Interim Results - Part 2 of 3

Aviva PLC 04 August 2004 PART 2 OF 3 -------------------------------------------------------------------------------------------------------------------- PAGE 18 Summarised consolidated profit and loss account - achieved profit basis For the six months ended 30 June 2004 6 months 6 months 6 months Full year 2004 2004 2003 2003 Page €m £m £m £m Operating profit 21 1,176 Life achieved operating profit 800 705 1,555 35 49 Health 33 27 61 40 25 Fund management 17 10 10 36 901 General insurance 613 387 911 41 (22) Non-insurance operations (15) (47) (64) 36 (138) Corporate costs (94) (56) (160) 40 (329) Unallocated interest charges (224) (198) (406) --------------------------------------------------------------------------------------------------------------------- Operating profit before tax, amortisation of goodwill and 1,662 exceptional items* 1,130 828 1,907 (72) Amortisation of goodwill (49) (52) (103) (37) Financial Services Compensation Scheme levy (25) - - --------------------------------------------------------------------------------------------------------------------- 1,553 Operating profit before tax 1,056 776 1,804 (733) Variation from longer-term investment return (499) 345 766 301 Effect of economic assumption changes 205 (217) 11 (16) Change in the equalisation provision (11) (28) (49) Profit/(loss) on the disposal of subsidiary and 34 9 associated undertakings 6 (7) (6) 33 (74) Exceptional costs for termination of operations (50) (19) (19) --------------------------------------------------------------------------------------------------------------------- 1,040 Profit on ordinary activities before tax 707 850 2,507 Tax on operating profit before amortisation of goodwill (497) and exceptional items (338) (260) (561) 133 Tax on (loss)/profit on other ordinary activities 91 (18) (192) --------------------------------------------------------------------------------------------------------------------- 676 Profit on ordinary activities after tax 460 572 1,754 (105) Minority interests (72) (40) (112) --------------------------------------------------------------------------------------------------------------------- 571 Profit for the financial period 388 532 1,642 38 (13) Preference dividends (9) (9) (17) ------------------------------------------------------------------------------------------------------------------- Profit for the financial period attributable to 558 equity shareholders 379 523 1,625 38 (310) Ordinary dividends (211) (203) (545) -------------------------------------------------------------------------------------------------------------------- 248 Retained profit for the financial period 168 320 1,080 ===================================================================================================================== Earnings per share Operating profit on an achieved profit basis before amortisation of goodwill 46.6c and exceptional items, after tax, attributable to equity shareholders* 31.7p 22.5p 53.2p 24.7c Profit attributable to equity shareholders 16.8p 23.2p 72.2p 24.6c Profit attributable to equity shareholders - diluted 16.7p 23.1p 71.9p * All operating profit is from continuing operations. -------------------------------------------------------------------------------------------------------------------- PAGE 19 Consolidated statement of total recognised gains and losses - achieved profit basis For the six months ended 30 June 2004 6 months 6 months Full year 2004 2003 2003 £m £m £m Profit for the financial period* 388 532 1,642 Foreign exchange (losses)/gains (306) 429 415 -------------------------------------------------------------------------------------------------------------------- Total recognised gains arising in the period 82 961 2,057 ==================================================================================================================== * Stated before the effect of foreign exchange movements, which are reported within the foreign exchange (losses)/gains line. Reconciliation of movements in consolidated shareholders' funds - achieved profit basis For the six months ended 30 June 2004 Restated* 6 months 6 months Full year 2004 2003 2003 £m £m £m Shareholders' funds at the beginning of the period, as originally reported 11,165 9,669 9,668 Prior period adjustment - (1) - -------------------------------------------------------------------------------------------------------------------- Shareholders' funds at the beginning of the period, as restated 11,165 9,668 9,668 Total recognised gains arising in the period 82 961 2,057 Dividends (220) (212) (562) Other movements 27 1 2 -------------------------------------------------------------------------------------------------------------------- Shareholders' funds at the end of the period 11,054 10,418 11,165 ==================================================================================================================== * Restated for the effect of a change in accounting policy in respect of the treatment of shares held by employee trusts as a deduction from shareholders' capital. Further details are set out on page 33. -------------------------------------------------------------------------------------------------------------------- PAGE 20 Summarised consolidated balance sheet - achieved profit basis As at 30 June 2004 Restated* General general Long-term business Long-term business Restated* business and other Group business and other Group Group 30 June 30 June 30 June 30 June 30 June 30 June 31 December 2004 2004 2004 2003 2003 2003 2003 £m £m £m £m £m £m £m Total assets before acquired additional value of in-force long-term business 179,990 29,712 209,702 168,853 28,570 197,423 208,192 Acquired additional value of in-force long-term business 458 - 458 522 - 522 488 -------------------------------------------------------------------------------------------------------------------- Total assets included in the modified statutory balance sheet 180,448 29,712 210,160 169,375 28,570 197,945 208,680 ==================================================================================================================== Liabilities of the long-term business (173,147) - (173,147) (162,133) - (162,133) (170,765) Liabilities of the general insurance business - (27,110) (27,110) - (27,333) (27,333) (27,736) --------------------------------------------------------------------------------------------------------------------- Net assets on a modified statutory basis 7,301 2,602 9,903 7,242 1,237 8,479 10,179 Additional value of in-force long-term business1 4,851 - 4,851 4,043 - 4,043 4,744 -------------------------------------------------------------------------------------------------------------------- Net assets on an achieved profit basis2 12,152 2,602 14,754 11,285 1,237 12,522 14,923 ==================================================================================================================== Shareholders' capital, share premium, shares held by employee trusts and merger reserves 4,604 4,666 4,622 Modified statutory basis retained profit 1,773 1,810 1,932 Additional achieved profit basis retained profit 4,677 3,942 4,611 -------------------------------------------------------------------------------------------------------------------- Shareholders' funds on an achieved profit basis 11,054 10,418 11,165 Minority interests 949 879 944 -------------------------------------------------------------------------------------------------------------------- 12,003 11,297 12,109 Subordinated debt 2,751 1,225 2,814 -------------------------------------------------------------------------------------------------------------------- Achieved profit basis total capital, reserves and subordinated debt 14,754 12,522 14,923 ==================================================================================================================== * Restated for the effect of a change in accounting policy in respect of the treatment of shares held by employee trusts as a deduction from shareholders' capital. Further details are set out on page 33. 