Interim Results - Part 2

Aviva PLC 09 August 2007 Part 2 of 4 EEV basis ----------------------------------------------------------------------------------------------------------------------- Page 25 Summarised consolidated income statement - EEV basis For the six months ended 30 June 2007 Page 6 months 6 months 6 months Full year 2007 2007 2006 2006 â‚¬m Â£m Â£m Â£m Operating profit before tax attributable to shareholders' profits 32 1,840 Life EEV operating return 1,251 1,021 2,033 38 66 Fund management* 45 33 96 56 824 General insurance and health 560 866 1,680 Other: 38 (67) Other operations** (45) 29 (23) 59 (118) Corporate centre (80) (73) (160) 59 (279) Group debt costs and other interest (190) (177) (381) ----------------------------------------------------------------------------------------------------------------------- 2,266 Operating profit before tax attributable to shareholders' profits 1,541 1,699 3,245 Adjusted for the following: 71 (4) Impairment of goodwill (3) - (94) (60) Amortisation and impairment of intangibles (41) (10) (46) - Financial Services Compensation Scheme and other levies - 6 6 408 Variation from longer-term investment return 278 (944) 468 443 Effect of economic assumption changes 301 471 671 53 (7) (Loss)/profit on the disposal of subsidiaries and associates (5) 86 161 54 (59) Integration and restructuring costs (40) (24) (246) ----------------------------------------------------------------------------------------------------------------------- 2,987 Profit before tax 2,031 1,284 4,165 (612) Tax on operating profit (416) (573) (1,028) (166) Tax on other activities (113) 49 (258) ----------------------------------------------------------------------------------------------------------------------- 2,209 Profit for the period 1,502 760 2,879 ======================================================================================================================= Attributable to: 2,029 Equity shareholders of Aviva plc 1,380 674 2,648 180 Minority interests 122 86 231 ----------------------------------------------------------------------------------------------------------------------- 2,209 1,502 760 2,879 ======================================================================================================================= All profit is from continuing operations. * Excludes the proportion of the results of Morley's fund management businesses, of our French asset management operation Aviva Gestion d'Actifs (AGA) and other fund management operations within the Group that arises from the provision of fund management services to our Life businesses. These results are included within the Life EEV operating return. ** 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. Other subsidiaries providing services to our life businesses do not materially impact the Group results. Earnings per share - EEV basis For the six months ended 30 June 2007 6 months Earnings per share 6 month 6 months Full year 2007 2007 2006 2006 Operating profit on an EEV basis after tax,attributable to ordinary shareholders of Aviva plc 56.8c Basic (pence per share) 38.6p 42.1p 79.2p 56.2c Diluted (pence per share) 38.2p 41.7p 78.3p Profit after tax for the period on an EEV basis, attributable to ordinary shareholders of Aviva plc 78.4c Basic (pence per share) 53.3p 27.7p 105.1p 77.6c Diluted (pence per share) 52.8p 27.4p 103.9p ----------------------------------------------------------------------------------------------------------------------- Page 26 Consolidated statement of recognised income and expense - EEV basis For the six months ended 30 June 2007 6 months 6 months 6 months Full year 2007 2007 2006 2006 â‚¬m Â£m Â£m Â£m Fair value gains/(losses) on AFS securities,owner-occupied 71 properties and hedging instruments 48 (57) 42 - Fair value gains transferred to profit - (4) (18) - Impairment losses on revalued assets - - (2) 1,097 Actuarial gains/(losses) on pension schemes (IFRS section: note 17) 746 473 (114) (69) Foreign exchange rate movements (47) (24) (401) (340) Aggregate tax effect - shareholder tax (231) (132) 27 ----------------------------------------------------------------------------------------------------------------------- 759 Net income/(expense) recognised directly in equity 516 256 (466) 2,209 Profit for the period 1,502 760 2,879 ----------------------------------------------------------------------------------------------------------------------- 2,968 Total recognised income and expense for the period 2,018 1,016 2,413 ======================================================================================================================= Attributable to: 2,794 Equity shareholders of Aviva plc 1,900 931 2,208 174 Minority interests 118 85 205 ----------------------------------------------------------------------------------------------------------------------- 2,968 2,018 1,016 2,413 ======================================================================================================================= Reconciliation of movements in consolidated shareholders' equity - EEV basis For the six months ended 30 June 2007 6 months 6 months 6 months Full year 2007 2007 2006 2006 â‚¬m Â£m Â£m Â£m 31,131 Balance at 1 January 20,858 17,546 17,546 3,012 Total recognised income and expense for the period 2,018 1,016 2,413 (748) Dividends and appropriations (IFRS section: note 15) (501) (427) (762) Issue of share capital for the acquisition of AmerUs Group Co, - net of transaction costs - - 892 45 Other issues of share capital, net of transaction costs 30 47 43 227 Shares issued in lieu of dividends 152 77 203 112 Capital contribution from minority shareholders 75 35 397 (94) Minority share of dividends declared in the period (63) (57) (75) 212 Minority interest in acquired/disposed subsidiaries 142 223 153 36 Reserves credit for equity compensation plans 24 5 48 ----------------------------------------------------------------------------------------------------------------------- 33,933 Total equity 22,735 18,465 20,858 (3,596) Minority interests (2,409) (1,743) (2,137) ----------------------------------------------------------------------------------------------------------------------- 30,337 Balance at 30 June / 31 December 20,326 16,722 18,721 ======================================================================================================================= ------------------------------------------------------------------------------------------------------------------------ Page 27 Summarised consolidated balance sheet - EEV basis As at 30 June 2007 30 June 30 June 30 June 31 December 2007 2007 2006 2006 â‚¬m Â£m Â£m Â£m Assets 4,346 Goodwill 2,912 2,336 2,910 4,233 Acquired value of in-force business and intangible assets 2,836 1,004 2,728 10,721 Additional value of in-force long-term business 7,183 6,345 6,794 3,816 Investments in joint ventures 2,557 2,420 2,795 1,330 Investments in associates 891 897 895 1,279 Property and equipment 857 883 904 23,406 Investment property 15,682 14,111 15,123 40,016 Loans 26,811 24,479 26,445 Financial investments 163,676 Debt securities 109,663 99,451 113,041 87,946 Equity securities 58,924 54,704 56,762 54,503 Other investments 36,517 30,782 33,050 11,690 Reinsurance assets 7,832 7,589 7,825 1,142 Deferred tax assets 765 655 1,199 400 Current tax assets 268 86 344 16,354 Receivables and other financial assets 10,957 8,660 8,098 5,864 Deferred acquisition costs and other assets 3,929 3,741 3,476 4,139 Prepayments and accrued income 2,773 2,993 2,585 22,575 Cash and cash equivalents 15,125 15,268 14,542 1,936 Assets of operations classified as held for sale 1,297 1,008 - ----------------------------------------------------------------------------------------------------------------------- 459,372 Total assets 307,779 277,412 299,516 ======================================================================================================================= Equity 966 Ordinary share capital 647 604 641 6,693 Capital reserves 4,484 4,480 4,460 767 Other reserves 514 770 531 9,101 Retained earnings 6,098 3,439 5,082 11,034 Additional retained profit on an EEV basis 7,393 6,239 6,817 ----------------------------------------------------------------------------------------------------------------------- 28,561 Equity attributable to ordinary shareholders of Aviva plc 19,136 15,532 17,531 1,776 Preference share capital and direct capital instrument 1,190 1,190 1,190 3,596 Minority interests 2,409 1,743 2,137 ----------------------------------------------------------------------------------------------------------------------- 33,933 Total equity 22,735 18,465 20,858 ======================================================================================================================= Liabilities 215,951 Gross insurance liabilities 144,687 133,068 144,230 137,464 Gross liabilities for investment contracts 92,101 82,856 88,358 14,163 Unallocated divisible surplus 9,489 8,235 9,465 5,955 Net asset value attributable to unitholders 3,990 3,080 3,810 2,881 Provisions 1,930 2,364 2,850 4,497 Deferred tax liabilities 3,013 2,323 3,077 1,727 Current tax liabilities 1,157 957 1,262 18,203 Borrowings 12,196 11,070 12,137 15,855 Payables and other financial liabilities 10,623 9,381 9,235 7,176 Other liabilities 4,808 4,785 4,234 1,567 Liabilities of operations classified as held for sale 1,050 828 - ---------------------------------------------------------------------------------------------------------------------- 425,439 Total liabilities 285,044 258,947 278,658 ======================================================================================================================= ----------------------------------------------------------------------------------------------------------------------- 459,372 Total equity and liabilities 307,779 277,412 299,516 ======================================================================================================================= ------------------------------------------------------------------------------------------------------------------------ Page 28 Segmentation