HY 2008 Results Part 2 of 4

RNS Number : 1654A

Aviva PLC

30 July 2008

 



Part 2 of 4

Page 27

European Embedded Value (EEV) Basis

Page 28

Summarised consolidated income statement - 
EEV basis

For the six months ended 30 June 2008

6 months 2008 €m		6 months 2008 £m	6 months 2007 £m	Full year 2007 £m
	Operating profit before tax attributable to shareholders' profits
1,922	Life EEV operating return	1,480	1,251	2,753
39	Fund management1	30	45	90
699	General insurance and health	538	560	1,033
	Other:
(75)	Other operations and regional costs2	(57)	(45)	(70)
(92)	Corporate centre	(71)	(80)	(157)
(261)	Group debt costs and other interest	(201)	(190)	(363)
2,232	Operating profit before tax attributable to shareholders' profits	1,719	1,541	3,286
	Adjusted for the following:
(3,425)	Variation from longer term investment return on long-term business	(2,638)	241	(450)
(188)	Effect of economic assumption changes on long-term business	(145)	301	517
(408)	Short-term fluctuation in return on investments backing general insurance and health business	(314)	37	(184)
(55)	Impairment of goodwill	(42)	(3)	(10)
(57)	Amortisation and impairment of intangibles	(44)	(41)	(89)
12	Profit/(loss) on the disposal of subsidiaries and associates	9	(5)	20
(171)	Integration and restructuring costs	(132)	(40)	(153)
(110)	Exceptional costs for termination of operations	(84)	-	-
(2,170)	(Loss)/profit before tax	(1,671)	2,031	2,937
(679)	Tax on operating profit	(523)	(416)	(992)
1,193	Tax on other activities	919	(113)	189
(1,656)	(Loss)/profit for the period	(1,275)	1,502	2,134
	Attributable to:
(1,749)	Equity shareholders of Aviva plc	(1,347)	1,380	1,869
93	Minority interests	72	122	265
(1,656)		(1,275)	1,502	2,134

All (loss)/profit is from continuing operations. 

1.    Excludes the proportion of the results of Aviva Investors and other fund management operations within the Group that arise from the provision of fund management services to our Life businesses. These results are included within the Life EEV operating return consistent with CFO Forum EEV principles.

2.    Excludes the proportion of the results of subsidiaries providing services provided to the Life businesses. These results are included within the Life EEV operating return. 

Earnings per share - EEV basis

For the six months ended 30 June 2008

6 months  2008	Earnings per share	6 months  2008	6 months  2007	Full year  2007
	Operating profit on an EEV basis after tax, attributable  to ordinary shareholders of Aviva plc
51.7c	Basic (pence per share)	39.4p	38.6p	76.5p
51.3c	Diluted (pence per share)	39.1p	38.2p	75.8p
	(Loss)/profit after tax for the period on an EEV basis, attributable to ordinary shareholders of Aviva plc
(66.5)c	Basic (pence per share)	(51.5)p	53.3p	70.1p
(65.9)c	Diluted (pence per share)	(51.1)p	52.8p	69.5p

Page 29

Consolidated statement of recognised income 
and expense - EEV basis

For the six months ended 30 June 2008

6 months 2008 €m		6 months 2008 £m	6 months 2007 £m	Full year 2007 £m
(169)	Fair value (losses)/gains on AFS securities, owner-occupied properties and hedging instruments	(130)	48	45
83	Fair value losses/(gains) transferred to profit	64	-	(12)
(896)	Actuarial (losses)/gains on pension schemes (IFRS section: note 19)	(690)	830	648
92	Actuarial gains/(losses) on pension schemes transferred to unallocated divisible surplus and other movements	71	(84)	(61)
1,222	Foreign exchange rate movements	941	(47)	1,122
15	Aggregate tax effect - shareholder tax	11	(231)	(246)
347	Net income recognised directly in equity	267	516	1,496
(1,656)	(Loss)/profit for the period	(1,275)	1,502	2,134
(1,309)	Total recognised (expense)/income for the period	(1,008)	2,018	3,630
	Attributable to:
(1,618)	Equity shareholders of Aviva plc	(1,246)	1,900	3,194
309	Minority interests	238	118	436
(1,309)		(1,008)	2,018	3,630

Reconciliation of movements in consolidated shareholders' equity - EEV basis

For the six months ended 30 June 2008

6 months 2008 €m		6 months 2008 £m	6 months 2007 £m	Full year 2007 £m
31,106	Balance at 1 January	24,574	20,858	20,858
(1,275)	Total recognised (expense)/income for the period	(1,008)	2,018	3,630
(713)	Dividends and appropriations (IFRS section: note 16)	(563)	(501)	(871)
39	Issues of share capital, net of transaction costs	31	30	48
215	Shares issued in lieu of dividends	170	152	301
139	Capital contributions from minority shareholders	110	75	307
(95)	Minority share of dividends declared in the period	(75)	(63)	(66)
75	Minority interest in acquired subsidiaries	59	142	317
(98)	Changes in minority interest in existing subsidiaries	(78)	-	-
34	Reserves credit for equity compensation plans	27	24	50
29,427	Total equity	23,247	22,735	24,574
(4,286)	Minority interests	(3,385)	(2,409)	(3,131)
25,141	Balance at 30 June/31 December	19,862	20,326	21,443

  Page 30

Summarised consolidated balance sheet - 
EEV basis

As at 30 June 2008

30 June 2008 €m		30 June 2008 £m	Restated 30 June 2007 £m	Restated 31 December 2007 £m
	Assets
3,858	Goodwill	3,048	2,912	3,082
4,013	Acquired value of in-force business and intangible assets	3,170	2,836	3,197
9,912	Additional value of in-force long-term business	7,830	7,183	7,982
3,276	Interests in, and loans to, joint ventures	2,588	2,557	2,576
1,533	Interests in, and loans to, associates	1,211	891	1,206
1,261	Property and equipment	996	857	942
18,567	Investment property	14,668	15,682	15,077
47,325	Loans	37,387	30,207	36,193
	Financial investments
157,184	Debt securities	124,176	111,035	119,743
61,414	Equity securities	48,517	58,924	56,018
48,704	Other investments	38,476	36,517	40,413
10,541	Reinsurance assets	8,327	7,832	8,109
315	Deferred tax assets	249	765	590
676	Current tax assets	534	268	376
13,619	Receivables and other financial assets	10,760	10,957	8,629
6,423	Deferred acquisition costs and other assets	5,074	3,929	4,487
4,029	Prepayments and accrued income	3,183	2,773	2,986
23,776	Cash and cash equivalents	18,783	14,534	16,089
8,409	Assets of operations classified as held for sale	6,643	1,297	1,128
424,835	Total assets	335,620	311,956	328,823
	Equity
841	Ordinary share capital	664	647	655
5,716	Capital reserves	4,516	4,484	4,494
2,025	Other reserves	1,600	514	1,177
6,506	Retained earnings	5,140	6,098	6,233
8,547	Additional retained profit on an EEV basis	6,752	7,393	7,694
23,635	Equity attributable to ordinary shareholders of Aviva plc	18,672	19,136	20,253
1,506	Preference share capital and direct capital instrument	1,190	1,190	1,190
4,286	Minority interests	3,385	2,409	3,131
29,427	Total equity	23,247	22,735	24,574
	Liabilities
195,935	Gross insurance liabilities	154,789	144,687	153,040
124,844	Gross liabilities for investment contracts	98,627	92,101	98,244
5,146	Unallocated divisible surplus	4,065	9,489	6,785
8,372	Net asset value attributable to unitholders	6,614	4,624	5,101
3,035	Provisions	2,398	1,930	1,937
1,587	Deferred tax liabilities	1,254	3,013	2,529
1,381	Current tax liabilities	1,091	1,157	1,189
16,928	Borrowings	13,373	12,196	12,657
24,962	Payables and other financial liabilities	19,720	14,166	18,060
5,743	Other liabilities	4,537	4,808	3,765
7,475	Liabilities of operations classified as held for sale	5,905	1,050	942
395,408	Total liabilities	312,373	289,221	304,249
424,835	Total equity and liabilities	335,620	311,956	328,823

