Interim Results - Part 1

Aviva PLC 09 August 2007 Part 1 of 4 9 August 2007 AVIVA PLC INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2007 â€¢ Strong and profitable growth in long-term savings - Worldwide sales up 25% to Â£19,294m - Life EEV operating profit up 24% to Â£1,251m, with growth across all regions - UK: Record half year; sales up 7% to Â£7,415m; higher margins, improved service and lower costs - Europe: Excellent performance; sales up 14% to Â£8,131m; strong growth in Southern and Eastern Europe - US: Outstanding performance; sales up 51%# to Â£1,716m; integration on track - Asia Pacific: Continued strong sales growth, up 72% to Â£2,032m; new markets entered â€¢ General insurance profits hit by UK weather - Combined operating ratio at 97%, ahead of 'meet or beat' commitment of 98% - General insurance and health profit down 34% to Â£560m - exceptional UK weather losses of Â£235m â€¢ Resilient result due to composite model of life, general insurance and asset management - EEV operating profit lower by 8% to Â£1,541m - IFRS operating profit up 1% to Â£1,375m â€¢ Interim dividend increased by 10% â€¢ Fresh focus by new management team on strategic priorities and momentum to drive profitable growth â€¢ Top priority to realise the full potential of existing businesses Andrew Moss, group chief executive, commented: 'My new management team brings energy, pace and fresh thinking to Aviva. Our top priority is to realise the full potential of our existing businesses. 'Our new regional structure gets us closer to our customers, making it easier to offer products that are relevant in today's changing market with better service. Constant attention to meeting the needs of our current and future customers will create extra sales momentum and deliver growth. By eliminating unnecessary complexity, and drawing our operations across the world closer together, we will boost productivity and deliver further value to our customers and shareholders. 'Overall, Aviva has performed well in the first half of 2007. Substantial weather related losses in the UK have been countered by strong growth across our life and asset management businesses. The US has continued to be our star performer.' Worldwide highlights 6 months 6 months Growth in 2007 2006 constant currency Operating profit - EEV basis* Â£1,541m Â£1,699m (8)% Operating profit - IFRS basis** Â£1,375m Â£1,376m 1% Profit before tax - EEV basis Â£2,031m Â£1,284m 60% Profit before tax - IFRS basis Â£1,198m Â£1,248m (3)% Life EEV operating return Â£1,251m Â£1,021m 24% General insurance and health operating profit Â£560m Â£866m (34)% Long-term savings new business sales Â£19,294m Â£15,631m 25% New business contribution - gross Â£550m Â£459m 21% New business contribution - net of required capital, tax & minorities Â£240m Â£194m 25% Interim dividend per share 11.90p 10.82p 10% Equity shareholders' funds*** Â£19,136m Â£17,531m^ 9% Return on equity shareholders' funds 11.6% 14.0% - Net asset value per share 737p 683p^ 8% All operating profit is from continuing operations and all growth rates quoted are at constant rates of exchange. # On a pro forma basis for the former Aviva business in Boston and the former AmerUs group. * Including life EEV operating return, before tax and exceptional items. ** Before tax and exceptional items. *** Measured on an EEV basis, excluding preference shares, direct capital instrument and minority interests. ^ As at 31 December 2006 ---------------------------------------------------------------------------------------------------------------------- Segmental analysis of Group operating profit* For the six months ended 30 June 6 months 2006 at 2007 6 months exchange 6 months 2007 rates 2006 Â£m Â£m Â£m Continuing operations Life EEV operating return United Kingdom 413 350 350 France 225 194 196 Ireland 37 8 8 Italy 72 52 53 Netherlands (including Belgium and Germany) 166 182 185 Poland 71 66 66 Spain 107 111 112 Other Europe 1 (2) (3) Europe 679 611 617 North America 112 14 16 Asia 24 18 19 Australia 23 19 19 Asia Pacific 47 37 38 ---------------------------------------------------------------------------------------------------------------------- 1,251 1,012 1,021 ====================================================================================================================== Fund management** United Kingdom*** 19 12 12 France 5 5 5 Netherlands 9 10 10 Other Europe 2 1 1 Europe 16 16 16 North America 1 1 1 Asia Pacific 9 3 4 ---------------------------------------------------------------------------------------------------------------------- 45 32 33 ====================================================================================================================== General insurance and health United Kingdom# 284 566 566 France 31 26 27 Ireland 80 86 88 Netherlands 70 79 80 Other Europe 22 18 19 Europe 203 209 214 North America 70 78 85 Asia Pacific 3 1 1 ---------------------------------------------------------------------------------------------------------------------- 560 854 866 ====================================================================================================================== Other operations## (45) 30 29 Corporate centre (80) (73) (73) Group debt costs and other interest (190) (177) (177) ---------------------------------------------------------------------------------------------------------------------- Group operating profit before tax 1,541 1,678 1,699 ====================================================================================================================== * Group operating profit before tax. All operating profit is from continuing operations. ** Excludes the proportion of the results of Morley's fund management businesses and of our French asset management operation Aviva Gestion d'Actifs (AGA) that arise from the provision of fund management services to our life businesses. These results are included within the Life EEV operating return. *** Includes retail investment business trading as Norwich Union, our collective investment joint venture business with RBSG and both the UK and international businesses of Morley. # UK general insurance includes the results of the Group's reinsurance operations ## Excludes the results of Norwich Union Equity Release. Also excludes the proportion of the results of Norwich Union Life Services relating to the services provided to the UK life business. These results are included within the Life EEV operating return. The total IFRS operating profit for the six months to 30 June 2007 was Â£1,375 million (2006: Â£1,376 million; Â£1,360 million restated at constant exchange rates). ---------------------------------------------------------------------------------------------------------------------- GROUP CHIEF EXECUTIVE'S STATEMENT A generational change in the executive management of Aviva during the first half of 2007 has led to a reconsideration of our structure and our priorities. We remain committed to our diversified business model of long-term savings, general insurance and investment management, but with a new regional approach. Our top priority is to realise the potential of Aviva's existing businesses. The interests of our customers and shareholders are best served by our businesses acting as one group and we are headlining the changes we are making as a move to 'One Aviva'. To make this happen, the organisational structure of Aviva now comprises four regions: UK, Europe, North America and Asia Pacific. This will allow us to reap the benefits of being a group, while placing more of our staff closer to our customers. We will continue to encourage the entrepreneurial spirit that has led to great success in our individual businesses in the past, while ensuring that investment is channelled into areas where returns are attractive relative to risk. Revenue growth will be driven by: â€¢ Constant attention to the needs of our 40 million existing customers; â€¢ Providing the right products and services to prospective customers; and transferring product development expertise across markets; and â€¢ Continuing reinvestment of profits in expanding distribution to provide access to more customers. Further productivity gains will be achieved through: â€¢ A renewed focus on cost management across the Group to ensure we demonstrate the benefits of scale in our major markets; and â€¢ Greater use of shared services across our businesses to increase efficiency. Key areas for strong long-term savings growth include Southern, Central and Eastern Europe where we believe the opportunities for growth are under-estimated by many; also Asia where we place a high priority on growing our existing businesses and expanding our geographical presence; and the USA where the baby-boomer generation will drive a significant increase in retirement savings. We have established six new bancassurance partnerships in these key markets this year with the opportunity to market Aviva products to over 30 million new potential customers. Continuing development of our asset management capabilities will be key to our success. We have appointed Alain Dromer as chief executive of our largest asset management business, Morley. In addition he will pursue our 'One Aviva' agenda by harnessing the power and scale of our investment businesses around the world under the umbrella of Aviva Global Investors. This will enhance the value of our worldwide investment business. GROUP RESULTS Overview Our composite model has brought resilience to our results. EEV operating profit was Â£1,541 million (Â£1,699 million) and statutory profit on an IFRS basis was Â£1,198 million (Â£1,248 million). We increased our interim dividend by 10%. The excellent long-term savings performance was offset by poor weather experience in the UK, which had a negative impact on our general insurance result. General insurance profit declined by 34%. Despite this, we have reported a worldwide combined operating ratio (COR) of 97%, in line with our target, reflecting the benefit of a strong general insurance performance in Europe. We delivered excellent growth in life sales and profits, with record results in the US and UK, and strong performances in Europe and Asia Pacific. Total worldwide new business sales were up 25%, with investment sales increasing 52%. UK â€¢ Total long-term savings sales, up 7% â€¢ Life EEV operating profit, up 18% â€¢ Improved profitability with new business margin up to 3.1% â€¢ UK general insurance result down 50% â€¢ On track to achieve Â£250m cost savings across life and general insurance Our UK life performance builds on the strong sales growth delivered last year. We have grown market share, while increasing margins and improving service. We have driven costs down in line with our target and improved persistency. We continue to investigate ways to rationalise our cost base and simplify our legacy systems. Our outsourcing partnership with Swiss Re announced earlier this year will enable us to enhance customer service and cost effectiveness further. The UK general insurance market has been tough. A competitive market and some of the worst floods in living memory reduced our UK result, with a Â£235 million loss for adverse weather. We have sustained a further Â£165 million of flood losses in July, which will be reported in our full year results. We continue to do everything we can to help customers who have been affected by these events. We doubled the staff on our helplines at peak periods and have also brought in additional contractors and specialist equipment to ensure repairs are carried out as quickly as possible. We are also in discussion with local authorities to find the best solution for temporary accommodation for those who have had to leave their homes. We continue to focus on disciplined and profitable underwriting, while improving customer service. Later this year we will begin a significant new partnership with HSBC, selling general insurance products to their 10 million customers. Europe â€¢ Total long-term savings sales, up 14% â€¢ Life EEV operating profit, up 11% â€¢ General insurance profitability remains strong with improved COR of 85% Our businesses in Ireland and Central and Eastern Europe performed particularly well. Our southern European businesses in Italy and Spain also grew strongly. In the more mature markets of northern Europe, we focused on profitability and achieved margin increases in France and the Netherlands. Our aim is to grow our distribution capability and increase sales to our substantial bancassurance customer base. North America â€¢ Total long-term savings sales, up 51%* â€¢ New business contribution, up 60%* â€¢ New business margin almost doubled to 3.3% â€¢ AmerUs integration 80% complete In the USA, we delivered record sales across all business lines, exceeding our expectations. The integration of AmerUs into our group is almost complete and we are on track to achieve at least the targeted $45 million of cost savings. We expect to expand our distribution network further and grow sales by at least 20% a year, while maintaining margins. Asia Pacific â€¢ Total long-term savings sales, up 72% â€¢ Life EEV operating profit, up 27% â€¢ Improved new business margin, up to 4.9% Our businesses in Asia Pacific continue to achieve excellent growth, exceeding Â£2 billion of sales for the first time in a six month period, with strong life and pensions sales in Singapore, Hong Kong and China. We leveraged our global bancassurance skills to enter the new markets of Malaysia and Taiwan by securing major partnerships with local banks. We expect to continue to extend our footprint further in Asia and to achieve sustained growth in the Asia Pacific region. Outlook It is an exciting time at Aviva. Demographic changes are leading increasing numbers of people to protect their assets and invest for their future financial wellbeing. This presents a significant opportunity for us, particularly given the overall buoyancy in the world economy driven, to a great extent, by emerging markets. Our increasing scale and international reach, combined with our ability to deliver a wide range of superior products and services relevant to our customers, gives us every confidence that the group is well placed to deliver further significant growth. Andrew Moss Group Chief Executive * On a pro forma basis ---------------------------------------------------------------------------------------------------------------------- Enquiries: Andrew Moss Group chief executive Telephone +44 (0)20 7662 2679 Philip Scott Group finance director Telephone +44 (0)20 7662 2264 Analysts: Charles Barrows Investor relations director Telephone +44 (0)20 7662 8115 Amanda Wilbraham Senior manager, investor relations Telephone +44 (0)20 7662 2111 Media: Hayley Stimpson Director of external affairs Telephone +44 (0)20 7662 7544 Sue Winston Head of group media relations Telephone +44 (0)20 7662 8221 Vanessa Rhodes Group media relations manager Telephone +44 (0)20 7662 2482 James Murgatroyd Finsbury Telephone +44 (0)20 7251 3801 NEWSWIRES: There will be a conference call today for wire services at 8.15am (BST) on +44 (0)20 7162 0025 Quote: Aviva, Andrew Moss. ANALYSTS: A presentation to investors and analysts will take place at 9.30am (BST) at the London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS. The investors and analysts presentation is being filmed for live webcast and can be viewed on the Group's website www.aviva.com or on www.cantos.com. In addition a replay will be available on these websites later today. There will also be a live teleconference link to the investor and analyst meeting on +44 (0)20 7138 0839. A replay facility will be available until 24 August 2007 on +44 (0)20 7806 1970. The pass code is 4352983# for the whole presentation including Question & Answer session or 3161418# for Question & Answer session only. The presentation slides will be available on the Group's website, www.aviva.com/investors/presentations.cfm from 9.00am (BST). The Aviva media centre at www.aviva.com/media includes images, company information and news release archive. Photographs are available from the Aviva media centre at www.aviva.com/media. Notes to editors â€¢ Aviva is the leading provider of life and pensions to Europe with substantial positions in other markets around the