1 The analysis between the Group's and the minority interest share of the additional value of in-force long-term business is as follows: 30 June Movement in 31 December 2004 the period 2003 £m £m £m Group's share included in shareholders' funds 4,677 66 4,611 Minority interest share 174 41 133 -------------------------------------------------------------------------------------------------------------------- Balance 4,851 107 4,744 ==================================================================================================================== 2 Analysis of net assets on an achieved profit basis is made up as follows: 30 June 30 June 31 December 2004 2003 2003 £m £m £m Long-term business net assets on an achieved profit basis 12,152 11,285 12,373 -------------------------------------------------------------------------------------------------------------------- Comprises: Embedded value 11,941 11,061 12,155 RBSG goodwill 211 224 218 ==================================================================================================================== -------------------------------------------------------------------------------------------------------------------- PAGE 21 Basis of preparation - achieved profit basis The achieved profit statement on page 18 includes the results of the Group's life operations reported under the achieved profit basis combined with the modified statutory basis results of the Group's non-life operations. In the directors' opinion, the achieved profit basis provides a more accurate reflection of the performance of the Group's life operations year on year than results under the modified statutory basis. The achieved profit methodology used is in accordance with the guidance on 'Supplementary reporting for long-term insurance business (the achieved profit method)' circulated by the Association of British Insurers in December 2001. Further details on the methodology and assumptions are set out on pages 26 to 28. The results of the Group's life operations under the modified statutory basis, which is the basis used in the annual statutory accounts, can be found on pages 29 to 39. The contribution from the Group's share of the alliance with The Royal Bank of Scotland (RBSG) is incorporated within the achieved operating profit. Goodwill amortised in the period in respect of the Group's holding in the associated company, RBS Life Investments Limited, is included within the 'Amortisation of goodwill' on page 18. The results for the six month periods to 30 June 2004 and 30 June 2003 are unaudited but have been reviewed by the auditors, Ernst & Young LLP. Their report in respect of 30 June 2004 is included in the Interim Report on page 31 of that document. The interim accounts do not constitute statutory accounts as defined by section 240 of the Companies Act 1985. The results for the full year 2003 have been taken from the Group's 2003 Annual Report and Accounts. Components of total life achieved profit Total life achieved profit, including the Group's share from the alliance with RBSG, comprises the following components, the first three of which in aggregate are referred to as life achieved operating profit: • new business contribution written during the period including value added between the point of sale and end of the period; • the profit from existing business equal to: - the expected return on the value of the in-force business at the beginning of the period, - experience variances caused by the differences between the actual experience during the period and expected experience based on the operating assumptions used to calculate the start of year value, - the impact of changes in operating assumptions including risk margins; • the expected investment return on the shareholders' net worth, based upon assumptions applying at the start of the year; • investment return variances caused by differences between the actual return in the period and the expected experience based on economic assumptions used to calculate the start of year value; and • the impact of changes in economic assumptions in the period. 6 months 6 months Full year 2004 2003 2003 £m £m £m New business contribution (after the effect of solvency margin) 246 211 472 Profit from existing business - expected return 406 376 757 - experience variances (13) (19) (12) - operating assumption changes* (4) (10) 38 Expected return on shareholders' net worth 165 147 300 -------------------------------------------------------------------------------------------------------------------- Life achieved operating profit before tax 800 705 1,555 Investment return variances (214) 208 683 Effect of economic assumption changes 205 (217) 11 -------------------------------------------------------------------------------------------------------------------- Total life achieved profit before tax 791 696 2,249 Tax on operating profit (243) (213) (473) Tax on other ordinary activities - 9 (191) --------------------------------------------------------------------------------------------------------------------- Total life achieved profit after tax 548 492 1,585 ===================================================================================================================== * In 2003, operating assumption changes included the impact of reducing risk margins in Poland, the US and Australia in line with the directors' views of the risks associated with this in-force portfolio. The impact of this change was nil for the six months to 30 June 2003 and £24 million in the full year. -------------------------------------------------------------------------------------------------------------------- PAGE 22 New business contribution The following table sets out the contribution from new business written by the long-term business operations. The contribution generated by new business written during the period is the present value of the projected stream of after tax distributable profit from that business. Contribution before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at appropriate rates of tax for other countries. New business New business Annual premium contribution before contribution after equivalent* solvency margin** solvency margin*** ------------------------------- --------------------- ------------------ Local 6 months 6 months currency 6 months 6 months 6 months 6 months 2004 2003 growth 2004 2003 2004 2003 £m £m % £m £m £m £m United Kingdom 547 531 3% 126 117 112 102 Europe (excluding UK) France 145 120 21% 44 35 22 14 Ireland 44 39 13% 10 11 8 9 Italy 89 117 (24%) 21 27 13 15 Netherlands (including Belgium and Luxembourg) 119 102 17% 38 22 26 3 Poland 18 20 4% 3 - 2 (1) Spain 130 139 (7%) 66 68 53 58 Other 58 44 38% (1) (4) (3) (4) International 74 100 (21%) 17 21 13 15 -------------------------------------------------------------------------------------------------------------------- Total annualised premiums 1,224 1,212 2% Total new business contribution before effect of solvency margin** 324 297 Effect of solvency margin (78) (86) -------------------------------------------------------------------------------------------------------------------- Total new business contribution including effect of solvency margin 246 211 246 211 ==================================================================================================================== * Annual premium equivalent represents regular premiums plus 10% of single premiums. ** New business contribution before effect of solvency margin includes minority interests in 2004 of £54 million (six months to 30 June 2003: £54 million). This comprises minority interests in France of £3 million (six months to 30 June 2003: £2 million), Italy £12 million (six months to 30 June 2003: £14 million), Netherlands £5 million (six months to 30 June 2003: £3 million), Poland £1 million (six months to 30 June 2003: nil) and Spain £33 million (six months to 30 June 2003: £35 million). *** New business contribution after the effect of solvency margin includes minority interests of £40 million (six months to 30 June 2003: £40 million). This comprises minority interests in France nil (six months to 30 June 2003: nil), Italy £8 million (six months to 30 June 2003: £8 million), Netherlands £4 million (six months to 30 June 2003: £2 million), Poland £1 million (six months to 30 June 2003: nil) and Spain £27 million (six months to 30 June 2003: £30 million). New business contributions have been calculated using the same economic assumptions as those used to determine the embedded values as at the beginning of each year and operating assumptions used to determine the embedded values as at the end of the period. The effect of solvency margin represents the impact of holding the minimum European Union (EU) solvency margin (or equivalent for non-EU operations) and discounting to present value the projected future releases from the solvency margin to shareholders. New business contribution - before effect of solvency margin, tax and minority interest Annual premium New