Interim Results - Part 1

Aviva PLC 11 August 2005 PART 1 OF 4 11 August 2005 INTERIM RESULTS FOR THE 6 MONTHS ENDED 30 JUNE 2005 â€¢ Worldwide operating profit up 21% to Â£1,318 million â€¢ Life operating profit up 5% to Â£857 million, with more than 60% coming from businesses outside the UK; Group margin up at 3.6% (2004: 3.5%) â€¢ Strong long-term savings sales growth, up 13% to Â£12,078 million, with bancassurance a major driver for growth in continental Europe and Asia â€¢ Sustained excellent general insurance performance, with general insurance and health profits up 18% to Â£694 million, and worldwide combined operating ratio ahead of target at 95% (2004: 97%) â€¢ Strong performance from fund management with profits up 94% to Â£33 million***** (2004: Â£17 million) and assets under management up to over Â£290 billion (31 December 2004: Â£280 billion) â€¢ Interim dividend increased by 5% Richard Harvey, group chief executive, commented: 'This is a very good set of results, delivered by managing our business for value. Our balanced international portfolio of life and general insurance businesses has enabled us to sustain real growth momentum. 'We've delivered strong and profitable life growth, reaping the benefit from our growing position in continental Europe and managing our UK business for profit. In Asia we continue to develop our footprint for the long-term with new distribution in India and access to new regional centres in China. 'In general insurance, we've delivered another excellent result, once again delivering strong and resilient returns. Our integration of RAC in the UK is moving quickly and we are on track to deliver our targeted cost savings for 2006. 'Our shareholders continue to see healthy dividend growth, backed by strong statutory profits. Our continuing aim is profitable growth in all our businesses.' Highlights HY 05 HY 04 Growth in constant currency Operating profit before tax - EEV basis* Â£1,318m Â£1,076m 21% Operating profit before tax - IFRS basis** Â£943m Â£781m 19% Life EEV operating return Â£857m Â£799m 5% General insurance and health operating profit Â£694m Â£583m 18% Worldwide long-term savings new business sales Â£12,078m Â£10,528m 13% New business contribution - gross Â£393m Â£338m 15% New business contribution - net of required capital, tax and minorities Â£158m Â£146m 7% Total dividend per share 9.83p 9.36p 5% Total shareholders' funds*** Â£12,633m Â£11,661m**** - Return on capital employed 14.6% 13.7%**** - Net asset value per share 533p 511p**** - All operating profit is from continuing operations. All growth rates quoted are at constant rates of exchange. The 2004 comparative information has been restated for the adoption of European Embedded Value (EEV) principles and International Financial Reporting Standards (IFRS). * Including life EEV operating return, before exceptional items. ** Before exceptional items. *** Measured on an EEV basis, excluding preference shares, direct capital instrument and minority interests. **** As at 31 December 2004 ***** On an IFRS basis. ------------------------------------------------------------------------------------------------------------------- Segmental analysis of Group operating profit* 6 months 2004 at 2005 exchange Restated** 6 months rates 6 months 2005 Restated** 2004 Â£m Â£m Â£m Continuing operations Life EEV operating return United Kingdom 327 345 345 France 158 114 112 Ireland 22 16 16 Italy 47 37 36 Netherlands (including Belgium and Luxembourg) 115 135 132 Poland 46 41 35 Spain 92 83 81 Other Europe 14 14 14 International 36 28 28 ------------------------------------------------------------------------------------------------------------------ 857 813 799 ================================================================================================================== Fund Management*** United Kingdom 5 - - France 2 5 5 Other Europe 5 1 1 International 6 4 4 ------------------------------------------------------------------------------------------------------------------ 18 10 10 ================================================================================================================== General insurance and health United Kingdom 431 364 364 France 17 20 20 Ireland 83 61 60 Netherlands 55 54 53 Other Europe 19 12 12 Canada 67 54 52 Other 22 22 22 ------------------------------------------------------------------------------------------------------------------ 694 587 583 ================================================================================================================== Non-insurance operations**** 45 (12) (12) Corporate costs - global finance transformation programme (28) (45) (45) - central costs and sharesave schemes (55) (54) (54) Unallocated interest charges - external (130) (125) (124) - intra-group (101) (100) (100) - net pension income 18 19 19 ------------------------------------------------------------------------------------------------------------------ Group operating profit before tax* 1,318 1,093 1,076 ================================================================================================================== * Group operating profit before tax. All operating profit is from continuing operations. ** Restated for the effect of implementing European Embedded Value principles. *** 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 2005 was Â£943 million (2004: Â£781 million; Â£794 million restated at constant exchange rates). ------------------------------------------------------------------------------------------------------------------ GROUP CHIEF EXECUTIVE'S STATEMENT Aviva's strategy of managing for value has resulted in another very good result for the first six months of 2005. The Group has seen robust operational performance across all major businesses. Operating profit before tax is up 21% on an EEV basis to Â£1,318 million (2004: Â£1,076 million), representing an annualised return on capital employed of 14.6% (2004: annualised of 12.8%). On an IFRS basis, operating profit before tax reached Â£943 million (2004: Â£781 million), an increase of 19%. The Board is announcing a dividend increase of 5% to 9.83 pence net per share. The dividend is strongly covered and is in line with our stated policy of growing the dividend by approximately 5% per annum, while looking to maintain a target cover in a range of 1.5 to 2.0 times operating earnings after tax. Long-term savings With over 50% of Aviva's life new business sales and contribution on both a headline and a post minorities basis coming from outside the UK, during the first half of 2005 we benefited from our growing position in continental Europe. Focusing on disciplined growth, our long-term savings businesses delivered a groupwide IRR of 13% (2004: 12%) and operating profit before tax grew 5% to Â£857 million on an EEV basis. We delivered groupwide sales growth of 12% to Â£11,016 million on a PVNBP basis (2004: Â£9,753 million). With new business contribution up 15% to Â£393 million (2004: Â£338 million), Aviva is clearly demonstrating its focus on profitable growth. On a post-minorities basis, both new business sales and new business contribution rose by 7%. Sales in continental Europe grew strongly by 21% to Â£6,218 million driven by our increasing presence in bancassurance across most of our businesses. New business contribution on a gross basis increased 21% to Â£240 million and on a net basis increased by 16% to Â£76 million. In particular, we demonstrated a particularly strong increase in value in our French business where new business contribution increased 52% to Â£71 million compared to sales volume growth of 36% to Â£1,854 million. Our Credit du Nord bancassurance arrangement is showing impressive performance with sales of Â£411 million in the first half. Aviva France is managing its business mix towards a greater proportion of unit-linked products and this in turn is delivering increased margins of 3.8%, compared to 3.4% for the same period last year. The market for long-term savings business in the UK has been very competitive during the first six months of the year. Our strategic focus on managing our business for value continues. Sales were lower at Â£4,244 million (2004: Â£4,299 million), while new business contribution rose 6% to Â£135 million (2004: Â£127 million) increasing new business margins to 3.2% from 3.0%. We aim to retain significant presence across the product portfolio whilst selling all our product ranges comfortably above the cost of capital. We expect some margin pressure in the short term but remain confident in the medium-term growth prospects for the UK life market. Our Asian operations have seen significant developments this year. We continue to increase the rate of growth in new business sales, in line with our longer-term strategic ambitions in the region. In India, we continue to develop our bancassurance relationships and direct sales force. In China we have received regulatory approval to open new sales offices in Nauchong and Mianyang in Sichuan province, and Zhongshan in Guangdong province, which further extend our reach in this growing market, and we have applied for further licences. Fund management Our fund management operations continue to deliver improved performance. Worldwide investment sales increased 35% to Â£1,062 million (2004: Â£775 million). On an IFRS basis, operating profit before tax almost doubled to Â£33 million from Â£17 million and assets under management at 30 June 2005 grew to over Â£290 billion (31 December 2004: Â£280 billion). New business flows, tight management of our cost base, an increase in fee income and the performance of world investment markets have all contributed to this improved result. General Insurance With a COR of 95%, our general insurance performance is comfortably ahead of our stated target of 100%. Aviva's general insurance operations continue to outperform with operating profit of Â£694 million (2004: Â£583 million) demonstrating the continued resilience of the returns. In the UK we have since continued to produce excellent results with an operating profit of Â£431 million, up 19% from Â£361 million. The COR of 96% demonstrates the value of disciplined underwriting, an efficient supply chain, and positive claims experience. Investment in innovative technology has been possible due to strict cost management. We believe digital flood mapping, for example, provides Norwich Union Insurance with a competitive advantage. The acquisition of RAC was completed on 4 May and the integration has commenced and is firmly on track. We are excited by the opportunities now available to us and we are confident of achieving our stated 2006 target of Â£80 million of cost savings. The pro-forma six months operating profit before tax for the RAC business was ahead of plan at Â£51 million (2004: Â£45 million), achieved during a period of uncertainty for the business. A profit of Â£17 million has been included in the Group results relating to the post acquisition period. ------------------------------------------------------------------------------------------------------------------ Outlook We believe that Aviva has a strong platform for organic growth in long-term savings across continental Europe, the UK and Asia. In general insurance we continue to generate high returns for shareholders and will continue to maximise the opportunities our scale advantage brings. We continue to review value-driven inorganic growth opportunites and new market entries. In summary, these are a very good set of results. Our balanced portfolio of international life and general insurance businesses has enabled Aviva to sustain real growth momentum, generating value for both shareholders and customers. Richard Harvey Group chief executive ------------------------------------------------------------------------------------------------------------------ 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 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 7365 1854 Quote: Aviva, Richard Harvey. ANALYSTS: A presentation to investors and analysts will take place at 9:00am (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 1854. A replay facility will be available until 25 August 2005 on +44 (0) 20 7784 1024. The pass code is 4063138# for the whole presentation including Question & Answer session or 3104645# for Question & Answer session only. The presentation slides will be available on the Group's website, www.aviva.com/investors/presentations.cfm from 8.30am (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 Photographs are available from the Aviva media centre at www.aviva.com/media. 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 sixth largest insurance group based on both gross worldwide premiums and market capitalisation at 31 December 2004. â€¢ Aviva's principal business activities are long-term savings, fund management and general insurance, with worldwide total income of Â£40 billion and assets under management of Â£280 billion at 31 December 2004. 