------------------------------------------------------- Actuarial losses recognised in the statement of recognised income and expense 547 145 ===================================================================================================================== * The current year credit mainly arises in the Netherlands as a result of changes in the Dutch health care system which reduce the obligations of the relevant scheme. The cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expenses since 1 January 2004 (the date of transition to IFRS) is Â£692 million at 31 December 2005 (2004: Â£145 million). ---------------------------------------------------------------------------------------------------------------------- Page 67 (c) Long-term savings new business Present value of Annual premium new business premiums* equivalent** ---------------------- --------------- 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Life and pensions United Kingdom 9,053 9,172 1,142 1,166 France 3,530 2,782 384 307 Ireland 665 561 100 86 Italy 2,294 1,799 252 198 Netherlands(including Belgium and Luxembourg) 2,407 2,168 271 261 Poland 285 241 42 37 Spain 2,013 2,110 240 248 Other Europe 739 804 121 124 ---------------------------------------------------------------------------------------------------------------------- Continental Europe 11,933 10,465 1,410 1,261 International 1,260 1,024 193 171 ---------------------------------------------------------------------------------------------------------------------- Total (before the effect of required capital) 22,246 20,661 2,745 2,598 ---------------------------------------------------------------------------------------------------------------------- Investment sales United Kingdom 1,160 859 135 103 Netherlands 563 196 56 20 Poland 53 77 9 10 Other Europe 410 254 41 25 ---------------------------------------------------------------------------------------------------------------------- Continental Europe 1,026 527 106 55 International 213 243 21 24 ---------------------------------------------------------------------------------------------------------------------- Total investment sales 2,399 1,629 262 182 ---------------------------------------------------------------------------------------------------------------------- Total long-term savings (including share of associates and joint ventures) 24,645 22,290 3,007 2,780 ====================================================================================================================== * Investment sales are calculated as new single premiums plus annualised value of new regular premiums. ** United Kingdom APE has been restated to include NUER APE volumes of Â£37 million (2004: Â£48 million). ---------------------------------------------------------------------------------------------------------------------- Page 68 (d) Assets under management General Life and related business business and other Group Group 2005 2005 2005 2004 Â£m Â£m Â£m Â£m Total IFRS assets included in the balance sheet 224,768 38,679 263,447 239,303 Additional value of in-force long-term business 6,454 - 6,454 5,018 --------------------------------------------------------------------------------------------------------------------- Total EEV assets included in the balance sheet 231,222 38,679 269,901 244,321 Third party funds under management: Unit trusts, Oeics, Peps and Isas 16,188 10,527 Segregated funds 30,821 24,899 --------------------------------------------------------------------------------------------------------------------- Total assets under management 316,910 279,747 ===================================================================================================================== General insurance business only: geographical analysis (a) General insurance Longer-term Operating profit investment return Underwriting result ------------------ ----------------- ------------------- 2005 2004 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom 970 788 668 647 302 141 France 26 25 44 39 (18) (14) Ireland 171 135 55 53 116 82 Netherlands 97 51 42 33 55 18 Canada 147 133 112 96 35 37 Other 85 73 68 61 17 12 ------------------------------------------------------------------------------------------------------------------- 1,496 1,205 989 929 507 276 =================================================================================================================== (b) Combined operating ratio analysis - geographical basis - general insurance business only Combined Claims ratio Expense ratio operating ratio ----------------- ----------------- ---------------- 2005 2004 2005 2004 2005 2004 % % % % % % United Kingdom 61.8% 64.4% 10.9% 10.6% 96% 97% France 73.7% 73.4% 12.0% 12.1% 101% 101% Ireland 56.8% 66.6% 11.6% 10.3% 78% 87% Netherlands 60.0% 59.4% 12.0% 11.9% 93% 95% Canada 66.0% 66.6% 11.9% 12.1% 97% 97% ------------------------------------------------------------------------------------------------------------------- 62.7% 65.0% 11.4% 11.2% 95% 97% =================================================================================================================== 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 69 (c) General insurance business only: class of business analyses (i) United Kingdom Combined Net written premiums Underwriting result operating ratio -------------------- ------------------- ---------------- 2005 2004 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Â£m Â£m Personal Motor 1,641 1,383 (40) (12) 102% 102% Homeowner 1,300 1,041 69 24 97% 97% Other 772 737 8 9 100% 100% ------------------------------------------------------------------------------------------------------------------- 3,713 3,161 37 21 100% 100% =================================================================================================================== Commercial Motor 679 755 55 19 94% 97% Property 877 924 164 98 84% 88% Other 563 597 46 3 93% 99% ------------------------------------------------------------------------------------------------------------------- 2,119 2,276 265 120 88% 94% ------------------------------------------------------------------------------------------------------------------- 5,832 5,437 302 141 96% 97% =================================================================================================================== During 2005, annualised rating increases were as follows; personal motor: 4%; homeowners: 6% (including indexation); commercial motor: 1% decrease; commercial property: 1% decrease; and commercial liability: 1% decrease. ---------------------------------------------------------------------------------------------------------------------- Page 70 (ii) France Combined Net written premiums Underwriting result operating ratio -------------------- ------------------- ---------------- 2005 2004 2005 2004 2005 2004 â‚¬m â‚¬m â‚¬m â‚¬m % % Motor 