Interim Results - Part 1

Aviva PLC 09 August 2006 ---------------------------------------------------------------------------------------------------------------------- NEWS RELEASE 9 August 2006 AVIVA PLC INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2006 â€¢Record half-year results with strong performance across all businesses and geographies â€¢Worldwide EEV operating profit up 27% to Â£1,699m; IFRS operating profit up 45% to Â£1,376m â€¢Strong and profitable growth in long-term savings with worldwide sales up 25%: â€¢UK: up 43% to Â£6,899m (2005: Â£4,825m) â€¢Continental Europe: up 10% to Â£7,227m (2005: Â£6,593m) â€¢US: up 24% to Â£289m (2005: Â£222m) â€¢Asia: up 80% to Â£386m (2005: Â£201m) â€¢Bancassurance sales up 24% to Â£4,055m, representing 26% of new business sales â€¢Group new business margin remains strong at 3.5% (2005: 3.6%) â€¢Life EEV operating profit up 19% to Â£1,021m, with 66% coming from international businesses â€¢Excellent general insurance result: Best ever combined operating ratio (COR) of 92%, ahead of 'meet or beat' commitment of 98%; general insurance and health operating profit up 23% to Â£866m â€¢Interim dividend increased by 10% to 10.82 pence per share Richard Harvey, group chief executive, commented: 'Aviva has once again delivered top and bottom line growth around the world. We've grown premiums, profit and dividend and are reaping the benefits of being in the right markets at the right time. Especially pleasing is our increased market share in a stronger UK market and, in line with our ambitions, international life profits growth continues to outpace excellent sales. Bancassurance continues to be an important contributor to our growth. 'Looking to the future, Europe and the US will be the two biggest long-term savings markets over the next decade. We're in prime position to capture a significant share of European growth, having secured an early and leading franchise that cannot easily be replicated. In a single step, our acquisition of AmerUs in the United States will give us a scaleable platform to capture growth in the biggest savings market in the world. Meanwhile we continue to build scale in Asia where the savings market will offer significant rewards over the longer term. 'Our general insurance business has delivered its best combined operating ratio ever, demonstrating again the sustainability of our general insurance results. The integration of RAC is complete and we are on track to deliver our cost and revenue targets for this business. 'These results highlight the fundamental competitive advantage that Aviva derives from its balanced international portfolio of life and general insurance businesses. Our increase in profit is evenly spread, and we are poised to deliver further profitable growth both by business and geography.' Worldwide highlights 6 months 6 months Growth in 2006 2005 constant currency Operating profit - EEV basis* Â£1,699m Â£1,318m 27% Operating profit - IFRS basis** Â£1,376m Â£943m 45% Life EEV operating return Â£1,021m Â£857m 19% General insurance and health operating profit Â£866m Â£694m 23% Long-term savings new business sales Â£15,631m Â£12,510m 25% New business contribution - gross Â£459m Â£393m 17% New business contribution - net of required capital, tax & minorities Â£194m Â£158m 23% Interim dividend per share 10.82p 9.83p 10% Equity shareholders' funds*** Â£15,532m Â£14,899m^ - Return on equity shareholders' funds 14.0% 14.6% - Net asset value per share 643p 622p^ - All operating profit is from continuing operations and all growth rates quoted are at constant rates of exchange. * 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 2005 Segmental analysis of Group operating profit* For the six months ended 30 June Continuing operations 6 months 2005 at 2006 6 months exchange 6 months 2006 rates 2005 Â£m Â£m Â£m Life EEV operating return** France 196 157 158 Ireland 8 21 22 Italy 53 46 47 Netherlands (including Belgium, Germany and Luxembourg) 185 124 125 Poland 66 50 48 Spain 112 91 92 Other Europe (3) 2 (1) Asia 19 9 9 Australia 19 17 17 United States 16 11 10 Aviva International 671 528 527 United Kingdom 350 330 330 ---------------------------------------------------------------------------------------------------------------------- 1,021 858 857 ====================================================================================================================== Fund Management***,^ France 5 2 2 Netherlands 10 8 8 Other Europe 5 7 5 International 7 6 6 United Kingdom 6 5 5 ---------------------------------------------------------------------------------------------------------------------- 33 28 26 ====================================================================================================================== General insurance and health United Kingdom 555 431 431 France 27 17 17 Ireland 88 83 83 Netherlands 80 55 55 Other Europe 19 19 19 Canada 85 77 67 Other 12 22 22 Aviva International 311 273 263 ---------------------------------------------------------------------------------------------------------------------- 866 704 694 ====================================================================================================================== Non-insurance operations***,^^ 29 38 37 Corporate costs - global finance transformation programme - (27) (28) - central costs and sharesave schemes (73) (55) (55) Unallocated interest charges - external (109) (130) (130) - intra-group (106) (101) (101) - net pension income 38 18 18 Group operating profit before tax* 1,699 1,333 1,318 ====================================================================================================================== * Group operating profit before tax. All operating profit is from continuing operations. ** Germany has been reclassified from Other Europe to the Netherlands, Lithuania has been reclassified from Other Europe to Poland and Norwich Union's Dublin-based offshore life and savings business has been reclassified from Other Europe to the United Kingdom. 2005 figures have been reclassified accordingly. *** Delta Lloyd Asset Management previously included within non-insurance has been reclassified to fund management and 2005 figures reclassified accordingly. ^ 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. ^^ 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 2006 was Â£1,376 million (2005: Â£943 million; Â£949 million restated at constant exchange rates). ---------------------------------------------------------------------------------------------------------------------- NEWS RELEASE GROUP CHIEF EXECUTIVE'S STATEMENT I am delighted to report strong growth in premiums, profit and dividend for Aviva in the first six months of 2006. Our businesses are growing sales and profits, on the back of offering competitive products in each of our markets. Operating profit before tax is up 27% on an EEV basis to Â£1,699 million (2005: Â£1,318 million), representing an annualised return on equity shareholders' funds of 14.0% (2005: annualised of 14.6%), ahead of our group target of 12.5%. On an IFRS basis, operating profit before tax reached Â£1,376 million (2005: Â£943 million), an increase of 45%. The Board is announcing an interim dividend increase of 10% to 10.82 pence net per share. Financial highlights Long-term savings We have delivered strong life new business growth across our portfolio with total long-term savings new business sales up 25% to Â£15,631 million (2005: Â£12,510 million). This was led by sound growth from our International businesses and the return of growth to the UK market. Over 55% of Aviva's life new business sales and profit came from outside the UK in the first half of this year. The Group continues to focus on increasing value. Groupwide life and pension sales grew by 19% to Â£13,147 million (2005: Â£11,016 million), with new business contribution after required capital increasing by 24% to Â£352 million (2005: Â£286 million). On a post-minorities basis, new business sales and post-tax new business profit rose in line to maintain margins. Our total life operating profit before tax grew 19% to Â£1,021 million on an EEV basis. We are pleased to report new momentum in the UK life market with our UK life business delivering its fifth consecutive quarter of growth. Sales increased ahead of the market and Norwich Union became the UK market leader once again with a market share of 11.8% at the end of the first quarter. Total sales were up 43% to Â£6,899 million (2005: Â£4,825 million) with margins increasing to 2.9% (first quarter 2006: 2.8%). Individual pension sales led this increase with sales up 86%, boosted by A-day. This increased level of market activity is expected to continue for the rest of the year and into 2007 before moving back to lower, more normal levels thereafter. Our bancassurance partnership with the Royal Bank of Scotland Group generated best ever quarterly sales, with half year sales increasing 87% to Â£598 million (2005: Â£319 million). We continue to benefit from developing our collective investment capability, with sales doubling to just over Â£1 billion (2005: Â£513 million). We also continue to focus on delivering further service improvements in the advisor market. The new management structure for our UK operations gives us opportunities to align our customer proposition under the Norwich Union and RAC brands and we anticipate further benefits from more integrated management of our UK businesses. In June we announced growth ambitions for our international life operations to deliver average organic growth of at least 10% per annum over the next 5 years, while growing new business profit at least as quickly*. Our experienced management teams around the world are strongly positioned in the right markets with the right capabilities to achieve this. International life and pension sales grew strongly by 10% to Â£7,331 million, with new business contribution after required capital growing well ahead of sales by 22% to Â£217 million. Business mix changes towards less capital intensive products continue to be made in France and Italy. We have once again seen strong growth in sales from our US business with life and pension sales up 24% to Â£289 million (2005: Â£222 million). The acquisition of AmerUs will increase the size of our US business four-fold. In Asia we continue to build leadership positions in selected markets which will position us well to capture the long-term growth this market will bring. Total sales grew by 80% to Â£386 million (2005: Â£201 million). We are now the 6th largest private provider in the Indian life market and the market leader in the bancassurance market. In China, we have also recently received permission to open a branch in Changsha, the capital city of Hunan province which will bring the total number of major city licences to six, with sales offices in a further seven cities. General insurance and health With our best ever combined operating ratio (COR) at 92%, our worldwide general insurance performance is comfortably ahead of our stated commitment to meet or beat 98%. Aviva's general insurance and health operations continue to outperform with operating profit of Â£866 million (2005: Â£694 million) demonstrating the continued resilience of the returns, notwithstanding the benefit of Â£125 million benign weather experience in the UK. In the UK we have continued to produce excellent results with an operating profit of Â£555 million, up 29% from Â£431 million. The COR of 92% demonstrates the success of our focused general insurance strategy and the benefits of our scale, including our successful offshore operations, which together bring cost benefits and sustainable profits in competitive markets. In the UK, motor claims costs continue to rise and so premium rates have been increased. Fund management Our fund management operations continue to deliver improved performance. Worldwide investment sales increased 66% to Â£2,484 million (2005: Â£1,494 million). On an IFRS basis, operating profit before tax increased from Â£41 million to Â£61 million and assets under management at 30 June 2006 grew to over Â£332 billion (31 December 2005: Â£322 billion). New business flows, tight management of our cost base, an increase in fee income and the strong performance of global investment markets have all contributed to this improved result. Third party funds also increased to Â£55 billion (31 December 2005: Â£52 billion). * Compound annual growth rate, post minorities, before acquisitions, and assuming no major changes in conditions. New business contribution growth after cost of capital, tax and minorities. ---------------------------------------------------------------------------------------------------------------------- NEWS RELEASE A strong track record These strong results have been achieved by our core focus on growing our existing businesses supplemented by a number of successful acquisitions and distribution deals. Since Aviva was formed in May 2000, we have driven value for shareholders by integrating and developing new businesses both internationally and in the UK. Our international bancassurance business has grown seven fold since 2000, delivering Â£5,439 million of new business sales in 2005 and Â£3,457 million (2005: Â£2,955 million) in the first half of 2006. We are now a partner of choice for banks worldwide due to the depth of our experience and successful track record of making these arrangements work. This year has continued to be as exciting in terms of developing new international distribution with the start of new bancassurance arrangements