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 25 Consolidated statement of recognised income and expense - EEV basis 25 Consolidated statement of changes in equity - 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 33 Experience variances 34 Operating assumption changes 34 Geographical analysis of life EEV operating return 35 Analysis of life EEV operating return 35 Analysis of movement in life and related businesses embedded value 36 Segmental analysis of life and related businesses embedded value 37 Time value of options and guarantees 38 Minority interest in life and related businesses EEV results 38 Principal economic assumptions - deterministic calculations 39 Principal economic assumptions - stochastic calculations 40 Other assumptions 41 Sensitivity analysis - economic assumptions 42 Sensitivity analysis - non-economic assumptions 44 IFRS basis Summarised consolidated income statement - IFRS basis 45 Earnings per share - IFRS basis 45 Reconciliation of Group operating profit to profit before tax attributable to shareholders' profits 46 Summarised consolidated balance sheet - IFRS basis 47 Consolidated statement of recognised income and expense - IFRS basis 48 Consolidated statement of changes in equity - IFRS basis 48 Consolidated cash flow statement - IFRS basis 49 Basis of preparation - IFRS basis 50 Exchange rates 50 Acquisitions 51 Exceptional costs for termination of operations in 2004 52 Disposals 52 Geographical analysis of life IFRS operating return 53 Geographical analysis of fund management IFRS operating profit 53 Geographical analysis of general insurance and health 53 Other operations 55 Corporate costs 55 Unallocated interest 55 Tax 56 Earnings per share 57 Dividends and appropriations 58 Segmental information 58 Statistical supplement Segmental components of Life EEV operating return before tax 67 Supplementary analyses - life and related businesses 70 General insurance business only - geographical analysis 73 General insurance business only - class of business analyses 73 Appendix A: Group capital structure 75 Appendix B: IFRS first time adoption 80 Shareholder information 86 ------------------------------------------------------------------------------------------------------------------- Page 1 OPERATING AND FINANCIAL REVIEW Group operating profit before tax The European Union requires all European listed groups to prepare their consolidated financial statements using standards issued by the International Accounting Standards Board (IASB) with effect from 1 January 2005. Our statutory results have therefore been reported on an International Financial Reporting Standard (IFRS) basis rather than the previous modified statutory basis and comparatives for prior periods have been restated accordingly. Aviva continues to believe that embedded value provides the best way to value, measure and report life businesses and European Embedded Value (EEV) is therefore a more accurate reflection of the performance of the Group's life results. The first six months of 2005 saw a continuation of the strong operational performance across all our major businesses. This has been achieved by our continued focus on profitable growth, pricing and cost control, our disciplined approach to underwriting and efficient claims handling. The Group achieved an operating profit before tax, including life EEV operating return, of Â£1,318 million (2004: Â£1,076 million), an increase of 21%. On an IFRS basis, operating profit before tax increased by 19% to Â£943 million (2004: Â£781 million). EEV basis IFRS basis ------------------ ------------------ Restated* Restated 6 months 6 months 6 months 6 months 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Life EEV operating return / IFRS long-term business profit 857 799 510 520 Fund management 18 10 33 17 General insurance and health 694 583 694 583 Other: Other operations 45 (12) 2 (35) Corporate costs (83) (99) (83) (99) Unallocated interest charges (213) (205) (213) (205) ------------------------------------------------------------------------------------------------------------------- Operating profit before tax 1,318 1,076 943 781 =================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. Long-term savings Our worldwide long-term new business sales showed good progress in the first half of 2005 with growth of 13% to Â£12,078 million (2004: Â£10,528 million). Of this, life and pension sales increased by 12% to Â£11,016 million (2004: Â£9,753 million) and investment sales rose by 35% to Â£1,062 million (2004: Â£775 million). Total new business sales on a present value of new business (PVNBP) basis 6 months 2005 Local currency growth ------------------------------- -------------------------------- Life and Retail Life and Retail pensions investments Total pensions investments Total Â£m Â£m Â£m % % % Long-term savings sales United Kingdom 4,244 513 4,757 (1%) 14% - Europe (excluding UK) 6,218 443 6,661 21% 63% 23% International 554 106 660 31% 63% 36% ------------------------------------------------------------------------------------------------------------------- 11,016 1,062 12,078 12% 35% 13% ==================================================================================================================== Navigator 432 - 432 33% - 33% In the UK, Norwich Union delivered total long-term savings sales of Â£4,757 million as the company continued to focus on delivering customer and shareholder value by taking decisive pricing and commission actions in an increasingly competitive market. As a result, the first half of the year saw lower pension sales offset by strong growth in unit-linked bonds and annuities. Pricing actions in the second quarter benefited protection sales as anticipated and improved the company's market presence for the longer term. Norwich Union is committed to achieving disciplined growth to maintain a market-leading position. Sales in continental Europe continue to grow, accounting for 55% of total new business sales. Our businesses delivered 23% growth in these sales to Â£6,661 million, reflecting the success of our distribution arrangements, product offerings and quality of service. Our Credit du Nord and ABN AMRO bancassurance arrangements contributed to strong sales growth in France and the Netherlands, respectively. Sales in Italy increased significantly due to strong product marketing campaigns and the expansion of our distribution network with Banche Popolari Unite (BPU) from the start of 2005. In Ireland, growth in our single premiums products increased, as our five year capital guaranteed fund continues to be popular. In Spain, we continued to focus on higher margin protection and pension products. After excluding one-off sales, underlying sales in Spain were broadly flat. In our International businesses, sales in Asia continue to grow benefiting from our strong partnerships in the region. Strong sales growth was achieved in Singapore and Hong Kong, the largest components of our business in Asia, which include sales through our partnership with the banking group DBS. We continue to make excellent progress in developing our Indian and Chinese operations through the combination of our attractive savings products and strong relationships with local partners. In mature markets in Australia and the US, we continue to improve our distribution, product range and product terms. In the US, the recently launched equity-indexed annuity product is expected to provide a more balanced product range that is less susceptible to low interest rates. ------------------------------------------------------------------------------------------------------------------- Page 2 In the UK we anticipate modest market growth in the second half of the year and Norwich Union will focus on achieving disciplined growth in a competitive market. We continue to reap the benefits of our strong position in continental Europe and this region remains key to our growth. Our bancassurance network will enable us to benefit further from the significant opportunities these markets provide. Asia provides excellent longer-term growth potential and our growing distribution infrastructure in the region will allow us to increase value progressively. Life EEV operating return Restated* 6 months 6 months 2005 2004 Â£m Â£m New business contribution (after the effect of required capital) 286 251 Profit from existing business - expected return 434 417 - experience variances (31) (20) - operating assumption changes 7 - Expected return on shareholders' net worth 161 151 ------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 857 799 =================================================================================================================== * Restated for the effect of implementing the European Embedded Value principles. The life EEV operating return before tax was 5% higher at Â£857 million (2004: Â£799 million) due to both new and existing business. New business contribution after the effect of required capital was 12% higher at Â£286 million (2004: Â£251 million), reflecting the ongoing benefits of our pricing and cost control actions and an improvement in business mix towards less capital-intensive unit-linked products. New business margins before the effect of required capital increased to 3.6% (full year 2004: 3.4%) driven by improved business mix in the UK, France and Spain. The Group's new business margin after the effect of required capital was also higher at 2.6% (full year 2004: 2.5%), reflecting improved business mix and our value focus. The expected returns on existing business and shareholders' net worth were higher at Â£595 million (2004: Â£568 million) and reflect the application of lower economic assumptions on higher start of year embedded values. Adverse experience variances were Â£31 million (2004: Â£20 million adverse) and were partially offset by positive operating assumption changes of Â£7 million (2004: nil). Present value of New business New business new business premiums contribution** margin*** ------------------ ------------------ ---------------------------- Restated* 6 months 6 months 6 months 6 months 6 months 6 months Full year 2005 2004 2005 2004 2005 2004 2004 Â£m Â£m Â£m Â£m % % % Life and pensions business United Kingdom 4,244 4,299 135 127 3.2% 3.0% 2.9% Europe (excluding UK) 6,218 5,027 240 195 3.9% 3.9% 3.8% International 554 427 18 16 3.2% 3.7% 3.4% ------------------------------------------------------------------------------------------------------------------- 11,016 9,753 393 338 3.6% 3.5% 3.4% =================================================================================================================== * Restated for the effect of implementing the European Embedded Value principles. ** Before effect of required capital which amounted to Â£107 million (2004: Â£87 million). *** New business margin represents the ratio of new business contribution to present value of new business premiums, expressed as a percentage. UK Our market-leading business, Norwich Union, recorded a life EEV operating return of Â£327 million (2004: Â£345 million). The result includes a larger new business contribution before required capital of Â£135 million (2004: Â£127 million), with an improved margin of 3.2% (full year 2004: 2.9%). The increase in margin is driven by pricing and commission actions and improved business mix towards higher margin products. After deducting the effect of required capital, the margin also increased to 2.5% (full year 2004: 2.3%) and includes an increased proportion of annuity business, which carries a required capital margin of 200% of the EU minimum solvency requirement. The IRR of 11.4% represents an improvement from the first half of last year (2004: 11.0%) and has been maintained since the full year 2004. We continue to maintain our focus on value through margin and IRR, balancing this with retaining a market-leading position. Adverse experience variances of Â£30 million include Â£30 million of reorganisation costs and Â£50 million of higher project expenses which were partially offset by favourable mortality experience on annuity and protection business amounting to Â£41 million (2004: Â£17 million favourable). Expected returns on shareholders' net worth and the value of in-force were broadly unchanged at Â£252 million (2004: Â£251 million). ------------------------------------------------------------------------------------------------------------------- Page 3 Europe (excluding UK) New business contribution increased to Â£240 million (2004: Â£195 million), with strong performances in Spain, Italy and France which included a contribution of Â£17 million from our joint venture with Credit du Nord. New business margins before and after required capital increased to 3.9% and 2.8% (full year 2004: 3.8% and 2.6%) respectively, as business mix shifted towards higher margin, less capital intensive products particularly in France and Spain. This was offset mainly by a decrease in margins in the Netherlands, due to the impact of the reduction in bond yields by 60 basis points at the end of 2004. Smaller decreases in Italy and Ireland were due to changes in product mix. Life EEV operating return from our continental European businesses was Â£494 million (2004: Â£426 million) as new business contribution after required capital improved by Â£37 million to Â£171 million. Expected returns were higher at Â£318 million (2004: Â£294 million). Although adverse experience variances were small at Â£2 million (2004: Â£6 million profit), this included favourable mortality experience of Â£28 million (2004: Â£15 million) and positive tax experience of Â£16 million (2004: Â£10 million). These were offset by adverse persistency and expense experience of Â£23 million and Â£13 million (2004: Â£8 million and Â£13 million adverse), respectively. International The life EEV operating return from our International business was Â£36 million (2004: Â£28 million), benefiting from higher new business contribution in Singapore and Australia and more favourable experience variances. New business margins before and after the effect of required capital were 3.2% and 1.8% respectively (full year 2004: 3.4% and 2.3% respectively). 