378 370 (10) (12) 102% 103% Property and other 446 399 (16) (9) 101% 100% ------------------------------------------------------------------------------------------------------------------- â‚¬m 824 769 (26) (21) 101% 101% ------------------------------------------------------------------------------------------------------------------- Â£m 564 523 (18) (14) 101% 101% =================================================================================================================== (iii) Netherlands Combined Net written premiums Underwriting result operating ratio -------------------- ------------------- ---------------- 2005 2004 2005 2004 2005 2004 â‚¬m â‚¬m â‚¬m â‚¬m % % Property 351 368 44 6 88% 90% Motor 370 347 (1) 27 100% 95% Liability 83 56 15 (12) 84% 119% Other 242 287 23 6 91% 97% ------------------------------------------------------------------------------------------------------------------- â‚¬m 1,046 1,058 81 27 93% 95% ------------------------------------------------------------------------------------------------------------------- Â£m 716 720 55 18 93% 95% =================================================================================================================== (iv) Canada Combined Net written premiums Underwriting result operating ratio -------------------- ------------------- ---------------- 2005 2004 2005 2004 2005 2004 C$m C$m C$m C$m % % Automobile 1,756 1,747 70 5 96% 100% Property 831 821 (2) 79 100% 90% Liability 281 249 (9) (12) 102% 106% Other 43 42 18 14 73% 66% ------------------------------------------------------------------------------------------------------------------- C$m 2,911 2,859 77 86 97% 97% ------------------------------------------------------------------------------------------------------------------- Â£m 1,324 1,202 35 37 97% 97% =================================================================================================================== ---------------------------------------------------------------------------------------------------------------------- Appendix A Capital 1 - Group capital structure 2 - FRS 27 disclosures -------------------------------------------------------------------------------------------------------------------- Appendix A1 Group capital structure Page Capital employed by segment 71 Deployment of equity shareholders' funds 72 Return on capital employed 72 Sensitivity analysis 73 Shareholders' funds, including minority interests 74 Geographical analysis of return on capital employed 76 Strategic investments 76 Group capital resources 77 -------------------------------------------------------------------------------------------------------------------- Page 71 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 accurate 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 2005 2004 Â£m Â£m Long-term savings 15,598 13,826 General insurance and health 5,581 5,005 Other business 1,876 838 Corporate (36) (372) -------------------------------------------------------------------------------------------------------------------- Total capital employed 23,019 19,297 -------------------------------------------------------------------------------------------------------------------- Financed by Equity shareholders' funds and minority interests 16,356 12,821 Direct capital instrument 990 990 Preference shares 200 200 Subordinated debt 2,808 2,847 External debt 1,002 1,452 Net internal debt 1,663 987 -------------------------------------------------------------------------------------------------------------------- 23,019 19,297 ==================================================================================================================== At 31 December 2005 the Group had Â£23.0 billion (31 December 2004: Â£19.3 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 2005, the total capital employed in our long-term savings operations increased by Â£1.8 billion driven by the operational results and the strong movement in equity markets in the year. The capital employed in our general insurance businesses increased by Â£0.6 billion reflecting the profits in the year; the capital employed in our non-insurance and corporate businesses rose by Â£1.3 billion from Â£0.5 billion to Â£1.8 billion reflecting the RAC acquisition. 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. In order to better reflect the underlying level of internal leverage the presentation of internal debt was revised at the 2004 year end. The revised presentation 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 22% (31 December 2004: 31%). Fixed charged cover on an EEV basis, which measures the extent to which external interest costs are covered by EEV operating profit, was 9.6 times (31 December 2004: 8.7 times). At 31 December 2005 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£5,868 million (31 December 2004: Â£5,953 million), with a weighted average cost of 3.8% (31 December 2004: 3.9%). The Group WACC is 6.6% 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 2005 was 7.6%, based on a risk free rate of 4.1%, an equity market premium of 3% and a market beta of 1.17. ---------------------------------------------------------------------------------------------------------------------- Page 72 A1 Group capital structure (continued) Deployment of equity shareholders' funds 2005 2004 ----------------------------------------------------------- ------- 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 824 4,611 873 1,566 7,874 7,503 General insurance, health, and other business 3,679 1,519 1,274 (1,075) 5,397 4,859 -------------------------------------------------------------------------------------------------------------------- 4,503 6,130 2,147 491 13,271 12,362 Goodwill 2,491 1,401 Additional and acquired value of in-force long-term business and intangible assets 7,257 5,534 -------------------------------------------------------------------------------------------------------------------- Assets backing total capital employed in continuing operations 23,019 19,297 External debt (1,002) (1,452) Net Internal debt (1,663) (987) Subordinated debt (2,808) (2,847) -------------------------------------------------------------------------------------------------------------------- 17,546 14,011 Minority interests (1,457) (1,160) Direct capital instrument (990) (990) Preference capital (200) (200) -------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 14,899 11,661 ==================================================================================================================== Return on capital employed 2005 2004 ----------------------------------- ---------- Normalised Opening after-tax equity Return Return return capital on capital on capital Â£m Â£m % % Long-term savings 1,248 13,826 9.0% 8.9% General insurance and health 1,002 5,005 20.0% 17.1% Other business 78 838 