  Page 31

Segmentation of summarised consolidated 
balance sheet - EEV basis

As at 30 June 2008

	30 June 2008			Restated  30 June 2007			Restated 31 December 2007
	Life and Related Businesses £m	General Business and other £m	Group £m	Life and related Businesses £m	General Business and other £m	Group £m	Group £m
Total assets before acquired additional value of in-force long-term business	282,605	43,379	325,984	263,390	39,603	302,993	319,143
Acquired additional value of  in-force long-term business	1,806	-	1,806	1,744	-	1,744	1,698
Total assets included in the statutory IFRS balance sheet	284,411	43,379	327,790	265,134	39,603	304,737	320,841
Liabilities of the long-term business	(269,341)	-	(269,341)	(251,372)	-	(251,372)	(264,429)
Liabilities of the general insurance and other businesses	-	(43,032)	(43,032)	-	(37,849)	(37,849)	(39,820)
Net assets on a statutory  IFRS basis	15,070	347	15,417	13,762	1,754	15,516	16,592
Additional value of in-force  long-term business1	7,830	-	7,830	7,219	-	7,219	7,982
Net assets on an EEV basis2	22,900	347	23,247	20,981	1,754	22,735	24,574
Equity capital, capital reserves,  shares held by employee trusts  and other reserves			6,780			5,645	6,326
IFRS basis retained earnings			5,140			6,098	6,233
Additional EEV basis retained profit			6,752			7,393	7,694
Equity attributable to ordinary shareholders of Aviva plc on  an EEV basis			18,672			19,136	20,253
Preference share capital and direct capital instrument			1,190			1,190	1,190
Minority interests			3,385			2,409	3,131
EEV basis total equity			23,247			22,735	24,574

1.     The analysis between the Group's and the minority interest's share of the additional value of in-force long-term business is as follows:

	30 June 2008 £m	31 December 2007 £m	Movement in the period £m
Group's share included in shareholders' funds	6,752	7,694	(942)
Minority interest share	688	578	110
Movement in AFS securities	390	(290)	680
Per balance at 30 June/31 December*	7,830	7,982	(152)

*    Additional value of in-force long-term business of £7,219 million as at 30 June 2007 includes £36 million shown within assets of operations held for sale on the balance sheet.

2.     Analysis of net assets on an EEV basis is made up as follows:

	30 June 2008 £m	Restated 30 June 2007 £m	31 December 2007 £m
Embedded value	19,867	18,704	20,319
RBSG goodwill	217	217	217
Goodwill and intangible assets allocated to long-term business	2,118	1,652	2,036
Notional allocation of IAS 19 pension fund deficit to long-term business3,4	(140)	(56)	(58)
Minority interest in property investment vehicles	838	464	758
Long-term business net assets on an EEV basis5	22,900	20,981	23,272

3.    The value of the Aviva Staff Pension Scheme deficit has been notionally allocated between segments, based on current funding and the life proportion has been included within the long-term business net assets on an EEV basis.

4.    The pension fund deficit notionally allocated to long-term business is net of the proportion of funding borne by the UK with-profit funds.

5.    The long-term business net assets on an EEV basis have been restated to include the minority interest on property investment vehicles held in the UK. This change recognises that the embedded value reflects these investments post minority interest, whereas IFRS reports these investments gross. Prior year comparatives have been restated accordingly.

Page 32

Notes to the consolidated financial statements - EEV basis

1 - Basis of preparation - EEV basis 

The summarised consolidated income statement and balance sheet on pages 28 to 31 present the Group's results and financial position for the life and related businesses on the European Embedded Value (EEV) basis and for its non-life businesses on the International Financial Reporting Standards (IFRS) basis. The EEV methodology adopted is in accordance with the EEV Principles introduced by the CFO Forum in May 2004 and the Additional Guidance on EEV Disclosures published by the CFO Forum in October 2005. Detailed information on the basis of preparation and EEV methodology is set out in Aviva Plc's 2007 Report and Accounts; any updates are detailed below.

The directors consider that the EEV methodology represents a more meaningful basis of reporting the value of the Group's life and related businesses and the drivers of performance than IFRS methodology. This basis allows for the impact of uncertainty in the future investment returns more explicitly and is consistent with the way the business is priced and managed.

At the time the Group adopted EEV principles in 2004, its approach to establishing economic assumptions, including investment returns, required capital and discount rates, was reviewed by Tillinghast, a firm of actuarial consultants. The approach used by the Group is based on the established 'capital asset pricing model' theory and remains in line with EEV principles and guidance.

The results for the six month periods to 30 June 2008 and 30 June 2007 are unaudited but have been reviewed by Ernst & Young LLP. Their independent report in respect of 30 June 2008 is included in the Group's half year report on page 94 of that document. The half year accounts for the six months ended 30 June 2008 do not constitute statutory accounts as defined in Section 240 of the Companies Act 1985.

Covered business

Covered business includes the Group's share of our joint venture operations including our arrangement with The Royal Bank of Scotland Group (RBSG) and our operations in India, China, Turkey, Malaysia, Taiwan and South Korea.

Risk discount rates 

Following review at 30 June 2008, the directors have decided to maintain the life embedded value risk margin at 2.7%. The market assessed risk factor (beta) has reduced since the initial risk margin was originally set, implying a reduction of the risk in the life business. Management will keep the risk margin under review and will make adjustments as necessary to reflect past trends and future expected trends in the riskiness of the life business, based on the beta.

The sensitivity disclosures on pages 47 and 50 indicate the impact to the embedded value that would arise from a change in the risk discount rate.

2 - Components of life EEV return

The life EEV return comprises the following components:

• new business contribution written during the period including value added between the point of sale and end of the period;

• the profit from existing business equal to:

  - the expected return on the value of the in-force covered business at the beginning of the period, 

  - experience variances caused by the differences between the actual experience during the period   and expected experience based on the operating assumptions used to calculate the start of year value,

  - the impact of changes in operating assumptions including risk margins;

• the expected investment return on the shareholders' net worth, based upon assumptions applying at the start of the year;
• investment return variances caused by differences between the actual return in the period and the expected return based on economic assumptions used to calculate the start of year value; and,
• the impact of changes in economic assumptions in the period.
  
                                                

Page 33

2 - Components of life EEV return continued

The life EEV operating return comprises the first three of these components and is calculated using economic assumptions as at the start of the year and operating (demographic, expenses and tax) assumptions as at the end of the period.

	6 months 2008 £m	6 months 2007 £m	Full year 2007 £m
Life EEV return
New business contribution (after the effect of required capital)	488	419	912
Profit from existing business
- expected return	694	600	1,266
- experience variances	43	(19)	(16)
- operating assumption changes	(46)	11	114
Expected return on shareholders' net worth	301	240	477
Life EEV operating return before tax	1,480	1,251	2,753
Investment return variances	(2,638)	241	(450)
Effect of economic assumption changes	(145)	301	517
Life EEV return before tax	(1,303)	1,793	2,820
Tax on operating profit	(432)	(373)	(819)
Tax credit/(charge) on other activities	782	(146)	(1)
Life EEV return after tax	(953)	1,274	2,000

There were no separate development costs reported in these periods.

3 - New business contribution

The table below sets out the premium volumes, the contribution from and the resulting margin achieved on new business written by the life and related businesses.

The contribution generated by new business written during the period is the present value of the projected stream of after tax distributable profit from that business. New business contribution before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at appropriate rates of tax for other countries. New business contribution has been calculated using the same economic assumptions as those used to determine the embedded value as at the start of the year and operating assumptions used to determine the embedded value as at the end of the period, and is rolled forward to the end of the financial period. New business contribution is shown before and after the effect of required capital, calculated on the same basis as for in-force covered business.