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 4.6% (full year 2004: 4.9%). This reflects the change in geographical mix with lower weighting of the high margin business in Spain and a higher weighting of sales from our partnerships in Italy and France where margins are lower by comparison. Present value of New business New business new business premiums contribution** margin*** --------------------- --------------------- ------------------------------ Restated* 6 months 6 months 6 months 6 months 6 months 6 months 12 months 2005 2004 2005 2004 2005 2004 2004 Â£m Â£m Â£m Â£m % % % United Kingdom 267 216 7 7 2.6% 3.2% 2.6% France 411 - 17 - 4.1% - 3.1% Italy 1,240 715 32 21 2.6% 2.9% 2.8% Netherlands 347 238 9 10 2.6% 4.2% 4.3% Spain 855 1,053 76 71 8.9% 6.7% 7.3% Asia 102 83 8 7 7.8% 8.4% 6.4% ------------------------------------------------- ----------------------------------------- ------------------------ Total bancassurance channels 3,222 2,305 149 116 4.6% 5.0% 4.9% =================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. ** Before effect of required capital which amounted to Â£31 million (2004: Â£23 million). *** New business margin represents the ratio of new business contribution to present value of new business premiums, expressed as a percentage. In the UK, the new business margin from life and pensions sales from our partnership with The Royal Bank of Scotland Group (RBSG) was maintained at 2.6% (full year 2004: 2.6%). In France our bancassurance joint venture with Credit du Nord produced an increased new business margin of 4.1% (full year 2004: 3.1%) reflecting unit-linked sales growth. The new business bancassurance margin in Italy was 2.6% (full year 2004: 2.8%), reflecting the increased proportion of lower margin savings and structure bond products sold. In Spain, our bancassurance partnerships produced an increased margin of 8.9% (full year 2004: 7.3%, or excluding one-off business underlying margin: 8.3%) benefiting from demand for pension and protection products in the period. Our bancassurance agreement with ABN AMRO in the Netherlands generated a margin of 2.6% (full year 2004: 4.3%) as new business sales included an annuity business special promotion in the first quarter of 2005. The new business bancassurance margin from our partnership with DBS in Singapore and Hong Kong was 7.8% (full year 2004: 6.4%) reflecting the profitable growth of these developing operations. After the effect of required capital, the bancassurance margin was 3.7% (full year 2004: 4.0%), again reflecting the change in the geographical mix. New business contribution - after deducting required capital, tax and minority interest New business margins after required capital, tax and minority interest improved to 1.7% (full year 2004: 1.6%). The increase arose primarily in our non-bancassurance channels, reflecting the impact of tactical pricing actions and benefits from changes to business mix towards high margin products, such as unit-linked products in France. ------------------------------------------------------------------------------------------------------------------- Page 4 Present value of New business New business new business premiums** contribution*** margin**** -------------------- -------------------- ---------------------------- Restated* 6 months 6 months 6 months 6 months 6 months 6 months Full year 2005 2004 2005 2004 2005 2004 2004 Â£m Â£m Â£m Â£m % % % Bancassurance channels 1,678 1,263 42 35 2.5% 2.8% 2.7% Other distribution channels 7,597 7,288 116 111 1.5% 1.5% 1.5% -------------------------------------------------------------------------------------------------------------------- Total life and pensions business 9,275 8,551 158 146 1.7% 1.7% 1.6% ==================================================================================================================== Analysed: UK 4,244 4,299 74 74 1.7% 1.7% 1.6% Continental Europe 4,477 3,825 76 64 1.7% 1.7% 1.6% International 554 427 8 8 1.4% 1.9% 1.7% -------------------------------------------------------------------------------------------------------------------- * Restated for the effect of implementing European Embedded Value principles ** Stated after deducting the minority interest. *** Stated after deducting the 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. In the six months to 30 June 2005 the post-minority value of new business sales and new business contribution from our combined European businesses exceeded that from our UK Life operations. 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 broadly flat at Â£510 million (2004: Â£520 million). The operating result from the UK with-profit business of Â£33 million (2004: Â£49 million) reflects the reduction in bonus rates compared to 2004 and the change in the shareholder tax rate. The UK non-profit result was broadly unchanged at Â£178 million (2004: Â£179 million). In continental Europe, life IFRS operating profit totalled Â£315 million (2004: Â£235 million) which was driven primarily by increased profits in France and Spain. In France, the improvement to Â£131 million (2004: Â£89 million) is due to the Credit du Nord joint venture, with underlying growth reflecting the profitable development of the business and tightly controlled expenses. Additionally, the result includes the benefit of higher investment gains. In the Netherlands, the operating profit was Â£58 million (2004: Â£54 million). This includes a charge of Â£70 million for in the money guarantees on unit-linked contracts arising from falling interest rates whose impact has been partially offset by releases in reserving margins elsewhere. Operating profit in Spain increased to Â£39 million (2004: Â£24 million) due to the higher sales of protection products which deliver statutory earnings in the first year. Our International businesses reported a loss of Â£16 million (2004: Â£57 million profit) reflecting lower realised gains in our principal International life businesses and a change in valuation basis in Asia introduced on 1 January 2005. Fund management operating profit Operating profit from our worldwide fund management businesses increased to Â£33 million (2004: Â£17 million) on an IFRS basis. Assets under management at 30 June 2005 grew to over Â£290 billion (31 December 2004: Â£280 billion) reflecting the impact of new business flows and the performance of world investment markets. 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£11 million (2004: Â£3 million) in the period. Morley reported a profit of Â£11 million (2004: Â£4 million). The result reflects increased investment fees whilst continuing to focus on cost control. Fee income has risen due to new business mandates, revenue enhancing initiatives launched in 2004 and improved investment market performance. Whilst the expense base has been maintained, Morley continues to invest in the business in order to maintain its competitive position and respond to changing market conditions. In addition, a further Â£11 million (2004: Â£4 million) is included within the Group results relating to other Morley businesses, including the pooled pensions business and overseas operations. This brings the contribution that Morley makes to the total Group result to Â£22 million (2004: Â£8 million). Morley was named 'Property Manager of the Year' at the UK Pensions Awards 2005 as its expertise in property continues to be recognised. Operating profit from Norwich Union's retail investment business, amounted to Â£3 million (2004: Â£5 million), whilst our collective investment business with RBSG benefited from lower new business strain from sales of regular premium investment to report a loss of Â£3 million (2004: loss of Â£6 million). Aviva Gestion d'Actifs, our market-leading fund management operation in France, was awarded best asset manager for its investment performance over one, three and five years by La Tribune/Standard & Poor's for the second consecutive year. Operating profit from Aviva Gestion d'Actifs increased to Â£10 million (2004: Â£8 million) on an IFRS basis. Operating profits across our Other Europe and International businesses rose to Â£5 million (2004: Â£3 million). New business sales through Navigator, our master trust fund administration business in Australia, increased by 26% to Â£403 million (2004: Â£318 million), benefiting from continuing improvements in product offerings. Our Navigator business in Singapore reported sales of Â£29 million (2004: Â£5 million). -------------------------------------------------------------------------------------------------------------------- Page 5 On an EEV basis, the total operating profit from our fund management businesses was Â£18 million (2004: Â£10 million) predominantly relating to those funds managed on behalf of third parties and Group non-life businesses. General insurance and health operating profit Our worldwide general insurance and health operations reported an increase of 18% in operating profit to Â£694 million (2004: Â£583 million). The Group's general insurance combined operating ratio (COR) improved to 95% (full year 2004: 97%). Scale advantages, focused underwriting, claims management and efficiencies continue to provide us with ongoing benefits. Underwriting profit for the period amounted to Â£182 million (2004: Â£92 million). The improved performance was driven by our disciplined approach to underwriting, claims management and lower claims frequency across all our major businesses. Better than expected weather-related claims experience in the first six months of 2005 amounted to Â£3 million (2004: Â£30 million). The worldwide expense ratio was maintained at 11.2% (full year 2004: 11.2%) reflecting the benefit of ongoing cost efficiency initiatives across our business operations offset by our continued investment in the business to gain competitive advantage. The expense ratio includes employee benefit costs on a more current actuarial basis than previously accounted for under UK GAAP. The longer-term investment return (LTIR) on general insurance and health business assets increased to Â£512 million (2004: Â£491 million). The higher start-of-year asset base, together with positive cash inflows, more than offset the decrease in LTIR rates applied in 2005. As previously announced, the Group has decided to make this discretionary change to its LTIR methodology from 2005 in addition to including the amortisation of the premium or discount arising upon the acquisition of fixed income securities as a proxy for gross redemption yield and restated its 2004 comparatives accordingly. Net written premiums Underwriting result* Operating profit* -------------------- ------------------- ---------------- 6 months 6 months 6 months 6 months 6 months 6 months 2005 2004 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom 2,891 2,819 104 52 431 364 Europe (excluding UK) 1,605 1,598 57 27 174 145 International 708 718 21 13 89 74 -------------------------------------------------------------------------------------------------------------------- Continuing operations 5,204 5,135 182 92 694 583 ==================================================================================================================== * Excludes the Financial Services Compensation Scheme levy of nil (2004: Â£25 million). UK Our general insurance business, Norwich Union Insurance (NUI) delivered an operating profit of Â£431 million (2004: Â£361 million) and COR of 96% (full year 2004: 97%). This excellent result reflects disciplined underwriting and pricing, resulting in favourable claims experience. The cost of the storms in January was mitigated by better than expected weather during the rest of the period, to give a neutral impact (2004: Â£20 million benefit). We are on target to deliver Â£240 million annualised savings in claims costs through effective supply chain management. Despite a highly competitive market we have achieved a 5% increase in personal motor rates (2004: 2%) and 6% (including indexation) in homeowners rates (2004: 5%). Commercial rate increases have flattened but profitability remains excellent. Premium growth is 2%, however we are accelerating our strategy to move closer to our customers with 22% net written premium growth in our direct operation. The acquisition of RAC on 4 May 2005 reinforced this strategy providing access to 2.2 million direct Roadside members and the opportunity to develop fully the RAC brand in insurance and financial services. Furthermore the purchase enhances our partnership business introducing new distribution partners, with an additional 4.5 million corporate Roadside customers and the potential to develop the RAC's current partnership relationships. The acquisition of RAC was completed on 4 May for a consideration of Â£1.1 billion paid in the form of ordinary shares and cash in equal proportions. The fair value of tangible net liabilities acquired, including the pension fund deficit, amounted to Â£0.3 billion. The difference between the fair value of consideration and the fair value of tangible net liabilities of Â£1.4 billion, represents the value of the brand and other intangibles net of associated deferred tax and the residual goodwill arising on acquisition. Excellent progress has been made on the integration of RAC. The senior management team was announced on 30 June and the new organisation will be finalised by the end of September. We are confident of meeting the commitments on integration costs and savings we previously announced on 9 March. The pre-tax