with Allied Irish Banks in Ireland, Centurion Bank of Punjab in India and National Development Bank in Sri Lanka. Additionally, our access to Unicredit Group branches in Italy has nearly doubled to approximately 1,000. The integration of RAC with our UK general insurance business is now complete and RAC businesses contributed Â£86 million to the Group's operating profit. This includes the benefit of Â£43 million of cost savings in the first half of the year. We are on track to deliver cost savings of Â£100 million in total in 2006 and operating profits of Â£220 million per annum by 2008 for businesses retained. The disposal of non-core RAC businesses is now complete with proceeds totalling Â£354 million, generating a run-rate return on investment in 2008 of 18.8%. On 13 July 2006, we announced the acquisition of AmerUs for approximately Â£1.6 billion in cash, financed by a successful Â£900 million equity placing, internal resources and external debt. In a single step AmerUs creates a scaleable platform for Aviva in the US long-term savings market and makes the USA our fourth largest life business. As AmerUs is a leader in the high growth US equity-indexed market, Aviva will become the market leader in the equity-indexed life insurance market and number three for equity-indexed annuities, complementing our existing US product range. The acquisition of AmerUs provides us with the platform from which we can grow organically in the US and is expected to complete in the final quarter of 2006. Annual pre-tax cost savings of approximately $45 million (Â£24 million) by 2008 are anticipated and we expect significant revenue benefits from the enhanced national distribution platform and the superior financial strength and ratings of Aviva. We expect the investment to generate a post-tax return on investment of over 10% by 2009. Strongly positioned for further organic growth Our first priority is the continued profitable growth of our existing businesses. Our stated growth and profitability targets demonstrate our confidence in our international life growth ambitions for the next five years and the strength of our general insurance results. We anticipate further momentum in the UK market during this year, albeit at a more modest rate. We will continue to supplement organic growth through new distribution deals while focusing our efforts on the successful integration of AmerUs. Our success in the first half of 2006 highlights the fundamental competitive advantage that we derive from our balanced international portfolio of life and general insurance businesses. These businesses are poised to deliver further profitable growth. Richard Harvey Group Chief Executive ---------------------------------------------------------------------------------------------------------------------- NEWS RELEASE Enquiries: Richard Harvey Group chief executive Telephone +44 (0)20 7662 2286 Andrew Moss Group finance director Telephone +44 (0)20 7662 2679 Analysts: Charles Barrows Investor relations director Telephone +44 (0)20 7662 8115 Jessie Burrows Head of 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 Rob Bailhache Financial Dynamics Telephone +44 (0)20 7269 7200 NEWSWIRES: There will be a conference call today for wire services at 8.15am (BST) on +44 (0)20 7162 0125 Quote: Aviva, Richard Harvey. ANALYSTS: A presentation to investors and analysts will take place at 9.30am (BST) at St Helen's, 1 Undershaft, London, EC3P 3DQ. 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 7365 1833. A replay facility will be available until 23 August 2006 on +44 (0)20 7806 1970. The pass code is 5270491# for the whole presentation including Question & Answer session or 5865654# 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. High resolution images are also available for the media to view and download free of charge from www.vismedia.co.uk Notes to editors â€¢Aviva is one of the leading providers 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 2005. â€¢Aviva's principal business activities are long-term savings, fund management and general insurance, with worldwide total sales* of Â£36 billion and assets under management of Â£322 billion at 31 December 2005. *Based on life and pensions PVNBP, total investment sales and general insurance and health net written premiums including share of associates' premiums. â€¢Overseas currency results are translated at average exchange rates. 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 24 Earnings per share - EEV basis 24 Summarised consolidated statement of recognised income and expense - EEV basis 25 Summarised reconciliation of movements in consolidated shareholders' funds - EEV basis 25 Summarised consolidated balance sheet - EEV basis 26 Segmentation of summarised consolidated balance sheet - EEV basis 27 Basis of preparation - EEV basis 28 EEV methodology 28 Components of life EEV return 31 New business contribution 32 EEV basis - new business contribution before and after the effect of required capital, tax and minority interest 33 Post-tax internal rate of return on life and pensions new business 34 Experience variances 35 Operating assumption changes 35 Geographical analysis of life EEV operating return 36 Analysis of movement in life and related businesses embedded value 37 Segmental analysis of life and related businesses embedded value 38 Time value of options and guarantees 39 Minority interest in life and related businesses' EEV results 39 Principal economic assumptions - deterministic calculations 40 Principal economic assumptions - stochastic calculations 41 Other assumptions 42 Sensitivity analysis - economic assumptions 43 Sensitivity analysis - non-economic assumptions 45 IFRS basis Summarised consolidated income statement - IFRS basis 46 Earnings per share - IFRS basis 46 Proforma reconciliation of Group operating profit to retained profit in the period - IFRS basis 47 Summarised consolidated statement of recognised income and expense - IFRS basis 48 Summarised reconciliation of movements in consolidated shareholders' funds - IFRS basis 48 Summarised consolidated balance sheet - IFRS basis 49 Summarised consolidated cash flow statement - IFRS basis 50 Basis of preparation - IFRS basis 51 Exchange rates 51 Acquisitions 52 Other income - profit on the disposal of subsidiaries and associates 54 Integration Costs 55 Operations classified as held for sale 55 Geographical analysis of life IFRS operating profit 55 Geographical analysis of fund management operating profit 56 Geographical analysis of general insurance and health 57 Analysis of other operations' operating profit 58 Corporate costs 59 Unallocated interest charges 59 Tax 59 Earnings per share 60 Dividends and appropriations 62 Segmental information 62 Statistical supplement Segmental analysis of the components of life EEV operating return 74 Supplementary analyses 77 General insurance business only: geographical analysis 79 General insurance business only: class of business analyses 80 Appendix: Group capital structure 82 Shareholder information 88 ---------------------------------------------------------------------------------------------------------------------- PAGE 1 OPERATING AND FINANCIAL REVIEW Group operating profit before tax The Group's operating profit before tax, including life EEV operating return, increased by 27% to Â£1,699 million (2005: Â£1,318 million) driven by strong operational performances across all of our business segments. On an IFRS basis, worldwide operating profit before tax increased by 45% to Â£1,376 million (2005: Â£943 million). This strong set of results has been achieved by our continued focus on profitable growth from all of our distribution channels, leveraging our scale advantages in pricing and costs, our disciplined approach to underwriting and efficient claims management. This, combined with the Group's strong capital position, has allowed us to grow our interim dividend by 10% to 10.82 pence per share. EEV basis IFRS basis ------------------ ----------------- 6 months 6 months 6 months 6 months 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Life EEV operating return / IFRS long-term business profit 1,021 857 710 510 Fund management 33 26 61 41 General insurance and health 866 694 866 694 Other: Other operations 29 37 (11) (6) Corporate costs (73) (83) (73) (83) Unallocated interest charges (177) (213) (177) (213) ---------------------------------------------------------------------------------------------------------------------- Operating profit before tax 1,699 1,318 1,376 943 ---------------------------------------------------------------------------------------------------------------------- Profit before tax attributable to shareholders 1,284 1,739 1,248 1,124 ---------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 15,532 14,899^ 9,526 8,774^ ====================================================================================================================== ^ As at 31 December 2005 Long-term savings Our worldwide long-term savings new business sales grew strongly by 25% to Â£15.6 billion (2005: Â£12.5 billion) benefiting from a combination of excellent UK sales growth of 43% to Â£6.9 billion and our strong and well diversified international portfolio where sales grew by 14% to Â£8.7 billion and accounted for 56% of overall sales. Worldwide life and pension sales increased by 19% to Â£13.1 billion (2005: Â£11.0 billion) and we achieved substantial growth in investment sales of 66% to Â£2.5 billion (2005: Â£1.5 billion). We expect continued growth albeit at a more modest rate due to strong comparatives in the second half of 2005 as we continue to benefit from our multi-distribution networks, product expertise and diversified portfolio. 6 months 2006 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 % % % Continental Europe 6,645 582 7,227 9% 32% 10% Rest of the World 686 819 1,505 19% 51% 34% International 7,331 1,401 8,732 10% 42% 14% United Kingdom 5,816 1,083 6,899 35% 111% 43% --------------------------------------------------------------------------------------------------------------------- Total new business sales on a present value of new business premium (PVNBP) basis 13,147 2,484 15,631 19% 66% 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 2006 2005 Â£m Â£m New business contribution (after the effect of required capital) 352 286 Profit from existing business - expected return 503 434 - experience variances (9) (31) - operating assumption changes 3 7 Expected return on shareholders' net worth 172 161 ---------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 1,021 857 ====================================================================================================================== Analysed by: Continental Europe 617 491 Rest of the World 54 36 International 671 527 United Kingdom 350 330 ---------------------------------------------------------------------------------------------------------------------- PAGE 2 Worldwide life EEV operating return before tax was 19% higher at Â£1,021 million (2005: Â£857 million) due to increased contributions from both new and existing business. New business contribution after the effect of required capital was 24% higher at Â£352 million (2005: Â£286 million) outpacing the 19% growth in sales. Consequently the Group's new business margin after the effect of required capital increased to 2.7% (2005: 2.6%), reflecting improved business mix and our value focus. Aviva International now accounts for 62% of new business contribution after the effect of required capital. 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 6 months 6 months 6 months 6 months 6 months 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m % % Â£m Â£m % % Continental Europe 6,645 6,150 268 239 4.0% 3.9% 202 170 3.0% 2.8% Rest of the World 686 554 24 18 3.5% 3.2% 15 10 2.2% 1.8% International 7,331 6,704 292 257 4.0% 3.8% 217 180 3.0% 2.7% United Kingdom 5,816 4,312 167 136 2.9% 3.2% 135 106 2.3% 2.5% ----------------------------------------------------------------------------------------------------------------------- Total life and pensions business 13,147 11,016 459 393 3.5% 3.6% 352 286 2.7% 2.6% ======================================================================================================================= * Before effect of required capital which amounted to Â£107 million (2005: 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£675 million (2005: Â£595 million) reflecting the higher start of year embedded values. Adverse experience variances of Â£9 million (2005: Â£31 million adverse) were partially offset by positive operating assumption changes of Â£3 million (2005: Â£7 million positive). Continental Europe Life EEV operating return from our continental European businesses has increased 26% to Â£617 million (2005: Â£491 million). New business contribution after the effect of required capital increased to Â£202 million (2005: Â£170 million), with strong performances in France, Spain and Poland, mainly reflecting a combination of sales growth and margin improvements. New business margins before and after required capital were 4.0% and 3.0% (2005: 3.9% and 2.8%), respectively. The increase in new business margin after required capital reflects a change in business mix towards less capital intensive products, with higher sales of unit-linked and single premium savings products notably in France and Italy. Expected returns were higher at Â£360 million (2005: Â£315 million), reflecting higher start of year embedded value. Experience variances were higher at Â£52 million (2005: Â£1 million