of summarised consolidated balance sheet - EEV basis As at 30 June 2007 31 December 30 June 2007 30 June 2006 2006 ---------------------------------- ---------------------------------- ------------ Life and General Life and General related business related business businesses and other Group businesses and other Group Group Â£m Â£m Â£m Â£m Â£m Â£m Â£m Total assets before acquired additional value of in-force long-term business 259,847 38,969 298,816 231,790 38,916 270,706 290,916 Acquired additional value of in-force long-term business 1,744 - 1,744 361 - 361 1,806 -------------------------------------------------------------------------------------------------------------------- Total assets included in the statutory IFRS balance sheet 261,591 38,969 300,560 232,151 38,916 271,067 292,722 Liabilities of the long-term business (248,293) - (248,293) (222,264) - (222,264) (241,892) Liabilities of the general insurance and other businesses - (36,751) (36,751) - (36,683) (36,683) (36,766) ---------------------------------------------------------------------------------------------------------------------- Net assets on a statutory IFRS basis 13,298 2,218 15,516 9,887 2,233 12,120 14,064 Additional value of in-force long-term business* 7,219 - 7,219 6,345 - 6,345 6,794 --------------------------------------------------------------------------------------------------------------------- Net assets on an EEV basis** 20,517 2,218 22,735 16,232 2,233 18,465 20,858 ===================================================================================================================== Equity capital, capital reserves, shares held by employee trusts and other reserves 5,645 5,854 5,632 IFRS basis retained earnings 6,098 3,439 5,082 Additional EEV basis retained profit 7,393 6,239 6,817 --------------------------------------------------------------------------------------------------------------------- Equity attributable to ordinary shareholders of Aviva plc on an EEV basis 19,136 15,532 17,531 Preference share capital and direct capital instrument 1,190 1,190 1,190 Minority interests 2,409 1,743 2,137 ----------------------------------------------------------------------------------------------------------------------- EEV basis total equity 22,735 18,465 20,858 ======================================================================================================================= * The analysis between the Group's and the minority interest's share of the additional value of in-force long-term business is as follows: 30 June 31 December Movement in 2007 2006 the period Â£m Â£m Â£m Group's share included in shareholders' funds 7,393 6,817 576 Minority interest share 478 439 39 Movement in AFS securities (652) (462) (190) ----------------------------------------------------------------------------------------------------------------------- Per segmentation of summarised consolidated balance sheet 7,219 6,794 425 Less: share included in assets of operations held for sale (36) - (36) ---------------------------------------------------------------------------------------------------------------------- Per balance at 30 June / 31 December 7,183 6,794 389 ====================================================================================================================== ** Analysis of net assets on an EEV basis is made up as follows: 30 June 30 June 31 December 2007 2006 2006 Â£m Â£m Â£m Embedded value 18,704 15,532 18,098 RBSG goodwill 217 217 217 Goodwill and intangible assets allocated to long-term business 1,652 696 1,527 Notional allocation of IAS 19 pension fund deficit to long-term business***,# (56) (213) (179) ---------------------------------------------------------------------------------------------------------------------- Long-term business net assets on an EEV basis 20,517 16,232 19,663 ===================================================================================================================== ***The value of the Aviva Staff Pension Scheme deficit has been notionally allocated between segments, based on current funding and the life proportion has been included within the long-term business net assets on an EEV basis. # Effective from 31 December 2006, the pension fund deficit notionally allocated to long-term business is net of the proportion of funding borne by the UK with-profit funds. ---------------------------------------------------------------------------------------------------------------------- Page 29 1. Basis of preparation and EEV methodology The summarised consolidated income statement and balance sheet on pages 25 to 28 present the Group's results and financial position for life and related businesses on the European Embedded Value (EEV) basis and for its non-life businesses on the International Financial Reporting Standards (IFRS) basis. The EEV methodology that the Group has adopted is in accordance with the EEV principles introduced by the CFO Forum in May 2004 and the Additional Guidance on EEV disclosures, published by the CFO Forum in October 2005, which is applicable for financial years ending on or after 31 December 2006. Detailed information on the basis of preparation and EEV methodology is set out in Aviva plc's 2006 Report and Accounts; any updates are detailed below. In the Directors' opinion, the EEV basis provides a more relevant reflection of the performance of the Group's life and related operations year on year than results presented under the IFRS basis. The Directors consider that the EEV methodology represents a more meaningful basis of reporting the underlying value of the Group's life and related businesses and the underlying drivers of performance. This basis allows for the impact of uncertainty in the future investment returns more explicitly and is consistent with the way the business is priced and managed. At the time the Group adopted EEV principles in 2004, its approach to establishing economic assumptions, including investment returns, required capital and discount rates, was reviewed by Tillinghast, a firm of actuarial consultants. The approach used by the Group is based on the established 'capital asset pricing model' theory and remains in line with EEV principles and guidance. The results for the six month periods to 30 June 2007 and 30 June 2006 are unaudited but have been reviewed by Ernst & Young LLP. Their independent report in respect of 30 June 2007 is included in the Group's interim report on page 85. The interim accounts for the six months ended 30 June 2007 do not constitute statutory accounts as defined in section 240 of the Companies Act 1985. Risk discount rates (RDR) Following the review of the risk margin at 31 December 2006, the Directors decided to leave the life embedded value risk margin unchanged at 2.7%. The market assessed risk factor (beta) had reduced in recent periods, implying a reduction of the risk in the life business. Following the review at 30 June 2007, the Directors have decided to maintain the life embedded value risk margin at 2.7%. Management will keep the risk margin under review and will make adjustments as necessary to reflect past trends and future expected trends in the riskiness of the life business, based on the beta. The sensitivity disclosures on pages 43 to 45 of this announcement indicate the potential impact on embedded value that could be caused by a change to the RDR. 2.Components of life EEV return The life EEV return comprises the following components: â€¢ new business contribution written during the period including value added between the point of sale and end of the period; â€¢ the profit from existing business equal to: - the expected return on the value of the in-force covered business at the beginning of the period, - experience variances caused by the differences between the actual experience during the period and expected experience based on the operating assumptions used to calculate the start of year value, - the impact of changes in operating assumptions including risk margins; â€¢ the expected investment return on the shareholders' net worth, based upon assumptions applying at the start of the year; â€¢ investment return variances caused by differences between the actual return in the period and the expected return based on economic assumptions used to calculate the start of year value; and â€¢ the impact of changes in economic assumptions in the period. The life EEV operating return comprises the first three of these components and is calculated using economic assumptions as at the start of the year and operating (demographic, expenses and tax) assumptions as at the end of the period. 