business equivalent contribution(1) ------------------ ------------------- 6 months 6 months 6 months 6 months 2004 2003 2004 2003 £m £m £m £m Bancassurance arrangements 275 295 111 107 Other distribution 949 917 213 190 -------------------------------------------------------------------------------------------------------------------- 1,224 1,212 324 297 ==================================================================================================================== (1) Stated before effect of solvency margin, tax and minority interest. -------------------------------------------------------------------------------------------------------------------- PAGE 23 New business contribution - after effect of solvency margin, tax and minority interest (continued) Annual premium New business equivalent(1) contribution(2) ------------------ ------------------- 6 months 6 months 6 months 6 months 2004 2003 2004 2003 £m £m £m £m Bancassurance arrangements 154 168 32 29 Other distribution 928 895 111 90 -------------------------------------------------------------------------------------------------------------------- 1,082 1,063 143 119 ==================================================================================================================== (1) Stated after deducting minority interest. (2) Stated after effect of solvency margin, tax and minority interest. Post-tax internal rate of return on life and pensions new business The total internal rate of return on life and pensions new business for the Group was 14% (30 June 2003: 15%; 31 December 2003: 14%). The return is the discount rate at which the present value of the post-tax cash flows expected to be earned over the life time of the business written is equal to the initial capital required to support the writing of the business. The capital includes the statutory minimum solvency margin and amounts to £460 million (30 June 2003: £400 million; 31 December 2003: £900 million). This includes £160 million (30 June 2003: £170 million; 31 December 2003: £340 million) of solvency requirements. Experience variances Experience variances include the impact of the difference between expense, demographic and persistency assumptions, and actual experience incurred in the period. Also included are variances arising from tax, where such variances are due to management action. The source of profit is included in the table below. Exceptional Mortality/ expenses(1) morbidity(2) Lapses(3) Other(4) Total 30 June 2004 £m £m £m £m £m United Kingdom (35) 20 (14) 11 (18) France (1) 8 1 1 9 Netherlands (including Belgium and Luxembourg) (9) 3 - 3 (3) Europe - 4 (5) 7 6 International (3) 1 1 (6) (7) --------------------------------------------------------------------------------------------------------------------- (48) 36 (17) 16 (13) ===================================================================================================================== (1) Exceptional expenses reflect project spend, including costs associated with the pace of regulatory change in the UK. (2) Mortality experience has typically been better than anticipated in many of the group businesses in particular in the UK on annuity and PHI contracts. (3) Lapse experience has been adverse in a number of businesses including on savings businesses in the UK, and on some classes of business in Ireland. (4) In the UK, other experience profits include exceptional profits arising from better than assumed default experience on corporate bonds and commercial mortgages. Operating assumption changes Changes in operating assumptions are made when the assumed future levels of expenses, mortality or other operating assumptions are expected to change permanently. The impact of operating assumption changes in the period was a loss of £4 million (2003: loss of £10 million) and arose primarily in Ireland where the persistency assumptions with respect to certain classes of business were lowered, reflecting the recent actual experience. This has been partially offset by the beneficial impact of changes in asset mix in the Netherlands. --------------------------------------------------------------------------------------------------------------------- PAGE 24 Analysis of life achieved operating profit Life achieved operating profit is calculated on an after-tax basis and then grossed up at the full rate of corporation tax for UK business and at appropriate rates of tax for other countries. 6 months 6 months Full year 2004 2003 2003 £m £m £m United Kingdom 356 339 659 Europe (excluding UK) France 114 90 220 Ireland 18 31 65 Italy 34 33 70 Netherlands (including Belgium and Luxembourg) 129 69 189 Poland 33 40 104 Spain 78 71 158 Other 7 2 9 International 31 30 81 -------------------------------------------------------------------------------------------------------------------- Total life achieved operating profit before tax* 800 705 1,555 ==================================================================================================================== * Life achieved operating profit includes minority interests in the six months to 30 June 2004 of £79 million (six months to 30 June 2003: £65 million; full year 2003: £154 million). This comprises minority interests in France of £5 million (six months to 30 June 2003: £4 million; full year 2003: £6 million), Italy £18 million (six months to 30 June 2003: £17 million; full year 2003: £37 million), Netherlands £13 million (six months to 30 June 2003: £3 million; full year 2003: £14 million), Poland £5 million (six months to 30 June 2003: £6 million; full year 2003: £20 million), Spain £37 million (six months to 30 June 2003: £35 million; full year 2003: £76 million) and Other Europe £1 million (six months to 30 June 2003: nil; full year 2003: £1 million). Embedded value of life business 6 months 6 months Full year 2004 2003 2003 £m £m £m Embedded value at the beginning of the period 12,155 10,148 10,148 Total life achieved profit after tax 548 492 1,585 Exchange rate movements (317) 307 342 Embedded value of businesses acquired* - 64 64 Amounts injected into life operations 13 88 221 Amounts released from life operations (458) (38) (205) -------------------------------------------------------------------------------------------------------------------- Embedded value at the end of the period** 11,941 11,061 12,155 ==================================================================================================================== * Embedded value of businesses acquired in 2003 represents the embedded value of Delta Lloyd ABN AMRO Verzekeringen Holding BV, the insurance company acquired as part of the bancassurance agreement entered into with ABN AMRO NV in the Netherlands, of £64 million. ** Embedded value at the end of the period includes minority interests in 2004 of £575 million (30 June 2003: £504 million; 31 December 2003: £559 million). This comprises minority interests in France of £52 million (30 June 2003: £49 million; 31 December 2003: £46 million), Italy £223 million (30 June 2003: £204 million; 31 December 2003: £230 million), Netherlands £53 million (30 June 2003: £37 million; 31 December 2003: £43 million), Poland £56 million (30 June 2003: £50 million; 31 December 2003: £63 million), Spain £187 million (30 June 2003: £161 million; 31 December 2003: £174 million) and Other Europe £4 million (30 June 2003:£3 million; 31 December 2003: £3 million). --------------------------------------------------------------------------------------------------------------------- PAGE 25 Segmental analysis of embedded value of life business Net worth Value of in-force Embedded value at 30 June* at 30 June** at 30 June ----------- ----------------- -------------- 2004 2003 2004 2003 2004 2003 £m £m £m £m £m £m United Kingdom 1,769 1,913 3,744 3,443 5,513 5,356 Europe (excluding UK) France 1,049 961 451 408 1,500 1,369 Ireland 262 247 274 284 536 531 Italy 319 291 109 102 428 393 Netherlands (including Belgium and Luxembourg) 1,222 967 1,131 1,021 2,353 1,988 Poland 121 120 226 216 347 336 Spain 194 182 284 226 478 408 Other 137 138 67 47 204 185 International 453 369 129 126 582 495 -------------------------------------------------------------------------------------------------------------------- 5,526 5,188 6,415 5,873 11,941 11,061 ==================================================================================================================== * The shareholders' net worth comprises the market value of the shareholders'funds and the shareholders' interest in the surplus held in the non-profit