world, making it the world's fifth largest insurance group based on gross worldwide premiums at 31 December 2006. â€¢ Aviva's principal business activities are long-term savings, fund management and general insurance, with worldwide total sales* of Â£41.5 billion at 31 December 2006 and assets under management of Â£377 billion at 30 June 2007. * Based on life and pensions PVNBP, total investment sales and general insurance and health net written premiums including share of associates' premiums. â€¢ Income statements and cash flows of foreign entities are translated at average exchange rates while their balance sheets are translated at the closing exchange rates on 30 June 2007. â€¢ The present value of new business premiums (PVNBP) is equal to total single premium sales received in the year plus the discounted value of annual premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. â€¢ All growth rates are quoted at constant currency, which excludes the impact of changes in exchange rates between periods. â€¢ This interim announcement may contain 'forward-looking statements' with respect to certain of Aviva's plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Aviva's control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which Aviva and its affiliates operate. As a result, Aviva's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in Aviva's forward-looking statements. Aviva undertakes no obligation to update the forward-looking statements contained in this presentation or any other forward-looking statements we may make. ---------------------------------------------------------------------------------------------------------------------- Contents Page Operating and financial review 1 European Embedded Value (EEV) basis Summarised consolidated income statement - EEV basis 25 Earnings per share - EEV basis 25 Consolidated statement of recognised income and expense - EEV basis 26 Reconciliation of movements in consolidated shareholders' equity - EEV basis 26 Summarised consolidated balance sheet - EEV basis 27 Segmentation of summarised consolidated balance sheet - EEV basis 28 1. Basis of preparation and EEV methodology 29 2. Components of life EEV return 29 3. New business contribution 30 4. Geographical analysis of the components of life EEV operating return 32 5. Analysis of movement in life and related businesses embedded value 35 6. Segmental analysis of life and related businesses embedded value 36 7. Time value of options and guarantees 37 8. Analysis of service companies and fund management businesses within embedded value 37 9. Geographical analysis of fund management operating profit 38 10. Analysis of other operations' operating result 38 11. Summary of minority interest in life and related businesses' EEV results 39 12. Principal economic assumptions 40 13. Sensitivity analysis 43 IFRS basis Summarised consolidated income statement - IFRS basis 46 Earnings per share - IFRS basis 46 Pro forma reconciliation of Group operating profit to profit before tax - IFRS basis 47 Consolidated statement of recognised income and expense - IFRS basis 48 Reconciliation of movements in consolidated shareholders' equity - IFRS basis 48 Summarised consolidated balance sheet - IFRS basis 49 Summarised consolidated cash flow statement - IFRS basis 50 1. Basis of preparation - IFRS basis 51 2. Exchange rates 51 3. Acquisitions 52 4. (Loss)/profit on the disposal of subsidiaries and associates 53 5. Integration and restructuring costs 54 6. Operations classified as held for sale 54 7. Geographical analysis of long-term business IFRS operating profit 55 8. Geographical analysis of fund management operating profit 55 9. Geographical analysis of general insurance and health 56 10. Analysis of other operations' operating result 59 11. Corporate centre 59 12. Group debt costs and other interest 59 13. Tax 59 14. Earnings per share 60 15. Dividends and appropriations 62 16. Segmental information 62 17. Pension schemes 73 Appendix - Group capital structure 75 Shareholder services 81 ---------------------------------------------------------------------------------------------------------------------- Page 1 OPERATING AND FINANCIAL REVIEW Group operating profit before tax The Group's operating profit before tax, including life EEV operating return, decreased by 8% to Â£1,541 million (2006: Â£1,699 million) with strong results in the life segment offset by lower results in the general insurance segment as a result of adverse effects from weather and an increase in competition in the current year. On an IFRS basis, worldwide operating profit before tax was stable at Â£1,375 million (2006: Â£1,376 million). EEV basis IFRS basis ------------------ ----------------- 6 months 6 months 6 months 6 months 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Life EEV operating return / IFRS long-term business profit 1,251 1,021 1,081 710 Fund management 45 33 76 61 General insurance and health 560 866 560 866 Other: Non-insurance operations (45) 29 (72) (11) Corporate Centre (80) (73) (80) (73) Group debt costs and other interest (190) (177) (190) (177) ---------------------------------------------------------------------------------------------------------------------- Operating profit before tax 1,541 1,699 1,375 1,376 ---------------------------------------------------------------------------------------------------------------------- Profit before tax attributable to shareholders' profits 2,031 1,284 1,198 1,248 ---------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 19,136 17,531^ 12,395 11,176^ ====================================================================================================================== ^ As at 31 December 2006 Long-term savings Our worldwide long-term new business sales grew strongly in the six months to 30 June 2007, with total long-term savings new business sales up 25% to Â£19.3 billion (2006: Â£15.6 billion). The overall increase reflects growth in life and pension sales of 19% to Â£15.5 billion (2006: Â£13.1 billion), and strong investment sales, up 52% to Â£3.8 billion (2006: Â£2.5 billion). Aviva USA is continuing to progress extremely well with very strong sales of Â£1.7 billion from the combined business (2006 pro forma: Â£1.3 billion), a pro forma increase of 51% on a constant currency basis. 6 months 2007 Local currency growth --------------------------------- ------------------------------ Life and Retail Life and Retail pensions investments Total pensions investments Total Long-term savings sales Â£m Â£m Â£m % % % United Kingdom 5,820 1,595 7,415 - 47% 7% Europe 7,353 778 8,131 12% 35% 14% North America 1,716 - 1,716 553% - 553% Asia Pacific 654 1,378 2,032 73% 71% 72% --------------------------------------------------------------------------------------------------------------------- Total new business sales on a present value of new business premium (PVNBP) basis 15,543 3,751 19,294 19% 52% 25% ===================================================================================================================== Further details regarding life new business sales can be found on page 13 of this announcement. Life EEV operating return 6 months 6 months 2007 2006 Â£m Â£m New business contribution (after the effect of required capital) 419 352 Profit from existing business - expected return 600 503 - experience variances (19) (9) - operating assumption changes 11 3 Expected return on shareholders' net worth 240 172 ---------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 1,251 1,021 ====================================================================================================================== Analysed by: United Kingdom 413 350 Europe 679 617 North America 112 16 Asia Pacific 47 38 Worldwide life EEV operating return before tax was 24% higher at Â£1,251 million (2006: Â£1,021 million) due to increased contributions from both new and existing business. New business contribution after the effect of required capital was 20% higher at Â£419 million (2006: Â£352 million) with the Group's new business margin after the effect of required capital remaining stable at 2.7% (2006: 2.7%). ---------------------------------------------------------------------------------------------------------------------- Page 2 Present value of new business New business New business New business New business premiums contribution* margin*,** contribution*** margin**,*** ---------------- ---------------- ----------------- ----------------- ----------------- 6 months 6 months 6 months 6 months 6 months ---------------- ---------------- ------------- -------------- -------------- 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m % % Â£m Â£m % % United Kingdom 5,820 5,816 178 167 3.1% 2.9% 143 135 2.5% 2.3% Europe 7,353 6,645 283 268 3.8% 4.0% 218 202 3.0% 3.0% North America 1,716 289 57 5 3.3% 1.7% 35 2 2.0% 0.7% Asia Pacific 654 397 32 19 4.9% 4.8% 23 13 3.5% 3.3% ----------------------------------------------------------------------------------------------------------------------- Total life and pensions business 15,543 13,147 550 459 3.5% 3.5% 419 352 2.7% 2.7% ======================================================================================================================= * Before effect of required capital which amounted to Â£131 million (2006: Â£107 million). ** New business margin represents the ratio of new business contribution to present value of new business premiums, expressed as a percentage. *** After deducting the effect of required capital. The expected returns on existing business and shareholders' net worth increased to Â£840 million (2006: Â£675 million) reflecting the higher start of year embedded values and higher economic assumptions. Adverse experience variances of Â£19 million (2006: Â£9 million) were partially offset by positive operating assumption changes of Â£11 million (2006: Â£3 million). United Kingdom Norwich Union's life EEV operating return increased 18% to Â£413 million (2006: Â£350 million), reflecting the increased profitability of our new business, higher expected returns and a strong improvement in expense and persistency experience. New business margin has increased to 3.1% (2006: 2.9%), driven by a combination of the savings from our ongoing operational review and our commitment to maximising shareholder value through balancing price, volume and mix. After required capital, our new business contribution was Â£143 million (2006: Â£135 million) at a margin of 2.5% (2006: 2.3%). Our efficiency review, announced in September 2006, remains on track to deliver Â£125 million annualised savings by the end of this year. By 30th June 2007 we had achieved annualised savings of Â£96 million, which contributed Â£35 million to our half year financial performance. This is evident both in our improved new business margin and our reduced expense overruns on existing business. Total experience variances were Â£37 million adverse (2006: Â£67 million adverse). The improvement in the adverse expense variance (combined maintenance and project-related) to Â£52 million (2006: Â£76 million) is due to the impact of our efficiency review. We continue to record adverse project-related experience due to the one-off costs associated with simplifying our legacy infrastructure. Following the implementation of our recently announced administration outsource agreement with Swiss Re combined with the efficiency targets announced in September 2006 we expect to reduce significantly the risk of expense related experience variances from 2009. Improved persistency experience of adverse Â£6 million (2006: Â£35 million adverse) reflects the positive actions we have taken in implementing our customer retention strategy. Overall persistency experience for the period is broadly in line with expectations. Europe Life EEV operating return from our European businesses has increased 11% to Â£679 million (2006: Â£617 million). New business contribution after the effect of required capital increased to Â£218 million (2006: Â£202 million), with strong growth in Italy, Ireland and the Netherlands. New business margins before and after required capital were 3.8% and 3.0% respectively (2006: 4.0% and 3.0% respectively). Expected returns were higher at Â£429 million (2006: Â£360 million), reflecting higher start of year embedded value. Experience variances were favourable at Â£19 million (2006: Â£52 million), mainly driven by favourable operating variances in France and Poland, partly offset by adverse experience in the Netherlands and Spain. Improved expense management in France resulted in a positive operating assumption change in Europe of Â£13 million (2006: Â£3 million). North America The life EEV operating return was Â£112 million (2006: Â£16 million) reflecting the increase in expected return following the acquisition of AmerUs and the increased new business contribution. New business margins before and after the effect of required capital increased to 3.3% and 2.0% respectively (2006: 1.7% and 0.7% respectively) reflecting a favourable change in product mix towards higher margin indexed life and indexed annuity products and the discontinuance of lower margin life products as part of a product rationalisation process. Asia Pacific The life EEV operating return increased to Â£47 million (2006: Â£38 million), benefiting from higher new business volumes. New business margins before and after the effect of required capital were 4.9% and 3.5% respectively (2006: 4.8% and 3.3% respectively). New business margins are influenced by marketing campaigns and product launches, resulting in some volatility between quarters. Growth potential for the region remains strong and Aviva's diversified distribution model places the business in a strong position for continued future growth. ---------------------------------------------------------------------------------------------------------------------- Page 3 Bancassurance margins - before required capital, tax and minority interests The weighted average bancassurance new business margin before the effect of required capital in the six months was 4.5% (2006: 4.7%). This reduction mainly reflects the impact of a change in business mix in Spain and lower volumes and tighter product margins in the Netherlands; offset by increased margins in the UK, Ireland and Italy. After the effect of required capital, the bancassurance margin was 3.8% (2006: 3.9%). Present value of new business New business New business Total life and pensions premiums contribution* margin** ----------------- ------------------ ------------------ 6 months 6 months 6 months 6 months 6 months 6 months 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m % % United Kingdom 575 501 24 16 4.2% 3.2% France 417 504 19 23 4.6% 4.6% Ireland 435 223 9 4 2.1% 1.8% Italy 1,799 1,559 49 37 2.7% 2.4% Netherlands 199 258 7 11 3.5% 4.3% Spain 1,012 812 87 86 8.6% 10.6% Europe 3,862 3,356 171 161 4.4% 4.8% Asia Pacific 104 101 10 10 9.6% 9.9% ---------------------------------------------------------------------------------------------------------------------- Total bancassurance channels 4,541 3,958 205 187 4.5% 4.7% ====================================================================================================================== * Before effect of required capital which amounted to Â£32 million (2006: Â£32 million). ** New business margin represents the ratio of new business contribution to present value of new business premiums, expressed as a percentage. United Kingdom New business margin from Norwich Union's bancassurance partnership with RBSG improved to 4.2% (2006: 3.2%) reflecting economies of scale from higher volumes (up 15%) and a more profitable product mix. Europe In France, the new business margin of our bancassurance joint venture was stable at 4.6% (2006: 4.6%). In Ireland, Ark Life's new business margin was 2.1% (2006: 1.8%) driven by new product development and pricing. The new business bancassurance margin in Italy increased to 2.7% (2006: 2.4%), reflecting a change in business mix. In Spain, our bancassurance partnerships produced a margin of 8.6% (2006: 10.6%) reflecting a change in business mix, with higher sales of lower margin savings products and lower sales of protection products linked to mortgages. Our bancassurance agreement with ABN AMRO in