loss) mainly reflecting a favourable mortality experience of Â£42 million (2005: Â£28 million) in the Netherlands, France and Poland. Operating assumption changes were Â£3 million (2005: Â£7 million). Rest of the World The life EEV operating return increased to Â£54 million (2005: Â£36 million), benefiting from a higher expected return primarily resulting from the growth in embedded values achieved in our developing businesses during 2005. New business margins before and after the effect of required capital increased to 3.5% and 2.2%, respectively (2005: 3.2% and 1.8%, respectively) reflecting improving margins in our Asian operations. UK Norwich Union's life EEV operating return increased to Â£350 million (2005: Â£330 million) primarily reflecting increased new business contribution as higher expected returns from in-force business were offset by adverse experience variances. New business contribution after the effect of required capital grew 27% to Â£135 million (2005: Â£106 million) reflecting increased sales following strategic pricing actions taken in the second half of 2005. We continue to maintain our balance between focus on value while retaining a market-leading position. Experience variances amounting to an adverse Â£67 million (2005: Â£31 million) include exceptional expenses of Â£75 million (2005: Â£81 million) primarily relating to project costs associated with reorganisation, strategic initiatives and regulatory change, including pensions simplification. Persistency experience on pension and bond products continues to be adverse generating a loss of Â£35 million in the period (2005: Â£5 million loss). Following pensions simplification there has been increased activity in the pensions market, particularly in corporate pensions business, and consequently there have been higher transfers in the pensions business. As we had anticipated, this has resulted in increased lapse experience and at 30 June 2006 we have utilised Â£40 million of the Â£130 million provision established at the end of 2005. This was offset by positive mortality experience on protection business of Â£20 million (2005: Â£41 million) and better than assumed default experience on corporate bonds and commercial mortgages of Â£14 million (2005: Â£11 million). ---------------------------------------------------------------------------------------------------------------------- PAGE 3 Bancassurance margins - before required capital, tax and minority interests The weighted average bancassurance new business margins before the effect of required capital in the six months were 4.7% (2005: 4.6%). This increase mainly reflects a change in business mix in our partnerships in France and Spain. After the effect of required capital, the bancassurance margin was 3.9% (2005: 3.7%). 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 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m % % France 504 411 23 17 4.6% 4.1% Ireland 223 - 4 - 1.8% n/a Italy 1,559 1,240 37 32 2.4% 2.6% Netherlands 258 347 11 9 4.3% 2.6% Spain 812 855 86 76 10.6% 8.9% Asia 101 102 10 8 9.9% 7.8% United Kingdom 501 267 16 7 3.2% 2.6% ---------------------------------------------------------------------------------------------------------------------- Total bancassurance channels 3,958 3,222 187 149 4.7% 4.6% ====================================================================================================================== * Before effect of required capital which amounted to Â£32 million (2005: Â£31 million). ** New business margin represents the ratio of new business contribution to present value of new business premiums, expressed as a percentage. In France, our bancassurance joint venture produced an increased new business margin of 4.6% (2005: 4.1%). In Ireland, Ark Life's new business margin was 1.8% (first quarter 2006: 1.7%) reflecting competitive pressures. The new business bancassurance margin in Italy was 2.4% (2005: 2.6%), reflecting the increased proportion of lower margin unit-linked business and the lower proportion of traditional business which has a higher margin before the cost of capital. In Spain, our bancassurance partnerships produced an increased margin of 10.6% (2005: 8.9%) benefiting from demand for protection products in the period. Our bancassurance agreement with ABN AMRO in the Netherlands generated a margin of 4.3% (2005: 2.6%) as the comparative was affected by a special promotion on lower margin annuity business in the first quarter of 2005. The new business bancassurance margin from our partnership with DBS in Singapore and Hong Kong was 9.9% (2005: 7.8%) reflecting the profitable growth of these developing operations. The new business margin generated by our partnership in the UK with the Royal Bank of Scotland Group (RBSG) increased to 3.2% (2005: 2.6%) reflecting the sales momentum in this distribution channel and cost management. New business contribution - after deducting required capital, tax and minority interest New business contribution after required capital, tax and minority interest increased by 23% to Â£194 million while sales on a post minority basis grew by 20%. The total new business margin therefore remained unchanged at 1.7% when compared with the first half of 2005, with bancassurance accounting for 30% of new business contribution within the period. Present value of new business New business New business premiums* contribution** margin*** ----------------- ------------------ ------------------ 6 months 6 months 6 months 6 months 6 months 6 months 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m % % Bancassurance channels 2,218 1,678 59 42 2.7% 2.5% Other distribution channels 8,932 7,597 135 116 1.5% 1.5% ---------------------------------------------------------------------------------------------------------------------- Total life and pensions business 11,150 9,275 194 158 1.7% 1.7% ====================================================================================================================== Analysed: Continental Europe 4,651 4,409 87 75 1.9% 1.7% Rest of the World 683 554 12 8 1.8% 1.4% International 5,334 4,963 99 83 1.9% 1.7% UK 5,816 4,312 95 75 1.6% 1.7% ---------------------------------------------------------------------------------------------------------------------- * 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. 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£710 million (2005: Â£510 million), an increase of 39%. The increase is primarily driven by the effect of increases in long-term interest rates in the Netherlands. The UK life operating profit on an IFRS basis was Â£213 million (2005: Â£209 million). Within this, the operating profit of the with-profits business increased to Â£68 million (2005: Â£33 million) as strong with-profits fund investment performance in 2005 resulted in increased bonus rates and a decrease in the average market value reduction (MVR) on unitised with-profit policies. This was partially offset by a lower non-profit result of Â£145 million (2005: Â£176 million) reflecting higher new business strain. ---------------------------------------------------------------------------------------------------------------------- PAGE 4 In Continental Europe, life IFRS operating profit increased significantly to Â£497 million (2005: Â£317 million), driven primarily by increased profits in the Netherlands. In France, the operating profit reduced to Â£116 million (2005: Â£131 million) reflecting the higher investment gains in the prior period. In Ireland, operating profit of Â£31 million (2005: Â£14 million) included Â£14 million in respect of our partnership with AIB which was acquired in January 2006. In the Netherlands, the operating profit of Â£225 million (2005: Â£62 million) was substantially higher than in the prior year. This was mainly driven by increased interest rates which led to a Â£94 million release in the provision for guarantees set up in earlier years (2005: Â£70 million charge). Our businesses in Poland and Lithuania achieved an operating profit of Â£56 million (2005: Â£48 million) driven by increased income from higher funds under management. Operating profit in Spain increased to Â£48 million (2005: Â£39 million) due to higher profits from the growing portfolio of protection business which generate statutory profits in the first year. Our Rest of the World businesses improved to a break-even result from a loss of Â£16 million in 2005, with the prior year affected by a change in valuation basis in Asia introduced on 1 January 2005. Fund management operating profit Our worldwide fund management operating profit grew strongly to Â£61 million (2005: Â£41 million) on an IFRS basis. Assets under management at 30 June 2006 grew to Â£332 billion (31 December 2005: Â£322 billion) reflecting the impact of new business. In the UK, our fund management businesses comprise our institutional business Morley Fund Management (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£18 million (2005: Â£11 million) in the period. Our international operations consist of Morley's overseas businesses based in Melbourne, Dublin, Warsaw, Boston, Milan and Madrid, Aviva Gestion d'Actifs in France, Delta Lloyd Asset Management in the Netherlands, and other businesses including our fund administration business Navigator. Our international fund management operating profit was Â£43 million (2005: Â£30 million). 6 months 6 months 2006 2005 Â£m Â£m Morley UK 23 11 International 8 7 UK (excluding Morley) (5) - France 16 10 Netherlands 13 8 Other Europe and Rest of the World 6 5 ---------------------------------------------------------------------------------------------------------------------- Fund management operating profit - IFRS basis 61 41 ====================================================================================================================== The Morley group as a whole reported a 45% increase in total operating profit to Â£32 million (2005: Â£22 million), including the Â£1 million (2005: Â£4 million) contribution from our pooled pension business, which is reported in the long-term savings segment. Our fund management operating profit grew significantly to Â£31 million (2005: Â£18 million), resulting from positive market movements, new business mandates and performance fees. Sustained increases in revenue while maintaining the underlying cost base improved our cost/income ratio to 74% (2005: 80%). In May, Morley completed the take-on of Â£2.3 billion of funds from the Ark Life Assurance company resulting from Aviva's bancassurance joint venture with AIB. In addition to the Ark Life Assurance funds, new funded external mandates totalled Â£2.7 billion, principally from UK retail and institutional investors but also including contributions in respect of property partnerships vehicles and overseas operations. In June, Morley completed the purchase of a 56% stake in a hedge fund management company ORN Capital as part of their strategy to accelerate their alternatives business, adding one multi-strategy and four single-strategy hedge funds to their range of absolute return products. Furthermore, the growth of Morley's property funds under management continues apace with strong fund inflows. Our property team continues to be recognised by the industry, winning property fund manager of the year from both Property Week and Pensions Management. Our Socially Responsible Investment team continues to be highly regarded in the market and was the only UK-based team to be awarded a UK equities mandate by France's state pensions reserve fund. It was also recognised as SRI Provider of the Year by Global Pensions 2006. Norwich Union's retail investment business reported a loss of Â£1 million in the period (2005: Â£3 million profit) while our collective investment business with RBSG recorded a loss of Â£4 million (2005: Â£3 million loss) due to increased new business strain. Operating profit from our French business, Aviva Gestion d'Actifs (AGA), increased to Â£16 million (2005: Â£10 million) as a result of increased fee income from increased funds under management. We have continued to earn industry awards for the sustained performance of our funds. Over the 5 years to 30 June 2006, 97% of AGA funds were ranked in the first and second quartiles. The financial newspaper 'Le Revenu' awarded 5 prizes to AGA's funds for their high performance over both the past 3 and 10 years. ---------------------------------------------------------------------------------------------------------------------- PAGE 5 Operating profit from our fund management business in the Netherlands was Â£13 million (2005: Â£8 million previously reported within non-insurance business). The increase in the result reflects the impact of increased funds under management. Operating profits across our Other Europe and Rest of the World businesses rose to Â£6 million (2005: Â£5 million). On an EEV basis, the total operating profit from our fund management businesses was Â£33 million (2005: Â£26 million) and represents the profit from those funds managed on behalf of third parties and the Group's non-life businesses. General insurance and health operating profit The Group's net written premiums from its worldwide general insurance and health businesses increased by 7% to Â£5.7 billion, driven by an increase in the UK of 6% to Â£3.1 billion and 22% growth to Â£1.0 billion in the Netherlands. Group operating profit from general insurance and health businesses increased by 23% to Â£866 million (2005: Â£694 million). The worldwide general insurance combined operating ratio (COR) improved to 92% (2005: 95%), comfortably meeting our stated commitment to meet or beat a worldwide COR of 98% for the foreseeable future. While our scale advantages, focused underwriting, claims management and efficiencies continue to provide us with ongoing benefits, we are actively seeking to maximise these through knowledge sharing across our businesses. The general insurance and health underwriting profit improved to Â£346 million (2005: Â£182 million) including better than expected weather claims experience in the UK of Â£125 million (2005: neutral). The underlying improvement was driven by our disciplined approach to underwriting, claims management and lower claims frequency across most of our major businesses. The worldwide expense ratio was 11.6% (2005: 11.2%), reflecting the change in distribution mix towards the direct channel and strategic investment in the business to gain competitive advantage. The longer-term investment return (LTIR) on general insurance and health business assets was Â£520 million (2005: Â£512 million). The higher start-of-year asset base and positive cash inflows were offset by the application of lower LTIR rates in 2006. 