New business sales are expressed on two bases: annual premium equivalent (APE) and the present value of new business premiums (PVNBP). The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate new business contribution, so the components of the new business margin are on a consistent basis. 

Page 34

3 - New business contribution continued

(a) Geographical analysis of new business

	Before the effect of required capital								After the effect of required capital
	Annual premium equivalent		Present value of new business premiums		New business contribution		New business   margin1		New business contribution		New business   margin1
	6 months 2008 £m	6 months 2007 £m	6 months 2008 £m	6 months 2007 £m	6 months 2008 £m	6 months 2007 £m	6 months 2008 %	6 months  2007  %	6 months 2008 £m	6 months 2007 £m	6 months 2008 %	6 months  2007  %
Life and pensions
United Kingdom	771	757	5,863	5,820	183	178	3.1%	3.1%	154	143	2.6%	2.5%
France	223	205	2,010	1,832	84	80	4.2%	4.4%	52	54	2.6%	2.9%
Ireland	103	131	648	889	5	14	0.8%	1.6%	2	12	0.3%	1.3%
Italy	154	218	1,275	1,818	37	49	2.9%	2.7%	29	37	2.3%	2.0%
Netherlands (including Belgium and Germany)	219	133	1,991	1,146	60	37	3.0%	3.2%	15	24	0.8%	2.1%
Poland	90	49	739	379	21	17	2.8%	4.5%	18	15	2.4%	4.0%
Spain	170	139	1,259	1,114	133	88	10.6%	7.9%	124	79	9.8%	7.1%
Other Europe	70	36	509	175	7	(2)	1.4%	(1.1)%	5	(3)	1.0%	(1.7)%
Europe	1,029	911	8,431	7,353	347	283	4.1%	3.8%	245	218	2.9%	3.0%
North America	227	183	2,205	1,716	92	57	4.2%	3.3%	68	35	3.1%	2.0%
Asia	94	66	580	414	22	20	3.8%	4.8%	15	16	2.6%	3.9%
Australia	42	44	204	240	12	12	5.9%	5.0%	6	7	2.9%	2.9%
Asia Pacific	136	110	784	654	34	32	4.3%	4.9%	21	23	2.7%	3.5%
Total life and pensions	2,163	1,961	17,283	15,543	656	550	3.8%	3.5%	488	419	2.8%	2.7%
Investment sales	278	410	2,417	3,751
Total  long-term savings (including share of associates and joint ventures)2	2,441	2,371	19,700	19,294

1.    New business margin represents the ratio of new business contribution to PVNBP, expressed as a percentage.

2.    Total long-term savings includes investment sales. Investment sales are calculated as new single premiums plus annualised value of new regular premiums.

Page 35

3 - New business contribution continued

(b) Analysis of new business by distribution channel

(i) Before the effect of required capital, tax and minority interest

	Annual premium equivalent		Present value of  new business premiums		New business contribution		New business margin
	6 months 2008  £m	6 months 2007  £m	6 months 2008  £m	6 months 2007  £m	6 months 2008  £m	6 months 2007  £m	6 months 2008  %	6 months 2007  %
Analysed between:
-     Bancassurance channels	598	557	4,695	4,541	243	204	5.2%	4.5%
-     Other distribution channels	1,565	1,404	12,588	11,002	413	346	3.3%	3.1%
Total	2,163	1,961	17,283	15,543	656	550	3.8%	3.5%

(ii) After the effect of required capital, tax and minority interest

	Annual premium equivalent		Present value of  new business premiums		New business contribution		New business margin
	6 months 2008  £m	6 months 2007  £m	6 months 2008  £m	6 months 2007  £m	6 months 2008  £m	6 months 2007  £m	6 months 2008  %	6 months 2007  %
Analysed between:
-     Bancassurance channels	372	320	2,894	2,586	80	71	2.8%	2.7%
-     Other distribution channels	1,528	1,367	12,319	10,716	200	169	1.6%	1.6%
Total	1,900	1,687	15,213	13,302	280	240	1.8%	1.8%

(c) Post tax internal rate of return on life and pensions new business

The internal rate of return (IRR) on life and pensions new business for the Group was 14.0% for the six months to 30 June 2008 (full year to 31 December 2007: 14.1%). 

The internal rate of return is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the life time of the business written, including allowance for the time value of options and guarantees, is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is the initial capital required to pay acquisition costs and set up statutory reserves in excess of premiums received ('initial capital'), plus required capital at the same level as for the calculation of new business contribution post cost of capital.

	6 months 2008
	Internal rate of return  %	Initial capital  £m	Required capital  £m	Total invested capital  £m
United Kingdom	13%	136	60	196
France	12%	21	68	89
Ireland	8%	30	14	44
Italy	17%	5	22	27
Netherlands (including Belgium and Germany)	7%	77	115	192
Poland	20%	16	7	23
Spain	45%	13	40	53
Other Europe	11%	32	7	39
Europe	14%	194	273	467
North America	14%	57	110	167
Asia Pacific	21%	28	27	55
Total	14%	415	470	885

The total initial capital for life and pensions new business for the six months to 30 June 2008 of £415 million (six months to 30 June 2007: £338 million) shown above is expressed at the point of sale. Hence it is higher than the impact of writing that new business on net worth of £372 million (six months to 30 June 2007: £318 million) shown on page 39, because the latter amount includes expected profits from the point of sale to the end of the reporting period, partly offset by the expected return on the initial capital.

Page 36

4 - Geographical analysis of the components of life EEV operating return

	6 months 2008  £m
	UK	France	Ireland	Italy	Nether-lands	Poland	Spain	Other Europe	Europe	North America	Asia	Australia	Asia Pacific	Total
New business contribution (after the effect of required capital)	154	52	2	29	15	18	124	5	245	68	15	6	21	488
Profit from existing business
expected return	243	108	28	21	104	46	43	8	358	70	10	13	23	694
experience     variances:
Maintenance expenses	6	-	(1)	(1)	(4)	3	(2)	(3)	(8)	-	-	-	-	(2)
Project and other related expenses1	(30)	-	(5)	-	(2)	-	(1)	(3)	(11)	(1)	(1)	(1)	(2)	(44)
Mortality/     Morbidity2	11	14	2	1	(7)	10	(2)	1	19	1	-	1	1	32
Lapses3	(10)	-	(1)	-	18	20	(12)	(3)	22	(18)	(3)	-	(3)	(9)
Other4	18	10	(5)	12	33	(2)	2	(1)	49	1	(3)	1	(2)	66
	(5)	24	(10)	12	38	31	(15)	(9)	71	(17)	(7)	1	(6)	43
-     operating assumption changes:
Maintenance expenses	-	-	(1)	-	1	-	-	1	1	(7)	(1)	-	(1)	(7)
Project and other related      expenses	(7)	-	-	-	-	-	-	-	-	-	-	-	-	(7)
Mortality/ Morbidity5	(11)	-	-	-	(37)	-	(6)	1	(42)	-	-	-	-	(53)
Lapses	-	-	-	-	-	-	-	-	-	-	(1)	-	(1)	(1)
Other6	30	61	-	-	(74)	-	-	(1)	(14)	4	2	-	2	22
	12	61	(1)	-	(110)	-	(6)	1	(55)	(3)	-	-	-	(46)
Expected return on shareholders'  net worth	67	52	11	27	92	8	11	3	204	21	5	4	9	301
Life EEV operating return  before tax	471	297	30	89	139	103	157	8	823	139	23	24	47	1,480

1.    Project and other related expenses in the UK reflect project costs associated with strategic initiatives, including developments designed to offer simpler products to customers, and the simplification of systems and processes. 

