Interim Results - Part 2

Aviva PLC 11 August 2005 PART 2 OF 4 ------------------------------------------------------------------------------------------------------------------ Page 24 EEV basis Summarised consolidated income statement - EEV basis For the six months ended 30 June 2005 Restated* 30 June 6 months 6 months Full year 2005 2005 2004 2004 Page â‚¬m Â£m Â£m Â£m Operating profit 31 1,242 Life EEV operating return 857 799 1,611 26 Fund management** 18 10 20 53 1,006 General insurance and health 694 583 1,259 Other: 65 Other operations*** 45 (12) (41) 55 (120) Corporate costs (83) (99) (188) 55 (309) Unallocated interest charges (213) (205) (437) ------------------------------------------------------------------------------------------------------------------ 1,910 Operating profit before tax 1,318 1,076 2,224 (14) Impairment of goodwill (10) - (41) (12) Amortisation and impairment of other intangibles (8) (1) (3) - Financial Services Compensation Scheme and other levies - (25) (49) 1,216 Variation from longer-term investment return 839 (440) 662 (770) Effect of economic assumption changes (531) 56 (318) 52 210 Profit on the disposal of subsidiaries and associates 145 8 34 52 (20) Integration costs (14) - - 52 - Exceptional costs for termination of operations - (40) (40) ------------------------------------------------------------------------------------------------------------------- 2,520 Profit before tax 1,739 634 2,469 (597) Tax on operating profit (412) (350) (618) (171) Tax on profit/(loss) on other activities (118) 101 (32) ------------------------------------------------------------------------------------------------------------------- 1,752 Profit for the period 1,209 385 1,819 ================================================================================================================== Attributable to: 1,623 Equity shareholders of Aviva plc 1,120 308 1,641 129 Minority interests 89 77 178 ------------------------------------------------------------------------------------------------------------------ 1,752 1,209 385 1,819 ================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. All profit is from continuing operations. ** Excludes the proportion of the results of Morley's fund management businesses and of our French asset management operation Aviva Gestion d'Actifs (AGA) that 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. The results for the six month period to 30 June 2004 also exclude the results of Norwich Union Equity Release (NUER). 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. ------------------------------------------------------------------------------------------------------------------ Page 25 Earnings per share - EEV basis For the six months ended 30 June 2005 Restated* 6 months 6 months 6 months Full year 2005 Earnings per share 2005 2004 2004 Operating profit on an EEV basis after tax, attributable to equity shareholders in respect of Aviva Plc 51.6c Continuing operations 35.6p 28.6p 63.1p Profit after tax for the year on an EEV basis, attributable to equity shareholders of Aviva plc 70.0c Basic (pence per share) 48.3p 13.3p 72.0p 69.3c Diluted (pence per share) 47.8p 13.1p 71.4p * Restated for the effect of implementing European Embedded Value principles. Summarised consolidated statement of recognised income and expense - EEV basis For the six months ended 30 June 2005 Restated* 6 months 6 months Full year 2005 2004 2004 Â£m Â£m Â£m Fair value gains/(losses), net of transfers to the income statement 1 (38) 151 Actuarial (losses)/gains and on pension schemes (46) 18 (145) Foreign exchange rate movements (340) (294) 119 Aggregate tax effect - shareholder tax 18 41 (15) ------------------------------------------------------------------------------------------------------------------- Net (expense)/income recognised directly in equity (367) (273) 110 Profit for the period** 1,209 385 1,819 ------------------------------------------------------------------------------------------------------------------ Total recognised income and expense for the period 842 112 1,929 ================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. ** Stated before the effect of foreign exchange rate movements, which are reported within the foreign exchange rate movements line. Summarised consolidated statement of changes in equity - EEV basis For the six months ended 30 June 2005 Restated* 6 months 6 months Full year 2005 2004 2004 Â£m Â£m Â£m Balance at 1 January 14,011 11,534 11,534 Total recognised income and expense for the period 842 112 1,929 Dividends and appropriations (note 14) (373) (351) (570) Movement in shares held by employee trusts - 1 1 Issue of share capital for the acquisition of RAC 530 - - Other issue of share capital 27 23 25 Shares issued in lieu of dividends 12 - 103 Issue of direct capital instrument, net of transaction costs of Â£9 million - - 981 Capital contribution from minority shareholders 93 - 4 Minority share of dividends declared in the period (36) (41) (41) Minority interest in acquired subsidiaries - - 45 ------------------------------------------------------------------------------------------------------------------ Total equity 15,106 11,278 14,011 Minority interests (1,283) (987) (1,160) ------------------------------------------------------------------------------------------------------------------ Balance at 30 June / 31 December 13,823 10,291 12,851 =================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. ------------------------------------------------------------------------------------------------------------------- Page 26 Summarised consolidated balance sheet - EEV basis As at 30 June 2005 Restated* 30 June 30 June 30 June 31 December 2005 2005 2004 2004 â‚¬m Â£m Â£m Â£m Assets Intangible assets 3,366 Goodwill 2,289 1,137 1,184 1,350 Acquired value of in-force business and other intangible assets 918 466 516 7,709 Additional value of in-force long-term business 5,242 4,493 4,949 1,287 Property and equipment 875 895 812 16,284 Investment property 11,073 10,267 11,057 2,050 Investments in joint ventures 1,394 1,115 1,242 1,313 Investments in associates 893 841 886 Financial investments 145,204 Debt securities 98,739 90,348 98,719 70,449 Equity securities 47,905 42,214 47,291 33,432 Other investments 22,734 17,603 20,346 32,237 Loans 21,921 19,098 22,055 12,912 Reinsurance assets 8,780 7,520 8,503 72 Current tax assets 49 8 - 1,234 Deferred tax assets 839 704 908 14,081 Receivables and other financial assets 9,575 6,901 7,509 4,728 Deferred acquisition costs and other assets 3,215 3,645 3,189 3,794 Prepayments and accrued income 2,580 2,285 2,307 21,184 Cash and cash equivalents 14,405 10,002 12,779 163 Assets of operations classified as held for sale 111 - - ------------------------------------------------------------------------------------------------------------------ 372,849 Total assets 253,537 219,542 244,252 ================================================================================================================== Equity 874 Share capital 594 566 570 6,487 Capital reserves 4,411 3,839 3,878 749 Other reserves 509 237 736 3,056 Retained earnings 2,079 1,107 1,709 7,412 Additional retained profit on an EEV basis 5,040 4,342 4,768 ------------------------------------------------------------------------------------------------------------------ 18,578 Equity attributable to shareholders of Aviva plc 12,633 10,091 11,661 1,750 Preference share capital and direct capital instrument 1,190 200 1,190 1,887 Minority interests 1,283 987 1,160 ------------------------------------------------------------------------------------------------------------------ 22,215 Total equity 15,106 11,278 14,011 ================================================================================================================== Liabilities 188,324 Gross insurance liabilities 128,060 113,222 124,122 104,419 Gross liability for investment contracts 71,005 58,932 69,555 11,371 Unallocated divisible surplus 7,732 9,128 7,549 3,541 Provisions 2,408 1,803 2,056 1,584 Current tax liabilities 1,077 871 922 2,434 Deferred tax liabilities 1,655 979 1,543 15,735 Borrowings 10,700 8,817 10,090 10,362 Payables and other financial liabilities 7,047 8,639 7,240 9,184 Other liabilities 6,245 3,820 4,917 3,631 Net asset value attributable to unitholders 2,469 2,053 2,247 49 Liabilities of operations classified as held for sale 33 - - ------------------------------------------------------------------------------------------------------------------ 350,634 Total liabilities 238,431 208,264 230,241 ================================================================================================================== ------------------------------------------------------------------------------------------------------------------ 372,849 Total equity and liabilities 253,537 219,542 244,252 ================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. ------------------------------------------------------------------------------------------------------------------- Page 27 Segmentation of summarised consolidated balance sheet - EEV basis As at 30 June 2005 Restated* Restated* Life and General Life and General related business related business Restated* businesses and other Group businesses and other Group Group 30 June 30 June 30 June 30 June 30 June 30 June 31 December 2005 2005 2005 2004 2004 2004 2004 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 211,209 36,760 247,969 184,337 30,336 214,673 238,939 Acquired additional value of in-force long-term business 326 - 326 376 - 376 364 ------------------------------------------------------------------------------------------------------------------ Total assets included in the statutory IFRS balance sheet 211,535 36,760 248,295 184,713 30,336 215,049 239,303 ================================================================================================================== Liabilities of the long-term business (203,113) - (203,113) (177,002) - (177,002) (198,483) Liabilities of the general insurance and other businesses - (35,411) (35,411) - (31,331) (31,331) (31,827) ------------------------------------------------------------------------------------------------------------------- Net assets on a statutory IFRS basis 8,422 1,349 9,771 7,711 (995) 6,716 8,993 Pension scheme funding adjustment** 93 - 93 69 - 69 69 Additional value of in-force long-term business*** 5,242 - 5,242 4,493 - 4,493 4,949 ------------------------------------------------------------------------------------------------------------------ Net assets on an EEV basis**** 13,757 1,349 15,106 12,273 (995) 11,278 14,011 ================================================================================================================== Equity capital, capital reserves, shares held by employee trusts and other reserves 5,514 4,642 5,184 IFRS