9.3% (2.0)% Corporate (114) (372) 30.6% 40.9% --------------------------------------------------------------------------------------------------------------------- 2,214 19,297 11.5% 10.4% Borrowings (237) (5,286) 4.5% 3.9% --------------------------------------------------------------------------------------------------------------------- 1,977 14,011 14.1% 13.9% Minority interests (187) (1,160) 16.1% 17.5% Direct capital instrument (29) (990) 2.9% - Preference capital (17) (200) 8.5% 8.5% --------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 1,744 11,661 15.0% 13.7% ===================================================================================================================== 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 73 Sensitivity analysis The sensitivity of the Group's shareholders' funds on an EEV basis at 31 December 2005 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 2004 2005 down 10% up 1% Â£bn Â£bn Â£bn Â£bn 13.8 Long-term savings* 15.6 14.7 15.4 5.5 General insurance and other 7.4 7.0 7.1 (5.3) Borrowings** (5.5) (5.5) (5.5) -------------------------------------------------------------------------------------------------------------------- 14.0 Shareholders' funds 17.5 16.2 17.0 ==================================================================================================================== 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 74 A1 Group capital structure (continued) Shareholders' funds, including minority interests. 31 December 2005 31 December 2004 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 United Kingdom 2,929 3,496 6,425 3,162 2,703 5,865 France 1,177 890 2,067 1,175 644 1,819 Ireland 410 72 482 403 248 651 Italy 639 88 727 478 72 550 Netherlands (including Belgium and Luxembourg) 2,229 826 3,055 1,758 727 2,485 Poland 191 456 647 176 381 557 Spain 790 438 1,228 761 279 1,040 Other Europe 77 128 205 160 53 213 International 702 60 762 735 (89) 646 ---------------------------------------------------------------------------------------------------------------------- 9,144 6,454 15,598 8,808 5,018 13,826 ---------------------------------------------------------------------------------------------------------------------- General insurance and health 1,2 United Kingdom 2,725 2,725 2,504 2,504 France 362 362 416 416 Ireland 545 545 498 498 Netherlands 553 553 461 461 Other Europe 302 302 162 162 Canada 848 848 687 687 Other 246 246 277 277 ---------------------------------------------------------------------------------------------------------------------- 5,581 - 5,581 5,005 - 5,005 ---------------------------------------------------------------------------------------------------------------------- Other business 1,2 1,876 1,876 838 838 Corporate (36) (36) (372) (372) External debt 3 (1,002) (1,002) (1,452) (1,452) Internal debt (1,663) (1,663) (987) (987) Subordinated debt (2,808) (2,808) (2,847) (2,847) ---------------------------------------------------------------------------------------------------------------------- (3,633) - (3,633) (4,820) - (4,820) ---------------------------------------------------------------------------------------------------------------------- Shareholders' funds, including minority interests 11,092 6,454 17,546 8,993 5,018 14,011 ======================================================================================================================= Comprising Equities 4,503 4,503 3,881 3,881 Debt and fixed income securities 6,130 6,130 4,802 4,802 Property 957 957 1,292 1,292 Deposits and other investments 1,190 1,190 1,480 1,480 Intangible assets 4 3,294 6,454 9,748 1,917 5,018 6,935 Other net assets 491 491 907 907 Borrowings (5,473) (5,473) (5,286) (5,286) ---------------------------------------------------------------------------------------------------------------------- 11,092 6,454 17,546 8,993 5,018 14,011 ====================================================================================================================== Notes 1. Goodwill of Â£2,491 million (2004: Â£1,401 million) has been allocated as follows: life assurance Â£848 million (2004: Â£812 million); general insurance and health Â£398 million; (2004: Â£465 million) and other businesses Â£1,245 million (2004: Â£124 million). 2. Intangibles of Â£379 million (2004: Â£65 million) have been allocated as follows: general insurance and health Â£265 million (2004: Â£19 million); other businesses Â£114 million (2004: Â£46 million). 3. The external borrowings reported in the summary consolidated balance sheet of Â£11,013 million (2004: Â£10,090 million) comprise Â£6,303 million (2004: Â£5,193 million) securitised mortgage funding, Â£2,808 million (2004: Â£2,847 million) subordinated debt, Â£900 million (2004: Â£598 million) borrowings by operating businesses and Â£1,002 million (2004: Â£1,452 million) borrowings by holding companies of the Group not allocated to operating companies (shown as external debt). 4. Total intangible assets of Â£9,748 million (2004: Â£6,935 million) comprise goodwill of Â£2,491 million (2004: Â£1,401 million); acquired value of in-force long-term business and intangibles of Â£803 million (2004: Â£516 million) and additional value of in-force long-term business of Â£6,454 million (2004: Â£5,018 million). The associated deferred tax liability on the intangibles of Â£123 million (2004: nil) is included within other net assets. 5. The post-tax pension fund deficit of Â£989 million has been allocated as follows: life operations Â£363 million, general insurance and health Â£532 million, other business Â£58 million and corporate of Â£36 million. --------------------------------------------------------------------------------------------------------------------- Page 75 A1 Group capital structure (continued) Geographical analysis of return on capital employed For the year ended 31 December 2005 Opening Shareholders' funds Operating return including minority Return on (Note1) interests Capital ----------------------- ------------------- ---------- Note Before tax After tax Â£m Â£m Â£m % Life assurance United Kingdom 585 409 5,865 7.0% France 321 209 1,819 11.5% Ireland 20 17 651 2.6% Italy 96 60 550 10.9% Netherlands (including Belgium and Luxembourg) 318 217 2,485 8.7% Poland 128 104 557 18.7% Spain 214 139 1,040 13.4% Other Europe 33 22 213 10.3% International 99 71 646 11.0% -------------------------------------------------------------------------------------------------------------------- 1,814 1,248 13,826 9.0% General insurance and health United Kingdom 827 580 2,504 23.2% 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% -------------------------------------------------------------------------------------------------------------------- 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 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 76 A1 Group