costs of restructuring are around Â£100 million; Â£14 million integration costs have been included within these interim results. We are on track to deliver the previously announced 2006 pre-tax cost savings of at least Â£80 million and increased revenue and cashflow. The combined organisation has a wide range of product offering and capabilities that will touch customers at each stage of their motoring lives. We are currently developing specific opportunities, outlined on 9 March, including growing RAC's direct insurance business, developing new packaged services and growing Roadside assistance with risk pricing. -------------------------------------------------------------------------------------------------------------------- Page 6 RAC delivered a good performance in the six month period, with operating profit growth in all divisions. RAC results for May and June have been included within these interim results with the Roadside business, presented as general insurance, contributing Â£6 million to NUI's underwriting result. Individual membership numbers for Roadside are in line with 2004 levels. Excluding the impact of RAC, our expense ratio improved to 10.5% (full year 2004: 10.6%). The inclusion of RAC Roadside (which includes expense but no commission costs) increased the expense ratio to 10.8%. As previously announced there will be a reduction in headcount of 900 through combining the support functions of both companies. We also announced 800 back office roles will be offshored as part of the integration process. Our focus on cost management continues to provide opportunities to invest in initiatives that confer competitive advantage. Our 'Pay As You Drive'TM pilot is expanding and our digital flood map is now being used in England and Wales. On 31 March 2005, NUI signed a contract with Barclays to become its sole provider of household, motor and travel insurance. This deal will strengthen our leadership in this market by providing access to over 15 million potential customers across the UK. As part of the deal, NUI purchased the associated underwriting company Gresham Insurance from Barclays at a cost of Â£75 million. On 20 July NUI extended the long-standing agreement with Asda to be its sole provider of general insurance until the end of 2009, providing access to 11 million customers. These deals strengthen our position as partner of choice to the UK's best brands. Our health insurance business in the UK reported a breakeven result (2004: Â£3 million). Europe (excluding UK) In Europe, our general insurance and health businesses produced an operating profit of Â£174 million (2004: Â£145 million). In France, our general insurance and health business recorded an operating profit of Â£17 million (2004: Â£20 million) with an underwriting loss of Â£12 million (2004: loss of Â£9 million). Net written premiums increased by 9% to Â£424 million (2004: Â£382 million) reflecting rating increases. The longer-term investment return was unchanged at Â£29 million. The general insurance business reported a COR of 100% (full year 2004: 102%), as a larger proportion of premiums are renewed in the first half of the year. In Ireland, the increasingly competitive market that developed last year has continued to intensify into the first half of 2005. This led to a reduction in net written premiums in Hibernian, our market-leading general insurance business, to Â£262 million (2004: Â£292 million). Encouragingly for the rest of 2005, premium rates on personal motor are starting to stabilise. Operating profit increased to Â£83 million (2004: Â£60 million) while the COR improved to 80% (full year 2004: 87%). The underwriting profit of Â£53 million (2004: Â£38 million) reflects our disciplined underwriting, reduced claims frequency and lower costs. The half year result includes better than expected weather-related claims of Â£3 million (2004: Â£3 million). The business is investing in Geocoding, a flood mapping project providing new underwriting and risk selection techniques and will continue to maintain its careful, focused and targeted approach to underwriting. Hibernian was awarded 'Best Commercial Insurer' in the 2004 Irish Brokers Association (IBA) Service Excellence Awards. In the Netherlands, general insurance and health operating profit was broadly unchanged at Â£55 million (2004: Â£53 million). The general insurance COR improved to 94% (full year 2004: 97%) reflecting lower claims and the timing of premiums. Legislative reforms in the Dutch healthcare market, effective 1 January 2006, will integrate the provision of public and private health insurance. Accordingly, this will create opportunities for our health business as more healthcare services move to private providers. International Our International general insurance businesses recorded an operating profit of Â£89 million (2004: Â£74 million). Our Canadian business reported an increased underwriting profit of Â£14 million (2004: Â£5 million) and COR of 98% (full year 2004: 97%) which reflects the benefit of favourable claims frequency in all major classes of business. Net written premiums were comparable at Â£627 million (2004: Â£601 million). Legislative automobile reforms have led to lower premiums, which have been matched by lower claim costs. The commercial market continues to soften. Aviva Canada is increasing its distribution capability through our strategic alliance with Loblaw Companies Ltd., Canada's leading grocer, which provides products under the supermarket's own President's Choice Financial (PCF) brand, a first for the Canadian insurance market. The initiative continues to be rolled out successfully with launches in Quebec in March and Alberta later this year. In March we launched the pilot for Aviva Autograph, a pay-as-you-drive product which rewards responsible drivers with lower premiums. The longer-term investment return was higher at Â£53 million (2004: Â£47 million), primarily reflecting the higher asset base more than offsetting the application of lower LTIR rates. The operating profit from our other International businesses was Â£22 million (2004: Â£22 million) including Â£16 million reported by the Group's captive. We announced we had completed the first stage in the sale of our Asian general insurance operations in February 2005, and we have recognised Â£145 million of profit on sale in the results for the period. The second stage will complete in the second half of the year. Other operations The result of the Group's other operations improved to Â£2 million (2004: loss of Â£35 million) on an IFRS basis and includes Â£11 million (2004: nil) from RAC's Consumer Services, Business Solutions, Lex Vehicle Leasing and Manufacturer Support Services divisions which have been classed as non-insurance. In July 2005 we completed the transaction to transfer the ownership of Hyundai Cars (UK) from RAC to Hyundai Motor UK Limited. Accordingly we have presented the assets and liabilities of this business as held for sale on the balance sheet. We completed the transfer in July 2005. -------------------------------------------------------------------------------------------------------------------- Page 7 On an IFRS basis, the increased loss by NU Life Services of Â£38 million (2004: loss of Â£15 million) reflects the inclusion of Â£30 million of one-off reorganisation costs. This was more than offset by an increase in the profitability of our banking and other operations in the Netherlands. On an EEV basis, an operating profit of Â£45 million (2004: Â£12 million loss) was recorded by our other operations. The main difference between the two bases relates to the treatment of the losses incurred by NU Life Services on the administration services provided to our UK Life business, which are included within the life EEV operating return. Corporate costs Corporate costs were lower at Â£83 million (2004: Â£99 million) and include Â£28 million (2004: Â£45 million) in respect of the global finance transformation programme (GFTP). This decrease is in line with the reduced level of finance- related change activity across the Group which peaked in 2004 and successfully completed during the first half of 2005. Consequently there will be no further GFTP costs reported. Other corporate costs amounted to Â£55 million (2004: Â£54 million). Unallocated interest charges Unallocated interest charges comprise internal and external interest on borrowings, subordinated debt and intra- group loans not allocated to local business operations and net pension income. Total interest costs in the period were Â£231 million (2004: Â£224 million). External interest costs were slightly higher at Â£130 million (2004: Â£124 million) while internal interest costs were broadly unchanged at Â£101 million (2004: Â£100 million). Net pension income of Â£18 million (2004: Â£19 million) represents the expected return on pension scheme assets less the interest charge on pension scheme liabilities. This is now recognised as a consequence of adopting IFRS. Interest on the direct capital instrument is not included within unallocated interest and it is instead treated as an appropriation of profits retained in the period. In accordance with IFRS, this appropriation will be charged when declared and settled. Accordingly, the Â£20 million appropriation made in July 2005 will be reflected in the second half of the year. Cost savings We continue to focus on cost control and operational efficiencies. We have successfully delivered the savings from the initiatives previously announced and we are now focused on growing the business while maintaining the cost base. We continue to make progress on the cost saving initiatives announced as part of the RAC acquisition and in relation to the UK Life transformation project. In respect of our UK life operation, we have incurred costs of Â£30 million in the period, which brings the spend to date to Â£95 million. We remain on track to spend a total of Â£153 million by 2007 and to deliver annualised savings of Â£130 million. Profit on ordinary activities before tax EEV basis IFRS basis ------------------ ------------------ Restated* 6 months 6 months 6 months 6 months 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Operating profit before tax 1,318 1,076 943 781 Impairment of goodwill (10) - (10) - Amortisation of acquired additional value of in-force long-term business - - (44) (35) Amortisation and impairment of other intangibles (8) (1) (16) (2) Financial Services Compensation Scheme and other levies - (25) - (25) Profit on disposal of subsidiary and associates 145 8 145 8 Short-term fluctuations on return of investments backing general insurance and health business 120 (238) 120 (238) Variation from longer-term investment return - life business 719 (202) - - Effect of economic assumption changes (531) 56 - - Integration costs (14) - (14) - Exceptional costs for termination of operations - (40) - (40) -------------------------------------------------------------------------------------------------------------------- Profit before tax/ Profit before tax attributable to shareholders' profits 1,739 634 1,124 449 ==================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. Profit before tax on an EEV basis was higher at Â£1,739 million (2004: Â£634 million), and includes the positive investment return variances of Â£839 million (2004: Â£440 million adverse) and the Â£531 million adverse impact of economic assumption changes (2004: Â£56 million profit). The completion of the first phase of the sale of our Asian general insurance businesses resulted in a profit on sale of Â£145 million. Integration costs of Â£14 million reflect the integration activity following the acquisition of RAC in May. The variance from longer-term investment return reflects the higher than assumed overall equity returns during the period following improvements in the equity markets of between 6% and 10% and increased market values of fixed income securities following the fall in bond yields. This resulted in unrealised gains on the Group's life embedded value. Long-term economic assumption changes, which are set by reference to long-term bond yields, were revised downwards at 30 June 2005 in both the UK and Eurozone by 40 and 50 basis points respectively. These lower assumptions have reduced the expected value of future profits from in-force life contracts, reducing profits by Â£531 million. -------------------------------------------------------------------------------------------------------------------- Page 8 The non-life short-term fluctuations of Â£120 million (2004: Â£238 million adverse) are principally due to the higher equity market returns compared to our longer-term investment return assumptions. 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 to Â£1,124 million (2004: Â£449 million). The taxation charge for the period was Â£530 million (2004: Â£249 million) on an EEV basis and includes a charge of Â£412 million (2004: Â£350 million) in respect of operating profit, which is equivalent to an effective rate of 31.3% (2004: 32.5%). On an IFRS basis the effective tax rate on operating profit was 27.1% (2004: 31.4%). Dividend Ordinary dividends The Board has proposed an interim dividend of 9.83 pence net per share (2004: 9.36 pence) payable on 17 November 2005 to shareholders on the register on 19 August 2005. 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 has significant resources and financial strength. We report on these below. 