the Netherlands generated a margin of 3.5% (2006: 4.3%) reflecting a change in business mix and tighter product margins. Asia Pacific The new business bancassurance margin from our partnership with DBS in Singapore and Hong Kong remained high at 9.6% (2006: 9.9%) reflecting the profitable growth of these developing operations. New business contribution - after deducting required capital, tax and minority interest New business contribution after required capital, tax and minority interest increased by 25% to Â£240 million (2006: Â£194 million) with a resultant new business margin of 1.8% (2006: 1.7%). Present value of new business New business New business premiums* contribution** margin*** ----------------- ------------------ ------------------ 6 months 6 months 6 months 6 months 6 months 6 months 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m % % Bancassurance channels 2,586 2,218 71 59 2.7% 2.7% Other distribution channels 10,716 8,932 169 135 1.6% 1.5% ---------------------------------------------------------------------------------------------------------------------- Total life and pensions business 13,302 11,150 240 194 1.8% 1.7% ====================================================================================================================== Analysed by: United Kingdom 5,820 5,816 100 95 1.7% 1.6% Europe 5,116 4,651 99 87 1.9% 1.9% North America 1,716 289 23 1 1.3% 0.3% Asia Pacific 650 394 18 11 2.8% 2.8% ---------------------------------------------------------------------------------------------------------------------- * Stated after deducting the minority interest. ** Stated after deducting the effect of required capital, tax and minority interest. *** New business margin represents the ratio of new business contribution to present value of new business premiums, expressed as a percentage. ---------------------------------------------------------------------------------------------------------------------- Page 4 Long-term business operating profit on an International Financial Reporting Standard (IFRS) basis On an IFRS basis, our long-term business operating profit before shareholder tax was Â£1,081 million (2006: Â£710 million), an increase of 53%. The increase is primarily driven by the benefit of improved equity markets across most businesses, the impact of on-going PS06/14 implementation in the United Kingdom and the effect of increases in long-term interest rates on guarantee provisions in the Netherlands. United Kingdom The UK life operating profit on an IFRS basis was 42% higher at Â£303 million (2006: Â£213 million), driven by both with-profit and non-profit business. The increase in operating profit for with-profits business to Â£85 million (2006: Â£68 million) is driven by strong investment performance conditions which continue to drive higher policyholder bonuses. The increase in the non-profit business results from the FSA rule change PS06/14 which contributed Â£76 million to the result although this has been partially offset by investment losses caused by adverse market interest rate movements. Europe In Europe, life IFRS operating profit increased to Â£582 million (2006: Â£497 million), driven primarily by increased profits in France and the Netherlands. In France, operating profit increased to Â£138 million (2006: Â£116 million) reflecting the increased profits from the growing unit-linked in-force portfolio and higher equity-market related investment gains. In Ireland, operating profit increased to Â£40 million (2006: Â£31 million including five months in respect of Ark Life) following the inclusion of a full six months profit for Ark Life and increased sales across both bank and broker channels. In the Netherlands, operating profit of Â£254 million (2006: Â£225 million) included a Â£78 million release (2006: Â£94 million release) from the provision for guarantees resulting from an increase in interest rates and policy values in the period. The year on year increase reflected lower expenses and lower new business strain. In our businesses in Poland and Lithuania operating profit increased to Â£60 million (2006: Â£56 million) reflecting increased income as a result of higher funds under management. Operating profit in Spain increased to Â£63 million (2006: Â£48 million) due to higher profits from the growing portfolio of protection and pensions business. Operating profit in Italy increased to Â£41 million (2006: Â£28 million) driven by increased interest rates and higher investment returns. Aviva's other European businesses based in the Czech Republic, Hungary, Romania, Russia and Turkey, had an operating loss of Â£14 million (2006: Â£7 million loss) reflecting the developing nature of these operations. North America Life operating profit was Â£165 million (2006: Â£15 million loss) driven primarily by the inclusion of the AmerUs business. Operating profit was favourably impacted by net market value adjustments of Â£36 million (2006: Â£9 million loss). Asia Pacific Life operating profit improved significantly to Â£31 million from Â£15 million in the six months to 2006, driven mainly by favourable investment markets in the region and higher emerging profits from existing business. Fund management operating profit Our worldwide fund management operating profit grew to Â£76 million (2006: Â£61 million) on an IFRS basis. Assets under management at 30 June 2007 grew to Â£377 billion (31 December 2006: Â£364 billion) reflecting the impact of new business and the performance of global investment markets. 6 months 6 months 2007 2006 Â£m Â£m Morley 41 31 Other UK (4) (5) United Kingdom 37 26 France 16 16 Netherlands 11 13 Other Europe 2 1 Europe 29 30 North America 1 1 Asia Pacific 9 4 ---------------------------------------------------------------------------------------------------------------------- Fund management operating profit - IFRS basis 76 61 ====================================================================================================================== On an EEV basis, the total operating profit from our fund management businesses was Â£45 million (2006: Â£33 million) and represents the profit from those funds managed on behalf of third parties and the Group's non-life businesses. United Kingdom Our UK fund management businesses comprise our institutional business, Morley, our retail investment business trading as Norwich Union, and our collective investment joint venture business with RBSG. These businesses reported an operating profit of Â£37 million (2006: Â£26 million) in the period. Morley As a group, Morley reported a 34% increase in total operating profit to Â£43 million (2006: Â£32 million), including the Â£2 million (2006: Â£1 million) contribution from the pooled pension business, which is reported in the long-term savings segment. Fund management operating profit grew strongly to Â£41 million (2006: Â£31 million) including Â£5 million (2006: Â£1 million) of performance fees relating to prior periods. Morley's cost/income ratio was 73% (full year 2006: 72%) reflecting both additional revenue streams and increasing investment in the business as part of a more focused investment style within the active equity management teams. ---------------------------------------------------------------------------------------------------------------------- Page 5 Our property team also continued to grow, increasing funds under management and the size of the team as property remained a key asset class for investors across Europe. The property team was recognised as Property Manager of the Year at the 2007 UK Pensions Awards and Morley also received industry recognition for its investment capabilities including the 'Fixed Income Hedge Fund of the Year' award at the Eurohedge Awards for our G7 Fixed Income Fund. We continue to build our European distribution reach, opening a new office in Frankfurt to sell the Aviva Morley range of SICAV funds and establishing the sales and client teams in Milan and Madrid. In February, we also established our first office in China and announced a number of new property investments and partnerships across Asia and Japan as part of a long-term commitment to the region. Norwich Union's retail investment business broke even in the period (2006: Â£1 million loss) while our collective investment business with RBSG recorded a loss of Â£4 million (2006: Â£4 million loss) due to increased new business strain. Europe Our European operations consist mainly of Aviva Gestion d'Actifs (AGA) in France and Delta Lloyd Asset Management in the Netherlands. These businesses reported a slightly lower operating profit of Â£29 million (2006: Â£30 million). Operating profit from our business in France, AGA, was stable at Â£16 million (2006: Â£16 million). This business has a strong investment performance track record, with all of AGA's funds ranked in the top half over the 5 years to 30 June 2007. We have continued to earn industry awards for the sustained performance of our funds, with the financial magazine 'Mieux Vivre Votre Argent' awarding prizes to 7 of AGA's funds. Operating profit from our fund management business in the Netherlands was Â£11 million (2006: Â£13 million). Investment performance has been strong in the period, notably Delta Lloyd's equity participation fund which headed the fund performance rankings over a 5 year period and held a top-5 ranking over six and 12 months. Three new funds are to be launched later in 2007 following the success of the Select Opportunity fund earlier in the year. On 19 June, Delta Lloyd announced its acquisition of Cyrte Investments which will add funds with distinctive technology and media profiles to our fund offering. Asia Pacific In Asia Pacific, our fund management and administration business consists of the successful Navigator platforms in Australia and Singapore. Operating profits more than doubled to Â£9 million (2006: Â£4 million), reflecting profitable growth in these businesses. General insurance and health operating profit The Group's net written premiums from its worldwide general insurance and health businesses decreased by 4% to Â£5.5 billion, reflecting increasing price competition across most regions. Group operating profit from general insurance and health businesses decreased by 34% to Â£560 million (2006: Â£866 million). The worldwide general insurance combined operating ratio (COR) worsened to 97% (2006: 92%) mainly as a result of adverse weather in the UK and increased competitive pressures in this business segment across most regions. The general insurance and health underwriting profit decreased to Â£49 million (2006: Â£346 million) following worse than expected weather claims experience in the UK of Â£235 million (2006: Â£125 million benefit). The worldwide GI expense ratio was 12.9% (2006: 11.6%), reflecting reduced premiums and ongoing investment made to secure the future profitability of the business. The longer-term investment return (LTIR) on general insurance and health business assets was Â£511 million (2006: Â£520 million) as the impact of higher start-of-year asset base and higher LTIR rates in 2007 were offset by the effect of lower cash flows due to lower premiums. The reserves in the Group are set conservatively with the aim to protect against adverse future claims experience and development. Our business is predominantly short tail in nature and loss development experience is generally stable. As a result of the prudence applied in setting the reserves, there are releases of Â£330 million in 2007 which reflect releases from the 2006 accident year and prior. We continue to apply our reserving policy consistently and our reserves remain at very strong levels. Net written premiums Underwriting results* Operating profit* -------------------- -------------------- ------------------ 6 months 6 months 6 months 6 months 6 months 6 months 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom 2,950 3,132 (46) 222 284 566 Europe 1,869 1,783 88 99 203 214 North America 665 724 5 24 70 85 Asia Pacific 14 11 2 1 3 1 -------------------------------------------------------------------------------------------------------------------- Continuing operations 5,498 5,650 49 346 560 866 ==================================================================================================================== * 2006 excludes the Financial Services Compensation Scheme credit of Â£6 million (2007 was nil). ---------------------------------------------------------------------------------------------------------------------- Page 6 United Kingdom Our UK operations comprise our main general insurance business, Norwich Union Insurance (NUI), a small health operation and the Group's captive reinsurance business. The combined UK performance was Â£284 million (2006: Â£566 million). NUI has generated operating profits of Â£269 million (2006: Â£561 million) and a combined operating ratio of 102% (2006: 92%). The result includes an adverse weather impact of Â£235 million (2006: Â£125 million benefit), with an estimated Â£175 million arising from the June floods and Â£60 million relating to the storms of 18 January. This impact has been mitigated by a benefit of Â£245 million (2006: Â£140 million) releases from the 2006 accident year and prior. We continue to apply our reserving policy consistently and our reserves remain at very strong levels. The result includes a contribution of Â£75 million from the RAC (2006: Â£46 million). The result has been achieved against a backdrop of challenging conditions across our core insurance markets. In personal motor we have achieved rate increases of 8% (2006: between 2% and 5% increase) and our focus on writing profitable business is reflected in a combined operating ratio of 103%, 2% better than the same period in 2006. Homeowner rates have increased by 5% (2006: 6% increase). Overall commercial rates have fallen by around 3% (2006: 3% decrease), although we are seeing increased market stability in commercial motor rates. Market conditions continue to impact our net written premium levels, which have decreased by 7% to Â£2,699 million (2006: Â£2,898 million). During the first half of 2007, our position as a partner of choice to the UK's top brands has been reflected in a number of major deals across the organisation. In February, the RAC successfully renewed its contract with Motability until 2014 and has also agreed a new three year contract with Barclays to provide roadside assistance to their advance value account customers that commenced in June. In May we announced plans for the creation of a new joint venture with HSBC. Operating under the name of HSBC Insurance, the venture will underwrite and distribute general insurance products to HSBC's 10 million UK customers when it launches later in the year. We are continually looking to improve our products and customer service levels. Following the launch of a dedicated retention centre in Norwich Union Direct in November 2006 our customer ownership initiative is now live for all motor claims and provides a single point of contact for customers who experience a claim. Additionally, we are also working to develop closer ties with large commercial brokers. The success of such initiatives is reflected in very strong retention rates across all classes of business and improving customer satisfaction scores. Our focus on cost control is reflected in the reduction in expense ratio from the 2006 full year figure of 13.9% to 13.6%, with our cost and efficiency programme, which is on track to deliver its anticipated benefits of Â£125 million from 2008, contributing to this improvement. The increase compared to the same period in 2006 reflects a combination of our investment in the business and pressure on volumes. We have seen an increase in our commission ratio to 24.3% (2006: 21.9%) driven by lower volumes of commission-free direct business and the impact of consolidators in our intermediary business. Europe In Europe, our general insurance and health businesses recorded an operating profit of Â£203 million (2006: Â£214 million). In France, our general insurance and health business achieved an operating profit of Â£31 million (2006: Â£27 million) with a break-even underwriting result (2006: loss of Â£1 million) and net written premiums of Â£421 million (2006: Â£435 million). Although