basis retained earnings 2,079 1,107 1,709 Additional EEV basis retained profit 5,040 4,342 4,768 ------------------------------------------------------------------------------------------------------------------ Equity attributable to shareholders of Aviva plc on an EEV basis 12,633 10,091 11,661 Preference share capital and direct capital instrument 1,190 200 1,190 Minority interests 1,283 987 1,160 ------------------------------------------------------------------------------------------------------------------ EEV basis total equity 15,106 11,278 14,011 ================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. ** The difference in pension scheme funding arises on the embedded value balance sheet as the element of the pension scheme deficit which relates to UK Life and other related businesses is now incorporated within shareholders' funds at an amount equivalent to the post-tax contributions discounted using the UK Life business risk discount rate. *** 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 2005 2004 the period Â£m Â£m Â£m Group's share included in shareholders funds 5,040 4,768 272 Minority interest share 295 250 45 Difference in pension scheme funding (93) (69) (24) ------------------------------------------------------------------------------------------------------------------ Balance at 30 June / 31 December 5,242 4,949 293 ================================================================================================================= **** Analysis of net assets on an EEV basis is made up as follows: Restated* 30 June 30 June 31 December 2005 2004 2004 Â£m Â£m Â£m Long-term business net assets on an EEV basis 13,757 12,273 13,826 ----------------------------------------------------------------------------------------------------------------- Comprises: Embedded value 12,989 11,473 13,014 RBSG goodwill 217 217 217 Goodwill allocated to long-term business 551 583 595 ----------------------------------------------------------------------------------------------------------------- Long-term business net assets on an EEV basis 13,757 12,273 13,826 ================================================================================================================= * Restated for the effect of implementing European Embedded Value principles. ----------------------------------------------------------------------------------------------------------------- Page 28 Basis of preparation - EEV basis The consolidated income statement and balance sheet on pages 24 to 27 present the Group's results and financial position for the 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 adopted is in accordance with the EEV Principles introduced by the CFO Forum in May 2004. In the Directors' opinion, the EEV basis provides a more accurate 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 is a refinement to the Achieved Profits basis previously adopted by the Group and represents a more meaningful basis of reporting the underlying value in our life business 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. The Group's revised approach to establishing economic assumptions (specifically investment returns, required capital and discount rates) was reviewed by Tillinghast, a firm of actuarial consultants, as part of the restatement work. The approach is based on the well established capital asset pricing model theory and is in line with the EEV Principles and Guidance. In addition, the results of our equity release business have been reclassified from non-insurance operations to life insurance operations. This has resulted in assets, liabilities and operating profits being reclassified out of non-insurance segments and into life segments. Comparatives for 30 June 2004 have been restated accordingly and the impact of the reclassification on consolidated shareholders' funds and consolidated profit for the six months to 30 June 2004 is nil. The results for the six month period to 30 June 2005 and 30 June 2004 are unaudited but have been reviewed by the auditors, Ernst & Young LLP. Their report in respect of 30 June 2005 is included in the Interim Report on page 58 of that document. The interim accounts do not constitute statutory accounts as defined by Section 240 of the Companies Act 1985. Covered business The EEV calculations cover the following lines of business: life insurance, long term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of the other life and related business written in our associated undertakings and joint ventures, as well as the equity release business written in the UK. The adoption of IFRS has resulted in no change to the Group's definition of new business and so includes contracts that meet the definition of 'non-participating investment' contracts under IFRS. Covered business includes the Group's share of our joint venture operations including our arrangement with The Royal Bank of Scotland Group (RBSG) and our operations in India and China. In addition, the results of Group companies providing significant administration, investment management and other services and of Group holding companies have been included to the extent that they relate to covered business. Together these businesses are referred to as 'Life and related businesses'. New business premiums New business premiums include: â€¢ premiums arising from the sales of new contracts during the period; â€¢ non-contractual additional premiums, including future Department