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 some releases in 2006 relating to the 2005 and prior accident years. The releases mainly arise in the UK and this favourable development benefits the UK underwriting result by Â£140 million, of which Â£50 million is weather-related. We have increased our confidence levels in our reserves over the past few years and have maintained our reserves at very strong levels. Net written premiums Underwriting results* Operating profit* -------------------- -------------------- ------------------ 6 months 6 months 6 months 6 months 6 months 6 months 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom 3,073 2,891 225 104 555 431 Continental Europe 1,783 1,605 99 57 214 174 Rest of the World 794 708 22 21 97 89 International 2,577 2,313 121 78 311 263 -------------------------------------------------------------------------------------------------------------------- Continuing operations 5,650 5,204 346 182 866 694 ==================================================================================================================== * Excludes the Financial Services Compensation Scheme credit of Â£6 million (2005: nil). UK Norwich Union Insurance (NUI) has delivered an excellent result in the first half of the year, with a general insurance operating profit of Â£561 million (2005: Â£431 million) and COR of 92% (2005: 96%). The result includes a benefit of Â£125 million from better than expected weather (2005: neutral) and includes a contribution of Â£66 million from the RAC (2005: Â£6 million). Competition is increasing in the personal motor market. However, we have increased our rates by between 2% and 5% across the different segments of our book (2005: 5% overall) and we are committed to applying the necessary increases to maintain the profitability of this account. Homeowner rates have increased by 6% (2005: 6%). Commercial rates have fallen by around 3% (2005: no change), but our disciplined approach to risk selection and underwriting has maintained the level of profitability. General insurance net written premiums have increased by 6% to Â£2,898 million (2005: Â£2,736 million) over the first half of 2005. Premiums in our direct operation grew by 5% and this includes net written premiums of Â£57 million from RAC Direct Insurance, where we have launched new motor and homeowner products and an internet 'Quote and Buy' facility for travel insurance. Over 40% of our direct business is now written online. We are investing substantially in our brand presence and technology in order to secure our future profitability. We aim to provide better service to brokers, by streamlining back-office processing and improving our trading capability. In addition, we are developing our personal lines systems, which will enable customer transactions to be performed online, in one place, and provide seamless links into the systems used by our trading partners. The level of our strategic investment, and the inclusion of RAC for the entirety of the period, has increased our expense ratio to 11.9% (2005: 10.8%). Importantly, however, the total cost of distributing our products (expenses and commission combined) is in line with the 2005 full year position at 34%. ---------------------------------------------------------------------------------------------------------------------- PAGE 6 During the first half of 2006 we have secured a new deal with the Post Office to provide motor and homeowner products. We also successfully renewed our contracts with Abbey and Saga to provide homeowner insurance, and our contract with Lloyds TSB to provide creditor insurance. The RAC integration is complete and we are on track to deliver our external commitments for 2006 and beyond. Specifically, we have delivered Â£43 million cost savings in the period and we are on course to deliver the targeted cost savings of Â£100 million in 2006. Our acquisition of RAC is firmly on track to deliver an overall run rate return on investment of 18.8%. RAC has signed a new deal with Lex Vehicle Leasing to provide roadside assistance and glass replacement for six years, and a UK roadside contract with AssetCo for two years. RAC has successfully renewed its contracts with Porsche, Volvo and Budget. NU Healthcare provides private medical insurance (PMI), protection and occupational health services for over 800,000 customers. In 2006, the PMI business continued to grow with net written premiums up 13% to Â£175 million (2005: Â£155 million) and the result was a loss of Â£6 million (2005: break even) reflecting continuing investment in the business. Continental Europe In Continental Europe, our general insurance and health businesses recorded an operating profit of Â£214 million (2005: Â£174 million). In France, our general insurance and health business achieved an operating profit of Â£27 million (2005: Â£17 million) with an underwriting loss of Â£1 million (2005: loss of Â£12 million). Net written premiums increased to Â£435 million (2005: Â£424 million) reflecting selective rate increases in a competitive market, notably in commercial lines. The general insurance COR improved to 98% (2005: 100%) reflecting these higher premium rates together with expense improvements including cost savings due to our head office relocation. In Ireland, our general insurance business achieved an underwriting profit of Â£63 million (2005: Â£53 million) and a COR of 74% (2005: 80%). This strong performance reflected continuing favourable weather claims experience of Â£5 million (2005: Â£3 million) and reduced frequency of bodily injury claims. As a result of increased competition for market share and selective underwriting, net written premiums decreased to Â£251 million (2005: Â£262 million). In the Netherlands, the operating profits from general insurance and health operations increased to Â£80 million (2005: Â£55 million) reflecting an improvement in the underwriting profit to Â£34 million (2005: Â£14 million). The general insurance COR was 82% (2005: 94%) due to the exceptionally low incidence of large claims, in particular bodily injury and property damage claims. Net written premiums increased significantly to Â£955 million (2005: Â£790 million) largely driven by the increase in health premiums to Â£544 million (2005: Â£361 million) following the introduction of new healthcare arrangements which merged public and private health care provision at the start of 2006. Market changes in the Netherlands have intensified healthcare competition as providers bid to sign up customers, with an adverse impact on profitability as the COR of our healthcare business increased to 103% (2005: 100%). In response, we intend to merge our health operations with those of Agis Zorgverzekeringen, and Menzis Zorg and Inkomen to create a new organisation with four million customers representing a quarter of the market, in which Delta Lloyd would hold a minimum 25% share. This organisation would have the scale, expertise and distribution required to achieve success in the new environment. Subject to regulatory approval and due diligence, the three parties will start the integration process in October 2006 and complete the transaction during 2007. As a consequence the relevant assets and liabilities of our health business have been classified as held for sale in the consolidated balance sheet. Other general insurance operations are based in Italy, Poland and Turkey and achieved a total operating profit of Â£19 million (2005: Â£19 million). Rest of the World Operating profit in our general insurance and health businesses in the Rest of the World improved to Â£97 million (2005: Â£89 million). In Canada, net written premiums have increased by 1% to Â£724 million (2005: Â£627 million). Within this, the benefit of strengthening rates on personal motor and homeowner and premiums from our corporate partnership with Loblaws were offset by the continued softening of the commercial lines market although all lines remain profitable. The COR for our Canadian business has improved to 96% (2005: 98%) and operating profit to Â£85 million (2005: Â£67 million) as a result of careful management of underwriting and costs, together with a lower level of weather-related claims which benefited the result by Â£6 million (2005: Â£5 million). This strong performance is also due to our continued investment in improving risk selection, operational efficiency and the customer's experience. The operating profit from our other Rest of the World businesses, including the Group's captive reinsurer, amounted to Â£12 million (2005: Â£22 million including pre-disposal profits from our general insurance operations in Asia). Our Asian health business and our recently acquired general insurance business in Sri Lanka as part of the acquisition of Eagle Insurance recorded an operating profit of Â£1 million. Other operations The Group's other operations recorded an operating loss of Â£11 million (2005: loss of Â£6 million) on an IFRS basis. This comprises Â£20 million profit from RAC non-insurance operations (2005: Â£11 million), a loss from NU Life Services Ltd of Â£42 million (2005: Â£38 million loss) reflecting higher development costs, a Â£6 million loss resulting from the development of the Lifetime platform and Â£17 million profit from other non-insurance operations (2005: Â£21 million), including our Dutch banking division. ---------------------------------------------------------------------------------------------------------------------- PAGE 7 Operating profit from RAC non-insurance operations amounted to Â£20 million reflecting the inclusion of results for the entire period (2005: Â£11 million post acquisition). The sale of the Manufacturing Support Services division of RAC was completed in April, followed in May by the sale of our share of Lex Vehicle Leasing. Total proceeds were Â£354 million. Both operations were classified as held for sale at 31 December 2005 and the profit before tax on the disposals was Â£66 million. These businesses contributed an operating profit of Â£17 million in the period. This completes the disposal programme regarding the RAC non-core businesses. On an EEV basis, operating profit from our other operations was Â£29 million (2005: Â£37 million) as this excludes the majority of NU Life Services Ltd losses which are incorporated within the life EEV operating return. Corporate costs The non-recurrence of global finance transformation programme (GFTP) costs lowered the Group's corporate costs to Â£73 million (2005: Â£83 million of which Â£28 million related to GFTP). Costs excluding GFTP have increased reflecting increased brand spend plus higher pension and bonus costs. Unallocated interest charges Unallocated interest charges of Â£177 million (2005: Â£213 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 lower at Â£215 million (2005: Â£231 million). Within this, external interest costs reduced to Â£109 million (2005: Â£130 million) reflecting repayment of senior debt while internal interest costs amounted to Â£106 million (2005: Â£101 million). Net pension income increased to Â£38 million (2005: Â£18 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. Profit on ordinary activities before tax EEV basis IFRS basis -------------------- -------------------- 6 months 6 months 6 months 6 months 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Operating profit before tax 1,699 1,318 1,376 943 Impairment of goodwill - (10) - (10) Amortisation of acquired additional value of in-force long-term business - - (33) (44) Amortisation and impairment of intangibles (10) (8) (19) (16) Financial Services Compensation Scheme and other levies 6 - 6 - Profit on disposal of subsidiary and associates 86 145 147 145 Short-term fluctuations on return of investments backing general insurance and health business (205) 120 (205) 120 Variation from longer-term investment return - life business (739) 719 - - Effect of economic assumption changes 471 (531) - - Integration costs (24) (14) (24) (14) ---------------------------------------------------------------------------------------------------------------------- Profit before tax/ Profit before tax attributable to shareholders' profits 1,284 1,739 1,248 1,124 ====================================================================================================================== Profit before tax on an EEV basis was lower at Â£1,284 million (2005: Â£1,739 million), and includes adverse