6 months 6 months Full year 2007 2006 2006 Life EEV return Â£m Â£m Â£m New business contribution (after the effect of required capital) 419 352 683 Profit from existing business - expected return 600 503 1,011 - experience variances (19) (9) (50) - operating assumption changes 11 3 44 Expected return on shareholders' net worth 240 172 345 ---------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 1,251 1,021 2,033 Investment return variances 241 (739) 319 Effect of economic assumption changes 301 471 671 ----------------------------------------------------------------------------------------------------------------------- Life EEV return before tax 1,793 753 3,023 Tax on operating profit (373) (315) (630) Tax charge on other ordinary activities (146) 75 (295) ----------------------------------------------------------------------------------------------------------------------- Life EEV return after tax 1,274 513 2,098 ======================================================================================================================= There were no separate development costs reported in these periods. ----------------------------------------------------------------------------------------------------------------------- Page 30 3.New business contribution The table below sets out the premium volumes, the contribution from and the resulting margin achieved on new business written by the life and related businesses. The contribution generated by new business written during the period is the present value of the projected stream of after tax distributable profit from that business. New business contribution before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at appropriate rates of tax for other countries. New business contribution has been calculated using the same economic assumptions as those used to determine the embedded value as at the start of the year and operating assumptions used to determine the embedded value as at the end of the year, and is rolled forward to the end of the financial period. New business contribution is shown before and after the effect of required capital, calculated on the same basis as for in-force covered business. New business sales are expressed on two bases: annual premium equivalent (APE) and the present value of new business premiums (PVNBP). The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate new business contribution, so the components of the new business margin are on a consistent basis. (a) Geographical analysis of new business New New business business contribution New business contribution New business Annual Present value before the margin* before after the margin* after premium of new business effect of the effect of effect of the effect of equivalent premiums required capital required capital* required capital required capital -------------- --------------- ---------------- ----------------- ---------------- ----------------- 6 mths 6 mths 6 mths 6 mths 6 mths 6 mths 6 mths 6 mths 6 mths 6 mths 6 mths 6 mths 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m % % Â£m Â£m % % Life and pensions United Kingdom 757 746 5,820 5,816 178 167 3.1% 2.9% 143 135 2.5% 2.3% France 205 219 1,832 2,028 80 87 4.4% 4.3% 54 64 2.9% 3.2% Ireland 131 80 889 558 14 11 1.6% 2.0% 12 8 1.3% 1.4% Italy 218 176 1,818 1,583 49 38 2.7% 2.4% 37 26 2.0% 1.6% Netherlands (including Belgium and Germany) 133 135 1,146 1,170 37 34 3.2% 2.9% 24 17 2.1% 1.5% Poland 49 36 379 264 17 14 4.5% 5.3% 15 12 4.0% 4.5% Spain 139 112 1,114 916 88 88 7.9% 9.6% 79 80 7.1% 8.7% Other Europe 36 26 175 126 (2) (4) (1.1)% (3.2)% (3) (5) (1.7)% (4.0)% Europe 911 784 7,353 6,645 283 268 3.8% 4.0% 218 202 3.0% 3.0% North America 183 31 1,716 289 57 5 3.3% 1.7% 35 2 2.0% 0.7% Asia 66 43 414 252 20 12 4.8% 4.8% 16 10 3.9% 4.0% Australia 44 27 240 145 12 7 5.0% 4.8% 7 3 2.9% 2.1% Asia Pacific 110 70 654 397 32 19 4.9% 4.8% 23 13 3.5% 3.3% ----------------------------------------------------------------------------------------------------------------------- Total life and pensions 1,961 1,631 15,543 13,147 550 459 3.5% 3.5% 419 352 2.7% 2.7% ==================================================================== Investment sales 410 266 3,751 2,484 ------------------------------------------------ Total long-term savings (including share of associates and joint ventures)** 2,371 1,897 19,294 15,631 =============================================== * New business margin represents the ratio of new business contribution to PVNBP, expressed as a percentage. ** Total long-term savings includes investment sales. Investment sales are calculated as new single premiums plus annualised value of new regular premiums. ---------------------------------------------------------------------------------------------------------------------- Page 31 3. New business contribution (continued) (b) Analysis of new business by distribution channel (i) Before the effect of required capital, tax and minority interest Annual premium Present value of new New business equivalent business premiums contribution New business margin ----------------------- ----------------------- ----------------------- ----------------------- 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 2007 2006 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m % % Analysed between: - Bancassurance channels 557 472 4,541 3,958 205 187 4.5% 4.7% - Other distribution channels 1,404 1,159 11,002 9,189 345 272 3.1% 3.0% --------------------------------------------------------------------------------------------------------------------- Total 1,961 1,631 15,543 13,147 550 459 3.5% 3.5% ===================================================================================================================== (ii) After the effect of required capital, tax and minority interest Annual premium Present value of new New business equivalent business premiums contribution New business margin ----------------------- ----------------------- ----------------------- ----------------------- 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 2007 2006 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m % % Analysed between: - Bancassurance channels 320 267 2,586 2,218 71 59 2.7% 2.7% - Other distribution channels 1,367 1,133 10,716 8,932 169 135 1.6% 1.5% --------------------------------------------------------------------------------------------------------------------- Total 1,687 1,400 13,302 11,150 240 194 1.8% 1.7% ===================================================================================================================== (c) Post-tax internal rate of return on life and pensions new business The internal rate of return (IRR) on life and pensions new business for the Group was 12.9% for the six months to 30 June 2007 (full year to 31 December 2006: 12.6%). The internal rate of return is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the life time of the business written, including allowance for the time value of options and guarantees, is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is the initial capital required to pay acquisition costs and set up statutory reserves in excess of premiums received ('initial capital'), plus required capital at the same level as for the calculation of new business contribution post cost of capital. 6 months 2007 --------------------------------------------------------------------------------------------------------------------- Internal rate of Initial Required Total invested return capital capital capital % Â£m Â£m Â£m United Kingdom 12% 155 79 234 France 13% 15 52 67 Ireland 10% 33 14 47 Italy 19% 1 25 26 Netherlands (including Belgium and Germany) 8% 21 49 70 Poland 23% 10 4 14 Spain 29% 11 38 49 Other Europe 4% 22 2 24 Europe 14% 113 184 297 North America 11% 51 102 153 Asia Pacific 20% 19 19 38 -------------------------------------------------------------------------------------------------------------------- Total 13% 338 384 722 ===================================================================================================================== The total initial capital for life and pensions new business for the six months to 30 June 2007 of Â£338 million (six months to 30 June 2006: Â£357 million) shown above is expressed at the point of sale. Hence it is higher than the impact of writing that new business on net worth of Â£318 million (six months to 30 June 2006: Â£344 million) shown on page 35, because the latter amount includes expected profits from the point of sale to the end of the reporting period, partly offset by the expected return on the initial capital. ------------------------------------------------------------------------------------------------------------------------ Page 32 4. Geographical analysis of the components of life EEV operating return 6 months 2007 Â£m Ire Nether Other North Aust Asia UK France -land Italy -lands Poland Spain Europe Europe America Asia -ralia Pacific Total ------------------------------------------------------------------------------------------------------------------------ New business contribution (after the effect of required capital) 143 54 12 37 24 15 79 (3) 218 35 16 7 23 419 Profit from existing business - expected return 261 81 21 18 85 29 33 5 272 50 7 10 17 600 - experience variances: Maintenance expenses* 4 2 1 (1) (10) 1 (1) (2) (10) 2 - (1) (1) (5) Project and other related expenses** (56) (1) (1) - (6) - - (3) (11) - - - - (67) Mortality/ Morbidity*** 3 11 - - 2 6 (2) 2 19 (2) 2 2 4 24 Lapses# (6) 5 (2) (2) (5) 11 (7) (2) (2) - (4) 2 (2) (10) Other## 18 19 (2) 4 (3) 4 (2) 3 23 (3) - 1 1 39 ----------------------------------------------------------------------------------------------------------------------- (37) 36 (4) 1 (22) 22 (12) (2) 19 (3) (2) 4 2 (19) - operating assumption changes: Maintenance expenses ### - 13 - - - - - - 13 - - (2) (2) 11 Project and other related expenses** - - - - - - - - - - - - - - Mortality/ Morbidity - - - - - - - - - - - - - - Lapses - - - - - - - - - - - - - - Other - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------- - 13 - - - - - - 13 - - (2) (2) 11 Expected return on shareholders' net worth 46 41 8 16 79 5 7 1 157 30 3 4 7 240 ----------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 413 225 37 72 166 71 107 1 679 112 24 23 47 1,251 ======================================================================================================================== * Maintenance expenses in Delta Lloyd reflect the impact of expense overruns in Belgium and ABN AMRO. ** Project and other related expenses in the UK reflect project costs associated with strategic initiatives, including developments designed to offer simpler products to customers, and the simplification of systems and processes.In the Netherlands, these expenses reflect higher project costs compared to allowances. *** Mortality experience continues to be better than the assumptions set across a number of our businesses. # Lapse experience in Poland continues to be better than the assumptions set for both Life and Pension products. This has been offset by small negative experience variances across a number of our other businesses. ## In the UK, other experience profits include better than assumed default experience on corporate bonds and commercial mortgages. In France, positive experience includes the benefit of higher than assumed tax-free dividend income. ### In France, the maintenance expenses assumption change relates to lower 'look through' expenses in the holding company. ----------------------------------------------------------------------------------------------------------------------- Page 