pressure on premium rates has intensified in the market, Aviva has continued to experience a low level of large and adverse weather related losses. The general insurance COR improved marginally to 97% (2006: 98%) reflecting a stable claims ratio and cost savings. In Ireland, our general insurance business achieved an operating profit of Â£80 million (2006: Â£88 million) and a COR of 78% (2006: 74%). This result reflects the intense competitive pressures within the market leading to falling premiums and higher claims frequency, partly offset by favourable development of prior year claims. Despite our policy count increasing compared with 2006, the difficult market conditions led to a slight reduction in net written premiums to Â£245 million (2006: Â£251 million). In the Netherlands, operating profit from general insurance and health operations was Â£70 million (2006: Â£80 million) reflecting a deterioration in the health underwriting result. The general insurance only COR improved to 76% (2006: 82%) reflecting premium rating which remains strong in certain lines and favourable development of prior year claims. The health operating result deteriorated to a loss of Â£16 million (2006: Â£6 million profit) as a result of a higher than expected level of late reported claims from 2006, which has also affected ultimate loss ratios in the current year. Net written premiums increased significantly to Â£1,055 million (2006: Â£955 million) largely driven by an increase in the size of the health portfolio combined with Â£17 million of general insurance premiums from Erasmus since its acquisition on 26 March 2007. On 16 July 2007, we announced the sale of our health operations to O.W.M CZ Groep Zorgverkeraar U.A (CZ) in a transaction that gives Delta Lloyd the opportunity to sell life, pensions and general insurance products to CZ's existing customer base. Other general insurance operations are based in Italy, Poland and Turkey and achieved a total operating profit of Â£22 million (2006: Â£19 million). North America In Canada, operating profit was Â£70 million (2006: Â£85 million), an underlying decrease of 10% in local currency terms. This result reflects a reduction in the underwriting result to Â£5 million (2006: Â£24 million) primarily as a result of a deterioration in the claims ratio due to a combination of claims inflation and persistent snowfalls in the first four months of the year which led to higher claims frequency. The COR was 99% (2006: 96%). ---------------------------------------------------------------------------------------------------------------------- Page 7 Net written premiums were Â£665 million (2006: Â£724 million). This represents an underlying 1% increase in local currency driven by growth in warranty business in personal lines and in commercial lines volumes. This growth was offset by reductions in private and commercial motor premium rates resulting from increased competition as several competitors adopted aggressive pricing strategies in this profitable segment. In the face of this, Aviva Canada continues to take an industry leading stance through maintaining its policy of underwriting integrity and pricing for profit. Asia Pacific The operating profit from our health insurance business in Singapore and general insurance business in Sri Lanka amounted to Â£3 million (2006: Â£1 million). Other operations The Group's other operations recorded an operating loss of Â£72 million (2006: loss of Â£11 million) on an IFRS basis, the decrease mainly occurring in the Netherlands. In the United Kingdom, a decrease in operating profit in the RAC is offset by reduced losses in Norwich Union Life Services (NULS). 6 months 6 months Full year 2007 2006 2006 Â£m Â£m Â£m RAC 6 20 45 UK Life - Norwich Union Life Services (20) (42) (50) - Lifetime and SIPP (18) (6) (29) Other (40) 17 (46) --------------------------------------------------------------------------------------------------------------------- Total (72) (11) (80) ===================================================================================================================== Analysed by: United Kingdom (46) (30) (26) Europe (22) 22 (48) North America - - - Asia Pacific (4) (3) (6) United Kingdom Operating profit from RAC non-insurance operations of Â£6 million (2006: Â£20 million) includes the costs of transforming the Auto Windscreens operating model and those incurred in the transformation of BSM. Additionally, the prior year numbers included Â£17 million from MSS and LVL which were disposed of in May 2006. NU Life Services Ltd reported a reduced loss of Â£20 million (2006: Â£42 million loss) reflecting expense savings from the ongoing efficiency review in the UK life business. Europe The Â£22 million loss (2006: Â£22 million profit) mainly reflects lower banking profits and increased share scheme costs in the Netherlands and holding company costs across a number of our European business units. In the Netherlands, the banking result for the current period has been adversely affected by the flattening yield curve. Additionally, the prior period included a one-off gain on the sale of investments in the Netherlands of Â£17 million. On an EEV basis, our other operations reported a loss of Â£45 million (2006: Â£29 million profit) as this excludes the majority of NU Life Services Ltd losses which are incorporated within the life EEV operating return. Corporate centre The corporate centre result for the period was Â£80 million (2006: Â£73 million) mainly due to increased brand spend reflecting Aviva's strong commitment to developing the global brand, increased investment in IT and higher staff incentive costs. Group debt costs and other interest Group debt costs and other interest of Â£190 million (2006: Â£177 million) comprise internal and external interest on borrowings, subordinated debt and intra-group loans not allocated to local business operations. Also included is net pension income which represents the expected return on pension scheme assets less the interest charge on pension scheme liabilities. Interest costs in the period were higher at Â£222 million (2006: Â£215 million). Within this, external interest costs increased to Â£129 million (2006: Â£109 million) reflecting interest on subordinated debt raised in December 2006 to repay locally held AmerUs debt and on commercial paper raised to help fund the AmerUs acquisition. Internal interest costs reduced to Â£93 million (2006: Â£106 million) following the restructuring of internal loan agreements. Net pension income fell to Â£32 million (2006: Â£38 million). Interest on the Â£990 million direct capital instrument issued in 2004 is not included within unallocated interest as it is instead treated as an appropriation of profits retained in the period. This appropriation will be charged when declared and settled in accordance with IFRS and will be reflected in the second half of the year. ---------------------------------------------------------------------------------------------------------------------- Page 8 Profit on ordinary activities before tax EEV basis IFRS basis -------------------- -------------------- 6 months 6 months 6 months 6 months 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Operating profit before tax 1,541 1,699 1,375 1,376 Impairment of goodwill (3) - (3) - Amortisation of acquired value of in-force business - - (114) (33) Amortisation and impairment of intangibles (41) (10) (52) (19) Financial Services Compensation Scheme and other levies - 6 - 6 (Loss)/profit on the disposal of subsidiaries and associates (5) 86 (5) 147 Short-term fluctuation in return of investments backing general insurance and health business 37 (205) 37 (205) Variation from longer-term investment return - life business 241 (739) - - Effect of economic assumption changes 301 471 - - Integration and restructuring costs (40) (24) (40) (24) ---------------------------------------------------------------------------------------------------------------------- Profit before tax/ Profit before tax attributable to shareholders' profits 2,031 1,284 1,198 1,248 ====================================================================================================================== Profit before tax on an EEV basis was higher at Â£2,031 million (2006: Â£1,284 million), and includes positive investment return variances and short-term investment fluctuations of Â£278 million (2006: Â£944 million adverse) and favourable economic assumption changes of Â£301 million (2006: Â£471 million favourable). Integration and restructuring costs mainly reflect the costs associated with the efficiency programme being implemented across the UK business and are in line with the Â£250 million previously announced. Other costs are attributable to activity to integrate Ark Life in Ireland and AmerUs in the US. Both businesses were acquired in 2006. The variance from the longer-term investment return primarily reflects higher than expected returns in equity markets. In the UK, the FTSE All Share index rose by 6%, the CAC40 in France by 9% and in the Netherlands, the AEX rose by 11% from end of 2006 levels. This was partly offset by the impact of lower fixed interest security valuations following the increase of 70 basis points and 60 basis points in UK and Euro zone long-term bond yields, respectively. Long-term economic assumptions, which are set with reference to bond yields, were revised upwards at 30 June 2007 and these higher assumptions, together with a Â£177 million favourable impact of tax reflecting the impact of the change to the UK corporation tax rates effective from April 2008, have increased the expected value of future profits from in-force life contracts, benefiting profits by Â£301 million. The positive non-life short-term fluctuations of Â£37 million (2006: Â£205 million adverse) are principally due to higher equity market returns compared to our longer-term investment return assumptions. The effect of the non-life investment market movements and integration costs are included in the IFRS profit before tax attributable to shareholders' profits of Â£1,198 million (2006: Â£1,248 million). The taxation charge for the period was Â£529 million (2006: Â£524 million) on an EEV basis and includes a charge of Â£416 million (2006: Â£573 million) in respect of operating profit, which is equivalent to an effective rate of 27.0% (2006: 33.7%) mainly reflecting the impact of one-off tax credits due to changes in future UK tax rates and the release of provisions. The effective tax rate on IFRS operating profit is 27.5% (2006: 26.9%). Consistent with comments made at our 2006 full year analysts' presentation, the group is reviewing its current IFRS operating profit definition and expects to announce refinements to this prior to the 2007 year end. The Group is also actively considering developments in European Embedded Value (EEV) reporting and intends to move to a 'market consistent' EEV basis once a credible, consistent and robust basis for MCEV reporting has been established. This will not be before year end 2008. Dividends Ordinary dividends The Board has recommended a 10% increase in the interim dividend to 11.90 net pence per share (2006: 10.82 pence) payable on 16 November 2007 to shareholders on the register on 21 September 2007. Please note, these dates differ from the provisional dates announced on 9 November 2006. Preference dividends 8 3/8 % cumulative irredeemable preference shares of Â£1 each The Board has recommended a dividend of 4 3/16 % per share for the six month period ending 30 September 2007 payable on 30 September 2007 to preference shareholders on the register on 1 September 2007. 8 3/4 % cumulative irredeemable preference shares of Â£1 each The Board has recommended a dividend of 4 3/8 % per share for the six month period ending 31 December 2007 payable on 31 December 2007 to preference shareholders on the register on 1 December 2007. Pension fund deficit At 30 June 2007, the Group's overall pension fund deficit less surpluses had reduced by Â£915 million to Â£58 million (gross of tax). This was mainly due to the favourable impact on the valuation of liabilities of a 40 basis point increase in the UK real discount rate (the difference between the discount and inflation rate) during the period. ---------------------------------------------------------------------------------------------------------------------- Page 9 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 Group is subject to a number of regulatory capital tests and also employs a number of realistic tests to allocate capital and manage risk. Overall, the Group comfortably meets all of these requirements and, as reported below, has significant resources and financial strength. The ratings of the Group's main operating subsidiaries are AA/AA- ('very strong') with a stable outlook from Standard & Poor's and Aa3 ('excellent') with a stable outlook from Moody's. These ratings reflect the Group's strong liquidity, competitive position, capital base, increasing underlying earnings and strategic and operational management. Capital management In managing its capital, the Group seeks to: (i) match the profile of its assets and liabilities, taking account of the risks inherent in each business. In the case of the Group's life operations, which have long-term liabilities, the majority of capital is held in fixed income securities. A significant proportion of the capital supporting the Group's general insurance and health operations is held in equities, reflecting the relatively low risk profile of these businesses; (ii) maintain financial strength to support new business growth and satisfy the requirements of its policyholders, regulators and rating agencies; (iii) retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit lines, and access to a range of capital markets; (iv) allocate capital efficiently to support growth and repatriate excess business unit capital where appropriate; and (v) manage exposures to movement in exchange rates by aligning the deployment of capital by currency with the Group's capital requirements by currency. An important aspect of the Group's overall capital management process is the setting of target risk-adjusted rates of return for individual business units, which are aligned to performance objectives and ensure that the Group is focused on the creation of value for shareholders. The Group has a number of sources of capital available to it and seeks to optimise its debt to equity structure in order to ensure that it can consistently maximise returns to shareholders. The Group considers not only the traditional sources of capital funding but the alternative sources of capital including reinsurance and securitisation, as appropriate, when assessing its deployment and usage of capital. One of our key strategic aims is to ensure that we continue to optimise our capital base. We consider a variety of techniques to achieve this aim, such as reviewing the potential to securitise parts of the insurance portfolios and initiatives to further enhance our management of financial risk. In undertaking this work we recognise the requirements of a range of stakeholders including shareholders, regulators and rating agencies. The overall capital risk appetite is managed by reference to capital constraints imposed by targets in relation to solvency (including IGD and ICA), ratings, borrowing and liquidity and dividend capacity. Return on equity shareholders' funds The Group's annualised post-tax operating return on equity shareholders' funds was 11.6% (2006: 14.0%) reflecting the impact of a higher opening capital base following organic growth in long-term operations, operational results including the effect of adverse weather within general insurance and movement in equity markets. This return is based on the post-tax operating profit from continuing operations, including the EEV operating return, expressed as a percentage of the opening equity shareholders' funds on an EEV basis. Different measures of capital The Group measures its capital on a number of different bases. These include measures which comply with the regulatory regime within which the Group operates and those which the directors consider appropriate for the management of the business. The measures which the Group uses are:- i) Accounting bases Although the Group is required to report its results on an IFRS basis, the directors consider that the European Embedded Value principles provide a more meaningful reflection of the Group's life operations and accordingly we analyse and measure the net asset value and total capital employed for the Group on this basis. ii) Regulatory bases In reporting the financial strength of our insurance subsidiaries the Group measures the capital and solvency using the regulations prescribed by the Financial Services Authority (FSA). These regulatory capital tests are based upon required levels of solvency capital and a series of prudent assumptions in respect of the type of business written by the Group's insurance subsidiaries. iii) Economic bases Notwithstanding the required levels of capital laid out by the FSA, the Group also measures its capital using various risk based capital models that take into account a more realistic set of financial and non-financial assumptions. These models have been under considerable development over the past few years and have become more relevant in the internal assessment of the Group's financial strength. In addition, these models include measures used by rating agencies in measuring and assessing the financial strength of the Group. ---------------------------------------------------------------------------------------------------------------------- Page 10 Group Accounting bases 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. At 30 June 2007 the Group had Â£26.7 billion (31 December 2006: Â£25.9 billion) of total capital employed in its trading operations which is efficiently financed by a combination of equity shareholders' funds, preference capital, subordinated debt and borrowings. 