of Work and Pensions (DWP) rebate premiums; and â€¢ expected renewals on new contracts and expected future contractual alterations to new contracts. For products sold to individuals, premiums are generally considered to represent new business in certain circumstances, including where a new contract has been signed, or where underwriting has been performed. Renewal premiums include contractual renewals, non-contractual variations that are reasonably predictable and recurrent single premiums that are pre-defined and reasonably predictable. For group products, new business includes new contracts and increases to aggregate premiums under existing contracts. Renewal premiums are based on the level of premium received during the reporting period and allow for premiums expected to be received beyond the expiry of any guaranteed premium rates. Foreign exchange adjustments Embedded value and other balance sheet items denominated in foreign currencies have been translated to sterling using the appropriate closing exchange rate. New business contribution and other income statement items have been translated using an average exchange rate for the relevant period. The exchange rates adopted in this announcement are shown on page 50. EEV methodology Overview Under the EEV methodology, profit is recognised as it is earned over the life of products defined within covered business. The total profit recognised over the lifetime of a policy is the same as under the IFRS basis of reporting, but the timing of recognition is different. Calculation of the embedded value The shareholders' interest in the life and related businesses is represented by the embedded value. The embedded value is the total of the net worth of the life and related businesses and the value of in-force covered business. Calculations are performed separately for each business and are based on the cash flows of that business, after allowing for both external and intra-group reinsurance. Where one life business has an interest in another life business, the net worth of that business excludes the interest in the dependent company. ----------------------------------------------------------------------------------------------------------------- Page 29 The embedded value is calculated on an after-tax basis applying current legislation and practice together with future known changes. Profits are then grossed up for tax at the full rate of corporation tax for the UK and at an appropriate rate for each of the other countries based on opening year tax rates. Net worth The 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, and consists of the required capital and free surplus. The level of required capital for each business, which ranges between 100% and 200% of the EU minimum solvency requirement for our main European businesses, reflects the level of capital considered by the Directors to be appropriate to manage the business, allowing for our internal assessment of the level of market, insurance and operating risk inherent in the underlying products. The same definition of required capital is used for both existing and new business. The free surplus comprises the market value of shareholder assets in excess of local statutory reserves and required capital. Value of in-force covered business The value of in-force covered business is the present value at the appropriate risk discount rate (which incorporates a risk margin) of the distributable profits to shareholders arising from the in-force covered business projected on a best estimate basis, less a deduction for the cost of holding the required level of capital. In the UK, shareholders' distributable profits arise when they are released following actuarial valuations. These valuations 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, administration costs, as well as management and policyholder actions. Releases to shareholders arising in future years from the in-force covered business and associated required capital can be projected using best estimate assumptions of future experience. In overseas businesses generally, there are similar requirements restricting payments to shareholders from life businesses. The value of in-force covered business includes an allowance for the impact of financial options and guarantees arising from best estimate assumptions (the intrinsic value) and from additional costs related to the variability of investment returns (the time value). The intrinsic value is included in the underlying value of the in-force covered business using deterministic assumptions. The time value of financial options and guarantees has been determined using stochastic modelling techniques. Stochastic modelling involves projecting the future cash flows of the business under thousands of economic scenarios that are representative of the possible future outcomes for market variables such as interest rates and equity returns. Allowance is made, where appropriate, for the effect of management and/or policyholder actions in different economic conditions on future assumptions such as asset mix, bonus rates and surrender rates. The time value is determined by deducting the average value of shareholder cash flows under these economic scenarios from the deterministic shareholder value under best estimate assumptions. The cost of holding required capital is the difference between the required capital and the present value at the appropriate risk discount rate of the