33 4. Geographical analysis of the components of life EEV operating return (continued) 6 months 2006 Â£m Ire Nether Other North Aust Asia UK France -land Italy -lands Poland Spain Europe Europe America Asia -ralia Pacific Total ------------------------------------------------------------------------------------------------------------------------ New business contribution (after the effect of required capital) 135 64 8 26 17 12 80 (5) 202 2 10 3 13 352 Profit from existing business - expected return 236 69 19 14 84 26 27 6 245 8 5 9 14 503 - experience variances: Maintenance expenses * (1) 4 - (1) (12) 4 (1) - (6) - - - - (7) Project and other related expenses ** (75) - (1) - (6) - - (1) (8) - - - - (83) Mortality/ Morbidity*** 20 14 (2) - 20 8 - 2 42 - 3 3 6 68 Lapses # (35) 5 (5) (2) 4 6 - (3) 5 - (1) 1 - (30) Other ## 24 6 (1) 2 9 5 - (2) 19 - - - - 43 ----------------------------------------------------------------------------------------------------------------------- (67) 29 (9) (1) 15 23 (1) (4) 52 - 2 4 6 (9) - operating assumption changes: Maintenance expenses ### - - (10) - - - - - (10) - - - - (10) Project and other related expenses - - - - - - - - - - - - - - Mortality/ Morbidity - - - - - - - - - - - - - - Lapses^ - - (7) - - - - - (7) - - - - (7) Other ^^ - - - - 20 - - - 20 - - - - 20 ------------------------------------------------------------------------------------------------------------------------ - - (17) - 20 - - - 3 - - - - 3 Expected return on shareholders' net worth 46 34 7 14 49 5 6 - 115 6 2 3 5 172 ----------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 350 196 8 53 185 66 112 (3) 617 16 19 19 38 1,021 ======================================================================================================================== * Maintenance expenses in the Netherlands reflect the impact of expense overruns in Belgium. ** Project and other related expenses in the UK reflect Â£18 million relating to the ongoing transformation of the life business and Â£57 million of other project and related costs associated with strategic initiatives, regulatory change and developments designed to increase future new business volumes such as those relating to pensions simplification. *** Mortality experience continues to be better than the assumptions set across many of our businesses, notably for term and protection business in the UK and AFER in France. In addition there is a one-off reserve release associated with the review of a large group pension scheme in the Netherlands. # Lapse experience in the UK has been worse than assumed and primarily relates to bonds and pensions. ## In the UK, other experience profits include better than assumed default experience on corporate bonds and commercial mortgages. ### Maintenance expenses in Ireland relate to a change in assumptions regarding the future attribution of investment income and expenses between policyholders and shareholders. ^ In Ireland, the lapse assumption change relates to the Celebration Bond and life linked bonds. ^^ In the Netherlands, the assumption changes relate to reduced asset management fees and a change in the asset mix in Belgium. ----------------------------------------------------------------------------------------------------------------------- Page 34 4. Geographical analysis of the components of life EEV operating return (continued) Year ended 31 December 2006 Â£m Ire Nether Other North Aust Asia UK France -land Italy -lands Poland Spain Europe Europe America Asia -ralia Pacific Total ----------------------------------------------------------------------------------------------------- New business contribution (after the effect of required capital) 263 110 9 50 25 25 168 (6) 381 8 22 9 31 683 Profit from existing business - expected return 474 142 41 26 158 52 53 9 481 29 10 17 27 1,011 - experience variances: Maintenance expenses 13 9 4 (1) (11) 5 (2) (2) 2 - - (2) (2) 13 Project and other related expenses * (149) 1 (4) - (23) - (1) (2) (29) - - - - (178) Mortality/ Morbidity ** (13) 33 (2) 4 3 16 1 2 57 - 8 7 15 59 Lapses *** (66) 8 (9) (8) 2 21 (1) (2) 11 (9) (6) 3 (3) (67) Other # 75 20 (9) 6 20 3 11 (1) 50 (2) (2) 2 - 123 ------------------------------------------------------------------------------------------------------------------------ (140) 71 (20) 1 (9) 45 8 (5) 91 (11) - 10 10 (50) - operating assumption changes: Maintenance expenses ## 58 - (3) - 60 (3) - (11) 43 (12) (1) (5) (6) 83 Project an other related expenses ### (46) (2) (22) - (9) - - (3) (36) - - - - (82) Mortality/ Morbidity ^ 57 45 (13) - - 17 - (1) 48 3 4 7 11 119 Lapses ^^ (224) (41) (47) - (14) 17 (21) (1) (107) - - 2 2 (329) Other ^^^ 215 9 - 2 19 1 2 3 36 - (1) 3 2 253 ----------------------------------------------------------------------------------------------------------------------- 60 11 (85) 2 56 32 (19) (13) (16) (9) 2 7 9 44 Expected return on shareholders' net worth 87 68 15 31 99 8 11 2 234 15 3 6 9 345 ----------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 744 402 (40) 110 329 162 221 (13) 1,171 32 37 49 86 2,033 ======================================================================================================================= * Project and other related expenses in the UK reflect Â£32 million relating to the ongoing transformation of the life business and Â£117 million of other exceptional and project costs associated with strategic initiatives, including developments designed to improve the future new business volumes, and regulatory changes. In the Netherlands, these expenses reflect higher project costs compared to allowances as well as the payment to ABN AMRO in respect of the joint venture operations. ** Mortality experience continues to be better than the assumptions set across many of our businesses. *** Lapse experience in the UK has been worse than assumed and primarily relates to bonds and pensions. In Poland, lapses for both life and pension products have been lower than assumed resulting in the favourable experience variance. # In the UK, other experience profits include better than assumed default experience on corporate bonds and mortgages, and the benefit of higher than expected performance fees in Morley. ## Maintenance expenses in the UK relate to Morley's change in profit margin. The change in Delta Lloyd is also driven by improved asset management profitability. The adverse movement in North America is due to a reassessment of expenses in our Boston-based operations. ### In the UK, exceptional expenses relate to short-term project costs and capitalisation of reorganisation costs. Ireland reflects changes in expense assumptions regarding the future attribution of investment income and expenses between policyholders and shareholders. ^ The change in mortality assumptions in the UK includes an alignment in the basis for internal business. Mortality assumptions in France were changed following improvements in mortality experience over the last few years. ^^ In the UK, the lapse assumption change relates to bonds and pension business while the change in Ireland relates to the Celebration Bond and unit-linked bonds. In France, lapse assumptions have been changed for non-AFER business in Aviva Vie. In Spain, lapse assumptions have been changed for risk business and some savings products. ^^^ In the UK, the assumption changes reflect the beneficial impact of the with-profit funds sharing the pension scheme deficit funding (Â£126 million) and the impact of PS06/14, primarily in reducing the non-profit reserves (Â£50 million). In Delta Lloyd the impact is due to changes to management fee rebates. ----------------------------------------------------------------------------------------------------------------------- Page 35 5. Analysis of movement in life and related businesses embedded value The following tables provide an analysis of the movement in embedded value for the life and related businesses for the six months to 30 June 2007 and the six months to 30 June 2006. The analysis is shown separately for net worth and the value of in-force covered business, and includes amounts transferred between these categories. The transfer to life and related businesses from other segments consists of service company profits and losses during the reported period that have emerged from the value of in-force. Since the 'look through' into service companies includes only future profits and losses, these amounts must be eliminated from the closing embedded value. All figures are shown net of tax. 6 months 2007 ---------------------------------- Net Value of worth in-force Total Â£m Â£m Â£m Embedded value at the beginning of the period - Free surplus 3,569 - Required capital* 5,314 Total 8,883 9,215 18,098 ----------------------------------------------------------------------------------------------------------------------- New business contribution (after the effect of required capital) (318) 611 293 Expected return on existing business - return on VIF - 425 425 Expected return on existing business - transfer to net worth 644 (644) - Experience variances and operating assumption changes 325 (332) (7) Expected return on shareholders' net worth 167 - 167 Investment return variances and economic assumption changes 602 (206) 396 ----------------------------------------------------------------------------------------------------------------------- Life EEV return after tax 1,420 (146) 1,274 Exchange rate movements (16) (12) (28) Embedded value from business acquired 33 9 42 Net amounts released from life and related businesses (666) - (666) Transfer from life and related businesses to other segments (16) - (16) ------------------------------------------------------------------------------------------------------------------------ Embedded value at the end of the period - Free surplus 4,033 - Required capital* 5,605 Total 9,638 9,066 18,704 ======================================================================================================================= * Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. The embedded value of business acquired in the six months to 30 June 2007 of Â£42 million represents the embedded value of Erasmus Groep BV. Required capital has increased in the period by Â£291 million. The movement comprises an increase of Â£384 million in relation to new business written, a reduction of Â£114 million regarding in-force business, Â£30 million additional in-force required capital relating to the acquisition during the period and a Â£9 million decrease due to foreign exchange rate movements. The decrease in the in-force required capital includes the effect of a maturing portfolio of business, an increase in long-term interest rates which has decreased statutory reserves and hence capital requirements and the impact of the higher solvency margin required for certain unit linked business, following clarification by the French regulator. 