investment return variances and short-term investment fluctuations of Â£944 million (2005: Â£839 million favourable) partially offset by positive economic assumption changes of Â£471 million (2005: Â£531 million negative). During the first half we completed the sale of our remaining RAC non-core businesses generating disposal profits of Â£66 million. Additionally as part of the Ark Life transaction in January we completed the sale of a minority stake in our Irish life business at fair value resulting in a profit on an EEV basis of Â£26 million and Â£87 million on an IFRS basis as, under the latter, the additional value of long-term in-force business is excluded from the IFRS balance sheet. Other small disposals in the period amounted to a total loss of Â£6 million. The integration of RAC successfully completed during the period and accordingly no further costs associated with this will be reported. The total integration costs incurred since the acquisition were in line with the Â£130 million previously announced. The variance from the longer-term investment return primarily reflects lower market values of fixed income securities following the increase of 60 basis points and 80 basis points in UK and Euro zone long-term bond yields respectively. This was partly offset by slightly higher than assumed overall equity returns during the period. Long-term economic assumptions, which are set by reference to long-term bond yields, were revised upward at 30 June 2006 and these higher assumptions have increased the expected value of future profits from in-force life contracts, benefiting profits by Â£471 million. ---------------------------------------------------------------------------------------------------------------------- PAGE 8 Included within the investment variances is a one off charge reflecting changes in UK Inland Revenue legislation introduced by the 2006 Finance Bill amounting to Â£75 million on a post-tax basis. The non-life short-term fluctuations loss of Â£205 million (2005: Â£120 million positive) is principally due to the rise in bond yields. The effect of the non-life investment market movements, profit on disposal, and integration costs are included in the IFRS profit before tax attributable to shareholders' profits of Â£1,248 million (2005: Â£1,124 million). The taxation charge for the period was Â£524 million (2005: Â£530 million) on an EEV basis and includes a charge of Â£573 million (2005: Â£412 million) in respect of operating profit, which is equivalent to an effective rate of 33.7% (2005: 31.3%). The effective tax rate on IFRS operating profit of 26.9% (2005: 27.1%) reflects in net terms the use of unrecognised deferred tax assets which reduced the tax charge. Dividends Ordinary dividends The Board has recommended a 10% increase in the interim dividend to 10.82 net pence per share (2005: 9.83 pence) payable on 17 November 2006 to shareholders on the register on 18 August 2006. This follows the removal of the 5% growth target at the end of 2005 while enabling the Group to invest in its future growth. 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 2006 payable on 30 September 2006 to preference shareholders on the register on 1 September 2006. 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 2006 payable on 31 December 2006 to preference shareholders on the register on 1 December 2006. Pension fund deficit As previously announced we are close to finalising our negotiations on the appropriate proportion to be borne by the UK with-profit funds. These funds could contribute up to 12% of the future deficit funding payments to the Norwich Union pension fund. Currently substantially all of the deficit is borne by shareholders as historic contractual arrangements have, to date, meant no deficit funding has been recharged to the Group's UK with-profits funds. At 30 June 2006 the Group's overall pension fund deficit had reduced by Â£687 million to Â£784 million (gross of tax), benefiting from the favourable impact on the valuation of liabilities of a 30 basis point increase in real interest rates during the period. It remains our intention to make additional deficit funding contributions totalling Â£540 million by early 2008. 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 Aa2 ('excellent') with a negative outlook from Moody's. These ratings were reaffirmed at the time of the AmerUs acquisition announcement in July and reflect the Group's strong liquidity, competitive position, capital base, increasing underlying earnings and positive strategic management. As a result of the AmerUs acquisition, Aviva's rating from Moody's is on review for downgrade due to AmerUs' lower credit rating. 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 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. ---------------------------------------------------------------------------------------------------------------------- PAGE 9 Return on equity shareholders' funds The Group's annualised post-tax operating return on equity shareholders' funds was 14.0% (2005: 14.6%) ahead of our target of 12.5%. Opening shareholders' funds were Â£3.2 billion higher impacting the return as previously indicated. 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. 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 accurate and 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. 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 2006 the Group had Â£23.5 billion (31 December 2005: Â£23.0 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 2006 2005 Total shareholders' funds - EEV basis (including minority interests) Â£18.5 billion Â£17.5 billion Total capital employed by business operations Â£23.5 billion Â£23.0 billion Net asset value per share 643 pence 622 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 643 pence per share. Regulatory bases EU Groups directive 30 June 31 December 2006 2005 Insurance Groups Directive (IGD) excess solvency Â£4.2 billion Â£3.6 billion Cover (times) over EU minimum 1.9 times 1.8 times Aviva Group had an estimated excess regulatory capital, as measured under the EU Groups Directive, of Â£4.2 billion at 30 June 2006 (31 December 2005: Â£3.6 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. ---------------------------------------------------------------------------------------------------------------------- PAGE 10 The increase in IGD excess solvency was driven by the Group's strong solvency capital generation of Â£0.6 billion reflecting operational performance in the period. From 1 January 2006, the Group is required to have a positive IGD basis solvency level at all times. The Group's risk management processes ensure adequate review of this measure at all times. 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 CGU International Insurance group (CGUII) and Norwich Union Insurance (NUI). The combined businesses of the CGUII 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£6.8 billion (31 December 2005: Â£5.7 billion) after covering the minimum capital base of Â£4.5 billion (31 December 2005: Â£4.4 billion). The table below sets out the regulatory basis of these general insurance groups at 30 June 2006 and 31 December 2005. 30 June 2006 31 December 2005 ---------------------------------------- ----------------------------------- NUI plc CGUII NUI and CGUII NUI plc CGUII NUI and CGUII Group Group pro forma Group Group pro forma Regulated asset value Â£bn Â£1.1 bn Â£10.2 bn Â£11.3 bn Â£1.3 bn Â£8.8 bn Â£10.1 bn Required minimum margin Â£bn Â£0.4 bn Â£4.1 bn Â£4.5 bn Â£0.4 bn Â£4.0 bn Â£4.4 bn Excess solvency margin Â£bn Â£0.7 bn Â£6.1 bn Â£6.8 bn Â£0.9 bn Â£4.8 bn Â£5.7 bn Cover (times) 3.0 times 2.5 times 2.6 times 3.4 times 2.2 times 2.3 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. Our traditional risk based capital measure for general insurance business assesses insurance market and credit risks and makes prudent allowance for diversification benefits. The underlying model looks at the level of capital necessary to enable the general insurance business to meet the statutory minimum solvency margin over a five year period with 99% probability of not requiring further capital. We consider risks over a five year period allowing for planned levels of business growth. Based on this model, our risk based capital requirement may be expressed at 34% of net written premiums which is equivalent to Â£3.7 billion (31 December 2005: Â£3.5 billion) of capital. This compares with a total of Â£5.6 billion (31 December 2005: Â£5.6 billion) of shareholders' capital employed in our general insurance 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 solvency margin is 128% (2005: 135%) reflecting the change in annuity required capital in the second half of 2005. 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 2006 the aggregate regulatory requirements based on the EU minimum test amounted to Â£4.1 billion (31 December 2005: Â£3.9 billion). At this date, the actual net worth held in the Group's long-term business was Â£7.3 billion (31 December 2005: Â£7.2 billion) which represents 178% (31 December 2005: 183%) of these minimum requirements. ---------------------------------------------------------------------------------------------------------------------- PAGE 11 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-profits 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-profits 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 2006 and 31 December 2005. 31 December 30 June 2006 2005 ------------------------------------------------------------------------------------ Estimated Estimated Estimated Realistic Realistic Realistic required capital Estimated Estimated assets liabilities*,** inherited estate*** margin^ excess excess Â£bn Â£bn Â£bn Â£bn Â£bn Â£bn CGNU Life 13.9 (11.7) 2.2 0.6 1.6 1.6 CULAC 13.6 (11.6) 2.0 0.6 1.4 1.3 NUL&P 25.4 (23.8) 1.6 1.0 0.6 0.4 Provident Mutual 2.3 (2.3) - - - - ----------------------------------------------------------------------------------------------------------------------- Aggregate 55.2 (49.4) 5.8 2.2 3.6 3.3 ======================================================================================================================= * These realistic liabilities include the shareholders' share of future bonuses of Â£0.7 billion (31 December 2005: Â£0.7 billion). Realistic liabilities adjusted to eliminate the shareholders' share of future bonuses are Â£48.7 billion (31 December 2005: Â£50.5 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£0.7 billion, Â£0.9 billion and Â£2.8 billion for CGNU Life, CULAC and NUL&P respectively (31 December 2005: Â£0.7 billion, Â£0.9 billion and Â£3.4 billion for CGNU Life, CULAC and NUL&P respectively). ***Estimated realistic inherited estate at 31 December 2005 was Â£2.1 billion, Â£1.9 billion and Â£1.2 billion for CGNU Life, CULAC and NUL&P respectively. ^ The required capital margin (RCM) is 2.6 times covered by the inherited estate (31 December 2005: 2.7 times). Possible reattribution of inherited estate As previously announced, Aviva is reviewing the possibility of a reattribution of the inherited estate, or orphan assets, of two of our with-profit funds: CGNU Life and CULAC. At 30 June 2006, the estimated inherited estates of the CGNU Life and CULAC with-profits funds were Â£2.2 billion and Â£2.0 billion, respectively. At this stage, no decision has been taken to proceed with a reattribution. This will only be undertaken if there are clear benefits for both policyholders and shareholders. As announced in February, Aviva has nominated Clare Spottiswoode as the Policyholder Advocate, as required under the new FSA rules for the reattribution of an inherited estate. The actual appointment of the Policyholder Advocate would happen when the FSA has fully considered the outline of any reattribution scheme and if Aviva is fully satisfied that a reattribution is in the clear interests of policyholders and shareholders. Any appointment is not expected to happen before the autumn of 2006. Investment mix The aggregate investment mix of the assets in the three main with-profit funds at 30 June 2006 was: 30 June 31 December 2006 2005 % % Equity 45% 42% Property 15% 15% Fixed interest 36% 37% Other 4% 6% ---------------------------------------------------------------------------------------------------------------------- 100% 100% ====================================================================================================================== The equity backing ratio, including property, supporting with-profit asset shares is 76% in CGNU Life and CULAC and 63% in NUL&P. New with-profit business is mainly written through CGNU Life. ---------------------------------------------------------------------------------------------------------------------- PAGE 12 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. 