component of the long-term business funds determined on a statutory solvency basis and adjusted to add back any non-admissible assets. ** The value of in-force includes the effect of holding shareholders' capital to support the minimum statutory solvency margin requirements and allowing for projected future releases. This impact reduces the value of in-force by £920 million (30 June 2003: £840 million). The minimum statutory solvency margin requirements supported by shareholders' capital of £3,200 million (30 June 2003: £3,000 million) is included within the net worth. Minority interest in life achieved profit 6 months 6 months Full year 2004 2003 2003 --------------------------------- -------- --------- Shareholders' Minority interest interest Group Group Group £m £m £m £m £m New business contribution before effect of solvency margin 270 54 324 297 621 Effect of solvency margin (64) (14) (78) (86) (149) --------------------------------------------------------------------------------------------------------------------- New business contribution including effect of solvency argin 206 40 246 211 472 ===================================================================================================================== Life achieved operating profit before tax and exceptional items 721 79 800 705 1,555 ===================================================================================================================== Total life achieved profit before tax 707 84 791 696 2,249 Attributed tax (213) (30) (243) (204) (664) --------------------------------------------------------------------------------------------------------------------- Total life achieved profit after tax 494 54 548 492 1,585 ===================================================================================================================== Closing life embedded value 11,366 575 11,941 11,061 12,155 ===================================================================================================================== --------------------------------------------------------------------------------------------------------------------- PAGE 26 Methodology (a) Life achieved profit The achieved profit method of financial reporting is designed to recognise the present value of profits to be earned over the life of an insurance policy. The total profit recognised over the lifetime of a policy is the same as under the modified statutory basis of reporting, but the timing of recognition is different. Distributable profits from long-term businesses arise when they are released to shareholders following actuarial valuations. These are carried out in accordance with statutory requirements designed to ensure and demonstrate solvency in long-term business funds. Future distributable profits will depend on experience in a number of areas such as investment return, discontinuance rates, mortality and administration costs. Using realistic assumptions of future experience, we can project releases to shareholders arising in future years from the business in-force and associated minimum statutory solvency margin. The life achieved profit reflects current performance by measuring the movement, from the beginning to the end of the period, in the present value of projected releases to shareholders from the business in-force and associated minimum statutory solvency margin, together with the movement in the net assets of the long-term operations, adjusted for any amounts released from or invested in life operations. The present value of the projected releases to shareholders is calculated by discounting back to the current time using a risk discount rate. The risk discount rate is a combination of a discount rate to reflect the time value of money and a risk margin to make prudent allowance for the risk that experience in future years may differ from the assumptions referred to above. Achieved profit reporting takes account of the cost of maintaining local provisions. In addition, a significant allowance for the expected cost of guarantees is implicitly allowed for in the risk margin inherent in the risk discount rate consistent with the principles of the achieved profit guidance. The calculations are carried out on an after-tax basis and the profits are then grossed up for tax at the full rate of corporation tax for the United Kingdom and at an appropriate rate for each of the other countries. (b) Embedded value The shareholders' interest in the long-term business operations is represented by the embedded value. The embedded value is the total of the net assets of the long-term operations and the present value at risk discount rates (which incorporate a risk margin) of the projected releases to shareholders arising from the business in-force, less a deduction for the effect of holding the minimum statutory solvency margin. This effect of solvency margin is the difference between the nominal value of the solvency margin and the present value at risk discount rates of the projected release of the solvency margin and investment earnings on the assets deemed to back the solvency margin. For with-profit funds in the United Kingdom and Ireland, for the purpose of recognising the value of the estate, it is assumed that terminal bonuses are increased to exhaust all of the free assets over the future lifetime of the in-force with-profit policies. ---------------------------------------------------------------------------------------------------------------------- PAGE 27 Principal economic assumptions Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at each period end. Margins are applied on a consistent basis to risk-free yields to obtain investment return assumptions for ordinary shares and property and risk discount rates. The change in assumptions in 2004 reflects the actual movements in risk free yields in each territory. The principal economic assumptions used are as follows: United Kingdom France ------------------------------------------ ----------------------------------------- 30 June 31 December 30 June 31 December 30 June 31 December 30 June 31 December 2004 2003 2003 2002 2004 2003 2003 2002 Risk discount rate 7.7% 7.5% 7.3% 7.3% 8.1% 8.1% 7.8% 8.1% Pre-tax investment returns: Base government fixed interest 5.1% 4.8% 4.5% 4.5% 4.3% 4.3% 3.9% 4.3% Ordinary shares 7.6% 7.3% 7.0% 7.0% 6.3% 6.3% 5.9% 6.3% Property 6.6% 6.3% 6.0% 6.0% 5.8% 5.8% 5.4% 5.8% Future expense inflation 4.2% 4.1% 3.6% 3.6% 2.5% 2.5% 2.5% 2.5% Tax rate 30.0% 30.0% 30.0% 30.0% 35.4% 35.4% 35.4% 35.4% Ireland Italy ------------------------------------------ ----------------------------------------- 30 June 31 December 30 June 31 December 30 June 31 December 30 June 31 December 2004 2003 2003 2002 2004 2003 2003 2002 Risk discount rate 8.6% 8.6% 8.3% 8.7% 7.4% 7.4% 7.0% 7.3% Pre-tax investment returns: Base government fixed interest 4.5% 4.5% 4.1% 4.6% 4.4% 4.4% 3.9% 4.4% Ordinary shares 7.5% 7.5% 7.1% 7.6% 7.4% 7.4% 6.9% 7.4% Property 6.0% 6.0% 5.6% 6.1% 5.9% 5.9% 5.4% 5.9% Future expense inflation 4.0% 4.0% 4.0% 4.0% 3.3% 3.3% 3.3% 3.3% Tax rate 12.5% 12.5% 12.5% 12.5% 38.3% 38.3% 39.3% 39.8% Netherlands Poland* ------------------------------------------ ----------------------------------------- 30 June 31 December 30 June 31 December 30 June 31 December 30 June 31 December 2004 2003 2003 2002 2004 2003 2003 2002 Risk discount rate 7.5% 7.4% 7.1% 7.4% 14.8% 13.5% 15.4% 15.4% Pre-tax investment returns: Base government fixed interest 4.4% 4.2% 3.9% 4.2% 7.5% 6.0% 8.0% 8.0% Ordinary shares 7.4% 7.2% 6.8% 7.2% 7.5% 6.0% 8.0% 8.0% Property 5.9% 5.7% 5.3% 5.7% n/a n/a n/a n/a Future expense inflation 2.5% 2.5% 2.5% 2.5% 4.9% 3.4% 5.4% 5.4% Tax rate 25.0% 25.0% 25.0% 25.0% 19.0% 19.0% 27.0% 27.0% Spain ---------------------------------------- 30 June 31 December 30 June 31 December 2004 2003 2003 2002 Risk discount rate 7.7% 7.7% 7.4% 7.7% Pre-tax investment returns: Base government fixed interest 4.6% 4.6% 4.2% 4.6% Ordinary shares 7.6% 7.6% 7.2% 7.6% Property 6.1% 6.1% 5.7% 6.1% Future expense inflation 3.0% 3.0% 3.0% 3.0% Tax rate 35.0% 35.0% 35.0% 35.0% * The economic assumptions shown above are those in the calculations for the life business. The economic assumptions for the pension business are identical with the exception of the risk discount rate which is 14.0% (30 June 2003: 13.8%; full year 2003: 12.7%; full year 2002: 13.8%). ---------------------------------------------------------------------------------------------------------------------- PAGE 28 Other assumptions • Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have been announced. • Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva's recent operating experience. • The management expenses of Aviva attributable to long-term business operations have been split between expenses relating to the acquisition of new business and to the maintenance of business in-force. Certain expenses of an exceptional nature have been identified separately and the discounted value of projected exceptional costs has been deducted from the value of in-force business. A realistic estimate of future fund management expenses that will be charged to long-term businesses by Group companies not included in the long-term business covered by the achieved profit method has been included within the value of in-force business. • It has been assumed that there will be no changes to the methods and bases used to calculate the statutory technical provisions and current surrender values. • The value of in-force business allows for future premiums under recurring single premium business where collection of future single premiums is expected and where the receipt of further single premiums is not regarded as new business at the point of receipt. It does not allow for future premiums under non-contractual increments, or for future Department of Work and Pensions (DWP) rebate premiums, and the value arising therefrom is included in the value of new business when the premiums are received. • The value of the in-force business has been determined after allowing for the effect of holding solvency margins equal to the minimum EU solvency requirement (or equivalent for non-EU operations). Solvency margins relating to with-profit business are assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders. • Bonus rates on with-profit business have been set at levels consistent with the economic assumptions and Aviva's medium-term bonus plans. The distribution of profit between policyholders and shareholders within the with-profit funds assumes that the shareholder interest in conventional with-profit business in the United Kingdom and Ireland continues at the current rate of one-ninth of the cost of bonus. Alternative assumptions Economic assumptions The table below shows the sensitivity to a one percentage point increase in the assumed investment returns for equity and property investments and in the discount rate for new business contribution for the half year and embedded value. New business contribution* Embedded value** ---------------------------- --------------------------- Equity/property Discount Equity/property Discount returns rates returns rates £m £m £m £m United Kingdom 8 (21) 150 (275) Europe (excluding UK) France 2 (4) 40 (80) Ireland 1 (2) 10 (15) Italy - (1) 10 (10) Netherlands (including Belgium and Luxembourg) 6 (7) 200 (150) Poland - - 10 (15) Spain - (5) 5 (20) Other - (1) 5 (5) International - (3) - (20) --------------------------------------------------------------------------------------------------------------------- 17 (44) 430 (590) ===================================================================================================================== * Calculated before effect of solvency margin, tax and minority interest. ** Calculated after effect of solvency margin and tax but before minority interest. The impact of an increase of one percentage point in the discount rate is calculated with all other assumptions remaining unchanged. Non-economic assumptions Sensitivity calculations have been performed to identify the non-economic assumptions to which new business contribution and the value of in-force business within embedded value are particularly sensitive. The calculations have been based on similar percentage movements in each assumption from the base assumption used to calculate the published new business contribution and value of in-force business. Based on this, the Group's new business contribution and value of in-force are most sensitive to changes in future maintenance expenses. --------------------------------------------------------------------------------------------------------------------- PAGE 29 Summarised consolidated profit and loss account - modified statutory basis For the six months ended 30 June 2004 6 months 6 months 6 months Full year 2004 2004 2003 2003 Page €m £m £m £m Premium income (after reinsurance) and investment sales Continuing operations 34 14,142 Life premiums, including share of associates' premiums 9,617 10,248 19,035 34 1,140 Investment sales 775 520 1,141 35 1,003 Health premiums 682 646 1,066 -------------------------------------------------------------------------------------------------------------------- 16,285 11,074 11,414 21,242 36 6,550 General insurance premiums 4,454 4,278 8,524 -------------------------------------------------------------------------------------------------------------------- 22,835 Total 15,528 15,692 29,766 ==================================================================================================================== Operating profit 35 805 Modified statutory life profit 548 515 1,138 35 49 Health 33 27 61 40 25 Fund management 17 10 10 36 901 General insurance 613 387 911 41 (22) Non-insurance operations (15) (47) (64) 36 (138) Corporate costs (94) (56) (160) 40 (329) Unallocated interest charges (224) (198) (406) -------------------------------------------------------------------------------------------------------------------- Operating profit - before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and 1,291 exceptional items* 878 638 1,490 (72) Amortisation of goodwill (49) (52) (103) (72) Amortisation of acquired additional value of in-force long-term business (49) (40) (135) (37) Financial Services Compensation Scheme levy (25) - - -------------------------------------------------------------------------------------------------------------------- 1,110 Operating profit before tax 755 546 1,252 (420) Short-term fluctuation in investment return (286) 250 212 (16) Change in the equalisation provision (11) (28) (49) 34 9 Profit/(loss) on the disposal of subsidiary and associated undertakings 6 (7) (6) (74) Exceptional costs for termination of operations (50) (19) (19) -------------------------------------------------------------------------------------------------------------------- 609 Profit on ordinary activities before tax 414 742 1,390 37 (222) Tax on profit on ordinary activities (151) (211) (367) -------------------------------------------------------------------------------------------------------------------- 387 Profit on ordinary activities after tax 263 531 1,023 (58) Minority interests (39) (30) (74) -------------------------------------------------------------------------------------------------------------------- 329 Profit for the financial period 224 501 949 38 (13) Preference dividends (9) (9) (17) -------------------------------------------------------------------------------------------------------------------- 316 Profit for the financial period attributable to equity shareholders 215 492 932 38 (310) Ordinary dividends (211) (203) (545) -------------------------------------------------------------------------------------------------------------------- 6 Retained profit transferred to reserves 4 289 387 ==================================================================================================================== * All operating profit is from continuing operations. --------------------------------------------------------------------------------------------------------------------- PAGE 30 Earnings per share - modified statutory basis For the six months ended 30 June 2004 6 months 6 months Full year Page 2004 2003 2003 Operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, 38 after tax, attributable to equity shareholders 25.4p 17.9p 44.0p 38 Profit attributable to equity shareholders 9.5p 21.8p 41.4p 39 Profit attributable to equity shareholders - diluted 9.5p 21.8p 41.3p 38 Dividend per share 9.36p 9.0p 24.15p ===================================================================================================================== Consolidated statement of total recognised gains and losses For the six months ended 30 June 2004 Restated* 6 months 6 months Full year Page 2004 2003 2003 £m £m £m 29 Profit for the financial period 224 501 949 Foreign exchange (losses)/gains (208) 350 329 -------------------------------------------------------------------------------------------------------------------- Total recognised gains arising in the period 16 