2.    Mortality experience continues to be better than the assumptions set across a number of our businesses.

3.    Lapse experience has been volatile, in part reflecting wider economic volatility. In the UK, lapse experience for non-profit pension and bond products was worse than expected. In Poland, lapse experience continued to be better than the long-term assumptions for both Life and Pension products. In Spain, the adverse lapse experience was observed on both protection and saving products. In the Netherlands the positive lapse variance mainly reflects better than expected persistency in the group pension business. In the USA, the surrender experience reflects a temporary increase in partial withdrawals on annuities. 

4.    In the UK, other experience profits include better than assumed default experience on corporate bonds and mortgages. In the Netherlands, this mainly reflects improved profitability of group pension business, principally driven by higher than expected salary increases.

5.    The mortality assumption change in the Netherlands reflects the impact of using the new industry mortality basis.

6.    In the UK, other operating assumptions reflect the distribution of a special bonus to with profit policyholders. In France, the impact reflects the reduction in the cost of required capital arising from the recognition of an increased value of an implicit item. In the Netherlands, the impact reflects a provision for restricting charges on existing unit linked contracts in line with the Ombudsman recommendation. 

Page 37

4 - Geographical analysis of the components of life EEV operating return continued

	6 months 2007  £m
	UK	France	Ireland	Italy	Nether-lands	Poland	Spain	Other Europe	Europe	North America	Asia	Australia	Asia Pacific	Total
New business contribution (after the effect of required capital)	143	54	12	37	24	15	79	(3)	218	35	16	7	23	419
Profit from existing business
-     expected  return	261	81	21	18	85	29	33	5	272	50	7	10	17	600
-     experience variances:
Maintenance expenses1	4	2	1	(1)	(10)	1	(1)	(2)	(10)	2	-	(1)	(1)	(5)
Project and other related expenses2	(56)	(1)	(1)	-	(6)	-	-	(3)	(11)	-	-	-	-	(67)
Mortality/ Morbidity3	3	11	-	-	2	6	(2)	2	19	(2)	2	2	4	24
Lapses4	(6)	5	(2)	(2)	(5)	11	(7)	(2)	(2)	-	(4)	2	(2)	(10)
Other5	18	19	(2)	4	(3)	4	(2)	3	23	(3)	-	1	1	39
	(37)	36	(4)	1	(22)	22	(12)	(2)	19	(3)	(2)	4	2	(19)
-     operating assumption changes:
Maintenance expenses6	-	13	-	-	-	-	-	-	13	-	-	(2)	(2)	11
Project and other related expenses2	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Mortality/ Morbidity	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Lapses	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Other	-	-	-	-	-	-	-	-	-	-	-	-	-	-
	-	13	-	-	-	-	-	-	13	-	-	(2)	(2)	11
Expected return on shareholders'  net worth	46	41	8	16	79	5	7	1	157	30	3	4	7	240
Life EEV operating return  before tax	413	225	37	72	166	71	107	1	679	112	24	23	47	1,251

1.    Maintenance expenses in Delta Lloyd reflect the impact of expense overruns in Belgium and ABN AMRO.

2.    Project and other related expenses in the UK reflect project costs associated with strategic initiatives, including developments designed to offer simpler products to customers, and the simplification of systems and processes. In the Netherlands, these expenses reflect higher project costs compared to allowances.

3.    Mortality experience continues to be better than the assumptions set across a number of our businesses.

4.    Lapse experience in Poland continues to be better than the assumptions set for both Life and Pension products. This has been offset by small negative experience variances across a number of our other businesses.

5.    In the UK, other experience profits include better than assumed default experience on corporate bonds and commercial mortgages. In France, positive experience includes the benefit of higher than assumed tax-free dividend income.

6.    In France, the maintenance expenses assumption change relates to lower 'look through' expenses in the holding company.

Page 38

4 - Geographical analysis of the components of life EEV operating return continued

	Year ended 31 December 2007  £m
	UK	France	Ireland	Italy	Nether-lands	Poland	Spain	Other Europe	Europe	North America	Asia	Australia	Asia Pacific	Total
New business contribution (after the effect of required capital)	305	117	25	61	53	32	173	(5)	456	108	27	16	43	912
Profit from existing business
-     expected      return	538	163	45	37	192	62	65	16	580	114	13	21	34	1,266
-     experience      variances:
Maintenance          expenses	10	4	(4)	(2)	(3)	3	(1)	(5)	(8)	(2)	(1)	-	(1)	(1)
Project and          other          related          expenses1	(90)	9	(3)	-	(19)	-	(2)	(8)	(23)	(17)	(2)	(3)	(5)	(135)
Mortality/         Morbidity2	14	27	(1)	1	7	14	(4)	3	47	(3)	8	3	11	69
Lapses3	(5)	10	3	(6)	(9)	23	(9)	3	15	-	(4)	(1)	(5)	5
Other4	26	3	(5)	7	(3)	9	10	(3)	18	(1)	-	3	3	46
	(45)	53	(10)	-	(27)	49	(6)	(10)	49	(23)	1	2	3	(16)
-     operating      assumption      changes:
Maintenance      expenses5	7	2	(1)	(2)	-	5	-	(8)	(4)	(30)	1	-	1	(26)
Project and          other          related          expenses	(2)	(1)	-	-	(7)	-	-	(9)	(17)	-	-	-	-	(19)
Mortality/         Morbidity6	(133)	(2)	-	3	(31)	14	(8)	(1)	(25)	-	(1)	4	3	(155)
Lapses7	(6)	-	-	(2)	2	35	(16)	4	23	(8)	(4)	(2)	(6)	3
Other8	108	122	-	7	12	-	16	5	162	42	-	(1)	(1)	311
	(26)	121	(1)	6	(24)	54	(8)	(9)	139	4	(4)	1	(3)	114
Expected return on shareholders'  net worth	92	83	18	33	158	9	15	3	319	52	6	8	14	477
Life EEV operating return  before tax	864	537	77	137	352	206	239	(5)	1,543	255	43	48	91	2,753

1.    Project and other related expenses in the UK reflect project costs associated with strategic initiatives, including developments designed to offer simpler products to customers, and the simplification of systems and processes. In the Netherlands, project costs mainly represent one-off restructuring costs in the Dutch businesses. In the USA, expenses reflect a number of one-off expenses including management incentive rewards, brand awareness and investment in strategic systems.

2.    Mortality experience continues to be better than the assumptions set across a number of our businesses.

3.    Lapse experience in Poland continues to be better than the long-term assumptions set for both Life and Pension products.

4.    In the UK, other experience profits include better than assumed default experience on corporate bonds and commercial mortgages. 

5.    In the USA, expense assumptions have been strengthened following investment to support the growth in the business.

6.    In the UK, the allowance for annuitant mortality improvement has been strengthened, by increasing the minimum rates of improvement.

7.    In Poland lapse assumptions have been changed following continued favourable experience. In Spain, lapse assumptions have been strengthened mainly on risk products.

8.    In the UK, other operating assumption changes include the reduction in the level of required capital assumed on the Company's annuity portfolio. In France, other operating assumption changes reflect increased profitability driven by product development and the increased proportion of unit-linked assets within managed funds. In the USA, other assumption changes relate to the implementation of the AXXX securitisation, an efficient financing solution to free up capital previously held to support excessive regulatory reserves.

Page 39

5 - Analysis of movement in life and related businesses embedded value

The following tables provide an analysis of the movement in embedded value for the life and related businesses for the six months to 30 June 2008 and the six months to 30 June 2007. The analysis is shown separately for net worth and the value of in-force covered business, and includes amounts transferred between these categories. The transfer to life and related businesses from other segments consists of service company profits and losses during the reported period that have emerged from the value of in-force. Since the 'look through' into service companies includes only future profits and losses, these amounts must be eliminated from the closing embedded value. All figures are shown net of tax.