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') negative outlook from Moody's. These ratings were reaffirmed in March 2005 and reflect the Group's very strong liquidity, competitive position, capital base, increasing underlying earnings and positive strategic management. Capital management In managing its capital, the Group seeks to: (i) match the profile of its assets and liabilities, taking account of the risks inherent in each business. In the case of the Group's life operations, which have long-term liabilities, the majority of capital is held in fixed income securities. A significant proportion of the capital supporting the Group's general insurance and health operations is held in equities, reflecting the relatively low risk profile of these businesses; (ii) maintain financial strength to support new business growth and satisfy the requirements of its policyholders, regulators and rating agencies; (iii) retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit lines, and access to a range of capital markets; (iv) allocate capital efficiently to support growth and repatriate excess 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. Return on capital employed The Group's normalised annualised 2005 post-tax operating return on equity was 14.6% (full year 2004: 13.7%), which reflects the strong operational performance delivered by our businesses in the period. The normalised annualised 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 capital. 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 the 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. -------------------------------------------------------------------------------------------------------------------- Page 9 iii) Economic bases Notwithstanding the required levels of capital laid out by the FSA, the Group also measures its capital using risk based capital techniques which take into account a more realistic set of assumptions. These bases have been under considerable development over the past few years and have become more relevant in the assessment of the Group's financial strength. In addition they 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 2005 the Group had Â£20.6 billion (31 December 2004: Â£19.3 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 2005 2004 Total shareholders' funds - EEV basis (including minority interests) Â£15.1 billion Â£14.0 billion Total capital employed by business operations Â£20.6 billion Â£19.3 billion Net asset value per share 533 pence 511 pence The increase in shareholders' funds reflects strong operational performance in the first half of the year and the capital raised as part of the acquisition of RAC in May. Net asset value per ordinary share, based on equity shareholders' funds, was higher at 533 pence per share. Regulatory bases EU Groups directive 30 June 31 December 2005 2004 Insurance Groups Directive (IGD) excess solvency Â£2.6 billion Â£3.6 billion Cover (times) over EU minimum 1.6 times 1.9 times Aviva Group had an estimated excess regulatory capital, as measured under the EU Groups Directive, of Â£2.6 billion at 30 June 2005 (31 December 2004: 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 FSA introduced further changes to the valuation rules which apply during 2005. From 1 January 2005, the valuations of non-insurance subsidiaries were restated from market value to net asset value reducing IGD by Â£0.6 billion. Furthermore, the FSA introduced the rules for accounting for pension fund deficits under IAS with effect from April 2005. The impact of this is to reduce Aviva's excess solvency by Â£0.4 billion. The impact of these valuation changes has been offset by the Group's strong solvency capital generation in the period which amounted to Â£0.6 billion while the acquisition of RAC reduced the excess regulatory capital by a further Â£0.8 billion. As previously announced, completion of the first phase of the Asian general insurance business sale in period improved the IGD excess solvency by Â£0.2 billion. From 1 January 2005, the Group is required to monitor its capital in accordance with the requirements of the Prudential Sourcebook (PSB) as set out by the FSA. We have established the Group's risk and governance frameworks to ensure compliance and finalised the parameters and assumptions that underpin the internal capital adequacy (ICA) assessment. An evaluation of our framework by the FSA will take place during the course of 2005. From 1 January 2006, the Group will be required to have a positive IGD basis solvency level at all times. 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) increased to Â£6.2 billion (31 December 2004: Â£5.7 billion) after covering the minimum capital base of Â£3.9 billion (31 December 2004: Â£4.1 billion). -------------------------------------------------------------------------------------------------------------------- Page 10 The table below sets out the regulatory basis of these general insurance groups at 30 June 2005 and 31 December 2004. 30 June 2005 31 December 2004 -------------------------------------- ------------------------------------- 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£1.0 bn Â£9.1 bn Â£10.1 bn Â£1.0 bn Â£8.8 bn Â£9.8 bn Required minimum margin Â£bn Â£0.4 bn Â£3.5 bn Â£3.9 bn Â£0.4 bn Â£3.7 bn Â£4.1 bn Excess solvency margin Â£bn Â£0.6 bn Â£5.6 bn Â£6.2 bn Â£0.6 bn Â£5.1 bn Â£5.7 bn Cover (times) 2.8 times 2.6 times 2.6 times 2.6 times 2.4 times 2.4 times Economic bases - Risk based capital The Group uses risk based capital as one of several measures 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. The introduction of the Internal Capital Assessment (ICA) regime has resulted in the calculation of the realistic capital needed to meet adverse situations. As a result we have been in discussion with our regulator for both our life and general insurance business to agree specific risk adjusted capital requirements. Our risk based capital model underpins our ICA modelling, and will form the basis of our discussions with the regulator in agreeing such capital requirements, along with our strong risk management processes. We continue to evolve our risk based capital modelling capability for both our life and general insurance 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. Our current risk based capital methodology for general insurance business assesses insurance, market and credit risks and makes prudent allowance for diversification benefits. We look 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 our model, our risk based capital requirement may be expressed as 34% of net written premiums which is equivalent to Â£3.3 billion (31 December 2004: Â£3.3 billion) of capital. This compares with a total of Â£5.5 billion (31 December 2004: Â£5.0 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 200% 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 135%. 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 2005 the regulatory capital held in the Group's long-term business amounted to Â£6.4 billion (31 December 2004: Â£6.3 billion) which represents 177% (31 December 2004: 168%) of the EU minimum requirements. UK Life operations Available capital The available capital of the with-profit funds is represented by the realistic orphan 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 and guarantees, less 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 and Pensions (NUL&P). These realistic liabilities have been included within the long-term business provision and the liability for investment contracts on the Group's IFRS balance sheet at 30 June 2005 and 31 December 2004. The required capital margin has increased since December 2004 mainly as a result of a change in assumptions in relation to charges made for guarantees within the RCM calculation. -------------------------------------------------------------------------------------------------------------------- Page 11 30 June 2005 --------------------------------------------------------------------------------------------- Estimated Estimated Estimated Realistic Realistic Realistic orphan required capital Estimated assets liabilities*/** estate*** margin**** excess Â£bn Â£bn Â£bn Â£bn Â£bn CGNU Life 13.9 12.2 1.7 0.6 1.1 CULAC 13.9 12.2 1.7 0.5 1.2 NUL&P 25.7 24.5 1.2 1.1 0.1 ---------------------------------------------------------------------------------------------- Aggregate 53.5 48.9 4.6 2.2 2.4 ============================================================================================== * These realistic liabilities include the shareholders' share of future bonuses of Â£0.6 billion. Realistic liabilities adjusted to eliminate the shareholders' share of future bonuses are Â£48.3 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£0.8 billion, Â£1.0 billion and Â£3.4 billion for CGNU Life, CULAC and NUL&P respectively (31 December 2004: Â£0.6 billion, Â£0.9 billion and Â£3.3 billion for CGNU Life, CULAC and NUL&P respectively). *** Estimated realistic orphan estate at 31 December 2004 was Â£1.7 billion, Â£1.6 billion and Â£1.2 billion for CGNU Life, CULAC and NUL&P respectively. **** The required capital margin (RCM) is 2.0 times covered by the orphan estate (31 December 2004: 2.6 times). In addition to those funds disclosed above, the PM fund holds Â£2.8billion of realistic assets and liabilities. However, as realistic assets and liabilities are equal in the PM fund, there is no impact on the realistic orphan estate. The aggregate investment mix of the assets in the three main with-profit funds at 30 June 2005 was: 30 June 2005 31 December 2004 % % Equity 38% 36% Property 15% 15% Fixed interest 40% 43% Other 7% 6% ------------------------------------------------------------------------------------------------------------------- 100% 100% =================================================================================================================== The equity backing ratio, including property, supporting with-profit asset shares is 66% in CGNU Life and CULAC and 55% in NUL&P. With-profit new business is mainly written through CGNU Life. Group capital statement The purpose of the capital statement is to set out the financial strength of the Group and to provide an analysis of the disposition and constraints over the availability of capital to meet risks and regulatory requirements. The capital statement also provides a reconciliation of shareholders' funds to regulatory capital. Restated* 31 December 30 June 2005 2004 ---------------------------------------------------------------------------- ----------- UK with- Other UK Overseas 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 - 2.8 4.9 7.7 2.1 9.8 9.0 Other sources of capital** - - 0.1 0.1 2.8 2.9 3.0 Unallocated divisible surplus 4.4 0.2 3.1 7.7 - 7.7 7.5 Adjustments onto a regulatory basis*** 0.2 (1.9) (3.4) (5.1) (3.4) (8.5) (6.7) ------------------------------------------------------------------------------------------------------------------ Total available capital 4.6 1.1 4.7 10.4 1.5 11.9 12.8 ================================================================================================================== * Restated for the adoption of FRS 27. ** Other sources of capital represents: subordinated debt of Â£2,789 million (31 December 2004: Â£2,847 million) issued by Aviva plc and Â£120 million (31 December 2004: Â£129 million) subordinated perpetual loan notes issued by a Dutch subsidiary undertaking. *** Including an adjustment for minorities **** Other UK life operations include Â£238 million (31 December 2004: Â£300 million) of UDS, relating to Hibernian life which is owned by the UK life shareholders' funds. ***** Other operations include general insurance and fund management businesses. The December 2004 restated capital position statement reflects the reduction in shareholders' funds under IFRS. The restated unallocated divisible surplus reflects the impact of IFRS and FRS 27 which restates UK with-profit liabilities to the realistic basis. The 2004 capital position remains unchanged however, as the FSA does not require us to restate our regulatory solvency position. The June 2005 capital position reflects the impact of the acquisition of RAC by Aviva. ------------------------------------------------------------------------------------------------------------------- Page 12 Sensitivity analysis The sensitivity of the Groups' shareholders' funds on an EEV basis at 30 June 2005 to a 10% fall in global equity markets or a rise of 1% in global interest rates is as follows: 31 December 30 June Equities Interest rates 2004 2005 down 10% up 1% Â£bn Â£bn Â£bn Â£bn 13.8 Long-term savings* 13.8 13.1 13.7 5.5 General insurance and other 6.8 6.4 6.6 (5.3) Borrowings** (5.5) (5.5) (5.5) ------------------------------------------------------------------------------------------------------------------- 14.0 Shareholders' funds 15.1 14.0 14.8 =================================================================================================================== * Assumes EEV assumptions adjusted to reflect revised bond yields ** Comprising internal, external and subordinated debt, net of corporate tangible net assets. *** These sensitivities assume a full tax charge/credit on market value assumptions. ------------------------------------------------------------------------------------------------------------------- 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 New business New business business premiums* contribution*** margin**** -------------------------------- ---------------------- ---------------------------------- 6 months to 6 months to 6 months to 6 months to 6 months to 6 months to 30 June 30 June