capital structure (continued) Geographical analysis of return on capital employed (continued) Year ended 31 December 2004 Opening Shareholders' funds Operating return including minority Return on (Note*) interests Capital ----------------------- ------------------- ---------- Note Before tax After tax Â£m Â£m Â£m % Life assurance United Kingdom 551 385 5,439 7.1% France 286 185 1,559 11.9% Ireland 40 35 613 5.7% Italy 79 49 436 11.2% Netherlands (including Belgium and Luxembourg) 277 201 2,461 8.2% Poland 93 75 458 16.4% Spain 180 117 916 12.8% Other Europe 22 14 78 17.9% International 83 60 598 10.0% -------------------------------------------------------------------------------------------------------------------- 1,611 1,121 12,558 8.9% General insurance and health United Kingdom 662 484 2,711 17.9% France 33 21 435 4.8% Ireland 135 118 391 30.2% Netherlands 90 67 311 21.5% Other Europe 32 20 109 18.3% Canada 133 86 618 13.9% Other 41 29 246 11.8% -------------------------------------------------------------------------------------------------------------------- 1,126 825 4,821 17.1% Other business (21) (14) 683 (2.0)% Corporate (162) (81) (198) 40.9% External debt (77) (65) (1,879) 3.5% Net internal debt 2 (84) (61) (1,613) 3.8% Subordinated debt (169) (118) (2,838) 4.2% -------------------------------------------------------------------------------------------------------------------- 2,224 1,607 11,534 13.9% ==================================================================================================================== 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£(84) million comprises investment return of Â£135 million and unallocated interest of Â£(219) million. Strategic Investments The Group has certain equity investments which are classified as strategic. The market value of these holdings and the percentage of the issued share capital of these companies held by the Group are as follows: Long-term business General & other Market value Proportion held ------------------ -------------- -------------- --------------- 2005 2004 2005 2004 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Â£m Â£m % % Munchener Ruckversicherungs Gesellschaft 150 205 - 179 150 384 0.8% 2.5% Unicredit Group 383 283 501 255 884 538 2.1% 2.8% Societe Generale - 242 - 2 - 244 - 1.1% ---------------------------------------------------------------------------------------------- 533 730 501 436 1,034 1,166 ============================================================================================== ---------------------------------------------------------------------------------------------------------------------- Page 77 Group Capital Resources During 2004, the FSA published Policy Statement PS04-24 which requires the Group to disclose the Group Capital Resources (GCR), the Capital Resources Requirement (CRR) and the resulting surplus or deficit. The statement for 2005 is given in the table below. This information has been published by the Group in prior years and represents the surplus calculated in accordance with the Insurance Groups' Directive (IGD). In 2005, the FSA issued further guidance in the Consultation Paper CP05-09. The FRS 27 Group Capital Statement shows the Group's capital resources on a regulatory basis; following publication of CP05-09, the Group is required to reconcile this to the Group's capital resources on a statutory reporting basis. This reconciliation is given in the second table below. 31 December 2005 --------------------------------- UK Life IGD Group Funds solvency Total Â£bn Â£bn Â£bn Group Capital Resources (PS04-24) 3.1 7.8 10.9 Less: Capital Resources Requirement (3.1) (4.3) (7.4) -------------------------------------------------------------------------------------------------------------------- Group surplus - 3.5 3.5 ==================================================================================================================== Under the FSA rules the Group capital resource amount relating to UK life funds is set at the lower of the regulatory capital requirement and the actual regulatory capital. The UK Life funds are excluded from the IGD solvency calculation. The FRS 27 Group capital statement shows the Group's capital resources on a regulatory basis; the FSA, following publication of the Consultation Paper CP05-09, requires the Group to reconcile this to the Group's resources on a statutory reporting basis. The Group Capital Adequacy Report is prepared in accordance with the FSA's valuation rules and brings in capital in respect of the with-profit funds equal to the UK Life Capital Resources Requirement; the FRS 27 disclosure brings in the totality of the with-profit capital resources. 31 December 2005 Â£bn Total capital and reserves (IFRS basis) 11.1 Plus: Other qualifying capital 2.9 Plus: UK Life Funds (restricted at amount of regulatory capital requirements) 3.1 Less: Goodwill, acquired AVIF and intangible assets (3.1) Less: Other adjustments to restate from IFRS to regulatory basis (3.1) ------------------------------------------------------------------------------------------------------------------- Group Capital Resources (PS04-24) 10.9 =================================================================================================================== The Group Capital Resources can be analysed as follows: 31 December 2005 Â£bn Core Tier 1 Capital 6.5 Innovative Tier 1 Capital 1.0 ------------------------------------------------------------------------------------------------------------------- Total Tier 1 Capital 7.5 Upper Tier 2 Capital 1.7 Lower Tier 2 Capital 1.7 ------------------------------------------------------------------------------------------------------------------- Group Capital Resources Tier 1 & Tier 2 Capital (PS04-24) 10.9 Less: UK Life Funds (restricted at amount of regulatory capital requirements) (3.1) Plus: Actual UK life fund capital resources 6.5 Less: Assets treated as inadmissable at local level (0.7) ------------------------------------------------------------------------------------------------------------------- Total per FRS 27 capital position statement 13.6 =================================================================================================================== ---------------------------------------------------------------------------------------------------------------------- Appendix A2 FRS 27 disclosures Page Capital statement Available capital resources 78 Analysis of liabilities 78 Analysis of movements in capital 79 Financial guarantees and options a) UK Life with-profits business 81 b) UK Life non-profits business 81 c) Overseas life business i) France 81 ii) Netherlands 82 iii) Ireland 82 iv) Spain and Italy 83 ---------------------------------------------------------------------------------------------------------------------- Page 78 