	6 months 2008
	Net worth  £m	Value of  in-force  £m	Total  £m
Embedded value at the beginning of the period - Free Surplus	4,127
- Required capital1	6,331
Total	10,458	9,861	20,319
New business contribution (after the effect of required capital)	(372)	716	344
Expected return on existing business - return on VIF	-	498	498
Expected return on existing business - transfer to net worth	702	(702)	-
Experience variances and operating assumption changes	141	(149)	(8)
Expected return on shareholders' net worth	214	-	214
Investment return variances and economic assumption changes	(1,464)	(537)	(2,001)
Life EEV return after tax	(779)	(174)	(953)
Exchange rate movements	531	400	931
Embedded value from business acquired	175	50	225
Net amounts released from life and related businesses	(626)	-	(626)
Transfer from life and related businesses to other segments	(29)	-	(29)
Embedded value at the end of the period     - Free Surplus	2,979
- Required capital1	6,751
Total	9,730	10,137	19,867

1.    Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.

The embedded value of business acquired in the six months to 30 June 2008 of £225 million represents the embedded value of UBI Assicurazioni Vita SpA in Italy, Swiss Life Belgium and LIG Life Insurance Co. Ltd, in South Korea.

Required capital has increased in the period by £420 million. The movement comprises an increase of £470 million in relation to new business written, a reduction of £398 million regarding in-force business, a reduction £145 million due to an increase in implicit items, £153 million additional in-force required capital relating to the acquisitions during the period and a £340 million increase due to foreign exchange rate movements.

	6 months 2007
	Net worth  £m	Value of in-force £m	Total £m
Embedded value at the beginning of the period - Free Surplus	3,569
- Required capital1	5,314
Total	8,883	9,215	18,098
New business contribution (after the effect of required capital)	(318)	611	293
Expected return on existing business - return on VIF	-	425	425
Expected return on existing business - transfer to net worth	644	(644)	-
Experience variances and operating assumption changes	325	(332)	(7)
Expected return on shareholders' net worth	167	-	167
Investment return variances and economic assumption changes	602	(206)	396
Life EEV return after tax	1,420	(146)	1,274
Exchange rate movements	(16)	(12)	(28)
Embedded value from business acquired	33	9	42
Net amounts released from life and related businesses	(666)	-	(666)
Transfer from life and related businesses to other segments	(16)	-	(16)
Embedded value at the end of the period - Free Surplus	4,033
- Required capital1	5,605
Total	9,638	9,066	18,704

1.    Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.

Page 40

6 - Segmental analysis of life and related businesses embedded value

30 June 2008	Net worth		Value of in-force  covered business		Total
	Required  capital1 £m	Free surplus £m	Present value of in-force £m	Cost of required capital £m	Embedded value £m
United Kingdom	1,329	998	4,569	(349)	6,547
France	1,495	22	1,422	(337)	2,602
Ireland	285	215	584	(48)	1,036
Italy	391	514	338	(72)	1,171
Netherlands (including Belgium and Germany)	1,649	910	1,789	(589)	3,759
Poland	150	80	832	(48)	1,014
Spain	341	130	790	(79)	1,182
Other Europe	25	44	127	(11)	185
Europe	4,336	1,915	5,882	(1,184)	10,949
North America2,3	804	(82)	1,159	(167)	1,714
Asia Pacific	282	148	310	(83)	657
Total	6,751	2,979	11,920	(1,783)	19,867

1.    Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.

2.    Aviva USA holding company debt amounting to £356 million at 30 June 2008 (30 June 2007: £349 million; 31 December 2007: £349 million) has been included within other operations.

3.    The temporary negative free surplus in Aviva USA reflects the different impact of reduced equity markets on regulatory reserves and the matching derivative protection for equity indexed products.

31 December 2007	Net worth		Value of in-force  covered business		Total
	Required  capital1  £m	Free surplus  £m	Present value of in-force  £m	Cost of required capital  £m	Embedded value  £m
United Kingdom	1,307	1,338	4,816	(355)	7,106
France	1,510	74	1,416	(340)	2,660
Ireland	267	213	564	(45)	999
Italy	305	464	299	(61)	1,007
Netherlands (including Belgium and Germany)	1,456	1,557	1,605	(442)	4,176
Poland	129	128	726	(41)	942
Spain	316	87	714	(69)	1,048
Other Europe	24	33	110	(11)	156
Europe	4,007	2,556	5,434	(1,009)	10,988
North America	776	46	918	(152)	1,588
Asia Pacific	241	187	281	(72)	637
Total	6,331	4,127	11,449	(1,588)	20,319

1.    Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.

The shareholders' net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in the non-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets. Required capital, net of implicit items, is included within the net worth.

The value of in-force covered business includes 'cost of required capital' - the effect of holding shareholders' capital to support the level of required capital and allowing for projected future releases. 

Page 41

7 - Time value of options and guarantees

The following table sets out the time value of options and guarantees relating to covered business by territory.

	30 June  2008  £m	30 June  2007  £m	31 December 2007  £m
United Kingdom	49	46	50
France	120	79	89
Ireland	2	2	2
Italy	24	18	22
Netherlands (including Belgium and Germany)	166	105	129
Poland	5	5	4
Spain	5	4	4
Other Europe	1	1	1
Europe	323	214	251
North America	66	55	85
Asia Pacific	6	6	6
Total	444	321	392

The time value of options and guarantees (TVOG) is most significant in the United Kingdom, France, the Netherlands and the United States. In the United Kingdom, this relates mainly to non-market value adjustment (MVA) guarantees on unitised with-profit business, guaranteed annuity rates and negative equity guarantees on equity release business. In France, this relates mainly to guaranteed crediting rates and surrender values on traditional business including the AFER fund. In the Netherlands, this relates mainly to maturity guarantees on unit-linked products and interest rate guarantees on traditional individual and group profit sharing business. In the United States, this relates to crediting rate, death benefit and surrender guarantees on life business.

The TVOG has increased by £52 million to £444 million reflecting the increase from exchange rates and the additional TVOG from acquistions. 

8 - Analysis of service companies and fund management businesses within embedded value

The EEV methodology incorporates the impact of profits and losses arising from subsidiary undertakings providing administration, investment management and other services where these arise in relation to covered business. The principal subsidiaries of the Aviva group providing such services include NU Life Services Limited (UK) and Aviva Investors. The following table provides an analysis of the elements within the life and other related business embedded value:

	30 June  2008			31 December 2007
	Fund management £m	Other operations  £m	Total £m	Total £m
United Kingdom	139	(141)	(2)	2
France	141	29	170	169
Netherlands	100	(62)	38	33
Other	29	10	39	35
Total	409	(164)	245	239

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 businesses operating expenditure, comprising acquisition, maintenance and project costs. Costs are recharged to the UK Life companies (the product companies) on the basis of pre-determined Management Services Agreements (MSAs) which will be reviewed in 2008. 

The EEV principles 'look-through' the contractual terms of the MSA to the underlying expenses of NULS. Accordingly the actual maintenance expenses and a 'normal' annual level of project expense allowances have been applied to the product companies. Under EEV, any further one-off project expenditure is reported as experience losses when incurred.

Page 42

9 - Analysis of fund management operating profit

The summarised consolidated income statement - EEV basis, includes profit from the Group's fund management operations as analysed below. As explained in note 8, this excludes the proportion of the results of Aviva Investors and other fund management operations within the Group that arises from the provision of fund management services to our Life businesses. These results are included within the Life EEV operating return.

	6 months  2008  £m	6 months   20071  £m	Full year   20071   £m
United Kingdom	13	18	40
France	5	5	10
Canada	1	1	3
Other	1	5	11
Aviva Investors	20	29	64
United Kingdom	(8)	(4)	(10)
Netherlands	6	9	17
Other Europe	3	2	4
Europe	9	11	21
Asia Pacific	9	9	15
Total	30	45	90

1.     Prior periods have been restated to reflect the new management structure to include France and Canada. Norwich Union's retail investment business and the collective investment business with RBSG do not form part of Aviva Investors UK operations. 