851 1,278 ==================================================================================================================== * Restated for the effect of a change in accounting policy in respect of internally-generated additional value of in-force long-term business no longer recognised. Further details are set out on page 33. Reconciliation of movements in consolidated shareholders' funds For the six months ended 30 June 2004 Restated* 6 months 6 months Full year Page 2004 2003 2003 £m £m £m Shareholders' funds at the beginning of the period As originally reported 6,554 9,669 5,836 Prior year adjustment - (3,833) - -------------------------------------------------------------------------------------------------------------------- 6,554 5,836 5,836 Total recognised gains arising in the period 16 851 1,278 38 Dividends (220) (212) (562) Increase in share capital 23 1 2 Movement in treasury shares 1 - - Goodwill written back and other movements 3 - - -------------------------------------------------------------------------------------------------------------------- Shareholders' funds at the end of the period 6,377 6,476 6,554 ==================================================================================================================== * Restated for the effect of changes in accounting policies in respect of internally-generated additional value of in-force long-term business no longer recognised and the treatment of shares held by employee trusts as a deduction from shareholders' funds. Further details are set out on page 33. -------------------------------------------------------------------------------------------------------------------- PAGE 31 Summarised consolidated balance sheet As at 30 June 2004 Restated* 30 June 30 June 31 December 2004 2003 2003 £m £m £m Assets Goodwill 1,052 1,139 1,105 -------------------------------------------------------------------------------------------------------------------- Investments Land and buildings 607 684 637 Investments in associated undertakings and participating interests 149 289 279 Variable yield securities 2,799 2,700 2,967 Fixed interest securities 9,734 9,037 10,098 Mortgages and loans, net of non-recourse funding 2,041 1,129 1,448 Deposits 744 551 435 Other investments 57 55 65 -------------------------------------------------------------------------------------------------------------------- 16,131 14,445 15,929 Reinsurers' share of technical provisions 2,699 2,822 2,926 Reinsurers' share of provision for linked liabilities 636 651 579 Assets of the long-term business 136,433 132,562 136,662 Assets held to cover linked liabilities 42,921 35,640 40,665 Other assets 9,830 10,164 10,326 Acquired value of in-force long-term business 458 522 488 -------------------------------------------------------------------------------------------------------------------- Total assets 210,160 197,945 208,680 ==================================================================================================================== Liabilities Shareholders' funds Equity 6,177 6,276 6,354 Non-equity 200 200 200 Minority interests 775 778 811 -------------------------------------------------------------------------------------------------------------------- 7,152 7,254 7,365 Subordinated debt 2,751 1,225 2,814 -------------------------------------------------------------------------------------------------------------------- Total capital, reserves and subordinated debt 9,903 8,479 10,179 Liabilities of the long-term business 121,774 120,323 121,078 Fund for future appropriations 7,816 5,519 8,443 Technical provision for linked liabilities 43,557 36,291 41,244 General insurance liabilities 17,553 17,203 17,515 Borrowings 1,769 2,337 1,760 Other creditors and provisions 7,788 7,793 8,461 -------------------------------------------------------------------------------------------------------------------- Total liabilities 210,160 197,945 208,680 ==================================================================================================================== * Restated for the effect of changes in accounting policies in respect of internally-generated additional value of in-force long-term business no longer recognised and the treatment of shares held by employee trusts as a deduction from shareholders' funds. Further details are set out on page 33. -------------------------------------------------------------------------------------------------------------------- PAGE 32 Consolidated cash flow statement For the six months ended 30 June 2004 6 months 6 months Full year 2004 2003 2003 £m £m £m Net cash inflow from operating activities, excluding exceptional items* 1,104 386 1,208 Exceptional items* - (503) (522) Net cash outflow from servicing of finance (99) (84) (256) Corporation tax paid (28) (90) (174) Net purchases of tangible fixed assets (48) (36) (101) Acquisitions and disposals of subsidiary and associated undertakings** 174 510 600 Equity dividends paid (341) (321) (523) Proceeds from issue of subordinated debt - - 1,567 Net cash inflow from other financing activities: Issue of share capital 23 1 2 Net drawdown of loans 69 221 80 -------------------------------------------------------------------------------------------------------------------- Net cash flows 854 84 1,881 ==================================================================================================================== Cash flows were invested as follows: Increase/(decrease) in cash holdings 304 (155) (164) Net purchases of investments 544 437 2,262 Non-trading cash inflow/(outflow) to long-term business operations 6 (198) (217) -------------------------------------------------------------------------------------------------------------------- Net investment of cash flows 854 84 1,881 ==================================================================================================================== The cash flows presented in this statement relate to non-long-term business transactions only. Long-term business profits are included as net cash inflows/ (outflows) from operating activities only to the extent that they have been remitted to shareholders by way of dividends from life operations. * Included within the exceptional items in 2003 are payments to the Berkshire Hathaway Group for reinsurance purchased in December 2000 to secure protection against any adverse impact of the run-off of London Market claims reserves. The final instalment was paid on 2 January 2003. ** The six months to 30 June 2003 and full year 2003 include £651 million of consideration received in relation to the disposal of the Australia and New Zealand general insurance businesses. -------------------------------------------------------------------------------------------------------------------- PAGE 33 1. Basis of preparation - modified statutory solvency basis (a) The results for the six months to 30 June 2004 have been prepared on the basis of the accounting policies set out in Aviva plc's 2003 Annual Report and Accounts. The results for the six months to 30 June 2004 and 2003 are unaudited but have been reviewed by the auditor. The interim accounts do not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The results for the full year 2003 have been taken from the Group's 2003 Annual Report and Accounts. The auditors have reported on the 2003 accounts and their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The Group's 2003 Annual Report and Accounts have been filed with the Registrar of Companies. (b) The contribution from the Group's share of the alliance with RBSG is incorporated within the modified statutory life profit. Goodwill amortised in the period in respect of the Group's holding in the associated company, RBS Life Investments Limited, is included within 'Amortisation of goodwill' on page 29. (c) In November 2000, the Accounting Standards Board issued Financial Reporting Standard 17 (FRS17) 'Retirement Benefits', the accounting provisions, which are not required to be adopted by the Group until 2005. FRS17 requires certain transitional disclosures to be made in the statutory accounts and the table shown in the supplementary analyses on page 41 shows the balance sheet effect of these memorandum disclosures. The Group has continued to account for pension costs in accordance with SSAP24. (d) Changes in accounting policy (i) Additional value of internally-generated in-force business In November 2003, the Association of British Insurers revised its Statement of Recommended Practice on accounting for insurance business (ABI SORP). One of the amendments is that insurance companies are no longer allowed to recognise the internally-generated additional value of in-force business (AVIF) on their balance sheets, either as an asset or as part of shareholders' funds. The effect of implementing this change are that shareholders' funds at 30 June 2004 have been reduced by £4,677 million (30 June 2003: reduced by £3,942 million; 31 December 2003: reduced by £4,611 million) and minority interests have been reduced by £174 million (30 June 2003: reduced by £101 million; 31 December 2003: reduced by £133 million). (ii) Presentation changes In December 2003, the Urgent Issues Task Force issued UITF Abstract 38 which requires shares held in employee share trusts to be deducted from capital in arriving at shareholders' funds rather than being held as assets. The effects of implementing this change on shareholders' funds at 30 June 2004 is nil (30 June 2003: reduced by £1 million; 31 December 2003: reduced by £1 million). 