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 2005 2004 ------------------------------------------------------------------------------------------------- ----- 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 25 22 24 71 2,515 2,586 6,129 8,715 2,377 11,092 8,993 Total other sources of capital* - - - - - - 133 133 2,808 2,941 3,016 Unallocated divisible surplus 1,871 1,872 1,633 5,376 - 5,376 3,602 8,978 - 8,978 7,549 Adjustments onto a regulatory basis: Shareholders' share of accrued bonus (74) (78) (548) (700) - (700) - (700) - (700) (570) Goodwill, acquired value of in-force long-term business and intangibles - - - - (56) (56) (798) (854) (2,223) (3,077) (1,700) Regulatory valuation and admissibility restrictions** 281 125 140 546 (1,221) (675) (3,991) (4,666) (953) (5,619) (4,507) ----------------------------------------------------------------------------------------------------------------------- Total available capital 2,103 1,941 1,249 5,293 1,238 6,531 5,075 11,606 2,009 13,615 12,781 ======================================================================================================================= Analysis of liabilities: Participating insurance liabilities 8,691 9,475 19,646 37,812 - 37,812 22,146 59,958 - 59,958 58,304 Unit-linked liabilities 3,201 51 - 3,252 2,692 5,944 12,055 17,999 - 17,999 15,227 Other non-participating life insurance 1,002 1,821 756 3,579 18,116 21,695 14,524 36,219 - 36,219 32,798 ----------------------------------------------------------------------------------------------------------------------- Total insurance liabilities 12,894 11,347 20,402 44,643 20,808 65,451 48,725 114,176 - 114,176 106,329 Participating investment liabilities 4,661 2,761 7,986 15,408 - 15,408 31,850 47,258 - 47,258 43,974 Non-participating investment liabilities 10,430 1,099 3,755 15,284 2,664 17,948 12,103 30,051 - 30,051 25,581 ----------------------------------------------------------------------------------------------------------------------- Total investment liabilities 15,091 3,860 11,741 30,692 2,664 33,356 43,953 77,309 - 77,309 69,555 ----------------------------------------------------------------------------------------------------------------------- Total liabilities 27,985 15,207 32,143 75,335 23,472 98,807 92,678 191,485 - 191,485 175,884 ====================================================================================================================== * Other sources of capital include subordinated debt of Â£2,808 million issued by Aviva and Â£119 million subordinated perpetual loan notes issued by a Dutch subsidiary undertaking ** Including adjustments for minorities *** Includes the PM with-profit fund ^ Other operations includes general insurance and fund management business ---------------------------------------------------------------------------------------------------------------------- Page 79 A2 FRS 27 disclosures (continued) Analysis of movements in capital For the year ended 31 December 2005 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 1,695 1,633 1,208 4,536 1,433 5,969 4,523 10,492 Movement in liabilities (4,671) (400) 800 (4,271) (4,184) (8,455) (7,238) (15,693) Other movements in capital* 5,079 708 (759) 5,028 3,989 9,017 7,790 16,807 ----------------------------------------------------------------------------------------------------------------------- Closing available capital resources 2,103 1,941 1,249 5,293 1,238 6,531 5,075 11,606 ======================================================================================================================= * Includes movement in: outstanding claims provision; other technical provision; and obligations to staff pension schemes transferred to provisions. The main drivers of the variance between actual and expected liability movements are reductions in valuation interest rates for traditional contracts and strong investment returns for unit-linked business. Other movements in capital reflect cashflows for premiums received, benefits paid and the investment return on assets held. This movement also includes the change in the regulatory adjustments and regulatory rules. The only regulatory rule changes having significant impact in the year are a change in the basis for inclusion of non-insurance subsidiaries from market value to a surplus assets basis, and new rules relating to the recognition of pension deficits, requiring a charge to be made based on anticipated additional payments over the next five years instead of the inclusion of the full scheme deficit. ----------------------------------------------------------------------------------------------------------------------- Page 80 A2 FRS 27 disclosures (continued) In aggregate, the Group has at its disposal total available capital of Â£13.6 billion (2004: Â£12.8 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£5.2 billion (2004: Â£4.5 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£8.3 billion (2004: Â£8.3 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£13.6 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 regulatory rules under its 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. 31 December 2005 31 December 2004 --------------------------------------------------------------- ---------------- Realistic Realistic Realistic Required assets liabilities orphan estate capital margin Excess Excess Â£bn Â£bn Â£bn Â£bn Â£bn Â£bn CGNU Life 14.0 (11.9) 2.1 0.5 1.6 1.4 CULAC 14.0 (12.1) 1.9 0.6 1.3 1.2 NUL&P 25.9 (24.7) 1.2 0.8 0.4 0.2 PM 2.5 (2.5) - - - - --------------------------------------------------------------------------------------------------------------------- Aggregate 56.4 (51.2) 5.2 1.9 3.3 2.8 ===================================================================================================================== 1. These realistic liabilities include the shareholders' share of future bonuses of Â£0.7 billion (31 December 2004: Â£0.5 billion). Realistic liabilities adjusted to eliminate the shareholders' share of future bonuses are Â£50.5 billion (31 December 2004: Â£47 billion). 2. 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£0.7 billion, Â£0.9 billion and Â£3.4 billion for CGNU Life, CULAC and NUL&P, respectively (31 December 2004: Â£0.6 billion, Â£0.9 billion and Â£3.3 billion for CGNU Life, CULAC and NUL&P respectively). 3. The required capital margin (RCM) is 2.7 times covered by the orphan estate (31 December 2004: 2.6 times). ----------------------------------------------------------------------------------------------------------------------- Page 81 A2 FRS 27 disclosures (continued) 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 and overseas general insurance businesses, the relevant capital requirement is the minimum solvency requirement determined in accordance with the local regulator's requirements. 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. 