On 28 February, as part of the 'one Aviva, twice the value' vision, we announced our plans to combine the  asset management companies within Aviva to create a single, globally integrated asset manager to be known as Aviva Investors. 

10 - Analysis of other operations and regional costs

The summarised consolidated income statement - EEV basis, includes the results of the Group's other operations as analysed below. Where subsidiaries provide services to our life businesses, that proportion has been excluded. These results are included within the life EEV operating return.

	6 months  2008  £m	6 months  2007  £m	Full year  2007  £m
Europe	(12)	-	(11)
North America	(5)	-	(2)
Asia Pacific	(9)	-	(3)
Regional costs	(26)	-	(16)
United Kingdom	(33)	(23)	(8)
Europe	(1)	(18)	(34)
North America	1	-	(2)
Asia Pacific	2	(4)	(10)
Other operations	(31)	(45)	(54)
Total	(57)	(45)	(70)

Page 43

11 - Summary of minority interest in life and related businesses' EEV results

6 months 2008	France  £m	Ireland  £m	Italy  £m	Nether- lands  £m	Poland  £m	Spain  £m	Europe  £m	Asia Pacific  £m	Total  £m	Share-holders interest  £m	Group  £m
Minority interest
New business   contribution before   effect of required capital	15	1	22	3	2	70	113	-	113	543	656
Effect of required capital	(8)	(1)	(5)	(3)	-	(4)	(21)	-	(21)	(147)	(168)
New business   contribution    after effect of    required capital	7	-	17	-	2	66	92	-	92	396	488
Life EEV operating return before tax	25	7	50	13	13	80	188	2	190	1,290	1,480
Life EEV return after tax	2	(8)	22	2	8	32	58	-	58	(1,011)	(953)
Closing life and related businesses' embedded value	222	253	619	146	129	532	1,901	11	1,912	17,955	19,867

6 months 2007	France  £m	Ireland  £m	Italy  £m	Nether-lands  £m	Poland  £m	Spain  £m	Europe  £m	Asia Pacific  £m	Total  £m	Share- holders interest  £m	Group  £m
Minority interest
New business   contribution    before effect of    required capital	13	3	28	3	2	45	94	1	95	455	550
Effect of required    capital	(6)	(1)	(7)	(1)	-	(4)	(19)	-	(19)	(112)	(131)
New business   contribution after   effect of required   capital	7	2	21	2	2	41	75	1	76	343	419
Life EEV operating   return before tax	19	8	40	8	9	55	139	1	140	1,111	1,251
Life EEV return    after tax	6	9	31	4	10	33	93	1	94	1,180	1,274
Closing life   and related   businesses'   embedded value	165	224	438	105	92	391	1,415	10	1,425	17,279	18,704

There are no minorities in the United Kingdom or North America.

  Page 44

12 - Principal economic assumptions

(a) Deterministic calculations

Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting period. The same margins are applied on a consistent basis across the Group to gross risk-free yields to obtain investment return assumptions for ordinary shares and property and to produce risk discount rates. Additional country-specific risk margins are applied to smaller businesses to reflect additional economic, political and business-specific risk, which result in the application of risk margins ranging from 3.7% to 8.7% in our eastern European and Asian business operations. Expense inflation is derived as a fixed margin above a local measure of long-term price inflation. Risk free rates and price inflation have been harmonised across territories within the Euro currency zone, except for expense inflation in Ireland where significant differences remain. Required capital is shown as a multiple of the EU statutory minimum solvency margin or equivalent.

Investment return assumptions are generally derived by major product class, based on hypothecating the assets at the valuation date. Future assumed reinvestment rates are consistent with implied market returns at 30 June 2008. Rates have been derived using rates from the current yield curve at a duration based on the term of the liabilities, or directly from forward yield curves where considered appropriate. Assumptions about future investment mix are consistent with long-term plans. In most cases, the investment mix is assumed to continue unchanged throughout the projection period. The changes in assumptions between reporting dates reflect the actual movements in risk free yields in the United Kingdom, the Eurozone and other territories. The principal economic assumptions used are as follows:

	United Kingdom				France
	30 June  2008	31 Dec  2007	30 June  2007	31 Dec  2006	30 June  2008	31 Dec  2007	30 June  2007	31 Dec  2006
Risk discount rate	7.9%	7.3%	8.0%	7.3%	7.5%	7.1%	7.3%	6.7%
Pre-tax investment returns:
Base government      fixed interest	5.2%	4.6%	5.3%	4.6%	4.8%	4.4%	4.6%	4.0%
Ordinary shares	8.2%	7.6%	8.3%	7.6%	7.8%	7.4%	7.6%	7.0%
Property	7.2%	6.6%	7.3%	6.6%	6.8%	6.4%	6.6%	6.0%
Future expense inflation	4.2%	3.5%	3.5%	3.4%	2.5%	2.5%	2.5%	2.5%
Tax rate	28.0%	28.0%	28.0%	30.0%	34.4%	34.4%	34.4%	34.4%
Required Capital  (% EU minimum)	100%	100%	150%/ 100%	150%/ 100%	115%	115%	115%	115%

	Ireland				Italy
	30 June  2008	31 Dec  2007	30 June  2007	31 Dec  2006	30 June  2008	31 Dec  2007	30 June  2007	31 Dec  2006
Risk discount rate	7.5%	7.1%	7.3%	6.7%	7.5%	7.1%	7.3%	6.7%
Pre-tax investment returns:
Base government      fixed interest	4.8%	4.4%	4.6%	4.0%	4.8%	4.4%	4.6%	4.0%
Ordinary shares	7.8%	7.4%	7.6%	7.0%	7.8%	7.4%	7.6%	7.0%
Property	6.8%	6.4%	6.6%	6.0%	6.8%	6.4%	6.6%	6.0%
Future expense inflation	4.0%	4.0%	4.0%	4.0%	2.5%	2.5%	2.5%	2.5%
Tax rate	12.5%	12.5%	12.5%	12.5%	32.4%	32.4%	38.3%	38.3%
Required Capital  (% EU minimum)	150%	150%	150%	150%	115%	115%	115%	115%

	Netherlands				Poland
	30 June  2008	31 Dec  2007	30 June  2007	31 Dec  2006	30 June  2008	31 Dec  2007	30 June  2007	31 Dec  2006
Risk discount rate	7.5%	7.1%	7.3%	6.7%	9.7%	9.4%	9.2%	8.7%
Pre-tax investment returns:
Base government      fixed interest	4.8%	4.4%	4.6%	4.0%	6.0%	5.7%	5.5%	5.0%
Ordinary shares	7.8%	7.4%	7.6%	7.0%	9.0%	8.7%	8.5%	8.0%
Property	6.8%	6.4%	6.6%	6.0%	n/a	n/a	n/a	n/a
Future expense inflation	2.5%	2.5%	2.5%	2.5%	4.4%	4.1%	3.9%	3.4%
Tax rate	25.5%	25.5%	25.5%	25.5%	19.0%	19.0%	19.0%	19.0%
Required Capital  (% EU minimum)	150%	150%	150%	150%	150%	150%	150%	150%

Page 45

12 - Principal economic assumptions continued

	Spain				United States
	30 June  2008	31 Dec  2007	30 June  2007	31 Dec  2006	30 June  2008	31 Dec  2007	30 June  2007	31 Dec   2006
Risk discount rate	7.5%	7.1%	7.3%	6.7%	6.7%	6.7%	7.7%	7.4%
Pre-tax investment returns:
Base government  fixed interest	4.8%	4.4%	4.6%	4.0%	4.0%	4.0%	5.0%	4.7%
Ordinary shares	7.8%	7.4%	7.6%	7.0%	7.0%	7.0%	8.0%	7.7%
Property	6.8%	6.4%	6.6%	6.0%	n/a	n/a	n/a	n/a
Future expense inflation	2.5%	2.5%	2.5%	2.5%	3.0%	3.0%	3.0%	3.0%
Tax rate	30.0%	30.0%	30.0%	30.0%	35.0%	35.0%	35.0%	35.0%
Required Capital  (% EU minimum)	125%/ 110%	125%/ 110%	125%/ 110%	125%/ 110%	250%	250%	250%	250%

For service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company. Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for credit risk. Following the change made in 2007 to the required capital in Norwich Union Annuity Limited (NUA), required capital in the United Kingdom is now 100%. Required capital in Spain is 125% EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies. The level of required capital for the US business is 250% of the risk based capital, at the company action level, set by the National Association of Insurance Commissioners. The required capital is equivalent to 5% of the insurance liabilities on a local regulatory basis which is broadly equivalent to the required capital we hold for our main European businesses.