Local 30 June 30 June Local 30 June 30 June 2005 2004 currency 2005 2005 currency 2005 2005 Â£m Â£m growth** Â£m Â£m growth** Â£m Â£m Life and pensions United Kingdom 4,244 4,299 (1%) 135 127 6% 3.2% 3.0% France 1,854 1,337 36% 71 46 52% 3.8% 3.4% Ireland 349 267 28% 9 13 (28%) 2.6% 4.9% Italy 1,333 811 61% 33 22 45% 2.5% 2.7% Netherlands (including Belgium and Luxembourg) 1,241 981 24% 39 40 (5%) 3.1% 4.1% Poland 112 121 (22%) 5 5 (4%) 4.5% 4.1% Spain 965 1,122 (16%) 80 68 15% 8.3% 6.1% Other Europe 364 388 (8%) 3 1 300% 0.8% 0.3% Continental Europe 6,218 5,027 21% 240 195 21% 3.9% 3.9% International 554 427 31% 18 16 12% 3.2% 3.7% --------------------------------------------------------------------------------------------------------------------- Total life and pensions 11,016 9,753 12% 393 338 15% 3.6% 3.5% ===================================================================================================================== Investment sales***** United Kingdom 513 451 14% Netherlands 180 120 49% Poland 26 49 (56%) Other Europe 237 91 157% Continental Europe 443 260 63% International 106 64 63% --------------------------------------------------------- Total investment sales 1,062 775 35% --------------------------------------------------------- Total long-term savings 12,078 10,528 13% ========================================================= Navigator sales 432 323 33% (not 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 to PVNBP, expressed as a percentage. ***** Investment sales are calculated as new single premium plus annualised value of new regular premiums. United Kingdom: In an increasingly competitive market, Norwich Union continued to rebalance its product mix to maximise returns. While, total sales, including investment sales, in the first half of 2005 were broadly flat at Â£4,757 million (2004: Â£4,750 million) the company's focus on value resulted in a 6% increase in new business contribution to Â£135 million (2004: Â£127 million). New business margin was higher at 3.2% (full year 2004: 2.9%). Norwich Union has enjoyed a strong performance in the individual annuity, bond and retail investments markets owing to a combination of dynamic pricing actions and continuing improvements to product offerings. The protection market remains challenging and the company continues to take strategic pricing actions in order to retain an appropriate presence for the long-term. Norwich Union continues to benefit from its strong and broad investment offering. Total bond sales increased 20% to Â£1,158 million (2004: Â£964 million) with a 46% increase in unit-linked bond sales. During the second quarter Norwich Union further enhanced its investment bond product, broadening the fund range to include manager of manager funds and launching Forecast, an online portfolio planning tool for financial advisers. These initiatives are expected to deliver further benefits to new business sales volumes in the second half of the year. The company recognises that building a significant position in collective investments will be an increasingly important driver of future growth and continues to develop its capability in this area. This increased focus on collective investments resulted in sales growth of 14% to Â£513 million (2004: Â£451 million). ------------------------------------------------------------------------------------------------------------------- Page 14 The protection market remains challenging reflecting the continued slowdown in the property market. Total protection sales were Â£467 million (2004: Â£534 million) excluding equity release. Norwich Union has used pricing actions to maintain a strongly competitive position, given the strategic importance of this market. Equity release sales totalled Â£179 million (2004: Â£197 million) and Norwich Union has a market leading position, which it expects to maintain as the market develops. Individual annuity sales increased by 39% to Â£787 million (2004: Â£568 million). Norwich Union has maintained the good momentum from the first quarter of 2005 and remains positive about the outlook for the remainder of the year. Norwich Union has successfully repositioned its pensions mix to deliver a strong improvement in value. Total pensions sales, including individual and group business, were Â£1,653 million (2004: Â£2,036 million). Total individual pension sales were Â£1,175 million (2004: Â£1,478 million), reflecting lower individual personal pensions sales due to tactical repositioning partly offset by increased group personal pension sales of Â£598 million (2004: Â£548 million). Recent actions include launching a 'non stakeholder' personal pension at the end of 2004 and varying commission levels in order to move the product mix from low margin 'stakeholder' products to higher margin products. This market remains a strategic focus for long-term profitable growth. Norwich Union maintains a strong position in the corporate pensions market, with sales of Â£478 million (2004: Â£558 million), extracting value from tactical opportunities as the market changes in the run up to Pensions Simplification. The joint venture with the Royal Bank of Scotland Group delivered strong sales, increasing 16% to Â£476 million (2004: Â£409 million). Norwich Union's share of these increased by 22% to Â£319 million (2004: Â£261 million), reflecting the benefits of closer integration between the sales force and the bank network. These benefits are expected to continue through the rest of the year. The product range has been augmented with the addition of the Norwich Union Portfolio Bond. Growth is expected to continue in the second half of the year from increasing sales force numbers and further enhancements to the investment, protection and pension propositions. New business margin was maintained at 2.6% (full year 2004: 2.6%). Norwich Union is well placed to compete in a depolarised market and has secured all the distribution agreements it needs to maintain a leading market position. Following the successful launch of the Lifetime wrap* platform, over 200 financial advisors have already signed up. As recently announced, Norwich Union has increased its share of Lifetime to 96%. Further enhancements to this platform around pensions and investments offerings are planned during the second half of the year. Norwich Union expects modest market growth in the remainder of 2005 with current trends within each individual product line continuing. The company remains committed to delivering value, while maintaining a leading position in key markets. Norwich Union is well placed over the medium-term to achieve profitable growth in line with the market and exploit opportunities as the market improves. * A wrap is an IT service that allows financial advisers to manage and transact on a range of different client investments. Continental Europe: France: Aviva France reported an excellent 36% growth in sales to Â£1,854 million (2004: Â£1,337 million), with Â£411 million of sales through the new bancassurance joint venture with Credit du Nord. This is an impressive result for the joint venture and represents stronger growth than other bancassurers in the French market. Aviva France continues to focus on moving the business mix towards a greater proportion of unit-linked business and Credit du Nord's performance includes the benefit of a special offer on unit-linked business. These products accounted for 40% of total sales in the first half of 2005 (2004: 29%), with sales increasing 88% to Â£740 million (2004: Â£387 million). This change in product mix resulted in a strong increase in the margin to 3.8% (full year 2004: 3.4%), and includes the margin on new business from the Credit du Nord joint venture of 4.1% (full year 2004: 3.1%). AFER, the largest savings association in France with more than 625,000 members at the end of June 2005, continues to be an important source of new business. Sales through AFER grew steadily at 4% to Â£865 million (2004: Â£819 million) against a high comparator. AFER sales now account for 47% of total new business for Aviva France (2004: 61%) as Credit du Nord adds distribution diversity. Unit-linked sales through AFER increased by 61% to Â£195 million (2004: Â£119 million) and now represent 23% of the total AFER sales. Euro fund sales declined to Â£670 million (2004: Â£700 million). New business sold through channels other than AFER and Credit du Nord showed good growth of 10% to Â£578 million (2004: Â£518 million) benefiting from strong sales of unit-linked products. Market growth in France for the first half of the year was 12% but is expected to fall back in the second half to give a rate of market growth of less than 10% for the whole of 2005. With a diversified distribution capability and a broad range of savings products, Aviva France is well positioned for continued growth. Ireland: Hibernian Life and Pensions maintained its position as the third largest Irish life and pensions provider with a 28% increase in sales to Â£349 million (2004: Â£267 million). This performance benefited from higher than expected sales of single premium business, which increased by 123% to Â£191 million (2004: Â£85 million). New single premium pension sales were 87% higher at Â£123 million (2004: Â£65 million) and included a significant number of large contracts across all categories of pensions, reflecting the attractive choice of fund managers. New regular premium pension sales were lower at Â£118 million (2004: Â£131 million), demonstrating continued customer and broker focus on single premium products. ------------------------------------------------------------------------------------------------------------------- Page 15 Life single premium sales increased to Â£68 million (2004: Â£20 million) and benefited from the guaranteed fund that provides a five year capital guarantee, launched in 2004. Life regular premium sales were Â£40 million (2004: Â£51 million) as a result of modest increments to existing Special Savings Incentive Account (SSIA) policies as well as lower protection sales following repricing actions during the first quarter due to increased reinsurance costs. New business contribution was Â£9 million (2004: Â£13 million) with a margin of 2.6% (full year 2004: 3.4%). The reduction in the margin reflects the higher level of single premium sales and the competitive pressures within the market. Italy: New business sales increased strongly by 61% to Â£1,333 million (2004: Â£811 million), including one-off single premium direct business of Â£73 million (2004: Â£82 million). This is higher than the growth in the Italian bancassurance market which increased by 36% based on total sales. The momentum of new business sales from Aviva's bancassurance partners continued into the second quarter of 2005. Aviva Italy concentrated marketing efforts in the first six months, in order to capture a good share of the buoyant long-term savings market. However, this exceptional growth rate is not expected to continue at the same level for the rest of the year as the country's economic slowdown is likely to restrain market growth. Sales through UniCredito Italiano were 27% higher at Â£502 million (2004: Â£388 million), reflecting strong growth in single premium unit-linked savings business following the launch of new products and marketing campaigns in the first half of 2005. Banche Popolari Unite (BPU) achieved strong growth with sales of Â£350 million (2004: Â£138 million). Sales benefited from the extension of the agreement with BPU to a further 380 branches from the start of 2005 and the start of sales through the financial adviser network of BPU in the second quarter of the year. New business from structured investment bonds with limited offer periods continued to be successful and there was increased demand for single premium profit sharing contracts. Total sales from Banca Popolare Italiana Group (formerly Banca Popolare di Lodi Group) were higher at Â£305 million (2004: Â£130 million), reflecting continued strong demand for both structured investment bonds and profit sharing policies. Sales through Banca delle Marche also increased strongly to Â£83 million (2004: Â£59 million), following a successful marketing campaign in the first half of the year. New business contribution was Â£33 million (2004: Â£22 million) reflecting the strong growth in sales, with the margin lower at 2.5% (full year 2004: 2.7%) reflecting business mix, with a higher proportion of lower margin structured investment bonds and profit sharing business. Netherlands: Delta Lloyd achieved strong new business sales growth, including investment sales, of 27% to Â£1,421 million (2004: Â£1,101 million). Sales through the joint venture with ABN AMRO increased by 43% to Â£347 million (2004: Â£238 million). Pension and annuity sales increased by 54% to Â£763 million (2004: Â£485 million). This reflects strong growth in annuity sales following a successful limited offer promotion by ABN AMRO that ended in April, designed to raise market awareness of the joint venture. Annuity volumes in the second quarter returned to a long-term sustainable level. Sales through ABN AMRO and the direct division continued to perform well, showing a seasonal effect, as well as good offers from the direct division. Individual and group pension sales continued to grow at a steady pace. Group pensions business continues to be an area of focus for the group, with 2005 new business sales comprising a larger number of medium-sized contracts compared with last year. The increase in regular premium pensions sales of 83% to Â£306 