30 June 31 December 2007 2006 Equity shareholders' funds - EEV basis Â£19.1 billion Â£17.5 billion Total shareholders' funds - EEV basis (including minority interests) Â£22.7 billion Â£20.9 billion Total capital employed by business operations Â£26.7 billion Â£25.9 billion Net asset value per share 737 pence 683 pence The significant increase in shareholders' funds reflects the strong operational performance in the period. Net asset value per ordinary share, based on equity shareholders' funds, was higher at 737 pence per share. Regulatory bases EU Groups directive 30 June 31 December 2007 2006 Insurance Groups Directive (IGD) excess solvency Â£4.0 billion Â£3.5 billion Cover (times) over EU minimum 1.8 times 1.8 times Aviva Group had an estimated excess regulatory capital, as measured under the EU Groups Directive, of Â£4.0 billion at 30 June 2007 (31 December 2006: Â£3.5 billion). This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the Group's UK life funds. The minimum solvency requirement for the Group's European businesses is based on the Solvency 1 Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves, respectively and for Aviva's general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For the Group's major non-European businesses (the US, Australia and Canada) a risk charge on assets and liabilities approach is used. The IGD is a pure aggregation test with no credit given for the considerable diversification benefits of Aviva. Our excess solvency of Â£4.0 billion reflects a net increase of Â£0.5 billion since 31 December 2006, driven by strong operational performance, the benefit of movements in interest rates and offset by payment of the dividend. From 31 December 2006, the Group has a regulatory obligation to have a positive solvency on an IGD basis at all times. The Group's risk management processes ensure adequate review of this measure. Economic bases We have developed a framework using ICA principles for identifying the risks that business units, and the Group as a whole, are exposed to and quantifying their impact on economic capital. The ICA estimates the capital required to mitigate the risk of insolvency to a 99.5% confidence level over a one year time horizon against financial and non-financial tests. Currently our ICA uses a mixture of scenario based approaches and risk based capital models. The FSA will use the results of our ICA process when discussing the target levels of capital it believes the UK regulated businesses should maintain. We continue to develop our risk based capital modelling capability for all our businesses as part of our longer-term development programme for more complex risk modelling techniques, and increasingly operate our business by reference to economic and risk based capital requirements. General insurance Regulatory basis Our principal UK general insurance regulated subsidiaries are Aviva International Insurance group (AII) and Norwich Union Insurance (NUI). The combined businesses of the AII group and NUI group have strong solvency positions. On an aggregate basis the estimated excess solvency margin (representing the regulatory value of excess available assets over the required minimum margin) amounted to Â£4.2 billion (31 December 2006: Â£3.8 billion) after covering the minimum capital base of Â£4.8 billion (31 December 2006: Â£4.5 billion). ---------------------------------------------------------------------------------------------------------------------- Page 11 The table below sets out the regulatory basis of these general insurance groups at 30 June 2007 and 31 December 2006. 30 June 2007 31 December 2006 ----------------------------------- ---------------------------------- AII NUI and AII AII NUI and AII NUI Group Group pro forma NUI Group Group pro forma Capital resources Â£1.0 bn Â£8.0 bn Â£9.0 bn Â£1.0 bn Â£7.3 bn Â£8.3 bn Capital resources requirement Â£0.3 bn Â£4.5 bn Â£4.8 bn Â£0.3 bn Â£4.2 bn Â£4.5 bn Solvency surplus Â£0.7 bn Â£3.5 bn Â£4.2 bn Â£0.7 bn Â£3.1 bn Â£3.8 bn ----------------------------------------------------------------------------------------------------------------------- Cover 3.2 times 1.8 times 1.9 times 2.9 times 1.7 times 1.8 times ----------------------------------------------------------------------------------------------------------------------- Economic bases - Risk based capital The Group uses a number of measures of risk based capital to assess its capital requirements for its general insurance businesses. Financial modelling techniques enhance our practice of active capital management, ensuring sufficient capital is available to protect against unforeseen events and adverse scenarios, and risk management. Our aim continues to be the optimal usage of capital through appropriate allocation to our businesses. Life operations Economic bases For the Group's non-participating worldwide life assurance business the Group has set its capital requirements as the higher of: - Target levels set by reference to own internal risk assessment and internal objectives - Minimum capital level (i.e. level of solvency capital at which local regulator is empowered to take action) Having undertaken an assessment of the level of operational, demographic, market and currency risk of each of our life businesses, we have quantified the levels of capital required for each business. We have expressed these as a percentage of EU minimum. The required capital across all the Group's businesses varies depending on the level of operational, market and currency risk, between 100% and 200% of EU minimum or equivalent. In the UK we have assessed the required capital for our annuity book at 150% of the EU minimum and the remainder of the non-profit portfolio has been set at 100% of the EU minimum. The weighted average level of required capital for the Group's non-participating life business, expressed as a percentage of the EU minimum (or equivalent) solvency margin remains unchanged at 134% (31 December 2006: 134%). This is a blended rate and we would expect this to change over time with product mix. These levels of required capital are used in the calculation of the Group's embedded value to evaluate the cost of locked in capital. At 30 June 2007 the aggregate regulatory requirements based on the EU minimum test amounted to Â£4.5 billion (31 December 2006: Â£4.3 billion). At this date, the actual net worth held in the Group's long-term business was Â£9.6 billion (31 December 2006: Â£8.9 billion) which represents 214% (31 December 2006: 206%) of these minimum requirements. UK Life operations Available capital The available capital of the with-profit funds is represented by the realistic inherited estate. The estate represents the assets of the long-term with-profit funds less the realistic liabilities for non-profit policies, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs, guarantees and promises. Realistic balance sheet information is shown below for the three main UK with-profit funds; CGNU Life, Commercial Union Life Assurance Company (CULAC) and Norwich Union Life & Pensions (NUL&P). These realistic liabilities have been included within the long-term business provision and the liability for insurance and investment contracts on the Group's IFRS balance sheet at 30 June 2007 and 31 December 2006. 31 December 30 June 2007 2006 ------------------------------------------------------------------------------------ Estimated Estimated Estimated Realistic Realistic Realistic risk capital Estimated Estimated assets liabilities*,** inherited estate*** margin^ excess excess Â£bn Â£bn Â£bn Â£bn Â£bn Â£bn CGNU Life 15.9 (13.2) 2.7 (0.3) 2.4 2.0 CULAC 15.1 (12.4) 2.7 (0.4) 2.3 2.0 NUL&P^^ 28.0 (26.0) 2.0 (0.4) 1.6 1.2 ----------------------------------------------------------------------------------------------------------------------- Aggregate 59.0 (51.6) 7.4 (1.1) 6.3 5.2 ----------------------------------------------------------------------------------------------------------------------- * These realistic liabilities include the shareholders' share of future bonuses of Â£0.7 billion (31 December 2006: Â£0.7 billion). Realistic liabilities adjusted to eliminate the shareholders' share of future bonuses are Â£50.9 billion (31 December 2006: Â£48.6 billion). ** These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is Â£0.5 billion, Â£0.6 billion and Â£2.5 billion for CGNU Life, CULAC and NUL&P respectively (31 December 2006: Â£0.5 billion, Â£0.7 billion and Â£3.0 billion for CGNU Life, CULAC and NUL&P respectively). *** Estimated realistic inherited estate at 31 December 2006 was Â£2.5 billion, Â£2.5 billion and Â£1.8 billion for CGNU Life, CULAC and NUL&P respectively. ^ The risk capital margin (RCM) is 6.7 times covered by the inherited estate (31 December 2006: 4.2 times). ^^ The NUL&P fund includes the Provident Mutual (PM) fund which has realistic assets and liabilities of Â£2.3 billion and therefore does not impact the realistic inherited estate. ---------------------------------------------------------------------------------------------------------------------- Page 12 Potential reattribution of inherited estate Aviva continues to pursue the potential reattribution of the inherited estates of the CGNU and CULAC with-profit funds and is currently engaged in complex and lengthy negotiations with the independent Policyholder Advocate, Clare Spottiswoode. This is the first time a reattribution on this scale has been proposed under the new regulatory process. Aviva is committed to working towards a deal but will only go ahead with a reattribution if the negotiated outcome is fair to policyholders and shareholders. Aviva expects to provide an update on the negotiations later in the year. Investment mix The aggregate investment mix of the assets in the three main with-profit funds at 30 June 2007 was: 30 June 31 December 2007 2006 % % Equity 42% 42% Property 14% 16% Fixed interest 36% 36% Other 8% 6% ---------------------------------------------------------------------------------------------------------------------- 100% 100% ====================================================================================================================== The equity backing ratio, including property, supporting with-profit asset shares is 63% in CGNU Life and CULAC and 49% in NUL&P. New with-profit business is mainly written through CGNU Life. Group capital statement The purpose of the capital statement is to set out the financial strength of the Group and to provide 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: 31 December 30 June 2007 2006 --------------------------------------------------------------- ----------- UK Other UK Overseas with-profit life life Total Other funds*** operations operations life operations^ Total Total Â£bn Â£bn Â£bn Â£bn Â£bn Â£bn Â£bn Total shareholders' funds 0.1 3.1 10.1 13.3 2.2 15.5 14.1 Other sources of capital* - 0.2 0.2 0.4 2.7 3.1 3.1 Unallocated divisible surplus 7.2 - 2.3 9.5 - 9.5 9.5 Adjustments onto a regulatory basis** 0.1 (1.4) (3.9) (5.2) (2.4) (7.6) (7.2) ---------------------------------------------------------------------------------------------------------------------- Total available capital 7.4 1.9 8.7 18.0 2.5 20.5 19.5 ====================================================================================================================== * Other sources of capital represents: subordinated debt of Â£2,949 million (31 December 2006: Â£2,937 million) issued by Aviva plc and Â£152 million (31 December 2006: Â£153 million) other qualifying capital issued by Dutch, Italian and US subsidiary undertakings. ** Including an adjustment for minorities *** Includes the Provident Mutual with-profit fund ^ Other operations include general insurance and fund management businesses. ---------------------------------------------------------------------------------------------------------------------- Page 13 LIFE NEW BUSINESS SALES Geographical analysis of life, pensions and investment sales, new business contribution and new business margin Present value of new business premiums* New business contribution*** New business margin^ ------------------------------ ---------------------------- ---------------------- Local Local 6 months 6 months currency 6 months 6 months currency 6 months 6 months 2007 2006 growth** 2007 2006 growth** 2007 2006 Â£m Â£m Â£m Â£m Life and pensions business United Kingdom 5,820 5,816 - 178 167 7% 3.1% 2.9% France 1,832 2,028 (8)% 80 87 (7)% 4.4% 4.3% Ireland 889 558 62% 14 11 27% 1.6% 2.0% Italy 1,818 1,583 16% 49 38 32% 2.7% 2.4% Netherlands (including Germany and Belgium) 1,146 1,170 (1)% 37 34 9% 3.2% 2.9% Poland 379 264 44% 17 14 21% 4.5% 5.3% Spain 1,114 916 23% 88 88 1% 7.9% 9.6% Other Europe 175 126 45% (2) (4) 50% (1.1)% (3.2)% Europe 7,353 6,645 12% 283 268 7% 3.8% 4.0% North America 1,716 289 553% 57 5 1,040% 3.3% 1.7% Asia 414 252 76% 20 12 82% 4.8% 4.8% Australia 240 145 68% 12 7 71% 5.0% 4.8% Asia Pacific 654 397 73% 32 19 78% 4.9% 4.8% ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 15,543 13,147 19% 550 459 21% 3.5% 3.5% ====================================================================================================================== Investment sales^^ United Kingdom 1,595 1,083 47% Netherlands 365 211 75% Poland 141 62 127% Other Europe 272 309 (11)% Europe 778 582 35% Australia 1,030 685 52% Singapore 348 134 172% Asia Pacific 1,378 819 71% ---------------------------------------------------------------- Total investment sales 3,751 2,484 52% ---------------------------------------------------------------- Total long-term savings 19,294 15,631 25% ================================================================ Navigator sales 1,298 723 79% (included above) * All references to sales in this announcement refer to the present value of new business premiums (PVNBP) unless otherwise stated. PVNBP is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine new business contribution. ** Growth rates are calculated based on constant rates of exchange. *** Stated before the effect of required capital. ^ New business margin represents the ratio of new business contribution before the effect of required capital to present value of new business premiums, expressed as a percentage. ^^ Investment sales are calculated as new single premiums plus the annualised value of new regular premiums. ---------------------------------------------------------------------------------------------------------------------- Page 14 Overview Aviva achieved continued strong growth in the 6 months to 30 June 