30 June 31 December 2006 2005 --------------------------------------------------------------- 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 - 2.6 6.8 9.4 2.7 12.1 11.1 Other sources of capital* - - 0.2 0.2 2.8 3.0 2.9 Unallocated divisible surplus 5.8 - 2.4 8.2 - 8.2 9.0 Adjustments onto a regulatory basis** - (1.6) (3.5) (5.1) (3.1) (8.2) (9.4) ---------------------------------------------------------------------------------------------------------------------- Total available capital 5.8 1.0 5.9 12.7 2.4 15.1 13.6 ====================================================================================================================== * Other sources of capital represents: subordinated debt of Â£2,811 million (31 December 2005: Â£2,808 million) issued by Aviva plc and Â£119 million (31 December 2005: Â£119 million) subordinated perpetual loan notes issued by a Dutch subsidiary undertaking. ** Including an adjustment for minorities *** Includes the PM 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 margins^ ------------------------------ ---------------------------- ----------------------- Local Local 6 months 6 months currency 6 months 6 months currency 6 months 6 months 2006 2005 growth** 2006 2005 growth** 2006 2005 Â£m Â£m Â£m Â£m Life and pensions business France 2,028 1,854 10% 87 71 23% 4.3% 3.8% Ireland 558 349 61% 11 9 23% 2.0% 2.6% Italy 1,583 1,333 20% 38 33 16% 2.4% 2.5% Netherlands (including Germany, Belgium and Luxembourg) 1,170 1,383 (15)% 34 39 (12)% 2.9% 2.8% Poland 264 137 85% 14 7 104% 5.3% 5.1% Spain 916 965 (4)% 88 80 11% 9.6% 8.3% Other Europe 126 129^^ (5)%^^ (4) -^^ - (3.2)% 0.0% Continental Europe 6,645 6,150 9% 268 239 13% 4.0% 3.9% Asia 252 172 37% 12 8 48% 4.8% 4.7% Australia 145 160 (10)% 7 6 16% 4.8% 3.8% United States 289 222 24% 5 4 19% 1.7% 1.8% Rest of the World 686 554 19% 24 18 31% 3.5% 3.2% International 7,331 6,704 10% 292 257 14% 4.0% 3.8% United Kingdom 5,816 4,312 35% 167 136 23% 2.9% 3.2% ----------------------------------------------------------------------------------------------------------------------- Total life and pensions 13,147 11,016 19% 459 393 17% 3.5% 3.6% ======================================================================================================================= Investment sales^^^ Netherlands 211 180 18% Poland 62 26 128% Other Europe 309 237 31% Continental Europe 582 443 32% Australia 685 509 34% Asia 134 29 331% Rest of the World 819 538 51% International 1,401 981 42% United Kingdom 1,083 513 111% --------------------------------------------------------------- Total investment sales 2,484 1,494 66% --------------------------------------------------------------- Total long-term savings 15,631 12,510 25% =============================================================== Navigator sales 723 432 65% (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. ^^ 2005 figures include new business sales of Â£36 million and new business contribution of Â£1 million from the Portuguese business, which was disposed in October 2005. Excluding Portugal, Other Europe sales growth would have been 30%. ^^^ Investment sales are calculated as new single premium plus annualised value of new regular premiums. ---------------------------------------------------------------------------------------------------------------------- PAGE 14 Overview Aviva achieved excellent sales growth in the six months to 30 June 2006, with total long-term savings new business sales up 25% to Â£15,631 million (2005: Â£12,510 million). The overall increase reflects growth in life and pension sales of 19% to Â£13,147 million (2005: Â£11,016 million), and exceptional growth in investment sales of 66%, to Â£2,484 million (2005: Â£1,494 million). Aviva International's total long-term savings new business sales grew strongly by 14% to Â£8,732 million (2005: Â£7,685 million), benefiting from growth in most of its key markets. Life and pensions new business sales were 10% higher at Â£7,331 million (2005: Â£6,704 million) while investment sales growth was even stronger, up 42% to Â£1,401 million (2005: Â£981 million). New business contribution before the effect of required capital increased by 14% to Â£292 million (2005: Â£257 million), reflecting higher volumes and improved product mix. After the effect of required capital, new business contribution increased faster than sales, up 22% to Â£217 million (2005: Â£180 million), reflecting the importance that Aviva attaches to both sales volumes and shareholders' profits. On 1 June 2006, Aviva International announced its plan to achieve average annual organic sales growth*, after minorities, of at least 10% a year across the international life operations over the next five years, while growing new business profit** at least as quickly as sales. On 13 July, Aviva announced its agreement to acquire AmerUs, a leader in the high growth US equity-indexed market, consistent with its focus on achieving profitable growth and strategy of developing strong businesses in attractive markets. The transaction is expected to complete in the fourth quarter of 2006. Aviva UK's total long-term saving new business sales grew by 43% to Â£6,899 million (2005: Â£4,825 million), reflecting strong sales of individual and group pension business allied to exceptionally good collective investment sales, which topped Â£1 billion in the six month period. New business contribution before the effect of required capital was also higher at Â£167 million (2005: Â£136 million), as Aviva UK continues to focus on actively managing margin, volume and business mix. Aviva International Continental Europe France: Aviva France's sales increased by 10% to Â£2,028 million (2005: Â£1,854 million), including sales through Aviva's bancassurance partner, Credit du Nord, of Â£504 million (2005: Â£411 million). Overall market growth*** in the same period was 24%, driven primarily by changes to the tax benefits attached to 'Plan d'Epargne Logement' (PEL) banking products. These benefits were restricted with effect from 1 January 2006, prompting significant transfers from these accounts into insurance products, mostly benefiting pure bancassurers (with growth of 30% compared with 13% amongst the traditional insurers). Transfers from PEL products have started to decrease from April and they are expected to decline further during the rest of 2006. Aviva France continues to focus on unit-linked sales, while delivering high quality customer service and advice. Total unit-linked sales were 29% higher at Â£949 million (2005: Â£740 million), representing 49% (2005: 40%) of savings sales (excluding protection sales). In AFER, France's largest savings association, unit-linked sales were 56% higher at Â£302 million (2005: Â£195 million), reflecting the preference for products offering an element of equity exposure during a time of reducing returns available on pure Euro funds. Consequently, Aviva's Euro fund sales were Â£991 million (2005: Â£1,029 million). Aviva expects its proportion of unit-linked business to remain stable despite a slow-down in the growth of equity markets. Since late in 2005, Aviva's distribution networks have been proactive in encouraging policyholders to transfer existing 100% Euro funds into more balanced Euro and unit-linked portfolios, while ensuring that policyholders are receiving best advice. In particular, AFER has been successful in such transfers and achieved over 53,000 policy conversions, with Â£1 billion transferred to unit-linked funds. While these transfers are not included in new business figures, this initiative brings benefits through increasing the proportion of existing investment in less capital- intensive unit-linked funds and enabling a greater proportion of future new business from existing customers to be unit-linked. New business contribution has increased to Â£87 million (2005: Â£71 million) with a margin of 4.3% (2005: 3.8%). The increased margin reflects the benefit of higher volumes combined with an increased proportion of unit-linked sales. Ireland: In Ireland, Aviva's new business sales increased by 61% to Â£558 million (2005: Â£349 million), including sales of Â£223 million through the new bancassurance partnership with Allied Irish Banks (AIB), Ireland's largest retail bank, which commenced at the end of January. The integration of Ark Life (the life company purchased from AIB) and Hibernian Life & Pensions is proceeding well, in line with our plans. The sales of Â£223 million through AIB in the five months since acquisition comprised Â£150 million of life sales, consisting primarily of single premium bonds, and Â£73 million of pension sales. Life sales through Aviva's existing Hibernian broker channel were 23% higher at Â£131 million (2005: Â£108 million), with strong sales of single premium unit-linked business reflecting the continued success of the guaranteed fund prior to its closure in June. In July, Hibernian announced the re-opening of its popular property fund. Pension sales through Aviva's existing broker channel were Â£204 million (2005: Â£241 million), with the decrease reflecting an exceptional level of investment only pension contracts sold in 2005. Single premium pension sales tend to fluctuate from quarter to quarter due to the timing and size of these contracts. * The growth ambition is a compound annual growth rate, post minorities, before acquisitions, and assuming no major changes in conditions. ** New business contribution after cost of capital, tax and minorities. *** Based on gross written premium ---------------------------------------------------------------------------------------------------------------------- PAGE 15 Further growth is expected in 2006 and early 2007, as Special Savings Incentive Accounts (SSIA) reach maturity, and from the continued development of the product range on offer through AIB's branch network. New business contribution was Â£11 million (2005: Â£9 million) with a margin of 2.0% (2005: 2.6%). The reduction in the margin reflects continuing competitive pressures and changes in assumptions since June 2005. Italy: In Aviva Italy total sales grew strongly by 20% to Â£1,583 million (2005: Â£1,333 million, including one-off single premium direct sales Â£73 million). This growth contrasted with the Italian market, which showed a decline in total sales of 10%^. Sales through UniCredit Group increased by 80% to Â£898 million (2005: Â£502 million), benefiting from access to nearly 400 additional branches in the UniCredit Group network since January 2006. From July 2006 Aviva Italy gained access to a further 150 branches, bringing the total number of UniCredit branches to approximately 1,000. Regular premium product sales were up by 141% to Â£190 million (2005: Â£79 million), reflecting a greater focus on regular premium business in 2006. Marketing campaigns carried out by UniCredit Group in the first half of the year contributed to the strong sales performance. Sales through Banche Popolari Unite were Â£356 million (2005: Â£350 million). Further new products are planned for the second half of the year. Sales through the Banca Popolare Italiana Group network were Â£281 million (2005: Â£305 million) as demand for structured bonds was lower than last year. Marketing campaigns that were carried out in the first half of 2005 are expected to take place in the second half of this year. Sales through Banca delle Marche were lower at Â£24 million (2005: Â£83 million), resulting from a significant change in sales mix from regular premium products to single premium. The Italian market offers strong long-term growth potential. However, the timing of marketing campaigns and product launches tends to vary throughout the year and this can result in some volatility in sales levels each quarter. New business contribution increased to Â£38 million (2005: Â£33 million), reflecting the growth in sales, with a margin of 2.4% (2005: 2.5%). Netherlands (including Germany, Belgium and Luxembourg): Delta Lloyd's total sales, including investment sales, were Â£1,381 million (2005: Â£1,563 million). The Dutch life insurance market has been adversely affected in 2006 by regulatory and fiscal changes that have removed some of the tax advantages of pre-retirement products. Pension and annuity sales fell by 9% to Â£645 million (2005: Â£714 million). Volumes of annuity sales were lower at Â£155 million (2005: Â£250 million), reflecting high volumes in the first half of 2005 driven by limited period special offers in ABN AMRO and the direct channel, and fiscal changes in 2006. Delta Lloyd's pension sales tend to fluctuate from quarter to quarter due to the timing and size of group contracts; the first quarter of 2006 included a premium from the Delta Lloyd pension scheme amounting to Â£125 million. Life and savings sales were Â£525 million (2005: Â£669 million), with the reduction mainly due to lower sales in Germany and Belgium. In the Netherlands, savings sales have been affected by competition from alternative banking products. In Germany, sales in the first quarter last year included a late influx of endowment sales following a change in the tax law. In Belgium, sales were lower following the introduction of a 1.1% insurance tax levy on life insurance premiums from 1 January 2006. Investment sales increased by 18% to Â£211 million (2005: Â£180 million), benefiting from Delta Lloyd's broad distribution network, which includes ABN AMRO and Rabobank and strong sales of the structured dividend fund. New business contribution was Â£34 million (2005: Â£39 million) with margins of 2.9% (2005: 2.8%). The 2005 margin was depressed by the low margin annuity sales in the first quarter last year which were not repeated in 2006. The 2006 margin incorporates the adverse impact of the 40 basis point decrease in the bond yield within the European Embedded Value assumptions at the end of 2005. The Dutch market currently faces a large amount of regulatory and fiscal change. In this challenging market environment, Delta Lloyd continues to focus on maintaining profitability while searching out new sales opportunities. ^ Based on new business single premium plus regular premiums for the five months to 31 May 2006. ---------------------------------------------------------------------------------------------------------------------- PAGE 16 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, were