2. Exchange rates The euro rates employed in this announcement are an average rate of 1 euro = £0.68 (six months to 30 June 2003: 1 euro = £0.68; full year 2003: 1 euro = £0.69) and a closing rate of 1 euro = £0.67 (30 June 2003: 1 euro = £0.70; 31 December 2003: 1 euro = £0.70). 3. Exceptional costs for termination of operations In February 2004, the Group announced the closure of its UK national broker subsidiary, Hill House Hammond (HHH) by the end of 2004 together with the sale of its commercial business. The associated pre-tax costs of the closure of HHH are £50 million and these exceptional costs relate to the redundancy costs and closure provisions. The Group expects to complete the branch closures by the end of September 2004. During 2003, the Group incurred costs on the closure of its general insurance operations in Belgium. These exceptional costs relate to termination activities, including redundancy costs and closure provision. -------------------------------------------------------------------------------------------------------------------- PAGE 34 4. Disposals The net profit/(loss) on the disposal of subsidiary undertakings comprises: 6 months 6 months Full year 2004 2003 2003 £m £m £m Other small operations 6 (7) (6) -------------------------------------------------------------------------------------------------------------------- 6 (7) (6) ==================================================================================================================== No disposal of subsidiary undertakings was sufficiently material to warrant separate disclosure. In June 2004, our French operations, Aviva France, sold its 31.4% holding in Societe Fonciere Lyonnaise (SFL) a French listed property company for €427 million (£285 million) and recorded a gain of £27 million. These shares were owned by both our French life and non-life operations. In accordance with local French provisions, the gain on sale in the life company of £22 million has been transferred to a statutory provision forming part of the fund for future appropriations and will be attributed to policyholders and shareholders as bonuses are declared to policyholders, within the next eight years. 5. Geographical analysis of life and pensions and investment sales - new business and total income New business sales Premium income -------------------------------------- -------------------------- New single New regular (after reinsurance) premiums premiums and investment sales ------------------ ----------------- -------------------------- 6 months 6 months 6 months 6 months 6 months 6 months Full year 2004 2003 2004 2003 2004 2003 2003 £m £m £m £m £m £m £m Life and pensions sales United Kingdom - group* 2,668 2,618 265 251 4,030 4,828 8,688 - associates 73 82 8 10 125 141 254 -------------------------------------------------------------------------------------------------------------------- 2,741 2,700 273 261 4,155 4,969 8,942 Europe (excluding UK) France 1,183 966 27 23 1,345 1,141 2,300 Ireland 85 86 35 30 219 217 442 Italy 694 804 20 37 794 913 1,662 Netherlands (including Belgium and Luxembourg) 542 431 65 59 1,123 970 1,722 Poland - Life 20 10 7 8 126 132 263 - Pensions 13 4 8 11 217 212 440 Spain 875 778 42 61 965 834 1,641 Other 167 100 41 34 316 258 616 International 225 476 51 52 357 602 1,007 -------------------------------------------------------------------------------------------------------------------- Total life and pension sales (including share of associates) 6,545 6,355 569 576 9,617 10,248 19,035 Investment sales United Kingdom 437 313 14 6 451 319 680 Netherlands 120 115 - - 120 115 204 Poland 48 30 1 1 49 31 110 Other Europe 91 21 - - 91 21 49 International 64 34 - - 64 34 98 -------------------------------------------------------------------------------------------------------------------- Total investment sales 760 513 15 7 775 520 1,141 -------------------------------------------------------------------------------------------------------------------- Total long-term savings (including share of associates) 7,305 6,868 584 583 10,392 10,768 20,176 ==================================================================================================================== Single premiums are those relating to products issued by the Group, which provide for the payment of one premium only. Regular premiums are those where there is a contractual obligation to pay on an ongoing basis. * Included within the prior year premium income (after reinsurance) and investment sales are transfers of institutional business into Morley Pooled Pensions (six months to 30 June 2003: £1,247 million; full year 2003: £1,247 million) which, since they are institutional in nature, are excluded from new business sales. ---------------------------------------------------------------------------------------------------------------------- PAGE 35 6. Geographical analysis of modified statutory life operating profit 6 months 6 months Full year 2004 2003 2003 £m £m £m United Kingdom With-profit 54 64 145 Non-profit 235 229 449 Europe (excluding UK) France 84 80 179 Ireland 12 18 41 Italy 19 14 30 Netherlands (including Belgium and Luxembourg) 54 29 107 Poland 38 41 103 Spain 28 24 50 Other 3 (7) (4) International 21 23 38 -------------------------------------------------------------------------------------------------------------------- Total modified statutory life operating profit 548 515 1,138 ==================================================================================================================== 7. Geographical analysis of health premiums after reinsurance and operating result (a) Premiums after reinsurance: 6 months 6 months Full year 2004 2003 2003 £m £m £m United Kingdom 145 136 270 France 78 71 134 Netherlands 459 439 662 -------------------------------------------------------------------------------------------------------------------- 682 646 1,066 ==================================================================================================================== (b) Operating result: Operating profit Underwriting result ---------------------------------- ---------------------------------- 6 months 6 months Full year 6 months 6 months Full year 2004 2003 2003 2004 2003 2003 £m £m £m £m £m £m United Kingdom 3 4 13 1 2 9 France 2 3 9 (3) (2) (2) Netherlands 28 20 39 4 (9) (20) -------------------------------------------------------------------------------------------------------------------- 33 27 61 2 (9) (13) ==================================================================================================================== ------------------------------------------------------------------------------------------------------------------------ PAGE 36 8. Geographical analysis of general insurance premiums after reinsurance and operating result (a) General insurance premiums after reinsurance: 6 months 6 months Full year 2004 2003 2003 £m £m £m United Kingdom 2,674 2,496 5,135 Europe (excluding UK) France 304 305 515 Ireland 292 319 611 Netherlands 341 295 563 Other 124 116 226 International Canada 601 565 1,208 Other 118 182 266 -------------------------------------------------------------------------------------------------------------------- 4,454 4,278 8,524 ==================================================================================================================== (b) Operating result: Operating profit* Underwriting result* ---------------------------------- ---------------------------------- 6 months 6 months Full year 6 months 6 months Full year 2004 2003 2003 2004 2003 2003 £m £m £m £m £m £m United Kingdom 408 313 676 67 10 50 Europe (excluding UK) France 13 15 35 (6) (7) (9) Ireland 68 43 91 36 14 26 Netherlands 23 12 35 (1) (3) (5) Other 18 16 32 (2) (4) (6) International Canada 59 (33) 12 4 (85) (98) Other 24 21 30 7 4 (12) -------------------------------------------------------------------------------------------------------------------- 613 387 911 105 (71) (54) ==================================================================================================================== * The general insurance operating profit and underwriting result are stated before the change in the equalisation provision of £11 million (six months to 30 June 2003: £28 million; full year to 31 December 2003: £49 million) and the Financial Services Compensation Scheme levy of £25 million (six months to 30 June 2003: nil; full year to 31 December 2003: nil). 