6 months 2006 ---------------------------------- Net Value of worth in-force Total Â£m Â£m Â£m Embedded value at the beginning of the period - Free surplus 2,772 - Required capital* 4,448 Total 7,220 7,893 15,113 ----------------------------------------------------------------------------------------------------------------------- New business contribution (after the effect of required capital) (344) 586 242 Expected return on existing business - return on VIF - 353 353 Expected return on existing business - transfer to net worth 488 (488) - Experience variances and operating assumption changes 179 (188) (9) Expected return on shareholders' net worth 119 - 119 Investment return variances and economic assumption changes (114) (78) (192) ------------------------------------------------------------------------------------------------------------------------ Life EEV return after tax 328 185 513 Exchange rate movements (9) (20) (29) Embedded value from business acquired 170 176 346 Net amounts released from life and related businesses (451) - (451) Transfer to life and related businesses from other segments 40 - 40 ----------------------------------------------------------------------------------------------------------------------- Embedded value at the end of the period - Free surplus 2,682 - Required capital* 4,616 Total 7,298 8,234 15,532 ======================================================================================================================= * Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. ----------------------------------------------------------------------------------------------------------------------- Page 36 6. Segmental analysis of life and related businesses embedded value Value of in-force Net worth covered business Total ----------------- -------------------- --------------- Present Cost of Required Free value of required capital* surplus in-force capital Embedded value 30 June 2007 Â£m Â£m Â£m Â£m Â£m United Kingdom 1,317 917 4,809 (443) 6,600 France 1,353 145 1,210 (322) 2,386 Ireland 247 174 539 (38) 922 Italy 286 386 229 (68) 833 Netherlands (including Belgium and Germany) 1,095 2,005 1,477 (381) 4,196 Poland 111 65 583 (35) 724 Spain 293 41 631 (60) 905 Other Europe 21 20 86 (11) 116 Europe 3,406 2,836 4,755 (915) 10,082 North America** 682 135 827 (140) 1,504 Asia Pacific 200 145 231 (58) 518 ------------------------------------------------------------------------------------------------------------------------ Total 5,605 4,033 10,622 (1,556) 18,704 ======================================================================================================================== * Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. ** AmerUs holding company debt amounting to Â£349 million at 30 June 2007 (30 June 2006: Â£nil) has been included within other operations. Value of in-force Net worth covered business Total ---------------- ------------------- -------------- Present Cost of Required Free value of required 30 June 2006 capital* surplus in-force capital Embedded value Â£m Â£m Â£m Â£m Â£m United Kingdom 1,170 491 4,906 (436) 6,131 France 1,130 183 1,099 (231) 2,181 Ireland 266 193 543 (46) 956 Italy 314 309 205 (63) 765 Netherlands(including Belgium and Germany) 1,074 1,213 1,377 (321) 3,343 Poland 98 69 461 (29) 599 Spain 268 7 533 (59) 749 Other Europe 19 23 68 (12) 98 Europe 3,169 1,997 4,286 (761) 8,691 North America 119 108 117 (28) 316 Asia Pacific 158 86 196 (46) 394 ----------------------------------------------------------------------------------------------------------------------- Total 4,616 2,682 9,505 (1,271) 15,532 ======================================================================================================================== * Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. The shareholders' net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in the non-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets. Required capital, net of implicit items, is included within the net worth. The value of in-force covered business includes 'cost of required capital' - the effect of holding shareholders' capital to support the level of required capital and allowing for projected future releases. ------------------------------------------------------------------------------------------------------------------------ Page 37 7.Time value of options and guarantees The following table sets out the time value of options and guarantees relating to covered business by territory. 30 June 30 June 31 December 2007 2006 2006 ------- ------- ----------- Â£m Â£m Â£m United Kingdom 46 46 50 France 79 56 77 Ireland 2 5 2 Italy 18 17 17 Netherlands (including Belgium and Germany) 105 117 146 Poland 5 5 4 Spain 4 4 4 Other Europe 1 - - Europe 214 204 250 North America 55 10 68 Asia Pacific 6 5 4 ------------------------------------------------------------------------------------------------------------------------ Total 321 265 372 ======================================================================================================================== The time value of options and guarantees (TVOG) is most significant in the United Kingdom, France, the Netherlands and the United States. In the United Kingdom, this relates mainly to non-market value adjustment (MVA) guarantees on unitised with-profit business and guaranteed annuity rates. In France, this relates mainly to guaranteed crediting rates and surrender values on traditional business including the Afer fund. In the Netherlands, this relates mainly to maturity guarantees on unit-linked products and interest rate guarantees on traditional individual and group profit sharing business. In the United States, this relates to crediting rate, death benefit and surrender guarantees on life business. The TVOG has reduced by Â£51 million to Â£321 million, reflecting the impact of the increase in interest rates. 8.Analysis of service companies and fund management businesses within embedded value The EEV methodology incorporates the impact of profits and losses arising from subsidiary undertakings providing administration, investment management and other services where these arise in relation to covered business. The principal subsidiaries of the Aviva group providing such services include NU Life Services Limited (UK), Morley (UK) and Aviva Gestion d'Actifs (France). The following table provides an analysis of the elements within the life and other related business embedded value: 30 June 31 December 2007 2006 --------------------------------- ---------- Fund Other management operations Total Total Â£m Â£m Â£m Â£m United Kingdom 156 (180) (24) (28) France 68 18 86 71 Netherlands 55 (45) 10 7 Other 29 (1) 28 30 ------------------------------------------------------------------------------------------------------------------------ Total 308 (208) 100 80 ======================================================================================================================== The 'look-through' value attributable to fund management is based on the level of after-tax profits expected to be earned in the future over the outstanding term of the covered business in respect of services provided to the Group's life operations. The EEV basis income statement excludes the actual statutory basis profits arising from the provision of fund management services to the Group's life businesses. The EEV income statement records the experience profit or loss compared to the assumed profitability, the return on the in-force value arising from the unwind at the relevant risk discount rate and the effect on the in-force value of changes to economic assumptions. NU Life Services Limited (NULS) is the main provider of administration services to the UK Life business. NULS incurs substantially all of the UK Life businesses operating expenditure, comprising acquisition, maintenance and project costs. Costs are recharged to the UK Life companies (the product companies) on the basis of a pre-determined Management Services Agreement (MSA) which will be reviewed in 2008. The EEV principles 'look-through' the contractual terms of the MSA to the underlying expenses of NULS. Accordingly the actual maintenance expenses and a 'normal' annual level of project expense allowances have been applied to the product companies. Under EEV, any further one-off project expenditure is reported as experience losses when incurred. ---------------------------------------------------------------------------------------------------------------------- Page 38 9.Geographical analysis of fund management operating profit The summarised consolidated income statement - EEV basis, includes profit from the Group's fund management operations as analysed below. As explained in note 8, this excludes the proportion of the results of Morley's fund management businesses, of our French asset management operation Aviva Gestion d'Actifs (AGA) and other fund management operations within the Group that arises from the provision of fund management services to our Life businesses. These results are included within the Life EEV operating return. 