Â£326 million (2005: Â£163 million). Life sales in Poland increased strongly to Â£136 million (2005: Â£62 million), including a one-off group scheme of Â£16 million. This performance reflects strong sales of single premium unit-linked business, driven by a favourable equity market and positive results from continued development of the direct sales force. Aviva's bancassurance partnership with Deutsche Bank also contributed to the strong sales result. Pension sales increased significantly to Â£103 million (2005: Â£50 million) mainly as a result of higher receipts of contributions from the State pension agency and higher levels of pension transfers from other private providers. Life and savings sales in Lithuania were stable at Â£25 million (2005: Â£25 million). Investment sales in Poland were Â£62 million (2005: Â£26 million) reflecting a buoyant equity market and the benefit of a new distribution agreement with a leading broker. Total new business contribution from life and pension sales was Â£14 million (2005: Â£7 million), driven by the strong growth in sales, with a new business margin of 5.3% (2005: 5.1%). The Polish insurance and investment markets continue to offer strong long-term growth potential, supported by a favourable economic outlook. Following a slowdown in equity markets, Aviva does not expect the current level of exceptional growth to be maintained throughout the year. Spain: Aviva Spain is the leader in the life bancassurance market and ranks second in the market overall following an increase in market share in the first quarter of 2006^^. Aviva Spain's sales fell to Â£916 million (2005: Â£965 million, including one-offs of Â£25 million), reflecting a decline in the Spanish market of 3% in the first quarter of 2006. Sales of savings products were adversely affected by uncertainty surrounding proposed tax changes in 2007 and this uncertainty is likely to continue to affect sales of savings products for the remainder of the year, until the introduction of new products in 2007. Sales through Aviva's bancassurance partnerships were Â£812 million (2005: Â£855 million). This performance was supported by marketing campaigns carried out by the bank partners in the first half of the year. Aviva continues to focus on higher margin protection products which benefit from the buoyant housing market. Sales through Aviva Vida y Pensiones, which distributes through direct sales force and intermediaries, were Â£104 million (2005: Â£110 million including one-off sales of Â£25 million) and benefited from increased sales of unit-linked business in the favourable equity market conditions. The new business contribution grew by 11% to Â£88 million (2005: Â£80 million) and the margin to 9.6% (2005: 8.3%), reflecting a greater proportion of sales of higher margin protection products. The timing of marketing campaigns and the 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 Continental European businesses in the Czech Republic, Hungary, Romania, Russia and Turkey amounted to Â£126 million (2005: Â£129 million, including Â£36 million of sales in the Portuguese business which was sold in 2005). Strong growth of 30% was achieved from continuing businesses, principally from an increase in sales through the broker channel in Hungary. In Turkey, where Aviva is a top-five life and pensions provider, total sales were Â£65 million (2005: Â£75 million) reflecting reduced activity in transfers from existing life to pension policies ahead of the regulatory deadline^^^ and increased competition to recruit sales advisers. Aviva Russia was granted its licence in March 2006. This business is being positioned to take advantage of the rapid growth expected to occur as the life insurance industry develops. Aviva expects to achieve at least a top five market position and a 10% share in the life insurance market in the next five years. Investment sales in Luxembourg were Â£309 million (2005: Â£237 million), continuing the strong performance achieved in 2005. ^^ Based on gross written premium. ^^^ Turkish legislation for pension business, which came into effect from August 2004, allows for transfers from existing life policies to new pension policies with the same life company until October 2006. Pensions business has advantages in terms of the range of investment funds and a lower tax charge on benefits at maturity/retirement. ---------------------------------------------------------------------------------------------------------------------- PAGE 17 Rest of the World Asian businesses: In line with its long-term strategic ambitions for the region, Aviva continues to achieve a strong rate of growth in new business sales. Total sales from operations in Asia were up 80% to Â£386 million (2005: Â£201 million). New business contribution from life and pension sales increased by 48% to Â£12 million (2005: Â£8 million) with a new business margin of 4.8% (2005: 4.7%), reflecting the overall growth in the region. Singapore: Total sales increased by 54% to Â£226 million (2005: Â£137 million). Life and pension sales were Â£93 million (2005: Â£108 million), reflecting lower bancassurance sales through Aviva's partnership with DBS. However, Aviva remains second in the bancassurance market and the leader in the developing broker market as well as the employee benefits and healthcare segment. Sales through Navigator, the investment fund administration business, increased significantly to Â£134 million (2005: Â£29 million), reflecting strong distribution relationships with key brokers, a comprehensive range of funds offered and a buoyant equity market in the first five months. Hong Kong: Sales increased significantly to Â£90 million (2005: Â£35 million), due to strong Independent Financial Adviser (IFA) sales that now account for 50% of the total, together with good performance from the partnership with DBS in Hong Kong. China: Sales through the joint venture life business, Aviva-COFCO were Â£38 million (2005: Â£32 million). Year-on-year comparatives are affected by the volatility of group business. Aviva's 50% share was Â£19 million (2005: Â£16 million). Aviva recently received approval to open a branch in Changsha, the capital city of Hunan province and is now licensed in six major cities, with sales offices in a further seven cities. India: Total sales from Aviva's joint venture with the Dabur Group increased strongly to Â£173 million (2005: Â£50 million) and Aviva's 26% share of new business sales was Â£45 million (2005: Â£13 million). Aviva is the sixth largest private insurer in India and the leader in the bancassurance market#. In January 2006, Aviva entered into a major new bancassurance partnership with Centurion Bank of Punjab and now has 22 distribution agreements with banks. Aviva's direct sales force now numbers more than 11,800 agents, with an additional 1,500 in training. Sri Lanka: On 1 February 2006, Aviva acquired a 51% stake in Eagle Insurance Company Limited (Eagle), the third largest insurer in Sri Lanka. At the same time, Eagle entered into a bancassurance agreement with National Development Bank Limited, Sri Lanka's biggest development bank and Eagle's other major shareholder. Total sales since acquisition amount to Â£6 million. Australia: Total sales increased by 23% to Â£830 million (2005: Â£669 million), driven primarily by significantly higher investment sales through Navigator, the master trust fund administration business. Life and pension sales were Â£145 million (2005: Â£160 million). Strong growth from protection products has continued following product enhancements. However, changes in legislation in July 2005## have resulted in a shift of corporate pension sales for Aviva towards Navigator retirement funds and this trend is expected to continue. Changes in tax legislation implemented towards the end of 2005 and recently announced changes to pension laws are expected to have a beneficial impact on the long-term savings industry. New distribution agreements have been established with AON and Bendigo Bank for the distribution of Aviva protection products in Australia. Sales through Navigator increased by 45% to Â£589 million (2005: Â£403 million) as a result of ongoing improvements in product offerings, an increase in retirement fund business, sustained customer service levels and the strategic investments in key distributors. Recent budget changes and cuts in personal income tax should encourage consumer investment in retirement funds. Other investment sales were Â£96 million (2005: Â£106 million). New business contribution from life and pension sales was Â£7 million (2005: Â£6 million). The new business margin increased to 4.8% (2005: 3.8%), reflecting the growth in higher margin protection business. United States: Life and pension sales increased by 24% to Â£289 million (2005: Â£222 million) driven by a strong performance in structured settlement sales following the A.M. Best rating upgrade to A+ in November 2005. Sales of deferred annuities have been adversely affected by difficult market conditions associated with a flat yield curve and this is expected to continue. New business contribution increased to Â£5 million (2005: Â£4 million) reflecting the growth in sales with a margin of 1.7% (2005: 1.8%). # Measured in terms of first year weighted premium income in the fiscal year to date (April 2006 - May 2006). ## From 1 July 2005, for the first time, individuals were entitled to choose where superannuation contributions made on their behalf by their employer were directed. Previously the employer would choose the plan. ---------------------------------------------------------------------------------------------------------------------- PAGE 18 Aviva United Kingdom United Kingdom: A record half year from Norwich Union with total sales, including investments, up 43% to Â£6,899 million (2005: Â£4,825 million). Total pension sales for the period were exceptionally strong, up 67% to more than Â£2.7 billion and collective investment sales exceeded Â£1 billion in a six month period for the first time. The new business margin for the half year improved to 2.9% from the first quarter 2006 figure of 2.8% and was in line with the full year 2005 figure of 2.9%. This reflects the company's continued focus on managing margin, volume and business mix. Individual pension sales, which include group personal pensions, were exceptional, up 86% to Â£2,188 million (2005: Â£1,175 million). Norwich Union performed very strongly in the run up to, and post, A-Day as advisers revisited their clients' pension provisions, and took advantage of the simplified tax regime and product enhancements. The company believes there has been a marked increase in activity triggered by A-Day, the market impact of which will continue throughout the rest of the year and into 2007. Despite a higher pension lapse experience, Norwich Union believes it will have gained further market share in the individual pension market. Group pension sales were up by 19% to Â£569 million (2005: Â£478 million), including strong sales of group life products, up 22%. Excellent bond and collective investment sales benefited from buoyant equity markets, with investor confidence remaining strong despite some market volatility during the second quarter. Bond sales for the half year increased substantially by 33% to Â£1,626 million (2005: Â£1,226 million). This excellent performance was underpinned by a strong showing in unit-linked products up 34% to Â£1,216 million and with-profits business up 22% to Â£297 million, boosted by the company's unique Retail Price Index guarantee bond. An outstanding performance in collective investments resulted in sales more than doubling in the first half of the year to Â£1,083 million (2005: Â£513 million). Norwich Union's strong property offerings from Morley Fund Management have continued to be very popular during the first half of the year. Total annuity sales of Â£748 million were lower by 5% (2005: Â£787 million) as the company continued to price for value. Norwich Union confirmed its entry into the bulk purchase annuity market and expects to start writing business during the second half of 2006. Protection sales grew strongly by 11% to Â£520 million (2005: Â£467 million). Norwich Union further strengthened its product range in the first half of the year with the launch of a new pension term assurance product. Norwich Union continued to lead the equity release market with sales in the first half of the year of Â£165 million, slightly lower than last year (2005: Â£179 million), as the market remained subdued. The company has recently announced the launch of its new income drawdown product as it seeks to consolidate further its market leading position. Norwich Union's bancassurance partnership with the Royal Bank of Scotland Group (RBSG) delivered significant growth with total sales for the first half of the year of Â£853 million, 79% ahead of 2005 (2005: Â£476 million). Norwich Union's share was Â£598 million, 87% ahead of the same period last year (2005: Â£319 million). The company is confident that the increase in the salesforce and product initiatives planned for the second half of 2006 will continue to deliver good growth. New business margin improved to 3.2% (2005: 2.6%). This reflects enhanced economies of scale, strong product level margins and improved cost management. Norwich Union has seen all distribution channels performing strongly, especially the IFA sector. It has continued to focus on improving service levels to the adviser market during the first half of the year and has made significant progress. By mid-June, the company was achieving its service level targets on all standard new business applications for protection, investment bonds, annuities and individual pensions. Delivering additional service enhancements remains a top priority for the company during the second half of 2006. Following on from an excellent first half of 2006, Norwich Union expects further underlying growth in all key product areas, albeit at a more modest rate for pension sales due to changes in its Stakeholder pension charging structure and strong comparative pension sales in the second half of 2005. ---------------------------------------------------------------------------------------------------------------------- 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 premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate new business contribution, so the components of the new business margin are on a consistent basis. 