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 guaranteed value of the policy 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 Group has made promises to certain policyholders, in relation to their mortgage endowments, that payments on these policies will meet the mortgage value, provided investment returns exceed 6% per annum net of tax between 1 January 2000 and maturity and the investment returns on the free reserves are sufficient to meet the top-up costs. (b) UK Life non-profit business The Group's UK non-profit funds are not subject to the requirements of the FSA's realistic reporting regime and, therefore, liabilities are evaluated by reference to local statutory reserving rules. (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£44 million at 31 December 2005 (2004: Â£47 million). ----------------------------------------------------------------------------------------------------------------------- Page 82 A2 FRS 27 disclosures (continued) (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. A PAF of Â£16 million was established at the end of 2005. The most significant of these contracts is the AFER Euro fund which has total liabilities of Â£22 billion at 31 December 2005 (2004: Â£21 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 3.51% for 2005 (2004: 3.69%) compared with an accounting income from the fund of 4.91% (2004: 5.25%). Non-AFER contracts with guaranteed surrender values had liabilities of Â£7 billion (2004: Â£6 billion) at 31 December 2005 and guaranteed annual bonus rates are between 0% and 4.5% on 97.8% of liabilities. There are higher guarantees in force on some older policies including a small number of policies with a guarantee of 8.5%. For non-AFER business, the accounting income return exceeded guaranteed bonus rates in 2005. 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 2005 for this guarantee is Â£14 million (2004: Â£17 million). The reserve is calculated on a prudent basis and is in excess of the economic liability. At the end of 2005, total sums at risk for these contracts were Â£73 million (2004: Â£182 million) out of total unit-linked funds of Â£8 billion (2004: Â£6 billion). The average age of policyholders was approximately 53. It is estimated that the economic liability would increase by Â£1 million (2004: Â£2 million) if yields were to increase by 1% per annum and by Â£0.1 million (2004: Â£1 million) if equity markets were to decline by 10% from year end 2005 levels. These figures do not reflect our ability to review the charges 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. The total liabilities for traditional business at 31 December 2005 are Â£8 billion (2004: Â£8 billion) analysed as follows: Liabilities Restated* liabilities Liabilities Restated* liabilities 3% guarantee 3% guarantee 4% guarantee 4% guarantee 31 December 2005 31 December 2004 31 December 2005 31 December 2004 Â£m Â£m Â£m Â£m Individual 1,210 1,098 3,112 3,169 Group pensions 412 263 3,175 3,695 -------------------------------------------------------------------------------------------------------------------- Total 1,622 1,361 6,287 6,864 ==================================================================================================================== * Restated to reflect the move to the active liability basis under IFRS 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£127 million (2004: Â£118 million). An additional provision of Â£77 million (2004: Â£27 million) in respect of investment return guarantees on group segregated fund business is held. It is estimated that the provision would increase by Â£293 million (2004: Â£234 million) if yields were to reduce by 1% pa and by Â£44 million (2004: Â£49 million) if equity markets were to decline by 10% from year end 2005 levels. -------------------------------------------------------------------------------------------------------------------- Page 83 A2 FRS 27 disclosures (continued) (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£145 million (2004: Â£125 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£84 million (2004: Â£79 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 (2004: Â£80 million) if yields were to increase by 1% per annum and by Â£39 million (2004: Â£40 million) if equity markets were to decline by 10% from year end 2005 levels. Return of premium guarantee In 2005 Hibernian Life has written two tranches of linked bonds with a return of premium guarantee after 5 or 6 years. The provision for these at the end of 2005 is Â£3 million. It is expected that the provision would increase by Â£4 million if equity markets were to decline by 10% from year end 2005 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, where 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. 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 2005, total liabilities for the Spanish business were Â£2 billion (2004: Â£2 billion) with a further reserve of Â£20 million (2004: Â£13 million) for guarantees. Total liabilities for the Italian business were Â£4 billion (2004: Â£4 billion), with a further provision of Â£55 million (2004: Â£49 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 (2004: Â£56 million) in Spain and Â£12 million (2004: Â£14 million) in Italy if interest rates fell by 1% from end 2005 values. Under this sensitivity test, the guarantee provision in Spain is calculated conservatively, assuming a long-term market interest rate of 1.68% and no lapses or premium discontinuances. (d) 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 2005 Report and Accounts: Page Movements in insurance liabilities (i) Movements in long-term business provisions 84 (ii) Movements in general insurance and health claims provisions 84 Long-term business investment liabilities 85 Movements in the year: (i) Participating investment contracts 85 (ii) Non-participating investment contracts 86 Loss development tables 86 Sensitivity analysis and capital management 88 Long-term business - impact on profit before tax 88 Long-term business - impact before tax on shareholders' equity 89 General insurance and health business - impact on profit before tax 89 General insurance and health business - impact before tax on shareholders' equity 89 -------------------------------------------------------------------------------------------------------------------- Page 84 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, 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: 2005 2004 Â£m Â£m Carrying amount at 1 January 106,491 96,228 Provisions in respect of new business 6,589 5,839 Expected change in existing business provisions (2,703) (3,164) Variance between actual and expected experience 3,784 1,680 Impact of operating assumption changes (1,034) 377 Impact of economic assumption changes 2,411 1,004 Other movements 340 227 ------------------------------------------------------------------------------------------------------------------- Change in liability recognised as an expense 9,387 5,963 Portfolio transfers, acquisitions and disposals (360) 924 Foreign exchange rate movements (684) 289 Effect of adjusting to FRS 27 realistic basis - 3,087 Other movements (404) - ------------------------------------------------------------------------------------------------------------------- Carrying amount at 31 December 114,430 106,491 =================================================================================================================== (ii) Movements in general insurance and health claims provisions Significant 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: 2005 2004 Â£m Â£m Carrying amount at 1 January 12,750 12,378 Impact of changes in assumptions (6) (30) Claim losses and expenses incurred in the current year 7,124 6,770 Decrease in estimated claim losses and expenses incurred in prior years (372) (234) ------------------------------------------------------------------------------------------------------------------- Incurred claims losses and expenses 6,746 6,506 Less: Payments made on claims incurred in the current year (3,379) (3,120) Payments made on claims incurred in prior years (3,407) (3,244) Recoveries on claim payments 263 233 ------------------------------------------------------------------------------------------------------------------- Claims payments made in the year, net of recoveries (6,523) (6,131) Other movements in the claims provisions (9) 27 ------------------------------------------------------------------------------------------------------------------- Changes in claims reserve recognised as an expense 214 402 Gross portfolio transfers, acquisitions and disposals (153) 2 Foreign exchange rate movements 146 32 Other gross movements 8 (64) ------------------------------------------------------------------------------------------------------------------- Carrying amount at 31 December 12,965 12,750 =================================================================================================================== -------------------------------------------------------------------------------------------------------------------- Page 85 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 II 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. 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 2005 2004 Â£m Â£m Carrying amount at 1 January 43,974 36,974 Reserves in respect of new business 3,467 3,284 Expected change in existing business provisions (1,720) (1,340) Variance between actual and expected experience 2,034 1,400 Impact of operating assumption changes 5 (18) Impact of economic assumption changes 513 47 Other movements (153) 73 -------------------------------------------------------------------------------------------------------------------- Change in liability 4,146 3,446 Portfolio transfers and acquisitions 4 2,030 Foreign exchange rate movements (856) 304 Effect of adjusting to FRS 27 realistic basis - 1,220 Other movements (10) - -------------------------------------------------------------------------------------------------------------------- Carrying amount at 31 December 47,258 43,974 ==================================================================================================================== -------------------------------------------------------------------------------------------------------------------- Page 86 (ii) Non-participating investment contracts 2005 2004 Â£m Â£m Carrying amount at 1 January 25,581 20,493 Reserves in respect of new business 5,247 3,872 Expected change in existing business provisions 936 769 Variance between actual and expected experience (1,732) 160 Impact of operating assumption changes 2 - Impact of economic assumption changes - 5 Other movements 93 78 -------------------------------------------------------------------------------------------------------------------- Change in liability 4,546 4,884 Portfolio transfers and acquisitions - 194 Foreign exchange rate movements (76) 10 -------------------------------------------------------------------------------------------------------------------- Carrying amount at 31 December 30,051 25,581 -------------------------------------------------------------------------------------------------------------------- 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 2005. 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 2001, by the end of 2005 Â£5,648 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£6,186 million was re-estimated to be Â£6,286 million at 31 December 2005. This increase from the original estimate is due to the combination of a number of factors, including claims being settled for larger amounts than originally estimated. The original estimates will also be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity. In the year of adoption of IFRS, only five years are 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 below. However, in order to maintain strong reserves the Group transfers much of this release to current accident year (2005) 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 2005 is also due to an improvement in the estimated ultimate cost of claims. -------------------------------------------------------------------------------------------------------------------- Page 87 After the effect of reinsurance the loss development table is: Accident Year All prior years 2001 2002 2003 2004 2005 Total 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) One year later (4,624) (4,369) (4,158) (4,378) Two years later (5,088) (4,779) (4,565) Three years later (5,436) (5,064) Four years later (5,648) Estimate of net cumulative claims At end of accident year 6,186 6,037 6,218 6,602 6,982 One year later 6,333 6,038 6,093 6,266 Two years later 6,321 5,997 6,037 Three years later 6,329 5,973 Four years later 6,286 Estimate of cumulative claims 6,286 5,973 6,037 6,266 6,982 Cumulative payments (5,648) (5,064) (4,565) (4,378) (3,281) --------------------------------------------------------------------------------------------------------------------- 2,417 638 909 1,472 1,888 3,701 11,025 Effect of discounting (16) (4) (5) (5) (5) (7) (42) --------------------------------------------------------------------------------------------------------------------- Present value 2,401 634 904 1,467 1,883 3,694 10,983 Cumulative effect of foreign exchange movements - - 17 22 29 - 68 --------------------------------------------------------------------------------------------------------------------- Present value recognised in the balance sheet 2,401 634 921 1,489 1,912 3,694 11,051 ===================================================================================================================== 