projected release of the required capital and investment earnings on the assets deemed to back the required capital. Where the required capital is covered by policyholder assets, for example in the UK with-profit funds, there is no impact of cost of capital on shareholder value. The assets regarded as covering the required capital are those that the operation deems appropriate. The value of in-force covered business includes the capitalised value of profits and losses arising from subsidiary companies providing administration, investment management and other services to the extent that they relate to covered business. This is referred to as the 'look through' into service company expenses. In addition, expenses arising in holding companies that relate directly to acquiring or maintaining covered business have been allowed for. Where external companies provide services to the life and related businesses, their charges have been allowed for in the underlying projected cost base. Risk discount rates Under the EEV methodology, a risk discount rate (RDR) is required to express a stream of expected future distributable profits as a single value at a particular date (the present value). It is the interest rate that an investment equal to the present value would have to earn in order to be able to replicate exactly the stream of future profits. The RDR is a combination of a risk free rate to reflect the time value of money plus a risk margin to make prudent allowance for the risk that experience in future years may differ from that assumed. In particular, a risk margin is added to allow for the risk that expected additional returns on certain asset classes (e.g. equities) are not achieved. Risk discount rates for our life businesses have been calculated using a risk margin based upon a Group Weighted Average Cost of Capital (WACC). The Group WACC is calculated using a gross risk free interest rate, an equity risk margin, a market assessed risk factor (beta), and an allowance for the gearing impact of debt financing (including subordinated debt). The market assessed risk factor captures the market's view of the effect of all types of risk on our business, including operational and other non-economic risk. The RDR is only one component of the overall allowance for risk in EEV calculations. Risk is also allowed for in the cost of holding statutory reserving margins, additional required capital and in the time value of options and guarantees. Hence to derive an RDR the Group WACC is adjusted to reflect the average level of required capital assumed to be held, and to reflect the explicit valuation of the time value of options and guarantees. ----------------------------------------------------------------------------------------------------------------- Page 30 In order to derive risk discount rates for each of our life businesses, the adjusted Group WACC is expressed as a risk margin in excess of the gross risk free interest rate used in the WACC calculation as described above. Business-specific discount rates are then calculated as the sum of this risk margin and the appropriate local gross risk free rate at the valuation date, based on returns on government bonds. A common risk free rate, and hence a common RDR, is used for all of our businesses within the Eurozone. Additional country-specific risk margins are applied to smaller businesses to reflect additional economic, political and business-specific risk. Within each business, a constant RDR has been applied in all future time periods and in each of the economic scenarios underlying the calculation of the time value of options and guarantees. At each valuation date, the risk margin is reassessed based on current economic factors and is updated only if a significant change has occurred. In particular, changes in risk profile arising from movements in asset mix are allowed for via the updated risk margin calculation. Participating business Future regular bonuses on participating business are projected in a manner consistent with current bonus rates and expected future returns on assets deemed to back the policies. For with-profit funds in the UK 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 assets in the fund over the future lifetime of the in-force with-profit policies. However, under stochastic modelling there may be some extreme economic scenarios when the total assets in the group's with-profit funds are not sufficient to pay all policyholder claims. The average additional shareholder cost arising from this shortfall has been included in the time value of options and guarantees. For profit sharing business in continental Europe, where policy benefits and shareholder value depend on the timing of realising gains, apportionment of unrealised gains between policyholders' benefits and shareholders reflect contractual requirements as well as existing practice. Where under certain economic scenarios additional shareholder injections required to meet policyholder payments, the average additional cost has been included in the time value of options and guarantees. Consolidation adjustments The effect of transactions between our life companies such as loans and reinsurance arrangements has been included in results split by territory in a consistent manner. No elimination is required on consolidation. As the EEV methodology incorporates the impact of profits and losses arising from subsidiary companies providing administration, investment