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 the present value of regular premiums by business units, and combined with single premium sales derives the present value of future new business premiums. 6 months 6 months 2006 2005 -------------------------------------------------------------- ------------ Weighted Present Present average Present value value of new value of new Regular capitalisation of regular Single business business premiums factor premiums premiums premiums premiums Â£m Â£m Â£m Â£m Â£m France Euro funds* 5 5.6 28 963 991 1,029 Unit-linked funds 24 6.1 147 802 949 740 Protection business 13 6.7 87 1 88 85 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 42 6.2 262 1,766 2,028 1,854 Ireland Life and savings 16 4.9 78 203 281 108 Pensions 31 4.7 147 130 277 241 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 47 4.8 225 333 558 349 Italy Life and savings 48 6.3 301 1,282 1,583 1,333 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 48 6.3 301 1,282 1,583 1,333 Netherlands (including Belgium, Germany and Luxembourg) Life 46 7.0 321 204 525 669 Pensions 30 8.7 261 384 645 714 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 76 7.7 582 588 1,170 1,383 Poland Life and savings 15 5.4 81 80 161 87 Pensions 9 7.0 63 40 103 50 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 24 6.0 144 120 264 137 Spain Life and savings 36 6.3 226 479 705 780 Pensions 16 5.9 94 117 211 185 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 52 6.2 320 596 916 965 Other Europe Life and pensions 23 4.1 94 32 126 129 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 23 4.1 94 32 126 129 Rest of the World Asia 35 4.7 165 87 252 172 Australia 18 3.3 60 85 145 160 United States 4 4.3 17 272 289 222 ---------------------------------------------------------------------------------------------------------------------- Total Life and pensions 57 4.2 242 444 686 554 ---------------------------------------------------------------------------------------------------------------------- International total life and pensions 369 5.9 2,170 5,161 7,331 6,704 United Kingdom Individual pensions 216 5.2 1,122 1,066 2,188 1,175 Group pensions 49 5.6 275 294 569 478 Annuities - - - 748 748 787 Bonds - - - 1,626 1,626 1,226 Protection 82 5.1 417 103 520 467 Equity release - - - 165 165 179 ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 347 5.2 1,814 4,002 5,816 4,312 ---------------------------------------------------------------------------------------------------------------------- Total 716 5.6 3,984 9,163 13,147 11,016 ====================================================================================================================== * 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 2006 2005 growth* Â£m Â£m Life and pensions France Credit du Nord 504 411 23% ---------------------------------------------------------------------------------------------------------------------- 504 411 23% Ireland Ark 223 - - ---------------------------------------------------------------------------------------------------------------------- 223 - - Italy UniCredit Group 898 502 80% Banca Popolare Italiana Group 281 305 (7)% Banca delle Marche 24 83 (71)% Banche Popolari Unite 356 350 2% ---------------------------------------------------------------------------------------------------------------------- 1,559 1,240 27% Netherlands ABN AMRO 258 347 (25)% ---------------------------------------------------------------------------------------------------------------------- 258 347 (25)% Spain Bancaja 359 402 (10)% Caixa Galicia 153 191 (19)% Unicaja 157 131 21% Caja Espana 80 78 4% Caja de Granada 63 53 20% ---------------------------------------------------------------------------------------------------------------------- 812 855 (4)% Asia DBS 101 102 (7)% ---------------------------------------------------------------------------------------------------------------------- 101 102 (7)% United Kingdom Royal Bank of Scotland Group 501 267 88% ---------------------------------------------------------------------------------------------------------------------- 501 267 88% ---------------------------------------------------------------------------------------------------------------------- Total life and pensions 3,958 3,222 23% Investment sales*** United Kingdom Royal Bank of Scotland Group 97 52 87% ---------------------------------------------------------------------------------------------------------------------- 97 52 87% ---------------------------------------------------------------------------------------------------------------------- Total bancassurance sales 4,055 3,274 24% ====================================================================================================================== * 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 long-term savings new business analysis Single Regular PVNBP ---------------------------- ---------------------------- -------- 6 months 6 months Local 6 months 6 months Local Local 2006 2005 currency 2006 2005 currency currency Â£m Â£m growth* Â£m Â£m growth* growth* France Euro funds** 963 990 (2)% 5 7 (28)% (3)% Unit-linked funds 802 616 31% 24 21 15% 29% Protection business 1 1 1% 13 13 1% 4% -------------------------------------------------------------------------------------------------------------------- 1,766 1,607 11% 42 41 3% 10% Ireland Life and savings 203 68 201% 16 8 101% 162% Pensions 130 123 6% 31 24 30% 16% -------------------------------------------------------------------------------------------------------------------- 333 191 76% 47 32 48% 61% Italy Life and savings 1,282 1,146 13% 48 30 61% 20% -------------------------------------------------------------------------------------------------------------------- 1,282 1,146 13% 48 30 61% 20% Netherlands (including Germany, Belgium & Luxembourg) Life 204 270 (24)% 46 53 (13)% (21)% Pensions 384 445 (13)% 30 34 (11)% (9)% -------------------------------------------------------------------------------------------------------------------- Total life and pensions 588 715 (17)% 76 87 (12)% (15)% Unit trusts 211 180 18% - - - 18% -------------------------------------------------------------------------------------------------------------------- 799 895 (10)% 76 87 (12)% (11)% Poland Life and savings 80 23 232% 15 11 40% 125% Pensions 40 12 218% 9 6 33% 45% -------------------------------------------------------------------------------------------------------------------- Total life and pensions 120 35 227% 24 17 37% 85% Mutual funds 60 24 139% 2 2 (5)% 128% -------------------------------------------------------------------------------------------------------------------- 180 59 191% 26 19 31% 91% Spain Life and savings 479 548 (12)% 36 34 7% (9)% Pensions 117 90 31% 16 15 7% 15% -------------------------------------------------------------------------------------------------------------------- 596 638 (6)% 52 49 7% (4)% Other Europe Life and pensions 32 47 (33)% 23 21 6% (5)% UCITS 309 237 31% - - - 31% -------------------------------------------------------------------------------------------------------------------- 341 284 21% 23 21 6% 18% Rest of the World Asia 87 48 70% 35 25 32% 37% Australia 85 97 (13)% 18 21 (15)% (10)% United States 272 181 43% 4 10 (62)% 24% -------------------------------------------------------------------------------------------------------------------- Life and pensions 444 326 31% 57 56 (2)% 19% Unit trusts 96 106 (10)% - - - (10)% Navigator 723 432 65% - - - 65% -------------------------------------------------------------------------------------------------------------------- 1,263 864 43% 57 56 (2)% 34% Aviva International Life and pensions 5,161 4,705 10% 369 333 10% 10% Total investments 1,399 979 42% 2 2 (5)% 42% -------------------------------------------------------------------------------------------------------------------- 6,560 5,684 16% 371 335 10% 14% United Kingdom Individual pensions 1,066 564 89% 216 120 80% 86% Group pensions 294 238 24% 49 44 11% 19% Annuities 748 787 (5)% - - - (5)% Bonds 1,626 1,226 33% - - - 33% Protection 103 130 (21)% 82 66 24% 11% Equity release 165 179 (7)% - - - (7)% -------------------------------------------------------------------------------------------------------------------- Total life and pensions 4,002 3,124 28% 347 230 50% 35% Peps/Isas/Unit trusts/Oeics 1,065 504 111% 18 9 100% 111% -------------------------------------------------------------------------------------------------------------------- 5,067 3,628 40% 365 239 53% 43% Total long-term savings 11,627 9,312 25% 736 574 28% 25% ==================================================================================================================== Analysed between: Life and pensions 9,163 7,829 17% 716 563 27% 19% Investment sales 2,464 1,483 66% 20 11 80% 66% --------------------------------------------------------------------------------------------------------------------- 11,627 9,312 25% 736 574 28% 25% ===================================================================================================================== * 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 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 2006 2005 currency 2006 2005 currency 2006 currency Â£m Â£m growth* Â£m Â£m growth* Â£m growth* IFA life & pension products 2,932 2,284 28% 271 181 50% 564 38% investment products 761 247 208% 1 - - 77 208% --------------------------------------------------------------------------------------------------------------------- 3,693 2,531 46% 272 181 50% 641 47% Bancassurance partnership with RBSG life & pension products 316 231 37% 36 9 300% 68 111% investment products 81 43 88% 17 9 89% 25 93% --------------------------------------------------------------------------------------------------------------------- 397 274 45% 53 18 194% 93 106% Other partnerships and Direct life & pension products 754 609 24% 40 40 - 116 15% investment products 223 214 4% - - - 22 6% --------------------------------------------------------------------------------------------------------------------- 977 823 19% 40 40 0% 138 13% --------------------------------------------------------------------------------------------------------------------- Total UK long-term savings 5,067 3,628 40% 365 239 53% 872 45% ===================================================================================================================== * 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 2006 2005 currency 2006 2005 currency currency Â£m Â£m growth* Â£m Â£m growth* growth* AFER - Euro funds** 627 670 (6)% - - - (6)% - Unit-linked funds 302 195 56% - - - 56% --------------------------------------------------------------------------------------------------------------------- 929 865 8% - - - 8% Bancassurance partnership with Credit du Nord - Euro funds 232 200 17% 2 2 (3)% 16% - Unit-linked funds 194 140 40% 10 10 7% 31% - Protection - - - 1 1 - 49% --------------------------------------------------------------------------------------------------------------------- 426 340 26% 13 13 6% 23% Other - Euro funds 104 120 (13)% 3 5 (39)% (19)% - Unit-linked funds 306 281 10% 14 11 23% 14% - Protection 1 1 - 12 12 - 2% --------------------------------------------------------------------------------------------------------------------- 411 402 3% 29 28 2% 4% --------------------------------------------------------------------------------------------------------------------- Total France long-term savings 1,766 1,607 11% 42 41 3% 10% ===================================================================================================================== * 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 23 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 realistic 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£1,376 million (2005: Â£943 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 of equivalent (APE) 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 of management third parties. CGUII - 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 additional value of in-force long-term 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 - Is calculated using the same economic assumptions as those used to determine the embedded contribution values at the beginning of each year and is stated before tax and the effect of required capital. New business - New business margins are calculated as the new business contribution divided by the present margin 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 value. Intrinsic 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 MSEIA

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