2007, with total long-term savings new business sales up 25% to Â£19,294 million (2006: Â£15,631 million). The overall increase reflects growth in life and pension sales of 19% to Â£15,543 million (2006: Â£13,147 million), and strong investment sales, up 52% to Â£3,751 million (2006: Â£2,484 million). Aviva USA has delivered an excellent performance with sales of Â£1,716 million from the combined business (2006 pro forma: Â£1,253 million), a pro forma increase of 51%. Aviva UK achieved a record half year with total sales increasing by 7% to Â£7,415 million (2006: Â£6,899 million). The company delivered good life and pension sales of Â£5,820 million (2006: Â£5,816 million), and at the same time improved its margin levels. Growth in life and pension sales would have been 4%* if consistent operating assumptions had been used in the comparative half year. Collective investment sales rose significantly by 47% to Â£1,595 million (2006: Â£1,083 million). Additionally, Aviva UK's share of sales through its bancassurance joint venture with The Royal Bank of Scotland Group (RBSG) was up by 30% to Â£777 million (2006: Â£598 million). Outside of the UK, Aviva's long-term savings new business sales grew strongly by 39% to Â£11,879 million (2006: Â£8,732 million), reflecting strong growth in all regions and particularly from businesses acquired in Ireland and the United States during 2006. Life and pension new business sales were 35% higher at Â£9,723 million (2006: Â£7,331 million), while investment sales grew by 56% to Â£2,156 million (2006: Â£1,401 million). New business contribution before the effect of required capital increased by 29% to Â£372 million (2006: Â£292 million). United Kingdom This was a record half year from Norwich Union with total sales, including investments, up 7% to Â£7,415 million (2006: Â£6,899 million). Norwich Union's strong performance built on the exceptional sales growth that the company delivered in the first half of 2006 in the run up to, and post, A-Day. Sales in the second quarter of Â£3,915 million were 12% higher than the previous quarter and represent the highest quarterly new business sales for the company. Norwich Union's market share has risen to 11.2% for the first quarter of 2007** (full year 2006: 10.9%). The company continued to grow both its sales and profitability, with an increase in new business margin to 3.1% (2006: 2.9%). This was achieved through careful balancing of price, volume and mix and by reducing new business administration costs as part of its efficiency review. As a result, new business contribution increased to Â£178 million (2006: Â£167 million). Norwich Union delivered strong bond sales, up by 19% to Â£1,939 million (2006: Â£1,626 million). The company's guarantee-backed RPI bond grew strongly with sales of Â£570 million (2006: Â£297 million). The main with-profit funds have returned a performance ahead of expectations over the first half of 2007, which has allowed Norwich Union to remove market value reductions from all with-profit policies and improve final bonuses on unitised with-profit policies. The company maintained its level of unit-linked bond sales at Â£1,144 million and unit-linked offshore bonds increased by 28% to Â£90 million. An excellent performance in collective investments resulted in sales growing by 47% to Â£1,595 million (2006: Â£1,083 million) as the company continues to benefit from offering a broad range of funds including socially responsible investment, property and UK equity funds. In the UK, all companies sector, three funds were placed in the first quartile over the year to 30 June; the NU sustainable futures growth, NU UK ethical and NU UK focus funds. The company will continue to focus on collective investments and will be launching further propositions in the year. Following Norwich Union's exceptionally strong A-Day performance in 2006, total pension sales were Â£2,401 million (2006: Â£2,757 million). Individual pension sales (including group personal pensions) of Â£1,819 million (2006: Â£2,188 million) were lower but more profitable than in the first half of 2006, benefiting from the company's higher charging structure on stakeholder pensions introduced in 2006. Since its launch in April 2006, the company's SIPP^ sales have increased rapidly to Â£276 million (three months 2006: Â£21 million). Corporate pension sales were up 2% to Â£582 million (2006: Â£569 million) as the trustee-based corporate pension market remained active; however, the company still expects a market trend towards group personal pensions in the long term. Annuity sales increased significantly to Â£927 million (2006: Â£748 million) as the company's competitive pricing and strong service continued to enable it to maximise internal transfer rates in a growing market. As part of its wider drive into the employee benefits market, the company has secured a small number of bulk purchase annuity schemes in 2007 with more business expected to come through in the second half of the year. Equity release sales of Â£110 million were down (2006: Â£165 million) with this market remaining particularly competitive. Norwich Union expects its sales performance to improve in the second half of the year as it continues to strengthen its customer proposition, for example, through providing customers with easy to understand guidance on equity release products. * Comparative sales figures are stated before the effect of year end 2006 assumptions changes. Restating sales comparatives for the effect of 2006 persistency assumption changes, in order to give a like-for-like comparison using the same persistency basis, results in the following growth progression: - Total sales, including investments, would have increased by 11% to Â£7,415 million (2006: Â£6,699 million) - Life & pension sales would have increased by 4% to Â£5,820 million (2006: Â£5,616 million) - Total pension sales would have fallen by 6% to Â£2,401 million (2006: Â£2,557 million) ** Latest available ABI market share data on an APE basis ^ Included in collective investment sales ---------------------------------------------------------------------------------------------------------------------- Page 15 Protection sales were lower at Â£443 million (2006: Â£520 million) due to the slowdown in the payment protection insurance market and partnership agreements concluding in 2006. During the first half of 2007, the company maintained a leading position with financial advisers and further developed its direct to consumer capability in this market. Norwich Union supports the broad thrust of the FSA recommendations on market change and believes that, assuming all stakeholders engage constructively, they provide a positive basis for improving consumer confidence and driving profitable market growth. The company supports the proposed solution to the issue of adviser remuneration, giving customers a clear understanding of the separate cost of the products, advice and ongoing service. However, Norwich Union believes that this basis should apply to all advisers to provide fair treatment for all customers. Norwich Union strengthened its broad distribution footprint by securing three protection partnerships with The Post Office, HSBC and Bankhall General Insurance. The Post Office agreement will enable Norwich Union to work in partnership with the largest retail and financial services chain in the UK, providing access to more than 14,000 nationwide branches. Norwich Union's share of sales from its bancassurance partnership with RBSG showed excellent growth across the product range, with total sales up by 30% to Â£777 million (2006: Â£598 million). The increase in the number of advisers to 900 (Full year 2006: 760) and a successful ISA campaign both contributed towards this strong performance. Furthermore, new business margin improved to 4.2% (2006: 3.2%) reflecting economies of scale and a more profitable product mix. The company has continued to improve service levels to its customers and advisers. Customer satisfaction has increased to 73% (2006: 63%) with adviser satisfaction also improving to 65% (2006: 35%). Norwich Union launched its annuity 'service promise' in May and will launch an equity release 'service promise' later this month, to complement the already established protection, bond and individual pension promises. Norwich Union continues to expect full year market* growth of 5% - 10% on an annual premium equivalent (APE) basis, with the company having already delivered 9% APE sales growth in the first half of 2007. Norwich Union reaffirms its aim to grow at least in line with the market, while maintaining or increasing its overall new business margin from current levels. Europe Aviva's total sales in Europe, including investment sales, grew by 14% to Â£8,131 million (2006: Â£7,227 million). Life and pension sales grew by 12% to Â£7,353 million (2006: Â£6,645 million) and the margin was 3.8% (2006: 4.0%). This performance reflected the benefits of Aviva's diversified portfolio of businesses in countries currently experiencing varying market growth conditions. Strong profitable growth was achieved in life and pension sales in southern Europe, with overall growth in Italy and Spain of 19% to Â£2,932 million (2006: Â£2,499 million). Sales also continued to expand in Ireland and Central and Eastern Europe. Life and pensions sales in Ireland increased by 62% to Â£889 million (2006: Â£558 million) and in Central and Eastern Europe by 44% to Â£554 million (2006: Â£390 million). Market conditions continued to be challenging in France and the Netherlands, where Aviva's life and pension sales decreased by 6% to Â£2,978 million (2006: Â£3,198 million). Nevertheless, Aviva's businesses in France and the Netherlands maintained a strong new business margin of 3.9% (2006: 3.8%). France: Aviva France's sales were Â£1,832 million (2006: Â£2,028 million) with underlying product margins maintained at full year 2006 levels. Sales in the comparative period in 2006 were buoyed by strong equity market performance. The French long-term savings market decline for the five months to May 2007 was 5%** reflecting the volatility in the financial markets and uncertainty regarding the outcome of the presidential elections held in May. However, there was an improvement in volumes towards the end of the second quarter. Working with its partner, AFER, France's largest savings association, Aviva France has continued to encourage Fourgous*** policy conversions with cumulative transfers to date of Â£4.5 billion including Â£438 million in the first half of 2007 of which approximately 30% has been invested in unit-linked funds. Aviva France does not include these value-enhancing conversions in new business sales. Sales through our partnership with AFER decreased by 4% to Â£881 million (2006: Â£929 million). Unit-linked sales fell by 21% compared with the exceptional level in 2006, reflecting the impact of greater volatility in financial markets on customer behaviour, while euro sales were 4% higher. Enhancements to the AFER product made at the beginning of June combined with a successful advertising campaign resulted in strong year on year sales growth in that month. Sales through the partnership with Credit du Nord were also affected by the bancassurance market slowdown and reduced by 16% to Â£417 million (2006: Â£504 million). Excluding partnership sales through AFER and Credit du Nord, sales were Â£534 million (2006: Â£596 million). The proportion of unit-linked saving sales remained strong at 79% (2006: 78%) reflecting the success of Aviva France's products that offer a phased investment into equities and the launch of two further 'multi-manager' funds in the first half of the year. The new business margin was 4.4% (2006: 4.3%), with a new business contribution of Â£80 million (2006: Â£87 million) as a consequence of lower sales. * Total ABI market (includes collective investments) ** Based on gross written premium for the six months to 30 June 2007. *** Fourgous policy conversions enable tax efficient investment in a mix of 'Euro' and unit-linked funds providing policyholders with the opportunity to enjoy a greater flexibility in managing their funds. Unit-linked funds are more capital-efficient. ---------------------------------------------------------------------------------------------------------------------- Page 16 The outlook for 2007 will be influenced by the market response to potential tax changes following the presidential election and the trends in the financial markets. Recent marketing initiatives, such as the AFER campaign, and our experience in responding to changes in the economic and regulatory environment means that the business is well placed to address these challenges. Ireland: Total new business sales in Ireland increased by 62% to Â£889 million (2006: Â£558 million)*. Sales through Allied Irish Banks (AIB) increased to Â£435 million (five months in 2006: Â£223 million). These comprised Â£310 million of life sales, consisting primarily of single premium bonds and Â£125 million of pension sales. Pro forma** sales growth for the six-month period was 70%. This substantial increase reflected the successful launch of the Secure Capital Fund in January 2007, a sales initiative on life savings products and increased pension sales driven by strong fund performances. Sales through the broker channel were 37% higher at Â£454 million (2006: Â£335 million). Life sales were Â£149 million (2006: Â£131 million), reflecting strong sales of the Secure Capital Fund. Pension sales were 52% higher at Â£305 million (2006: Â£204 million), reflecting higher sales of investment-only business and the continued success of the revised Horizon product re-launched in September 2006. New business contribution was Â£14 million (2006: Â£11 million) with a margin of 1.6% (2006: 2.0%). The reduction in the margin primarily reflected the continuing impact of assumption changes made in December 2006. The margin has improved since the start of 2007 as a result of new product developments and re-pricing. The continued development of new products and expansion of the range of funds offered through the bank and broker networks combined with strong market conditions are expected to contribute to further growth in 2007. Italy: In Aviva Italy total sales grew strongly by 16% to Â£1,818 million (2006: Â£1,583 million). This growth contrasted with the Italian market, which showed a decline in total sales of 6%***. Sales through the UniCredit Group increased by 25% to Â£1,106 million (2006: Â£898 million) reflecting the continuous development of our relationship with the UniCredit Group and successful marketing campaigns carried out in the first half of the year. Banche Popolari Unite sales increased by 36% to Â£479 million (2006: Â£356 million) benefiting from higher sales of structured bonds following the issue of a new index-linked product and sales through Banca delle Marche were Â£39 million (2006: Â£24 million). Sales through the Banca Popolare Italiana Group network were adversely affected as the bank focused on its merger with Banco Popolare di Verona e Novara (BPVN) and were Â£175 million (2006: Â£281 million). The merger is now complete and the combined bank, Banco Popolare, has agreed an exclusive distribution deal to sell Aviva's credit protection and non-life products through its network of 2,200 branches. New business contribution increased to Â£49 million (2006: Â£38 million), reflecting the growth in sales and the benefit of a change in sales mix towards regular premium products, generating an increased margin of 2.7% (2006: 2.4%). Long-term growth potential remains strong and Aviva Italy continues to develop its bancassurance partnerships. The timing of marketing campaigns and new product launches will vary throughout the year with some resulting volatility in sales levels each quarter. Netherlands (including Germany and Belgium): Delta Lloyd's total sales increased by 11% to Â£1,511 million (2006: Â£1,381 million) driven by a 75% increase in investment product sales. The Dutch life and pensions market has continued to be challenging, with a decline in mortgage-related business and unit-linked sales. In this environment, Delta Lloyd life and pension sales were stable year-on-year, and 11% higher excluding the