million (2004: Â£164 million) is partly due to the launch in the first quarter of the on-line version of the personal pension plan product. Life and saving sales were Â£478 million (2004: Â£496 million). Single premium sales of Â£196 million (2004: Â£221 million), include sales through ABN AMRO where its education and savings plans are highly regarded in the market. Investment sales increased by 49% to Â£180 million (2004: Â£120 million), continuing the sales momentum from the first quarter and reflecting a strengthening of the Delta Lloyd brand in this market. New business contribution was Â£39 million (2004: Â£40 million) with a margin of 3.1% (full year 2004: 3.7%). The reduction is as a result of the decrease in interest rates applied in calculating new business contribution which were lower by 60 basis points at the start of 2005. The margins would be broadly unchanged, if this effect is excluded. Poland: Total life and pension new business sales were Â£112 million (2004: Â£121 million). Life sales were higher at Â£62 million (2004: Â£52 million) as a result of currency strengthening and higher sales of regular premium savings business. CU Polska is focused on raising the productivity of the sales force, enhancing distribution capabilities and extending the product offering. New product launches are scheduled later in the year. Pension sales were Â£50 million (2004: Â£69 million). The comparator includes non-recurring sales of Â£26 million made through the Polish State Agency in respect of employees without a chosen pension provider. Following legislative changes prompted by competition issues, CU Polska and two other pension companies have been excluded from this business in 2005. ------------------------------------------------------------------------------------------------------------------- Page 16 Mutual fund sales were lower at Â£26 million (2004: Â£49 million) reflecting continued investor caution. The Polish equity market was very volatile in the first half of 2005 and investor preference switched to less risky fixed- income funds. CU Polska is in the process of finalising a number of alliances with distribution partners in order to generate sales growth. Spain: Total new business sales were Â£965 million (2004: Â£1,122 million), including one-off sales of Â£25 million through Aviva Vida y Pensiones (2004: Â£177 million through Caixa Galicia). Excluding one-off sales, new business sales were broadly flat at Â£940 million (2004: Â£945 million). Through the bancassurance distribution channels, the product focus in the second quarter has continued to be on higher margin protection and pension products, although there was an increase in volume of lower margin traditional savings products compared to the first quarter of this year. As a result of this beneficial product mix, the new business contribution has increased by 15% to Â£80 million (2004: Â£68 million) and the new business margin has increased to 8.3% (full year 2004: 6.8%). Total sales through bancassurance partners in Spain were lower at Â£855 million (2004: Â£1,053 million, which includes one-off sales of Â£177 million). Aviva continues to be a leading bancassurer in the Spanish life market and was number four in the market overall in the first quarter of 2005, based on gross written premiums. Growth potential is still strong across bancassurance partnerships, although quarterly sales volumes are variable due to the timing of marketing campaigns and product launches. Increased sales momentum in traditional savings products is expected in the second half of 2005 as new products are developed and launched, which should result in a more balanced product mix between protection and savings products. At Aviva Vida y Pensiones, which distributes through a direct sales force and intermediaries, new business sales increased to Â£110 million (2004: Â£60 million). Most of the increase is due to strong sales of individual pensions and unit-linked life business, and included one-off sales of Â£25 million (2004: nil) in respect of large group savings and risk schemes. Other Europe: Sales from Aviva's other European businesses decreased by 8% to Â£364 million (2004: Â£388 million), including total sales in Germany of Â£142 million (2004: Â£187 million). The sales slowdown in Germany is in line with local market trends following changes in tax laws introduced at the start of 2005. In Turkey, where Aviva is a top-five life insurance provider, total new business sales increased to Â£75 million (2004: Â£55 million), continuing to reflect good levels of regular premium sales in the personal pensions market. Sales through Norwich Union's Dublin-based offshore life and savings business were Â£68 million (2004: Â£50 million). Sales of Luxembourg UCITS increased to Â£237 million (2004: Â£91 million) as a result of improved investor sentiment and further development of broker relationships and distribution channels. Aviva is currently evaluating opportunities in the Russian market. This follows recent regulatory reform and developments in the long-term savings market. International: Asian businesses: Aviva continues to increase the rate of growth in new business sales generated by its Asian businesses in line with its longer-term strategic ambitions in the region. Total sales from the operations in Asia included in the Group's headline result, have increased by 62% to Â£172 million (2004: Â£107 million) and now account for 2% (2004: 1%) of the Group's sales. Strong growth was achieved in all the Asian operations. Singapore: Sales at Aviva Singapore increased to Â£108 million (2004: Â£75 million), benefiting from the strong partnership with banking group DBS, together with increased sales from the broker channel. The partnership has around 50% of the bancassurance regular premium new business market, reflecting its focus on selling higher margin regular premium business. Aviva is also the market leader in the developing broker market, and employee benefits and healthcare business segments. Total Navigator Asia sales, which are not included in the new business figures, have increased significantly to Â£29 million (2004: Â£5 million), facilitated by strong distribution relationships with key brokers and an increase in the number of funds offered. Hong Kong: Sales from the partnership with DBS in Hong Kong continued to increase strongly by 51% to Â£35 million (2004: Â£24 million) with an increasing contribution from the broker channel launched towards the end of 2004. Single premium sales of Â£16 million (2004: Â£8 million) benefited from the launch of a limited offer savings product. India: Total sales from the joint-venture life business with Dabur Group increased by 86% to Â£50 million (2004: Â£27 million), ranking Aviva eighth amongst private providers. Aviva's 26% attributable share of new business sales was Â£13 million (2004: Â£7 million). Distribution is through the growing direct sales force, now numbering 5,500, and bancassurance partnerships, including Canara Bank, India's second largest bank. Four new bancassurance agreements with cooperative banks have been signed in the first half of 2005 bringing the total numbers of bancassurance agreements to ten. Bancassurance distribution has been strengthened by an extension of the partnership with American Express for a further 10 years. ------------------------------------------------------------------------------------------------------------------- Page 17 China: Sales through the joint-venture life business, Aviva COFCO, continue to grow rapidly. Total sales were Â£32 million (2004: Â£2 million). Aviva's 50% share of new business sales was Â£16 million (2004: Â£1 million). The company has improved its market position among foreign joint venture life insurers, based on premium income, to be ranked third. Due to the rapid growth of group business the market rankings of foreign insurers remain volatile. Aviva has received regulatory approval to open a sales office in Nauchong in the province of Sichuan, in addition to those already approved in the cities of Zhongshan in Guangdong province and Mianyang in Sichuan. This brings the total number of major cities where Aviva is licensed to three, with sales offices in a further three cities. Applications for further new licenses have been made to the China Insurance Regulatory Commission. Australia: Life and pension sales increased by 5% to Â£160 million (2004: Â£151 million) including growth from single premium corporate pension transfers and protection products launched in late 2004. Sales of investment products in the region have improved as a result of more positive investor sentiment towards equity-backed investments. While not included in the new business figures, sales of Navigator, the master trust fund administration business, increased to Â£403 million (2004: Â£318 million) as a result of ongoing improvements in product offerings. Aviva remains focused on growth and has recently agreed a number of strategic investments and alliances with distribution partners to secure and enhance future sales volumes. This includes a strategic stake in Professional Investment Holding and alliance with HBOS. United States: Life and pension sales grew by 36% to Â£222 million (2004: Â£169 million), benefiting from distribution improvements, new single premium deferred annuity products and revised product terms. The company's focus remains on broadening distribution and improving growth. The wider product offering, including the recent launch of an equity-indexed annuity, is expected to reduce the volatility of new business volumes, which have previously been depressed due to the low interest rate environment. ------------------------------------------------------------------------------------------------------------------- Page 18 Present value of life new business premiums The present value of new business premiums (PVNBP) is derived from the single premiums 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. 30 June 2005 30 June 2004 ------------------------------------------------------------------------------- ------------- Weighted Present Present Present average value of value of new value of new Regular capitalisation regular Single business business premiums factor premiums premiums premiums premiums Â£m Â£m Â£m Â£m Â£m United Kingdom Individual pensions 120 5.1 611 564 1,175 1,478 Group pensions 44 5.5 240 238 478 558 Annuities - - - 787 787 568 Bonds - - - 1,158 1,158 964 Protection* 66 5.1 337 309 646 731 ------------------------------------------------------------------------------------------------------------------- Total life and pensions 230 5.2 1,188 3,056 4,244 4,299 France Euro funds** 7 5.6 39 990 1,029 865 Unit-linked funds 21 5.9 124 616 740 387 Protection business 13 6.5 84 1 85 85 ------------------------------------------------------------------------------------------------------------------- Total life and pensions 41 6.0 247 1,607 1,854 1,337 Ireland Life and savings 8 5.0 40 68 108 71 Pensions 24 4.9 118 123 241 196 ------------------------------------------------------------------------------------------------------------------- Total life and pensions 32 4.9 158 191 349 267 Italy Life and savings 30 6.2 187 1,146 1,333 811 ------------------------------------------------------------------------------------------------------------------- Total life and pensions 30 6.2 187 1,146 1,333 811 Netherlands (including Belgium and Luxembourg) Life 35 8.1 282 196 478 496 Pensions 38 8.1 306 457 763 485 ------------------------------------------------------------------------------------------------------------------- Total life and pensions 73 8.1 588 653 1,241 981 Poland Life and savings 9 4.3 39 23 62 52 Pensions 5 7.6 38 12 50 69 ------------------------------------------------------------------------------------------------------------------- Total life and pensions 14 5.5 77 35 112 121 Spain Life and savings 34 6.8 232 548 780 791 Pensions 15 6.3 95 90 185 331 ------------------------------------------------------------------------------------------------------------------- Total life and pensions 49 6.7 327 638 965 1,122 Other Europe Life and pensions 38 4.9 187 177 364 388 International Life and pensions 56 4.1 228 326 554 427 ------------------------------------------------------------------------------------------------------------------- Total 563 5.7 3,187 7,829 11,016 9,753 * United Kingdom includes single premiums of Â£179 million (2004: Â£197 million) in respect of NUER included in Protection business. ** Euro funds are savings that receive an annual bonus declaration, based on the investment performance of the underlying funds. ------------------------------------------------------------------------------------------------------------------- Page 19 Analysis of sales via our principal bancassurance channels Total single premium Present value of and regular premium sales new business premiums** -------------------------- -------------------------- 6 months to 6 months to 30 June Local 30 June Local 2005 currency 2005 currency Â£m growth* Â£m growth* Life and pensions United Kingdom Royal Bank of Scotland Group 240 25% 267 24% ------------------------------------------------------------------------------------------------------------------ 240 25% 267 24% France Credit du Nord (commenced 1 October 2004) 353 - 411 - ------------------------------------------------------------------------------------------------------------------ 353 - 411 - Italy UniCredito Italiano 432 23% 502 27% Banca Popolare