6 months 6 months Full year 2007 2006 2006 Â£m Â£m Â£m UK business 18 11 35 International business 5 6 9 ----------------------------------------------------------------------------------------------------------------------- Morley 23 17 44 Royal Bank of Scotland (4) (4) (7) Norwich Union investment funds - (1) 1 ======================================================================================================================== United Kingdom 19 12 38 France 5 5 10 Netherlands 9 10 33 Other Europe 2 1 3 ======================================================================================================================== Europe 16 16 46 North America 1 1 3 Asia Pacific 9 4 9 ------------------------------------------------------------------------------------------------------------------------ Total 45 33 96 ======================================================================================================================= 10. Analysis of other operations' operating result The summarised consolidated income statement - EEV basis, includes the results of the Group's other operations as analysed below. As explained in note 8, this 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. Other subsidiaries providing services to our life businesses do not materially impact the Group results. 6 months 6 months Full year 2007 2006 2006 Â£m Â£m Â£m RAC 6 20 45 UK Life - Norwich Union Life Services 3 2 5 - Lifetime and SIPP (18) (6) (29) Other (36) 13 (44) ------------------------------------------------------------------------------------------------------------------------ Total (45) 29 (23) ======================================================================================================================== ------------------------------------------------------------------------------------------------------------------------ Page 39 11.Summary of minority interest in life and related businesses' EEV results* 6 months 2007 Â£m Nether Asia Shareholder France Ireland Italy -lands Poland Spain Europe Pacific Total interest Group Minority interest New business contribution before effect of required capital 13 3 28 3 2 45 94 1 95 455 550 Effect of required capital (6) (1) (7) (1) - (4) (19) - (19) (112) (131) ------------------------------------------------------------------------------------------------------------------------ New business contribution after effect of required capital 7 2 21 2 2 41 75 1 76 343 419 ======================================================================================================================== Life EEV operating return before tax 19 8 40 8 9 55 139 1 140 1,111 1,251 ======================================================================================================================== Life EEV return after tax 6 9 31 4 10 33 93 1 94 1,180 1,274 ======================================================================================================================== Closing life and related businesses' embedded value 165 224 438 105 92 391 1,415 10 1,425 17,279 18,704 ======================================================================================================================== 6 months 2006 Â£m Nether Asia Shareholder France Ireland Italy -lands Poland Spain Europe Pacific Total interest Group Minority interest New business contribution before effect of required capital 14 3 22 6 2 45 92 - 92 367 459 Effect of required capital (5) (1) (7) (1) - (5) (19) - (19) (88) (107) ------------------------------------------------------------------------------------------------------------------------ New business contribution after effect of required capital 9 2 15 5 2 40 73 - 73 279 352 ======================================================================================================================== Life EEV operating return before tax 19 2 29 9 10 56 125 1 126 895 1,021 ======================================================================================================================= Life EEV return after tax 5 (4) 29 2 8 20 60 3 63 450 513 ======================================================================================================================== Closing life and related businesses' embedded value 151 232 396 73 98 322 1,272 11 1,283 14,249 15,532 ======================================================================================================================= 1. There are no minorities in the United Kingdom or North America. ------------------------------------------------------------------------------------------------------------------------ Page 40 12. Principal economic assumptions (a). Deterministic calculations Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting period. The same margins are applied on a consistent basis across the Group to gross risk-free yields to obtain investment return assumptions for ordinary shares and property and to produce risk discount rates. Additional country-specific risk margins are applied to smaller businesses to reflect additional economic, political and business-specific risk, which result in the application of risk margins ranging from 3.7% to 8.7% in our eastern European and Asian business operations. Expense inflation is derived as a fixed margin above a local measure of long-term price inflation. Risk free rates and price inflation have been harmonised across territories within the Euro currency zone, except for expense inflation in Ireland where significant differences remain. Required capital is shown as a multiple of the EU statutory minimum solvency margin or equivalent. Investment return assumptions are generally derived by major product class,based on hypothecating the assets at the valuation date. Future assumed reinvestment rates are consistent with implied market returns at 30 June 2007. Rates have been derived using rates from the current yield curve at a duration based on the term of the liabilities, or directly from forward yield curves where considered appropriate. Assumptions about future investment mix are consistent with long-term plans. In most cases, the investment mix is assumed to continue unchanged throughout the projection period. The changes in assumptions between reporting dates reflect the actual movements in risk free yields in the United Kingdom, the Eurozone and other territories. The principal economic assumptions used are as follows: United Kingdom France ------------------------------------ ------------------------------------- 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 2007 2006 2006 2005 2007 2006 2006 2005 Risk discount rate 8.0% 7.3% 7.4% 6.8% 7.3% 6.7% 6.8% 6.0% Pre-tax investment returns: Base government fixed interest 5.3% 4.6% 4.7% 4.1% 4.6% 4.0% 4.1% 3.3% Ordinary shares 8.3% 7.6% 7.7% 7.1% 7.6% 7.0% 7.1% 6.3% Property 7.3% 6.6% 6.7% 6.1% 6.6% 6.0% 6.1% 5.3% Future expense inflation 3.5% 3.4% 3.3% 3.2% 2.5% 2.5% 2.5% 2.5% Tax rate 28.0% 30.0% 30.0% 30.0% 34.4% 34.4% 34.4% 34.4% Required Capital (% EU minimum) 150%/100% 150%/100% 150%/100% 150%/100% 115% 115% 115% 115% ----------------------------------------------------------------------------------------------------------------------- Ireland Italy ------------------------------------ ------------------------------------- 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 2007 2006 2006 2005 2007 2006 2006 2005 Risk discount rate 7.3% 6.7% 6.8% 6.0% 7.3% 6.7% 6.8% 6.0% Pre-tax investment returns: Base government fixed interest 4.6% 4.0% 4.1% 3.3% 4.6% 4.0% 4.1% 3.3% Ordinary shares 7.6% 7.0% 7.1% 6.3% 7.6% 7.0% 7.1% 6.3% Property 6.6% 6.0% 6.1% 5.3% 6.6% 6.0% 6.1% 5.3% Future expense inflation 4.0% 4.0% 4.0% 4.0% 2.5% 2.5% 2.5% 2.5% Tax rate 12.5% 12.5% 12.5% 12.5% 38.3% 38.3% 38.3% 38.3% Required Capital (% EU minimum) 150% 150% 150% 150% 115% 115% 115% 115% ----------------------------------------------------------------------------------------------------------------------- Netherlands Poland ------------------------------------ ------------------------------------- 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 2007 2006 2006 2005 2007 2006 2006 2005 Risk discount rate 7.3% 6.7% 6.8% 6.0% 9.2% 8.7% 8.8% 8.6% Pre-tax investment returns: Base government fixed interest 4.6% 4.0% 4.1% 3.3% 5.5% 5.0% 5.1% 4.9% Ordinary shares 7.6% 7.0% 7.1% 6.3% 8.5% 8.0% 8.1% 7.9% Property 6.6% 6.0% 6.1% 5.3% n/a n/a n/a n/a Future expense inflation 2.5% 2.5% 2.5% 2.5% 3.9% 3.4% 3.5% 3.3% Tax rate 25.5% 25.5% 29.1% 29.1% 19.0% 19.0% 19.0% 19.0% Required Capital (% EU minimum) 150% 150% 150% 150% 150% 150% 150% 150% ------------------------------------------------------------------------------------------------------------------------ Spain United States ------------------------------------ ------------------------------------- 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 2007 2006 2006 2005 2007 2006* 2006 2005 Risk discount rate 7.3% 6.7% 6.8% 6.0% 7.7% 7.4% 7.8% 7.2% Pre-tax investment returns: Base government fixed interest 4.6% 4.0% 4.1% 3.3% 5.0% 4.7% 5.1% 4.5% Ordinary shares 7.6% 7.0% 7.1% 6.3% 8.0% 7.7% n/a n/a Property 6.6% 6.0% 6.1% 5.3% n/a n/a n/a n/a Future expense inflation 2.5% 2.5% 2.5% 2.5% 3.0% 3.0% 3.0% 3.0% Tax rate 30.0% 30.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% Required Capital (% EU minimum, or equivalent) 125%/110% 125%/110% 125%/110% 125%/110% 250% 250% 200% 200% ------------------------------------------------------------------------------------------------------------------------ * The principal economic assumptions used for AmerUs Group Co. at the date of acquisition were as follows: risk discount rate of 7.2%, pre-tax investment returns of 4.6% for base government fixed interest and required capital of 250%. For service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company. Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for credit risk. Required capital in the United Kingdom is 150% EU minimum for Norwich Union Annuity Limited and 100% for other companies. Required capital in Spain is 125% EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies. The level of required capital for the US business is 250% of the risk based capital, at the company action level, set by the National Association of Insurance Commissioners. The required capital is equivalent to 5% of the insurance liabilities on a local regulatory basis which is broadly equivalent to the required capital we hold for our main European businesses. ------------------------------------------------------------------------------------------------------------------------ Page 41 12. Principal economic assumptions (continued) Other economic assumptions Required capital relating to with-profit business is assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders. Bonus rates on participating business have been set at levels consistent with the economic assumptions and Aviva's medium-term bonus plans. The distribution of profit between policyholders and shareholders within the with-profit funds assumes that the shareholder interest in conventional with-profit business in the United Kingdom and Ireland continues at the current rate of one ninth of the cost of bonus. (b) Stochastic calculations The time value of options and guarantees calculation allows for expected management and policyholder actions in response to varying future investment conditions. The management actions modelled include changes to asset mix and bonus rates. Modelled policyholder actions are described under 'Other assumptions'. This section describes the models used to generate future investment simulations, and gives some sample statistics for the simulations used. Two separate models have been used, for the UK businesses and for International businesses, as each of these models better reflect the characteristics of the businesses. United Kingdom Model Overall asset returns have been generated assuming that the portfolio total return has a lognormal distribution. The mean and standard deviation of the overall asset return have been calculated using the evolving asset mix of the fund and assumptions over the mean and standard deviation of each asset class, together with correlations between them. Asset Classes The significant asset classes for UK participating business are equities,property and long-term fixed rate bonds. The most significant assumption is the distribution of future long-term interest rates, since this is the most important factor in the cost of guaranteed annuity options. Summary Statistics The following table sets out the mean and standard deviations (StDev) of future returns at 30 June 2007 for the three most significant asset classes. Interest rates are assumed to have a lognormal distribution with an annualised standard deviation of 12.5% p.a. for the natural logarithm of the interest rate. Mean* StDev** -------------------------------------------------------------- Equities 8.3% 20% Property 7.3% 15% Government Bonds 5.3% 3.25% - 4.5%*** * Means have been calculated by accumulating a unit investment for the required number of years in each simulation, averaging the accumulation across all simulations, and converting the result to an equivalent annual rate (by taking the nth root of the average accumulation minus one). ** Standard deviations have been calculated by accumulating a unit investment for the required number of years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by the projection period (n years) and taking the square root. This makes the result comparable to implied volatilities quoted in investment markets. *** Depending on the duration of the portfolio. For the UK, the statistics are the same over all projection horizons. Assumptions are also required for correlations between asset classes. These have been set based on an assessment of historical data. Returns for corporate fixed interest investments in each scenario are equal to the return on Government bonds plus a fixed additional amount, based on current spreads less a margin for credit risk. International Model Government nominal interest rates are generated by a model that projects a full yield curve at annual intervals. The model assumes that the logarithm of the short rate follows a mean reverting process subject to two normally distributed random shocks. This ensures that nominal interest rates are always positive, the distribution of future interest rates remains credible, and the model can be calibrated to give a good fit to the initial yield curve. The total annual return on equities is calculated as the return on one year bonds plus an excess return. The excess return is assumed to have a lognormal distribution. The model also generates property total returns and real yield curves, although these are not significant asset classes for Aviva outside the UK. Asset Classes The most important assets are fixed rate bonds of various durations. In some businesses equities are also an important asset class. Summary Statistics The following table sets out the means and standard deviations of future euro and US dollar returns at 30 June 2007 for the three most significant asset classes: equities (in the case of euro), short-term bonds (defined to be of 1 year duration) and long-term bonds (defined to be 10 year zero coupon bonds). In the accumulation of 10 year bonds, it is assumed that these are held for one year, sold as nine year bonds then the proceeds are reinvested in 10 year bonds, although in practice businesses follow more complex asset strategies or tend to adopt a buy and hold strategy. Correlations between asset classes have been set using the same approach as described for the United Kingdom. ------------------------------------------------------------------------------------------------------------------------ Page 42 12. Principal economic assumptions (continued) (b) Stochastic calculations (continued) 5 - year return 10 - year return 20 - year return --------------------------------------------------------------------------------------------------------------------- Mean* StDev** Mean* StDev** Mean* StDev** --------------------------------------------------------------------------------------------------------------------- Euro Short Government Bonds 4.4% 2.0% 4.4% 3.5% 4.5% 6.1% Long Government Bonds 5.0% 4.4% 4.6% 3.3% 4.8% 3.7% Equities 7.7% 19.7% 7.6% 19.3% 7.5% 19.1% US dollar Short Government Bonds 4.7% 2.1% 4.7% 3.7% 5.0% 7.2% Long Government Bonds 5.2% 4.9% 5.0% 4.0% 5.3% 4.7% * Means have been calculated by accumulating a unit investment for the required number of years in each simulation, averaging the accumulation across all simulations, and converting the result to an equivalent annual rate (by taking the nth root of the average accumulation minus one). ** Standard deviations have been calculated by accumulating a unit investment for the required number of years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by the projection period (n years) and taking the square root. This makes the result comparable to implied volatilities quoted in investment markets. (c) Other assumptions Taxation Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have been announced. Demographic assumptions Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva's recent operating experience. Where appropriate, surrender and option take up rate assumptions that vary according to the investment scenario under consideration have been used in the calculation of the time value of options and guarantees, based on our assessment of likely policyholder behaviour in different investment scenarios. Expense assumptions Management expenses and operating expenses of holding companies attributed to life and related businesses have been included in the EEV calculations and split between expenses relating to the acquisition of new business, the maintenance of business in-force and project expenses. Future expense assumptions include an allowance for maintenance expenses and a proportion of recurring project expenses. Certain expenses of an exceptional nature, when they occur, are identified separately and are generally charged as incurred. No future productivity gains have been anticipated. Where subsidiary companies provide administration, investment management or other services to businesses included in the European Embedded Value calculations, the value of profits or losses arising from these services have been included in the embedded value and new business contribution. Valuation of debt Borrowings in the EEV consolidated balance sheet are valued on an IFRS basis, consistent with the primary financial statements. At 30 June 2007 the market value of the Group's external debt, subordinated debt, preference shares including General Accident plc preference shares of Â£250 million (classified as minority interests) and direct capital instrument was Â£5,696 million (31 December 2006: Â£5,991 million). 