one-off effect of the Â£125 million Delta Lloyd pension scheme premium in the first quarter of last year. Life and savings sales were Â£420 million (2006: Â£525 million). Mortgage related business in the Netherlands declined due to lower activity in the mortgage market, and savings sales have been affected by negative press-coverage of unit-linked policy charging across the industry. Pension and annuity sales were Â£726 million (2006: Â£645 million) with annuity sales higher due to more competitive pricing of Delta Lloyd's immediate annuity products. * Sales for January 2006 did not include sales through AIB as the partnership began in February 2006. ** Pro forma sales for 2006 represent the sum of sales through AIB, including the period prior to beginning of the partnership in February 2006, plus sales through Hibernian's existing broker channel, on a consistent basis. *** Market sales growth is calculated using the volume measure, single plus annualised regular premiums. ---------------------------------------------------------------------------------------------------------------------- Page 17 Investment sales were 75% higher at Â£365 million (2006: Â£211 million), reflecting strong inflows into Delta Lloyd's new Select Opportunity fund, which focuses on undervalued European equities, and the DL Deelnemingen equity fund which retains its excellent performance in fund rankings. New business contribution increased to Â£37 million (2006: Â£34 million) with a new business margin of 3.2% (2006: 2.9%). The 2007 margin improvement benefits from the change in economic basis relative to 2006. The Dutch market is expected to remain highly competitive in 2007. In this context, Delta Lloyd continues its strategy of broadening distribution in order to strengthen its position in the market. Poland (including Lithuania): Aviva's life and pension operations in Poland and Lithuania are leading businesses in their respective markets. Total sales, including investment sales, increased by 60% to Â£520 million (2006: Â£326 million). Life sales in Poland increased strongly to Â£179 million (2006: Â£136 million, including one-off sales of Â£16 million from a large group scheme). This performance reflected the successful launch of a structured bond product, a promotional campaign targeting single premium business and increased volumes through our bancassurance channel. Pension sales increased by 69% to Â£174 million (2006: Â£103 million) helped by the launch of a specialist sales team, a growth in transfer business and higher average premiums. Single premium pension sales also benefited from higher transfer activity. Life and pensions sales in Lithuania were stable at Â£26 million (2006: Â£25 million). Polish investment sales were significantly higher at Â£141 million (2006: Â£62 million) reflecting the strong equity market performance and the benefit of marketing campaigns during the period. Total new business contribution from life and pension sales was Â£17 million (2006: Â£14 million), driven by the strong growth in sales. Lower receipts of overdue premiums from the state pension agency, which have lower associated acquisition costs, and a change in product and distribution mix affected the new business margin, which was lower at 4.5% (2006: 5.3%). The Polish insurance and investment markets continue to offer high long-term growth potential, supported by a favourable economic outlook. We are also confident that additional promotional campaigns will boost sales further during the year. Spain: Aviva Spain remains the leader in the life bancassurance market and ranks second in the life market overall*. Life sales in Spain were Â£1,114 million (2006: Â£916 million). This performance reflected strong sales of savings products including the successful launch of the PIAS** savings products that have been developed to take advantage of the more favourable tax regime for these products. Sales through Aviva's bancassurance partnerships were Â£1,012 million (2006: Â£812 million). This strong performance was supported by marketing campaigns carried out by the bank partners in the first half of the year making Aviva the market-leader in PIAS products. Sales through Aviva Vida y Pensiones, which distributes through direct sales force and intermediaries, were Â£102 million (2006: Â£104 million). The new business contribution was Â£88 million (2006: Â£88 million) with a lower margin of 7.9% (2006: 9.6%) reflecting higher volumes of long term savings products and a lower proportion of sales from mortgage linked protection products, while specific product margins have remained stable. The timing of marketing campaigns and the trend for a concentration of pension business sales in the last quarter of the year results in some variation in sales from quarter to quarter. Other Europe: Life and pension sales in Aviva's other European businesses in the Czech Republic, Hungary, Romania, Russia and Turkey increased strongly by 45% to Â£175 million (2006: Â£126 million). In Hungary sales increased by 57% to Â£71 million (2006: Â£44 million) principally from an increase in sales across all distribution channels, which was driven by Aviva's attractive unit-linked products. As a result, Aviva now ranks second in terms of new business in Hungary. In Turkey, where Aviva is a top-five life and pensions provider, total sales were Â£82 million (2006: Â£65 million). Strong growth has been driven by the successful development of the sales force, increasing productivity and the number of advisers. In the Czech Republic sales through the direct sales force channel increased, and in Romania the launch of new compulsory and voluntary pension products represents an opportunity for growth. Russia commenced corporate sales in the second half of 2006 and individual sales started this year. The development of the bancassurance network and the direct sales force are expected to drive growth during the remainder of the year. * Based on gross written premiums as at 31 March 2007 ** PIAS are newly introduced savings contracts with tax benefits if they are in force for ten years and if an annuity is purchased at maturity. ---------------------------------------------------------------------------------------------------------------------- Page 18 North America Total new business sales in the United States were Â£1,716 million (2006: Â£289 million) and pro forma sales have increased by 51%* (pro forma 2006: Â£1,253 million). This represents a record first-half sales performance from the former AmerUs operations across all business lines. It is anticipated that sales growth will continue to be strong. Sales of annuities reached Â£1,293 million (2006: Â£261 million), a pro forma increase of 58% over the prior period (pro forma 2006: Â£901 million). In a flat indexed annuity market, Aviva USA increased its market share by the introduction of new products, a successful marketing campaign at the beginning of the year and the expansion of the distribution network. During the first half of 2007, Aviva USA has added three new independent marketing organisations (IMOs) and 44 new wholesalers, and over 6,000 new agents have been contracted. Life sales were Â£271 million (2006: Â£28 million) representing a pro forma increase of 10% over the prior period. Increased indexed life sales more than offset reductions in sales of lower margin traditional and universal life products that were discontinued in the period as part of a product rationalisation process. Funding agreement sales, which are irregular in nature, totalled Â£152 million (pro forma 2006: Â£81 million). New business contribution increased to Â£57 million (2006: Â£5 million), a pro forma increase of 60% over the prior period. New business margin improved to 3.3% (2006: 1.7%), driven by a greater proportion of higher margin indexed product sales and improving expense performance. Asia Pacific In line with its long-term strategic ambitions, Aviva continues to achieve a strong rate of growth in new business sales with total sales 72% higher at Â£2,032 million (2006: Â£1,216 million) driven primarily by significantly higher sales in the Asian businesses. New business contribution from life and pension sales increased by 78% to Â£32 million (2006: Â£19 million) producing a new business margin of 4.9% (2006: 4.8%). Growth potential for the region remains strong and Aviva's diversified distribution model places the business in a strong position for continued growth. Australia: Total sales increased by 55% to Â£1,270 million (2006: Â£830 million), driven primarily by significantly higher investment sales through Navigator, the master trust fund administration business. Life and pension sales increased by 68% to Â£240 million (2006: Â£145 million) as a result of a Â£64 million one-off transfer in of group business and growth in protection business. In response to recent tax changes that affected the superannuation market, Aviva Australia has focused on capturing the one-off opportunities presented. Sales through Navigator increased by 63% to Â£950 million (2006: Â£589 million) as a result of changes in superannuation legislation and the positive impact of strategic investments in key independent advisers. Other investment sales were Â£80 million (2006: Â£96 million). Singapore: Total sales increased by 124% to Â£486 million (2006: Â£227 million). Life and pension sales increased by 55% to Â£138 million (2006: Â£93 million) as a result of direct sales of a new savings product. Aviva's partnership with DBS is ranked third in the bancassurance market. Sales through Navigator, the investment fund administration business, increased significantly by 172% to Â£348 million (2006: Â£134 million), reflecting strong distribution relationships with key brokers, a comprehensive range of funds offered and a buoyant equity market. Aviva remains the market leader in the developing broker market as well as the employee benefits and healthcare segment. Hong Kong: Sales have doubled to Â£162 million (2006: Â£90 million), due to strong Independent Financial Advisors (IFA) sales, which now account for over half of total sales, and a good performance from the partnership with DBS Hong Kong. China: Sales through the joint venture life business Aviva-COFCO have increased significantly by 168% to Â£96 million (2006: Â£38 million). Aviva's 50% share was Â£48 million (2006: Â£19 million). Aviva has increased its presence in the country to seven provinces, with a total of 17 city branches. Sales also benefited in the period from a new range of unit-linked products that have complemented our universal life products. India: Total sales from Aviva's joint venture with the Dabur Group increased to Â£221 million (2006: Â£173 million) and Aviva's 26% share of new business sales was Â£57 million (2006: Â£45 million). Aviva is the eighth largest private insurer in India and one of the leaders in the bancassurance market with over 30 distribution agreements in place. Sales are expected to continue to increase through India's bancassurance partnerships and through ongoing expansion of the direct sales force which now numbers more than 27,000 agents (June 2006: 11,800). Sri Lanka: In Sri Lanka, Eagle is the third largest life insurer and has become the leader in the life bancassurance market. Total life sales were Â£9 million (five months in 2006: Â£6 million). * Pro forma increases are based upon the combined sales for the former Aviva business based in Boston and the former AmerUs Group for the 2006 half year and are stated on a constant exchange rate basis. ---------------------------------------------------------------------------------------------------------------------- Page 19 Present value of life new business premiums The present value of new business premiums (PVNBP) is derived from the single and regular premiums of the products sold during the financial period and is expressed at the point of sale. 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. The projection assumptions used to calculate PVNBP for each product are the same as those used to calculate new business contribution. The discounted value of regular premiums is also expressed as annualised regular premiums multiplied by a Weighted Average Capitalisation Factor (WACF). The WACF will vary over time depending on the mix of new products sold, the average outstanding term of the new contracts and the projection assumptions. The table below sets out the factors required to derive PVNBP by business units. 6 months 6 months 2007 2006 -------------------------------------------------------------- ------------ Present value Regular of regular Single premiums WACF premiums premiums PVNBP PVNBP Â£m Â£m Â£m Â£m Â£m United Kingdom Individual pensions 211 4.1 860 959 1,819 2,188 Group pensions 42 5.1 215 367 582 569 Annuities - - - 927 927 748 Bonds - - - 1,939 1,939 1,626 Protection 63 5.3 336 107 443 520 Equity release - - - 110 110 165 ---------------------------------------------------------------------------------------------------------------------- UNITED KINGDOM 316 4.5 1,411 4,409 5,820 5,816 France Euro funds* 9 6.0 54 925 979 991 Unit-linked funds 28 5.3 149 631 780 949 Protection business 12 6.0 72 1 73 88 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 49 5.6 275 1,557 1,832 2,028 Ireland Life and savings 26 4.7 122 337 459 281 Pensions 46 3.8 173 257 430 277 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 72 4.1 295 594 889 558 Italy Total life and pensions 72 5.0 362 1,456 1,818 1,583 Netherlands (including Belgium and Germany) Life 32 6.3 201 219 420 525 Pensions 40 8.3 332 394 726 645 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 72 7.4 533 613 1,146 1,170 Poland Life and savings 14 5.4 75 130 205 161 Pensions 16 6.9 110 64 174 103 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 30 6.2 185 194 379 264 Spain Life and savings 43 5.3 229 669 898 705 Pensions 16 5.6 90 126 216 211 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 59 5.4 319 795 1,114 916 Other Europe 31 4.0 124 51 175 126 ---------------------------------------------------------------------------------------------------------------------- EUROPE 385 5.4 2,093 5,260 7,353 6,645 North America Life 35 7.0 245 26 271 28 Annuity 1 3.0 3 1,290 1,293 261 Funding agreements - - - 152 152 - ---------------------------------------------------------------------------------------------------------------------- NORTH AMERICA 36 6.9 248 1,468 1,716 289 Asia 48 4.8 230 184 414 252 Australia 29 3.2 94 146 240 145 --------------------------------------------------------------------------------------------------------------------- ASIA PACIFIC 77 4.2 324 330 654 397 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 814 5.0 4,076 11,467 15,543 13,147 ====================================================================================================================== * Euro funds are savings that receive an annual bonus declaration, based on the investment performance of the underlying funds. ---------------------------------------------------------------------------------------------------------------------- Page 20 Analysis of sales via principal bancassurance channels Present value of new business premiums** --------------------------------------- Local 6 months 6 months currency 2007 2006 growth* Â£m Â£m Life and pensions United Kingdom The Royal Bank of Scotland Group 575 501 15% ---------------------------------------------------------------------------------------------------------------------- 575 501 15% France Credit du Nord 417 504 (16)% ---------------------------------------------------------------------------------------------------------------------- 417 504 (16)% Ireland Allied Irish Banks (Ark) 435 223 98% ---------------------------------------------------------------------------------------------------------------------- 435 223 98% Italy UniCredit Group 1,106 898 25% Banca Popolare Italiana Group 175 281 (37)% Banca delle Marche 39 24 65% Banche Popolari Unite 479 356 36% ---------------------------------------------------------------------------------------------------------------------- 1,799 1,559 17% Netherlands ABN AMRO 199 258 (22)% ---------------------------------------------------------------------------------------------------------------------- 