management and other services to the Group's life companies, the equivalent profits and losses have been removed from the relevant segment (non insurance or fund management) and are instead included within the results of life and related businesses. In addition, the underlying basis of calculation for these profits has changed from the IFRS basis to the EEV basis. The capitalised value of the future profits and losses from such service companies are included in the embedded value and new business contribution calculations for the relevant territory, but the net assets (representing historical profits and other amounts) remain under non insurance or fund management. In order to reconcile the profits arising in the financial period within each segment with the assets on the opening and closing balance sheets, a transfer of IFRS profits from life and related business to the appropriate segment is deemed to occur. An equivalent approach has been adopted for expenses within our holding companies. ----------------------------------------------------------------------------------------------------------------- Page 31 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. Restated* 6 months 6 months Full year 2005 2004 2004 Life EEV return Â£m Â£m Â£m New business contribution (after the effect of required capital) 286 251 516 Profit from existing business - expected return 434 417 819 - experience variances (31) (20) (15) - operating assumption changes 7 - (7) Expected return on shareholders' net worth 161 151 298 ------------------------------------------------------------------------------------------------------------------ Life EEV operating return before tax 857 799 1,611 Investment return variances 719 (202) 501 Effect of economic assumption changes (531) 56 (318) ------------------------------------------------------------------------------------------------------------------ Life EEV return before tax 1,045 653 1,794 Tax on operating profit (266) (244) (490) Tax (charge)/credit on other ordinary activities (65) 36 (58) ------------------------------------------------------------------------------------------------------------------ Life EEV return after tax 714 445 1,246 ================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. There were no separate development costs reported in these periods. ------------------------------------------------------------------------------------------------------------------ Page 32 New business contribution The following tables set out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out on page 28. 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 sales are expressed on two bases: annual premium equivalent (APE) and the present value of future 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. 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 New business contributon contribution Annual premium Present value of new before the effect of after the effect of equivalent* business premiums required capital required capital ------------------ ---------------------- ----------------- -------------------- Restated** Restated** Restated** 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 2005 2004 2005 2004 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Life and pensions business United Kingdom 536 567 4,244 4,299 135 127 105 106 Continental Europe France 202 145 1,854 1,337 71 46 48 27 Ireland 51 44 349 267 9 13 8 11 Italy 145 89 1,333 811 33 22 20 14 Netherlands (including Belgium and Luxembourg) 138 119 1,241 981 39 40 18 25 Poland 17 18 112 121 5 5 5 4 Spain 113 130 965 1,122 80 68 70 55 Other Europe 55 58 364 388 3 1 2 (2) International 89 74 554 427 18 16 10 11 ------------------------------------------------------------------------------------------------------------------- Total (before the effect of required capital) 1,346 1,244 11,016 9,753 393 338 Effect of required capital (107) (87) ----------------------------------------------------------------------------------------------- Total (after the effect of required capital) 286 251 286 251 ================================================================================================================== * United Kingdom APE has been restated to include NUER APE volumes of Â£18 million (six months 30 June 2004: Â£20 million) ** Restated for the effect of implementing European Embedded Value Principles. New business contribution before the effect of required capital includes minority interests for the six months to 30 June 2005 of Â£77 million (six months to 30 June 2004: Â£56 million). This comprises minority interests in France of Â£11 million (six months to 30 June 2004: Â£2 million), Italy Â£20 million (six months to 30 June 2004: Â£13 million), Netherlands Â£5 million (six months to 30 June 2004: Â£5 million), Poland Â£1 million (six months to 30 June 2004: Â£1 million) and Spain Â£40 million (six months to 30 June 2004: Â£35 million). New business contribution after the effect of required capital includes minority interests for the six months to 30 June 2005 of Â£58 million (six months to 30 June 2004: Â£42 million). This comprises minority interests in France of Â£6 million (six months to 30 June 2004: nil), Italy Â£12 million (six months to 30 June 2004: Â£8 million), Netherlands Â£4 million (six months to 30 June 2004: Â£4 million), Poland Â£1 million (six months to 30 June 2004: Â£1 million) and Spain Â£35 million (six months to 30 