9. Corporate costs 6 months 6 months Full year 2004 2003 2003 £m £m £m Global finance transformation programme (45) (12) (60) Central costs and sharesave schemes (49) (44) (100) -------------------------------------------------------------------------------------------------------------------- (94) (56) (160) ==================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- PAGE 37 10. Tax The tax charge in the profit and loss account comprises: (a) Tax on profit on ordinary activities: 6 months 6 months Full year 2004 2003 2003 £m £m £m Current tax UK corporation tax - current year 22 1 (55) - prior year (11) (9) 17 Overseas tax - current year (44) (18) (1) - prior year 2 3 3 Tax attributable to balance on technical account (160) (147) (315) --------------------------------------------------------------------------------------------------------------------- (191) (170) (351) ---------------------------------------------------------------------------------------------------------------------- Deferred tax Origination and reversal of timing differences 47 (6) (19) Changes in tax rates or law (6) - (11) (Decrease)/increase in discount (1) (6) 14 Prior year adjustments - (29) - --------------------------------------------------------------------------------------------------------------------- 40 (41) (16) --------------------------------------------------------------------------------------------------------------------- Total tax charged in the profit and loss account (151) (211) (367) ===================================================================================================================== (b) Tax charge analysed between: 6 months 6 months Full year 2004 2003 2003 £m £m £m Tax charge on operating profit before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items (255) (194) (403) Tax credit/(charge) on (loss)/profit on other ordinary activities 104 (17) 36 -------------------------------------------------------------------------------------------------------------------- (151) (211) (367) ==================================================================================================================== (c) Factors affecting current tax charge for the year: 6 months 6 months Full year 2004 2003 2003 £m £m £m Profit on ordinary activities before tax 414 742 1,390 Current tax charge at standard UK corporation tax rate of 30% (2003: 30%) (124) (223) (417) Adjustment to tax charge in respect of prior years (8) (6) 20 Non-assessable dividends 23 6 5 Non-taxable profit/(loss)on the sale of investments 8 (1) (10) Non-taxable amortisation of goodwill (9) (7) (5) Other disallowable expenses (35) (16) (33) Utilisation/non-utilisation of tax losses 30 - (10) Different local basis of tax on overseas profits (29) 48 53 Deferred tax charge arising from movement in unrealised gains and losses - 4 20 Other deferred tax movements (41) 2 10 Deferred tax assets not recognised - 9 38 Other items (6) 14 (22) -------------------------------------------------------------------------------------------------------------------- Current tax charge for the year (191) (170) (351) ==================================================================================================================== ------------------------------------------------------------------------------------------------------------------------ PAGE 38 11. Dividends (a) The preference dividends in the profit and loss account comprise: 6 months 6 months Full year 2004 2003 2003 £m £m £m Preference dividends 9 9 17 ==================================================================================================================== The preference dividends are in respect of the cumulative irredeemable preference shares of £1 each in issue. (b) The ordinary dividends in the profit and loss account comprise: 6 months 6 months Full year 2004 2003 2003 £m £m £m Ordinary dividends Interim 9.36 pence (2003: 9.0 pence) 211 203 203 Final (2003: 15.15 pence) - - 342 -------------------------------------------------------------------------------------------------------------------- Total ordinary dividends 211 203 545 ==================================================================================================================== Irish shareholders who are due to be paid a dividend denominated in euros will receive a payment at the exchange rate prevailing on 3 August 2004. 12. Earnings per share (a) Basic earnings per share 6 months 2004 6 months 2003 Full year 2003 ----------------------------- --------------------- -------------------- Net of tax, Net of tax, Net of tax, minorities minorities minorities and and and Before preference Per preference Per preference Per tax dividend share dividend share dividend share £m £m p £m p £m p Operating profit* 878 571 25.4 404 17.9 991 44.0 Adjusted for the following items: - Amortisation of goodwill (49) (49) (2.2) (52) (2.3) (103) (4.6) - Amortisation of acquired additional value of in-force long-term business (49) (36) (1.6) (30) (1.3) (98) (4.4) - Financial Services Compensation Scheme levy (25) (18) (0.8) - - - - - Exceptional costs for termination of operations (50) (42) (1.9) (16) (0.7) (16) (0.7) - Short-term fluctuation in investment return (286) (209) (9.3) 207 9.1 198 8.9 - Change in the equalisation provision (11) (8) (0.4) (20) (0.9) (34) (1.5) - Net profit/(loss) on disposal of subsidiary undertakings 6 6 0.3 (1) - (6) (0.3) --------------------------------------------------------------------------------------------------------------------- Profit attributable to equity shareholders 414 215 9.5 492 21.8 932 41.4 ==================================================================================================================== * All operating profit is from continuing operations. ------------------------------------------------------------------------------------------------------------------------ PAGE 39 12. Earnings per share (continued) Earnings per share has been calculated based on the operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax, attributable to equity shareholders, as well as on the profit attributable to equity shareholders. The directors believe the former earnings per share figure provides a better indication of operating performance. The calculation of basic earnings per share uses a weighted average of 2,252 million (six months to 30 June 2003: 2,252 million; full year 2003: 2,251 million) ordinary shares in issue, after deducting shares owned by the employee share trusts as required by FRS14 'Earnings per share'. The actual number of shares in issue at 30 June 2004 was 2,262 million (30 June 2003: 2,257 million; 31 December 2003: 2,257 million). (b) Diluted earnings per share: 6 months 2004 6 months 2003 Full year 2003 ------------------------- ------------------------- -------------------------- Weighted Weighted Weighted average average average number of Per number of Per number of Per Total shares share Total shares share Total shares share £m m p £m m p £m m p Profit attributable to equity shareholders 215 2,252 9.5 492 2,252 21.8 932 2,251 41.4 Dilutive effect of share awards and options - 18 - - 8 - - 8 (0.1) -------------------------------------------------------------------------------------------------------------------- Diluted earnings per share 215 2,270 9.5 492 2,260 21.8 932 2,259 41.3 ==================================================================================================================== END OF PART 2 OF 3 This information is provided by RNS The company news service from the London Stock Exchange

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