Other economic assumptions

Required capital relating to with-profit business is assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders. Bonus rates on participating business have been set at levels consistent with the economic assumptions and Aviva's medium-term bonus plans. The distribution of profit between policyholders and shareholders within the with-profit funds assumes that the shareholder interest in conventional with-profit business in the United Kingdom and Ireland continues at the current rate of one-ninth of the cost of bonus.

(b) Stochastic calculations

The time value of options and guarantees calculation allows for expected management and policyholder actions in response to varying future investment conditions. The management actions modelled include changes to asset mix and bonus rates. Modelled policyholder actions are described under 'Other assumptions'.

This section describes the models used to generate future investment simulations and gives some sample statistics for the simulations used. Two separate models have been used, for the UK businesses and for International businesses, to better reflect the characteristics of the businesses.

United Kingdom

Model

Overall asset returns have been generated assuming that the portfolio total return has a lognormal distribution. 
The mean and standard deviation of the overall asset return have been calculated using the evolving asset mix of the fund and assumptions over the mean and standard deviation of each asset class, together with the correlations between them.

Asset classes

The significant asset classes for UK participating business are equities, property and long-term fixed rate bonds. The most significant assumption is the distribution of future long-term interest rates, since this is the most important factor in the cost of guaranteed annuity options.

Summary statistics

The following table sets out the mean and standard deviations (StDev) of future returns at 30 June 2008 for the three most significant asset classes. Interest rates are assumed to have a lognormal distribution with an annualised standard deviation of 11.5% p.a. for the natural logarithm of the interest rate.

	Mean1	StDev2
Equities	8.2%	25.5%
Property	7.2%	15%
Government Bonds	5.2%	3.5 - 4.75%3

1.    Means have been calculated by accumulating a unit investment for the required number of years in each simulation, averaging the accumulation across all simulations, and converting the result to an equivalent annual rate (by taking the nth root of the average accumulation minus one).

2.    Standard deviations have been calculated by accumulating a unit investment for the required number of years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by the projection period (n years) and taking the square root. This makes the result comparable to implied volatilities quoted in investment markets.

3.    Depending on the duration of the portfolio.

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12 - Principal economic assumptions continued

For the UK, the statistics are the same over all projection horizons. Assumptions are also required for correlations between asset classes. These have been set based on an assessment of historical data. Returns for corporate fixed interest investments in each scenario are equal to the return on Government bonds plus a fixed additional amount, based on current spreads less a margin for credit risk.

International

Model 

Government nominal interest rates are generated by a model that projects a full yield curve at annual intervals. The model assumes that the logarithm of the short rate follows a mean reverting process subject to two normally distributed random shocks. This ensures that nominal interest rates are always positive, the distribution of future interest rates remains credible, and the model can be calibrated to give a good fit to the initial yield curve.

The total annual return on equities is calculated as the return on one year bonds plus an excess return. The excess return is assumed to have a lognormal distribution. The model also generates property total returns and real yield curves, although these are not significant asset classes for Aviva outside the UK. 

Asset classes

The most important assets are fixed rate bonds of various durations. In some businesses equities are also an important asset class. 

Summary statistics

The following table sets out the means and standard deviations of future euro and US dollar returns at 30 June 2008 for the three most significant asset classes: equities (in the case of euro), short-term bonds (defined to be of one year duration) and long-term bonds (defined to be ten year zero coupon bonds). In the accumulation of ten year bonds, it is assumed that these are held for one year, sold as nine year bonds then the proceeds are reinvested in ten year bonds, although in practice businesses follow more complex asset strategies or tend to adopt a buy and hold strategy. Correlations between asset classes have been set using the same approach as described for the United Kingdom.

	5-year return		10-year return		20-year return
	Mean1	StDev2	Mean1	StDev2	Mean1	StDev2
Euro
Short Government Bonds	4.5%	2.0%	4.5%	3.9%	4.8%	7.0%
Long Government Bonds	5.2%	5.1%	5.1%	3.8%	5.1%	4.2%
Equities	7.8%	19.9%	7.7%	19.7%	7.7%	19.6%
US dollar
Short Government Bonds	3.3%	1.7%	4.0%	3.9%	4.5%	7.1%
Long Government Bonds	4.1%	5.4%	4.8%	3.9%	5.2%	4.1%

1.    Means have been calculated by accumulating a unit investment for the required number of years in each simulation, averaging the accumulation across all simulations, and converting the result to an equivalent annual rate (by taking the nth root of the average accumulation minus one).

2.    Standard deviations have been calculated by accumulating a unit investment for the required number of years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by the projection period (n years) and taking the square root. This makes the result comparable to implied volatilities quoted in investment markets.

(c) Other assumptions

Taxation

Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have been announced.

Demographic assumptions

Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva's recent operating experience. Where appropriate, surrender and option take up rate assumptions that vary according to the investment scenario under consideration have been used in the calculation of the time value of options and guarantees, based on our assessment of likely policyholder behaviour in different investment scenarios.

Expense assumptions

Management expenses and operating expenses of holding companies attributed to life and related businesses have been included in the EEV calculations and split between expenses relating to the acquisition of new business, the maintenance of business in-force and project expenses. Future expense assumptions include an allowance for maintenance expenses and a proportion of recurring project expenses. Certain expenses of an exceptional nature, when they occur, are identified separately and are generally charged as incurred. No future productivity gains have been anticipated.

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12 - Principal economic assumptions continued

Where subsidiary companies provide administration, investment management or other services to businesses included in the European Embedded Value calculations, the value of profits or losses arising from these services have been included in the embedded value and new business contribution. 

Valuation of debt

Borrowings in the EEV consolidated balance sheet are valued on an IFRS basis, consistent with the primary financial statements. At 30 June 2008 the market value of the Group's external debt, subordinated debt, preference shares including General Accident plc preference shares of £250 million (classified as minority interests) and direct capital instrument was £5,753 million (31 December 2007: £5,774 million). 

	30 June  2008  £m	30 June  2007  £m	31 December  2007  £m
Borrowings per summarised consolidated balance sheet - EEV basis	13,373	12,196	12,657
Add: amount included within held for sale	13	11	12
Less: Securitised mortgage funding	(7,620)	(6,825)	(7,295)
Borrowings excluding non-recourse funding - EEV basis	5,766	5,382	5,374
Less: Operational financing by businesses	(1,134)	(1,176)	(1,063)
External debt and subordinated debt - EEV basis	4,632	4,206	4,311
Add: Preference shares (including General Accident plc) and direct capital instrument	1,440	1,440	1,440
External debt, subordinated debt, preference shares and direct capital instrument - EEV basis	6,072	5,646	5,751
Effect of marking these instruments to market	(319)	50	23
Market value of external debt, subordinated debt, preference shares  and direct capital instrument	5,753	5,696	5,774

Other

It has been assumed that there will be no changes to the methods and bases used to calculate the statutory technical provisions and current surrender values, except where driven by varying future investment conditions under stochastic economic scenarios.