June 2004: Â£29 million). ------------------------------------------------------------------------------------------------------------------- Page 33 EEV basis - new business contribution before the effect of required capital, tax and minority interest Annual premium Present value of new New business equivalent* business premiums contribution ---------------------- -------------------- ------------------ Restated** Restated** 6 months 6 months 6 months 6 months 6 months 6months 2005 2004 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Â£m Â£m Analysed between: - Bancassurance channels 369 275 3,222 2,305 149 116 - Other distribution channels 977 969 7,794 7,448 244 222 ------------------------------------------------------------------------------------------------------------------ Total 1,346 1,244 11,016 9,753 393 338 ================================================================================================================== * APE has been restated to include NUER volumes. ** Restated for the effect of implementing European Embedded Value Principles. EEV basis - new business contribution after the effect of required capital, tax and minority interest Annual premium Present value of new New business equivalent* business premiums contribution** ---------------------- -------------------- ------------------ Restated*** Restated*** 6 months 6 months 6 months 6 months 6 months 6months 2005 2004 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Â£m Â£m Analysed between: - Bancassurance channels 197 154 1,678 1,263 42 35 - Other distribution channels 955 948 7,597 7,288 116 111 ------------------------------------------------------------------------------------------------------------------ Total 1,152 1,102 9,275 8,551 158 146 ================================================================================================================== * APE has been restated to include NUER volumes. ** Contribution stated after deducting the effect of required capital, tax and minority interests. *** Restated for the effect of implementing European Embedded Value Principles. 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 12.7% for the six months to 30 June 2005 (full year to 31 December 2004: 12.3%). 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 2005 ----------------------------------------------------------------------------- Internal rate of Total invested return Initial capital Required capital capital % Â£m Â£m Â£m UK 11% 174 82 256 Continental Europe France 13% 10 48 58 Ireland 11% 13 6 19 Italy 13% 5 32 37 Netherlands (including Belgium and Luxembourg) 8% 22 37 59 Poland 18% 4 2 6 Spain 26% 8 30 38 Other Europe 11% 9 9 18 International 15% 13 19 32 ------------------------------------------------------------------------------------------------------------------ Total 13% 258 265 523 ================================================================================================================== The total initial capital for life and pensions new business for the six months to 30 June 2005 of Â£258 million (six months to 30 June 2004: Â£309 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£210 million (six months to 30 June 2004: Â£280 million) shown on page 36, 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 34 Aviva's reported internal rates of return calculations are based on the total invested capital used to support the writing of the new business. However, this underestimates the returns due to the Group's shareholders as the total invested capital includes the cash flows attributable to both the Group's debt holders as well as the Group's shareholders. As the cost of debt capital is significantly lower than the Group's IRRs this underestimates the returns on new business for our shareholders measured through the reported internal rate of return calculations. The Group could equally have defined the internal rate of return calculations based on the cash flows that are attributable to the Group's shareholders as opposed to total cash flows. The effect on the reported calculation of the internal rates of return on this basis is to increase the IRR for UK Life from 11.4% to 13.6%. The revised calculation assumes that the external capital composition of the Group, 30% debt and 70% equity, is used to finance the initial and required capital, and allows for the cost of debt by deducting the relevant proportion of the Group's debt serving costs from the future cash flows earned over the lifetime of the products. The leveraged new business returns comfortably exceed the Group's cost of equity at 30 June 2005 of 8.6% (based on a risk free rate of 4.2%, an equity risk margin of 3% and a market assessed beta of 1.46). Experience variances Experience variances include the impact of the difference between expense, demographic and persistency assumptions, and actual experience incurred in the year. Also included are variances arising from tax, where such variances are due to management action. Restated* 6 months 6 months Full year 2005 2004 2004 Â£m Â£m Â£m United Kingdom (30) (19) (81) France 18 2 22 Netherlands (including Belgium and Luxembourg) (13) (1) 12 Europe (7) 5 23 International 1 (7) 9 ------------------------------------------------------------------------------------------------------------------ (31) (20) (15) =================================================================================================================== * Restated for the effect of implementing European Embedded Value Principles. 