Italiana Group (formerly Banca Popolare di Lodi Group) 296 141% 305 130% Banca delle Marche 34 70% 83 38% Banche Popolari Unite 328 134% 350 149% ------------------------------------------------------------------------------------------------------------------ 1,090 72% 1,240 70% Netherlands ABN AMRO 193 42% 347 43% ------------------------------------------------------------------------------------------------------------------ 193 42% 347 43% Spain Bancaja 326 (6%) 402 (3%) Caixa Galicia 138 (59%) 191 (47%) Unicaja 83 (16%) 131 (7%) Caja Espana 58 (19%) 78 (13%) Caja de Granada 36 (22%) 53 (25%) ------------------------------------------------------------------------------------------------------------------ 641 (29%) 855 (21%) International DBS 40 67% 102 24% ------------------------------------------------------------------------------------------------------------------ 40 67% 102 24% ------------------------------------------------------------------------------------------------------------------ Total life and pensions 2,557 36% 3,222 37% Investment sales*** United Kingdom Royal Bank of Scotland Group 52 20% 52 20% ------------------------------------------------------------------------------------------------------------------ 52 20% 52 20% ------------------------------------------------------------------------------------------------------------------ Total bancassurance sales 2,609 35% 3,274 36% ================================================================================================================== * 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. Analysis of total new business sales via the joint venture with Royal Bank of Scotland Group (RBSG) Total sales through the joint venture with RBSG are provided below on a 100% basis and for Aviva's share. In reporting the life and pensions results, a 50% share of sales written through the joint venture life company and 100% of single premium with-profit and unit-linked bond sales written through a Norwich Union fund are included. Investment sales represent Aviva's 50% share of the collective investment sales. Total RBSG sales Aviva's share ------------------------ ------------------------ 6 months to 6 months to 6 months to 6 months to 30 June 30 June 30 June 30 June 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Total life and pension sales 375 323 267 218 Collective investment sales 101 86 52 43 ------------------------------------------------------------------------------------------------------------------- Total RBSG bancassurance sales 476 409 319 261 =================================================================================================================== ------------------------------------------------------------------------------------------------------------------- Page 20 Detailed worldwide long-term savings new business analysis Single Regular Total ------------------------------------- ------------------------------------- --------- 6 months to 6 months to 6 months to 6 months to 30 June 30 June Local 30 June 30 June Local Local 2005 2004 currency 2005 2004 currency currency Â£m Â£m growth* Â£m Â£m growth* growth* United Kingdom Individual pensions 564 800 (30%) 120 136 (12%) (27%) Group pensions 238 303 (22%) 44 49 (10%) (20%) Annuities 787 568 39% - - - 39% Bonds 1,158 964 20% - - - 20% Protection 309 303 2% 66 88 (25%) (4%) ------------------------------------------------------------------------------------------------------------------ Total life and pensions 3,056 2,938 4% 230 273 (16%) 2% Peps/Isas/Unit trusts/Oeics 504 437 16% 9 14 (33%) 14% ------------------------------------------------------------------------------------------------------------------ 3,560 3,375 6% 239 287 (17%) 4% France Euro funds** 990 836 17% 7 6 21% 17% Unit-linked funds 616 326 86% 21 10 108% 86% Protection business 1 21 (94%) 13 11 17% (57%) ------------------------------------------------------------------------------------------------------------------ 1,607 1,183 34% 41 27 52% 34% Ireland Life and savings 68 20 241% 8 9 (13%) 161% Pensions 123 65 87% 24 26 (9%) 59% ------------------------------------------------------------------------------------------------------------------ 191 85 123% 32 35 (10%) 84% Italy Life and savings 1,146 694 63% 30 20 49% 63% ------------------------------------------------------------------------------------------------------------------ 1,146 694 63% 30 20 49% 63% Netherlands (including Belgium & Luxembourg) Life 196 221 (13%) 35 41 (17%) (13%) Pensions 457 321 41% 38 24 55% 42% ------------------------------------------------------------------------------------------------------------------ Total life and pensions 653 542 19% 73 65 10% 18% Unit trusts 180 120 49% - - - 49% ------------------------------------------------------------------------------------------------------------------ 833 662 24% 73 65 10% 23% Poland Life and savings 23 20 (5%) 9 7 6% (2%) Pensions 12 13 (22%) 5 8 (46%) (31%) ------------------------------------------------------------------------------------------------------------------- Total life and pensions 35 33 (12%) 14 15 (22%) (15%) Mutual funds 24 48 (58%) 2 1 49% (56%) ------------------------------------------------------------------------------------------------------------------ 59 81 (39%) 16 16 (18%) (35%) Spain Life and savings 548 626 (14%) 34 27 25% (12%) Pensions 90 249 (64%) 15 15 1% (61%) ------------------------------------------------------------------------------------------------------------------ 638 875 (28%) 49 42 16% (26%) Other Europe Life and pensions 177 167 6% 38 41 (10%) 3% UCITS and other 237 91 157% - - - 157% ------------------------------------------------------------------------------------------------------------------ 414 258 59% 38 41 (10%) 50% International Life and pensions 326 225 48% 56 51 10% 41% Unit trusts 106 64 63% - - - 63% ------------------------------------------------------------------------------------------------------------------ 432 289 51% 56 51 10% 45% Total long-term savings 8,880 7,502 17% 574 584 (3%) 16% ================================================================================================================== Analysed: Life and pensions 7,829 6,742 15% 563 569 (2%) 14% Investment sales 1,051 760 36% 11 15 (27%) 35% ------------------------------------------------------------------------------------------------------------------- Total long-term savings 8,880 7,502 17% 574 584 (3%) 16% =================================================================================================================== Navigator sales 432 323 33% (not included above) * 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 21 Analysis of UK long-term savings by distribution channel Single Regular Total ----------------------------------- --------------------------------- -------- 6 months to 6 months to 6 months to 6 months to 30 June 30 June Local 30 June 30 June Local Local 2005 2004 currency 2005 2004 currency currency Â£m Â£m growth* Â£m Â£m growth* growth* IFA - life & pensions products 2,216 2,085 6% 181 219 (17%) 4% - investment products 247 191 30% - 1 (40%) 30% ---------------------------------------------------------------------------------------------------------------------- 2,463 2,276 8% 181 220 (17%) 6% Bancassurance partnership with RBSG - life & pensions products 231 184 25% 9 8 18% 25% - investment products 43 30 42% 9 13 (33%) 20% ---------------------------------------------------------------------------------------------------------------------- 274 214 28% 18 21 (14%) 24% Other partnerships/Direct - life & pensions products 609 669 (9%) 40 46 (15%) (9%) - investment products 214 216 (1%) - - (14%) (1%) ---------------------------------------------------------------------------------------------------------------------- 823 885 (7%) 40 46 (15%) (7%) ---------------------------------------------------------------------------------------------------------------------- Total UK long-term savings 3,560 3,375 6% 239 287 (17%) 4% ====================================================================================================================== * Growth rates are calculated based on constant rates of exchange. Annual premium equivalent* Life and pensions sales Investment sales Total sales ----------------------- ---------------------- ----------------------- 6 months to 6 months to 6 months to 30 June Local 30 June Local 30 June Local 2005 currency 2005 currency 2005 currency Â£m growth** Â£m growth** Â£m growth** IFA 403 (6%) 25 28% 428 (4%) Bancassurance partnership with RBSG 32 23% 13 (19%) 45 7% Other partnerships/Direct 101 (11%) 21 (1%) 122 (10%) ----------------------------------------------------------------------------------------------------------------------- Total UK long-term savings 536 (6%) 59 4% 595 (5%) ======================================================================================================================= * Annual premium equivalent (APE) is the UK industry's standard measure of new regular premiums and 10% of single premiums. ** Growth rates are calculated based on constant rates of exchange. ------------------------------------------------------------------------------------------------------------------- Page 22 Analysis of France long-term savings by fund Single Regular Total -------------------------------- ------------------------------------ -------- 6 months to 6 months 6 months to 6 months to 30 June 30 June Local 30 June 30 June Local Local 2005 2004 currency 2005 2004 currency currency Â£m Â£m growth* Â£m Â£m growth* growth* AFER - Euro funds** 670 700 (6%) - - - (6%) - Unit-linked funds 195 119 61% - - - 61% --------------------------------------------------------------------------------------------------------------------- 865 819 4% - - - 4% Bancassurance partnership with Credit du Nord - Euro funds 200 - - 2 - - - - Unit-linked funds 140 - - 10 - - - - Protection - - - 1 - - - -------------------------------------------------------------------------------------------------------------------- 340 - - 13 - - - Other - Euro funds 120 136 (13%) 5 6 (14%) (13%) - Unit-linked funds 281 207 33% 11 10 14% 32% - Protection 1 21 (97%) 12 11 11% (60%) ---------------------------------------------------------------------------------------------------------------------- 402 364 9% 28 27 7% 9% --------------------------------------------------------------------------------------------------------------------- Total France long-term savings 1,607 1,183 34% 41 27 52% 34% ===================================================================================================================== * 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. Annual premium equivalent Annual premium equivalent* ----------------------------------------- 6 months to 6 months to 30 June 30 June Local 2005 2004 currency Â£m Â£m growth** Life and pensions United Kingdom 536 567 (6%) France 202 145 37% Ireland 51 44 16% Italy 145 89 60% Netherlands (including Belgium and Luxembourg) 138 119 14% Poland 17 18 (20%) Spain 113 130 (14%) Other Europe 55 58 (5%) Continental Europe 721 603 17% International 89 74 22% -------------------------------------------------------------------------------------------------------------------- Total life and pensions 1,346 1,244 7% ==================================================================================================================== Investment sales United Kingdom 59 58 4% Netherlands 18 12 49% Poland 4 6 (41%) Other Europe 24 9 157% Continental Europe 46 27 63% International 11 6 63% -------------------------------------------------------------------------------------------------------------------- Total investment sales 116 91 26% -------------------------------------------------------------------------------------------------------------------- Total long-term savings 1,462 1,335 9% ==================================================================================================================== * Annual premium equivalent (APE) is the UK industry's standard measure of new regular premiums and 10% of single premiums. ** Growth rates are calculated based on constant rates of exchange. ------------------------------------------------------------------------------------------------------------------- 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£943 million (2004: Â£781 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 by the Group including funds held on behalf of third parties. management 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 - The aggregate of incurred claims expressed as a percentage of earned premiums and written operating ratio expenses and written commissions expressed as a percentage of written premiums. (COR) 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 return on the EEV basis relating to the lines of business included in the embedded operating 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 - Inclusion of the capitalised value of profits and losses arising from subsidiary companies basis 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 profit to shareholders' profits, impairment 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 values contribution 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 value margin 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. Orphan 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 their Techniques 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

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