30 June 30 June 31 December 2007 2006 2006 Â£m Â£m Â£m Borrowings per summarised consolidated balance sheet - EEV basis 12,196 11,070 12,137 Add: amount included within held for sale 11 - - Less: Securitised mortgage funding (6,825) (6,689) (7,068) ------------------------------------------------------------------------------------------------------------------------ Borrowings excluding non-recourse funding - EEV basis 5,382 4,381 5,069 Less: Operational financing by businesses (1,176) (762) (874) ------------------------------------------------------------------------------------------------------------------------ External debt and subordinated debt - EEV basis 4,206 3,619 4,195 Add: Preference shares (including General Accident plc)and direct capital instrument 1,440 1,440 1,440 ----------------------------------------------------------------------------------------------------------------------- External debt, subordinated debt, preference shares and direct capital instrument - EEV basis 5,646 5,059 5,635 Effect of marking these instruments to market 50 354 356 ----------------------------------------------------------------------------------------------------------------------- Market value of external debt,subordinated debt, preference shares and direct capital instrument 5,696 5,413 5,991 ====================================================================================================================== Other It has been assumed that there will be no changes to the methods and bases used to calculate the statutory technical provisions and current surrender values, except where driven by varying future investment conditions under stochastic economic scenarios. ------------------------------------------------------------------------------------------------------------------------ Page 43 13. Sensitivity analysis (a) Economic assumptions The following tables show the sensitivity of the embedded value as at 30 June 2007 and the new business contribution before the effect of required capital for the six months to 30 June 2007 to: â€¢ one percentage point increase and decrease in the discount rates; â€¢ one percentage point increase and decrease in interest rates, including all consequential changes (including assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates); â€¢ one percentage point increase and decrease in the assumed investment returns for equity and property investments, excluding any consequential changes to the risk discount rate; â€¢ 10% rise and fall in market value of equity and property assets (not applicable for new business contribution); and â€¢ decrease in the level of required capital to 100% EU minimum (or equivalent) (not applicable for new business contribution). In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns. Some of the sensitivity scenarios may have consequential effects on valuation bases, where the basis for certain blocks of business is actively updated to reflect current economic circumstances. Consequential valuation impacts on the sensitivities are allowed for where an active valuation basis is used. Where businesses have a target asset mix, the portfolio is re-balanced after a significant market movement otherwise no re-balancing is assumed. Embedded value As 1% increase 1% decrease 1% increase 1% decrease (net of tax) reported in discount in discount in interest in interest 30 June 2007 on page 36 rates rates rates rates Â£m Â£m Â£m Â£m Â£m United Kingdom 6,600 (480) 560 (350) 395 France 2,386 (140) 160 (95) 90 Ireland 922 (40) 40 (35) 35 Italy 833 (25) 25 5 (30) Netherlands(including Belgium and Germany) 4,196 (170) 200 - (160) Poland 724 (40) 45 (5) 5 Spain 905 (45) 55 (25) 25 Other Europe 116 (5) 5 - - Europe 10,082 (465) 530 (155) (35) North America 1,504 (95) 105 (130) 125 Asia Pacific 518 (15) 20 - - ---------------------------------------------------------------------------------------------------------------------- Total 18,704 (1,055) 1,215 (635) 485 ===================================================================================================================== Embedded value 1% increase 1% decrease 10% rise 10% fall in (net of tax) As in equity/ in equity/ in equity/ equity/ EU minimum 30 June 2007 reported property property property in interest capital on page 36 returns returns market values market values (or equivalent) Â£m Â£m Â£m Â£m Â£m Â£m United 6,600 230 (235) 450 (445) 95 Kingdom France 2,386 75 (75) 120 (140) 50 Ireland 922 20 (20) 30 (30) 15 Italy 833 10 (10) 10 (10) 10 Netherlands(including Belgium and Germany) 4,196 215 (220) 425 (430) 100 Poland 724 10 (10) 10 (10) 10 Spain 905 10 (10) 15 (15) 5 Other Europe 116 - - - - 5 Europe 10,082 340 (345) 610 (635) 195 North America 1,504 10 (15) - - 95 Asia Pacific 518 5 (5) 10 (10) 10 ----------------------------------------------------------------------------------------------------------------------- Total 18,704 585 (600) 1,070 (1,090) 395 ======================================================================================================================= ------------------------------------------------------------------------------------------------------------------------ Page 44 13. Sensitivity analysis (continued) (a) Economic assumptions (continued) In general, the magnitude of the sensitivities will reflect the size of the embedded values, though this will vary as the sensitivities have different impacts on the different components of the embedded value. In addition, other factors can have a material impact, such as the nature of the options and guarantees, as well as the types of investments held. The interest rate sensitivity will vary significantly by territory, depending on the type of business written: for example, where non-profit business is well matched by backing assets, the favourable impact of reducing the risk discount rate is the dominant factor. Sensitivities will also vary according to the current economic assumptions, mainly due to the impact of changes to both the intrinsic cost and time value of options and guarantees. Options and guarantees are the main reason for the asymmetry of the sensitivities where the guarantee impacts to different extents under the different scenarios. This can be seen in the sensitivity of a 1% movement in the interest rate for the Netherlands, where there is a significant amount of business with investment return guarantees. The increase of 60 basis points to the assumed pre-tax investment returns at 30 June 2007 has significantly decreased this sensitivity, reflecting the level of the guarantees relative to the interest rate assumption. Sensitivities to a 1% movement in the equity/property return will only impact the value of the in-force covered business, whereas a 10% movement in equity/property values may impact both the net worth and the value of in-force, depending on the allocation of assets. New business contribution As 1% increase 1% decrease 1% increase 1% decrease before required capital reported in discount in discount in interest in interest (gross of tax) on page 30 rates rates rates rates 6 months 2007 Â£m Â£m Â£m Â£m Â£m United Kingdom 178 (29) 34 (12) 15 France 80 (7) 7 (1) - Ireland 14 (2) 3 (1) 2 Italy 49 (2) 2 - (1) Netherlands (including Belgium and Germany) 37 (7) 8 5 (12) Poland 17 (1) 2 - - Spain 88 (6) 7 (2) 2 Other Europe (2) (2) 1 (1) 1 Europe 283 (27) 30 - (8) North America 57 (14) 18 - (8) Asia Pacific 32 (3) 3 3 (4) ---------------------------------------------------------------------------------------------------------------------- Total 550 (73) 85 (9) (5) ====================================================================================================================== New business contribution As 1% increase in 1% decrease in before required capital reported equity/property equity/property (gross of tax) on page 30 returns returns 6 months 2007 Â£m Â£m Â£m United Kingdom 178 15 (14) France 80 3 (3) Ireland 14 2 (2) Italy 49 1 (1) Netherlands(including Belgium and Germany) 37 6 (6) Poland 17 1 (1) Spain 88 1 (1) Other Europe (2) - 1 Europe 283 14 (13) North America 57 2 (2) Asia Pacific 32 1 (1) ----------------------------------------------------------------------------------------------------------------------- Total 550 32 (30) ======================================================================================================================= ----------------------------------------------------------------------------------------------------------------------- Page 45 13. Sensitivity analysis (continued) (b) Non-economic assumptions The tables below show the sensitivity of the embedded value as at 30 June 2007 and the new business contribution before the effect of required capital for 2007 to the following changes in non-economic assumptions: â€¢ 10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of Â£10pa would represent an expense assumption of Â£9pa). Where there is a 'look through' into service company expenses, the fee charged by the service company is unchanged while the underlying expense decreases; â€¢ 10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% pa would represent a lapse rate of 4.5% pa); â€¢ 5% decrease in both mortality and morbidity rates disclosed separately for life assurance and annuity business. No future management actions are modelled in reaction to the changing non-economic assumptions. In each sensitivity calculation, all other assumptions remain unchanged. No changes to valuation bases have been included. As 10% decrease 10% decrease 5% decrease 5% decrease reported in maintence in lapse in mortality/ in mortality Embedded value on page 36 expenses rates morbidity rates morbidty rates (net of tax) -life assurance -annunity business 30 June 2007 Â£m Â£m Â£m Â£m Â£m United Kingdom 6,600 170 95 50 (120) France 2,386 35 35 25 (5) Ireland 922 20 20 5 (5) Italy 833 5 - - - Netherlands (including Belgium and Germany) 4,196 80 20 15 (40) Poland 724 20 40 10 - Spain 905 10 45 15 (5) Other Europe 116 5 5 - - Europe 10,082 175 165 70 (55) North America 1,504 25 15 15 (5) Asia Pacific 518 10 10 10 - ----------------------------------------------------------------------------------------------------------------------- Total 18,704 380 285 145 (180) ======================================================================================================================= New business contribution As 10% decrease 10% decrease 5% decrease 5% decrease before required capital reported in maintence in lapse in mortality/ in mortality (gross of tax) on page 30 expenses rates morbidity rates morbidty rate 6 months 2007 -life assurance -annunity business Â£m Â£m Â£m Â£m Â£m United Kingdom 178 10 10 11 (5) France 80 3 4 2 - Ireland 14 1 3 - - Italy 49 1 1 1 - Netherlands (including Belgium and Germany) 37 4 3 1 (1) Poland 17 1 2 1 - Spain 88 2 10 2 - Other Europe (2) 1 - - - Europe 283 13 23 7 (1) North America 57 2 3 2 - Asia Pacific 32 3 2 1 - ---------------------------------------------------------------------------------------------------------------------- Total 550 28 38 21 (6) ======================================================================================================================== The demographic sensitivities shown above represent a standard change to the assumptions for all products. Different products will be more or less sensitive to the change, and impacts may partially offset. End of Part 2 of 4 This information is provided by RNS The company news service from the London Stock Exchange

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