199 258 (22)% Spain Bancaja 405 359 14% Caixa Galicia 201 153 33% Unicaja 258 157 67% Caja Espana 89 80 13% Caja de Granada 59 63 (5)% ---------------------------------------------------------------------------------------------------------------------- 1,012 812 26% Asia DBS 104 101 10% --------------------------------------------------------------------------------------------------------------------- 104 101 10% ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 4,541 3,958 16% Investment sales*** United Kingdom The Royal Bank of Scotland Group 202 97 108% ---------------------------------------------------------------------------------------------------------------------- 202 97 108% ---------------------------------------------------------------------------------------------------------------------- Total bancassurance sales 4,743 4,055 17% ====================================================================================================================== * Growth rates are calculated based on constant rates of exchange. ** Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine new business contribution. *** Investment sales are calculated as new single premium plus annualised value of new regular premiums. ---------------------------------------------------------------------------------------------------------------------- Page 21 Detailed worldwide life and pension new business analysis Single Regular PVNBP ---------------------------- ---------------------------- -------- 6 months 6 months Local 6 months 6 months Local Local 2007 2006 currency 2007 2006 currency currency Â£m Â£m growth* Â£m Â£m growth* growth* United Kingdom Individual pensions 959 1,066 (10)% 211 216 (2)% (17)% Group pensions 367 294 25% 42 49 (14)% 2% Annuities 927 748 24% - - - 24% Bonds 1,939 1,626 19% - - - 19% Protection 107 103 4% 63 82 (23)% (15)% Equity release 110 165 (33)% - - - (33)% -------------------------------------------------------------------------------------------------------------------- UNITED KINGDOM 4,409 4,002 10% 316 347 (9)% - France Euro funds** 925 963 (3)% 9 5 80% - Unit-linked funds 631 802 (20)% 28 24 17% (17)% Protection business 1 1 - 12 13 (8)% (16)% -------------------------------------------------------------------------------------------------------------------- 1,557 1,766 (11)% 49 42 17% (8)% Ireland Life and savings 337 203 69% 26 16 63% 66% Pensions 257 130 101% 46 31 48% 58% -------------------------------------------------------------------------------------------------------------------- 594 333 81% 72 47 53% 62% Italy Life and savings 1,456 1,282 15% 72 48 53% 16% -------------------------------------------------------------------------------------------------------------------- 1,456 1,282 15% 72 48 53% 16% Netherlands (including Belgium and Germany) Life 219 204 9% 32 46 (29)% (19)% Pensions 394 384 4% 40 30 33% 14% -------------------------------------------------------------------------------------------------------------------- 613 588 6% 72 76 (4)% (1)% Poland Life and savings 130 80 63% 14 15 (7)% 27% Pensions 64 40 60% 16 9 78% 69% -------------------------------------------------------------------------------------------------------------------- 194 120 62% 30 24 25% 44% Spain Life and savings 669 479 41% 43 36 19% 29% Pensions 126 117 10% 16 16 - 4% -------------------------------------------------------------------------------------------------------------------- 795 596 35% 59 52 13% 23% Other Europe 51 32 59% 31 23 41% 45% -------------------------------------------------------------------------------------------------------------------- EUROPE 5,260 4,717 13% 385 312 25% 12% North America Life 26 21 37% 35 1 3,400% 984% Annuity 1,290 251 466% 1 3 (67)% 446% Funding agreements 152 - - - - - - -------------------------------------------------------------------------------------------------------------------- NORTH AMERICA 1,468 272 494% 36 4 800% 553% Asia 184 87 127% 48 35 46% 76% Australia 146 85 74% 29 18 61% 68% -------------------------------------------------------------------------------------------------------------------- ASIA PACIFIC 330 172 100% 77 53 51% 73% -------------------------------------------------------------------------------------------------------------------- Total life and pensions 11,467 9,163 26% 814 716 14% 19% ==================================================================================================================== * Growth rates are calculated based on constant rates of exchange. ** Euro funds are savings that receive an annual bonus declaration, based on the investment performance of the underlying funds. ---------------------------------------------------------------------------------------------------------------------- Page 22 Detailed worldwide investment sales analysis Single Regular PVNBP ---------------------------- ---------------------------- -------- 6 months 6 months Local 6 months 6 months Local Local 2007 2006 currency 2007 2006 currency currency Â£m Â£m growth* Â£m Â£m growth* growth* United Kingdom Peps/Isas/UTs/Oeics/SIPPs 1,475 1,065 38% 44** 18 144% 47%** -------------------------------------------------------------------------------------------------------------------- UNITED KINGDOM 1,475 1,065 38% 44 18 144% 47% Netherlands (including Belgium and Germany) Unit trusts 365 211 75% - - - 75% Poland Mutual funds 139 60 132% 2 2 - 127% Other Europe UCITS 272 309 (11)% - - - (11)% -------------------------------------------------------------------------------------------------------------------- EUROPE 776 580 34% 2 2 - 35% Asia Pacific Unit trusts 80 96 (5)% - - - (5)% Navigator 1,298 723 83% - - - 83% -------------------------------------------------------------------------------------------------------------------- ASIA PACIFIC 1,378 819 71% - - - 71% -------------------------------------------------------------------------------------------------------------------- Total investment sales 3,629 2,464 48% 46 20 130% 52% ==================================================================================================================== * Growth rates are calculated based on constant rates of exchange. ** UK regular premium investment sales include SIPP products. These are similar in nature to pension products and their payment pattern is stable and predictable and accordingly they have been capitalised. Regular premium SIPP sales for the 6 months to 30 June 2007 totalled Â£19 million and have been multiplied using a weighted average capitalisation factor of 5.0. As such, regular premium SIPP sales have produced an overall contribution to investment sales of Â£95 million out of the total UK investment sales of Â£1,595 million. The 2006 comparatives have not been restated as the level of regular premium SIPP sales was immaterial to the group's sales. ---------------------------------------------------------------------------------------------------------------------- Page 23 Analysis of UK long-term savings by distribution channel Annual Single Regular Premium equivalent** ---------------------------- ---------------------------- -------------------- 6 months 6 months Local 6 months 6 months Local 6 months Local 2007 2006 currency 2007 2006 currency 2007 currency Â£m Â£m growth* Â£m Â£m growth* Â£m growth* IFA - life & pension products 3,004 2,932 2% 276 271 2% 576 2% - investment products 827 761 9% 6 1 500% 88 15% --------------------------------------------------------------------------------------------------------------------- 3,831 3,693 4% 282 272 4% 664 4% Bancassurance partnership with RBSG - life & pension products 468 316 48% 22 36 (39)% 69 2% - investment products 98 81 21% 38 17 124% 48 90% --------------------------------------------------------------------------------------------------------------------- 566 397 43% 60 53 13% 117 26% Other partnerships and Direct - life & pension products 937 754 24% 18 40 (55)% 112 (3)% - investment products 550 223 147% - - - 55 147% --------------------------------------------------------------------------------------------------------------------- 1,487 977 52% 18 40 (55)% 167 21% --------------------------------------------------------------------------------------------------------------------- Total UK long-term savings 5,884 5,067 16% 360 365 (1)% 948 9% ===================================================================================================================== * Growth rates are calculated based on constant rates of exchange. ** Annual premium equivalent (APE) is the UK industry's standard measure of new regular premiums plus 10% of single premiums. Analysis of France long-term savings by fund Single Regular PVNBP ---------------------------- ---------------------------- -------- 6 months 6 months Local 6 months 6 months Local Local 2007 2006 currency 2007 2006 currency currency Â£m Â£m growth* Â£m Â£m growth* growth* AFER - Euro funds** 612 627 (1)% 5 - - 4% - Unit-linked funds 224 302 (25)% 2 - - (21)% -------------------------------------------------------------------------------------------------------------------- 836 929 (9)% 7 - - (4)% Bancassurance partnership with Credit du Nord - Euro funds 229 232 - 1 2 (23)% (1)% - Unit-linked funds 128 194 (33)% 8 10 (14)% (30)% - Protection - - - 1 1 (45)% (43)% -------------------------------------------------------------------------------------------------------------------- 357 426 (15)% 10 13 (17)% (16)% Other - Euro funds 84 104 (18)% 3 3 (14)% (18)% - Unit-linked funds 279 306 (7)% 18 14 29% (5)% - Protection 1 1 20% 11 12 (10)% (14)% -------------------------------------------------------------------------------------------------------------------- 364 411 (10)% 32 29 8% (8)% -------------------------------------------------------------------------------------------------------------------- Total France long-term savings 1,557 1,766 (11)% 49 42 18% (8)% ==================================================================================================================== * Growth rates are calculated based on constant rates of exchange. ** Euro funds are savings that receive an annual bonus declaration, based on the investment performance of the underlying funds. ---------------------------------------------------------------------------------------------------------------------- Page 24 Glossary Life profits reporting In reporting the headline operating profit, life profits have been included using the European Embedded Value basis. This is used throughout the Aviva Group to assess performance, having adopted the EEV Principles. We have focused on the EEV basis, as we believe EEV operating return is a more appropriate measure of the performance of the businesses than IFRS basis. The IFRS basis is used in our financial statements and, on this basis, the operating profit before tax on continuing operations amounted to Â£1,375 million (2006: Â£1,376 million). The EEV methodology adopted is in accordance with the EEV Principles introduced by the CFO Forum. Definitions of Group key performance indicators and other terms Annual premium - Method for calculating life, pensions and investment new business levels. It equals the total equivalent (APE) of new annualised regular premiums plus 10% of single premiums. Assets under - Represents all assets managed or administered by the Group including funds held on behalf management of third parties. AII Limited - A principal UK general insurance company and the parent of the majority of the Group's overseas general insurance and life assurance subsidiaries. Combined operating - The aggregate of incurred claims expressed as a percentage of earned premiums and written ratio (COR) expenses and written commissions expressed as a percentage of written premiums. Covered business - The contracts to which the EEV methodology has, in line with the EEV Principles, been applied. EU solvency - The excess of assets over liabilities and the world-wide minimum solvency margins, excluding goodwill and the additional value of in-force long-term business, and excluding the surplus held in the Group's life funds. The Group solvency calculation is determined according to the UK Financial Services Authority application of EU Insurance Groups Directive rules. Financial Options - Features of the covered business conferring potentially valuable guarantees underlying, or and Guarantees options to change, the level or nature of policyholder benefits and exercisable at the discretion of the policyholder, whose potential value is impacted by the behaviour of financial variables. Free Surplus - The amount of any capital and surplus allocated to, but not required to support, the in-force covered business. Gross risk free - Gross of tax yields on risk free fixed interest investments, generally Government bonds. yields Holding Company - A legal entity with a function of being a consolidating entity for primary financial reporting of covered business. Implicit items - Amounts allowed by local regulators to be deducted from capital amounts when determining the EU required minimum margin. Life EEV operating - Operating return on the EEV basis relating to the lines of business included in the embedded return value calculations. From continuing operations and is stated before tax, impairment of goodwill and exceptional items. Life EEV return - Total return on the EEV basis relating to the lines of business included in the embedded value calculations. From continuing operations. Look-through basis - Inclusion of the capitalised value of profits and losses arising from subsidiary companies providing administration, investment management and other services to the extent that they relate to covered business. IFRS operating - From continuing operations, stated before tax attributable to shareholders' profits, impairment profit of goodwill, amortisation of acquired value of in-force business and exceptional items. Net asset value - Net asset value divided by the number of ordinary shares in issue. Net asset value is based per ordinary share on equity shareholders' funds. New business - New business contribution is calculated using the same economic assumptions as those used contribution to determine the embedded values at the beginning of each year and is stated before tax and the effect of required capital. New business margin - New business margins are calculated as the new business contribution divided by the present value of new business premiums (PVNBP), and expressed as a percentage. Previously, under the Achieved Profits basis, they were expressed as new business contribution divided by premiums measured on an annual premium equivalent (APE) basis. Inherited estate - The assets of the long-term with-profit funds less the realistic reserves for non-profit policies, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs and guarantees. Present value of - Present value of new regular premiums plus 100% of single premiums, calculated using assumptions new business consistent with those used to determine new business contribution. premiums (PVNBP) Required Capital - The amount of assets, over and above the value placed on liabilities in respect of covered business, whose distribution to shareholders is restricted. Service companies - Companies providing administration or fund management services to the covered business. Solvency cover - The excess of the regulatory value of total assets over total liabilities, divided by the regulatory value of the required minimum solvency margin. Statutory Basis - The valuation basis and approach used for reporting financial statements to local regulators. Stochastic - Techniques that incorporate the potential future variability in assumptions affecting Techniques their outcome. Time Value and - A financial option or guarantee has two elements of value, the time value and intrinsic Intrinsic Value value. The intrinsic value is the discounted value of the option or guarantee at expiry, assuming that future economic conditions follow best estimate assumptions. The time value is the additional value arising from uncertainty about future economic conditions. End of Part 1 of 4 This information is provided by RNS The company news service from the London Stock Exchange

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