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£289 million (2004: Â£224 million). These net provisions were strengthened during the year by Â£83 million (2004: Â£71 million). --------------------------------------------------------------------------------------------------------------------- Page 88 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 our capital more efficiently. Primarily we use 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). However 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 to set the framework for identifying and quantifying the risks that each of its business units, and the Group as a whole are exposed to. For example, under ICA, an estimate of how much capital is needed to mitigate the risk of insolvency from events occurring within a selected remote level of probability is measured. This high level risk appetite parameter is then used to calibrate a series of core stresses and scenario tests of both an economic and operating nature to be examined by each business unit. Business units satisfy themselves that the range and level of these tests is appropriate to their local risk profile, and supplement the core tests where necessary. Business units also perform an assessment of the operational risk; this assessment is subject to central review and challenge by Group to verify consistency across business units and to identify aggregate exposures. The businesses are then able to assess the capital requirements within this risk appetite framework. The Group uses both the results at a business unit level and aggregated results to assess the benefits of diversification of risk within the Group, and to assess capital requirements of the types of risk it is exposed to. These results enable the Group to assess whether its risk appetite is appropriate and whether mitigating action is required. 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. 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 2005: Long-term business - impact on profit before tax (Â£m) Assurance Annuitant Interest rates Interest rates Expenses mortality mortality +1% -1% +10% +5% -5% Insurance participating 5 (35) (5) - - Insurance non-participating 60 (350) (5) (30) (295) Investment participating 10 (50) - - - Investment non-participating - - - - - ------------------------------------------------------------------------------------------------------------------- Total 75 (435) (10) (30) (295) =================================================================================================================== --------------------------------------------------------------------------------------------------------------------- Page 89 Sensitivity analysis and capital management (continued) Long-term business - impact before tax on shareholders' equity (Â£m) Assurance Annuitant Interest rates Interest rates Expenses mortality mortality +1% -1% +10% +5% -5% Insurance participating (10) (20) (5) - - Insurance non-participating 20 (305) (5) (30) (295) Investment participating (10) (25) - - - Investment non-participating (5) - - - - -------------------------------------------------------------------------------------------------------------------- Total (5) (350) (10) (30) (295) ==================================================================================================================== The sensitivity to a reduction in market interest rates relates primarily to the effect of interest rate guarantees in the Netherlands, with smaller impacts in the UK and other countries. The different impacts of interest rate changes on shareholders' equity and profit arise from the classification of fixed interest securities as available for sale in some business units, for which movements in unrealised gains would be taken directly to shareholders' equity. The mortality sensitivities relate primarily to the UK and Irish business units. General insurance and health business - impact on profit before tax (Â£m) Gross loss Interest rates Interest rates Expenses ratios +1% -1% +10% +5% Gross and net of reinsurance (275) 285 (115) (305) General insurance and health business - impact before tax on shareholders' equity (Â£m) Gross loss Interest rates Interest rates Expenses ratios +1% -1% +10% +5% Gross and net of reinsurance (275) 285 (30) (305) The sensitivity to a 5% increase in gross loss ratios is the same for both net and gross of reinsurance because this increase does not result in any material excess of loss reinsurance limits being reached. 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. Limitations of sensitivity analysis The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, such an occurrence is remote, due to correlations 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 90 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 91 and request a mandate form. The mandate form will need to be received by Lloyds TSB Registrars no later than 25 April 2006 in order to be effective for the 2005 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 91. 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 91. 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 91. 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 91 Group financial calendar for 2006 -------------------------------------------------------------------------------------------------------------------- Online publication of Aviva plc Annual Report and Accounts 2005 29 March Annual General Meeting 10 May Announcement of first quarter long-term savings new business figures 27 April Announcement of unaudited six months' interim results 9 August Announcement of third quarter long-term savings new business figures 26 October Ordinary Shares Ex-dividend date 8 March Record date 10 March Scrip dividend price available 15 March Last date for scrip dividend mandate forms to be received in order to be effective for 2005 final dividend 25 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. -------------------------------------------------------------------------------------------------------------------- General shareholding queries Lloyds TSB Registrars The Causeway 0870 600 3952 Worthing West Sussex BN99 6DA -------------------------------------------------------------------------------------------------------------------- Corporate and single company Peps Barclays Stockbrokers Limited Tay House 0870 514 3263 300 Bath Street Glasgow G2 4LH -------------------------------------------------------------------------------------------------------------------- Individual Savings Accounts (ISAs) Lloyds TSB Registrars The Causeway 0870 242 4244 (ISA Manager) Worthing West Sussex BN99 6DA -------------------------------------------------------------------------------------------------------------------- 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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