13 - Sensitivity analysis

(a) Economic assumptions

The following tables show the sensitivity of the embedded value as at 30 June 2008 and the new business contribution before the effect of required capital for the six months to 30 June 2008 to:

• one percentage point increase and decrease in the discount rates;
• one percentage point increase and decrease in interest rates, including all consequential changes (including assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);
• one percentage point increase and decrease in the assumed investment returns for equity and property investments, excluding any consequential changes to the risk discount rate;
• 10% rise and fall in market value of equity and property assets (not applicable for new business contribution); and
• decrease in the level of required capital to 100% EU minimum (or equivalent) (not applicable for new business contribution).

In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns. Some of the sensitivity scenarios may have consequential effects on valuation bases, where the basis for certain blocks of business is actively updated to reflect current economic circumstances. Consequential valuation impacts on the sensitivities are allowed for where an active valuation basis is used. Where businesses have a target asset mix, the portfolio is re-balanced after a significant market movement otherwise no re-balancing is assumed.

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13 - Sensitivity analysis continued

Embedded value (net of tax)  30 June 2008	As reported on page 41  £m	1%  increase in discount rates  £m	1% decrease in discount rates  £m	1%  increase in interest rates  £m	1% decrease in interest rates  £m
United Kingdom	6,547	(430)	495	(340)	405
France	2,602	(180)	210	(175)	155
Ireland	1,036	(40)	45	(45)	55
Italy	1,171	(35)	40	20	(45)
Netherlands (including Belgium and Germany)	3,759	(245)	285	(130)	(10)
Poland	1,014	(55)	65	(20)	20
Spain	1,182	(55)	65	(30)	30
Other Europe	185	(10)	5	-	5
Europe	10,949	(620)	715	(380)	210
North America	1,714	(70)	75	(145)	135
Asia Pacific	657	(25)	25	(5)	(5)
Total	19,867	(1,145)	1,310	(870)	745

Embedded value (net of tax)  30 June 2008	As reported on page 41  £m	1%  increase in equity/ property returns  £m	1% decrease in equity/ property returns  £m	10% rise in equity/ property market values  £m	10% fall in equity/ property market values  £m	EU minimum capital (or equivalent)  £m
United Kingdom	6,547	215	(210)	405	(420)	-
France	2,602	100	(100)	135	(140)	60
Ireland	1,036	15	(20)	25	(30)	15
Italy	1,171	10	(10)	5	(15)	10
Netherlands (including Belgium and Germany)	3,759	310	(320)	425	(425)	160
Poland	1,014	15	(15)	20	(20)	15
Spain	1,182	10	(10)	20	(15)	10
Other Europe	185	-	-	-	-	-
Europe	10,949	460	(475)	630	(645)	270
North America	1,714	10	(10)	-	-	95
Asia Pacific	657	10	(10)	15	(15)	15
Total	19,867	695	(705)	1,050	(1,080)	380

In general, the magnitude of the sensitivities will reflect the size of the embedded values, though this will vary as the sensitivities have different impacts on the different components of the embedded value. In addition, other factors can have a material impact, such as the nature of the options and guarantees, as well as the types of investments held. The interest rate sensitivity will vary significantly by territory, depending on the type of business written: for example, where non-profit business is well matched by backing assets, the favourable impact of reducing the risk discount rate is the dominant factor.

Sensitivities will also vary according to the current economic assumptions, mainly due to the impact of changes to both the intrinsic cost and time value of options and guarantees. Options and guarantees are the main reason for the asymmetry of the sensitivities where the guarantee impacts to different extents under the different scenarios. This can be seen in the sensitivity of a 1% movement in the interest rate for the Netherlands, where there is a significant amount of business with investment return guarantees. 

Sensitivities to a 1% movement in the equity/property return will only impact the value of the in-force covered business, whereas a 10% movement in equity/property values may impact both the net worth and the value of in-force, depending on the allocation of assets.

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13 - Sensitivity analysis continued

New business contribution  before required capital (gross of tax) 6 months 2008	As reported on page 35  £m	1%  increase in discount rates  £m	1% decrease in discount rates  £m	1%  increase in interest rates  £m	1% decrease in interest rates  £m
United Kingdom	183	(25)	27	(11)	14
France	84	(8)	9	(2)	4
Ireland	5	(2)	2	(1)	1
Italy	37	(2)	2	-	(1)
Netherlands (including Belgium and Germany)	60	(15)	19	3	(12)
Poland	21	(2)	2	-	-
Spain	133	(8)	10	(2)	2
Other Europe	7	(1)	1	(1)	2
Europe	347	(38)	45	(3)	(4)
North America	92	(5)	5	(7)	2
Asia Pacific	34	(3)	3	2	(3)
Total	656	(71)	80	(19)	9

New business contribution  before required capital (gross of tax)  6 months 2008	As reported on page 35  £m	1%  increase in equity/ property returns  £m	1% decrease in equity/ property returns  £m
United Kingdom	183	11	(11)
France	84	4	(2)
Ireland	5	1	(1)
Italy	37	-	-
Netherlands (including Belgium and Germany)	60	32	(34)
Poland	21	1	(1)
Spain	133	2	(2)
Other Europe	7	1	-
Europe	347	41	(40)
North America	92	2	(2)
Asia Pacific	34	1	(1)
Total	656	55	(54)

(b) Non-economic assumptions

The tables below show the sensitivity of the embedded value as at 30 June 2008 and the new business contribution before the effect of required capital for the six months to 30 June 2008 to the following changes in non-economic assumptions:

• 10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of £10 p.a. would represent an expense assumption of £9pa). Where there is a 'look through' into service company expenses the fee charged by the service company is unchanged while the underlying expense decreases;
• 10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% p.a. would represent a lapse rate of 4.5% p.a.);
• 5% decrease in both mortality and morbidity rates disclosed separately for life assurance and annuity business. 

No future management actions are modelled in reaction to the changing non-economic assumptions. In each sensitivity calculation all other assumptions remain unchanged. No changes to valuation bases have been included.

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13 - Sensitivity analysis continued

Embedded value (net of tax)  30 June 2008	As reported on page 41  £m	10% decrease in maintenance expenses  £m	10% decrease in lapse rates  £m	5% decrease in mortality/ morbidity rates - life assurance  £m	5% decrease in mortality/ morbidity rates  - annuity business  £m
United Kingdom	6,547	165	100	50	(130)
France	2,602	40	45	25	(5)
Ireland	1,036	15	20	5	(5)
Italy	1,171	10	10	5	-
Netherlands (including Belgium and Germany)	3,759	110	20	25	(50)
Poland	1,014	25	50	15	-
Spain	1,182	15	55	20	(5)
Other Europe	185	5	5	-	-
Europe	10,949	220	205	95	(65)
North America	1,714	30	10	15	-
Asia Pacific	657	15	15	10	-
Total	19,867	430	330	170	(195)

New business contribution  before required capital (gross of tax) 6 months 2008	As reported on page 35  £m	10% decrease in maintenance expenses  £m	10% decrease in lapse rates  £m	5% decrease in mortality/ morbidity rates - life assurance  £m	5% decrease in mortality/ morbidity rates - annuity business  £m
United Kingdom	183	11	9	10	(6)
France	84	2	4	2	-
Ireland	5	2	2	-	-
Italy	37	1	1	-	-
Netherlands (including Belgium and Germany)	60	5	3	2	-
Poland	21	1	2	1	-
Spain	133	4	11	2	-
Other Europe	7	2	3	2	(1)
Europe	347	17	26	9	(1)
North America	92	2	1	2	-
Asia Pacific	34	3	3	2	-
Total	656	33	39	23	(7)

The demographic sensitivities shown above represent a standard change to the assumptions for all products. 
Different products will be more or less sensitive to the change and impacts may partially offset.

End of Part 2 of 4

 

END

 

 

IR BIGDRGSDGGIC