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. Restated* 6 months 6 months Full year 2005 2004 2004 Â£m Â£m Â£m United Kingdom - 7 (58) France - (1) 35 Netherlands (including Belgium and Luxembourg) 6 3 21 Europe 1 (10) (4) International - 1 (1) ------------------------------------------------------------------------------------------------------------------- 7 - (7) =================================================================================================================== * Restated for the effect of implementing European Embedded Value Principles. Further disclosures on experience variances and operating assumption changes on an EEV basis are provided on pages 67, 68 and 69. ------------------------------------------------------------------------------------------------------------------- Page 35 Geographical analysis of life EEV operating return Restated* 6 months 6 months Full year 2005 2004 2004 Â£m Â£m Â£m United Kingdom 327 345 551 Continental Europe France 158 112 286 Ireland 22 16 40 Italy 47 36 79 Netherlands (including Belgium and Luxembourg) 115 132 277 Poland 46 35 93 Spain 92 81 180 Other Europe 14 14 22 International 36 28 83 ------------------------------------------------------------------------------------------------------------------ 857 799 1,611 ================================================================================================================== * Restated for the effect of implementing European Embedded Value Principles. Life EEV operating return includes minority interests in the six months to 30 June 2005 of Â£98 million (six months to 30 June 2004: Â£83 million). This comprises minority interests in France of Â£13 million (six months to 30 June 2004: Â£4 million), Italy Â£26 million (six months to 30 June 2004: Â£20 million), Netherlands Â£7 million (six months to 30 June 2004: Â£14 million), Poland Â£6 million (six months to 30 June 2004: Â£5 million), Spain Â£45 million (six months to 30 June 2004: Â£39 million) and Other Europe Â£1 million (six months to 30 June 2004: Â£1 million). Analysis of life EEV operating return 6 months 6 months Full year 2005 2004 2004 Â£m Â£m Â£m Life businesses 844 792 1,569 Equity release 21 21 51 Non-insurance service and holding companies (23) (26) (34) Fund management service companies 15 12 25 ------------------------------------------------------------------------------------------------------------------ 857 799 1,611 =================================================================================================================== ------------------------------------------------------------------------------------------------------------------ Page 36 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 2005 and for the six months to 30 June 2004. 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 from life and related businesses to 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 2005 ----------------------------------------------- Net worth Value of in-force Total Â£m Â£m Â£m Embedded value at the beginning of the period - Free surplus 1,894 - Required capital* 4,362 Total 6,256 6,758 13,014 -------------------------------------------------------------------------------------------------------- --------- New business contribution (after the effect of required capital) (210) 405 195 Expected return on existing business - return on VIF - 303 303 Expected return on existing business - transfer to net worth 455 (455) - Experience variances and operating assumption changes 81 (98) (17) Expected return on shareholders' net worth 110 - 110 Investment return variances and economic assumption changes 288 (165) 123 ----------------------------------------------------------------------------------------------------------------- Life EEV return after tax 724 (10) 714 Exchange rate movements (165) (129) (294) Amounts injected into life and related businesses 192 - 192 Amounts released from life and related businesses (647) - (647) Transfer from life and related businesses to other segments 10 - 10 ----------------------------------------------------------------------------------------------------------------- Embedded value at the end of the period - Free surplus 2,122 - Required capital* 4,248 Total 6,370 6,619 12,989 ================================================================================================================= * Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. Required capital has reduced in the period by Â£114 million. The movement comprises an increase of Â£265 million in relation to new business written, a reduction of Â£267 million in relation to in-force business and a reduction of Â£112 million in relation to movements in foreign exchange rates. The reduction in the in-force required capital includes a release of Â£245 million arising from the restructure of the UK non-profit funds. 6 months 2004 ----------------------------------------------- Net worth Value of in-force Total Â£m Â£m Â£m Embedded value at the beginning of the period - Free surplus 1,721 - Required capital* 4,114 Total 5,835 5,916 11,751 ----------------------------------------------------------------------------------------------------------------- New business contribution (after the effect of required capital) (280) 454 174 Expected return on existing business - return on VIF - 294 294 Expected return on existing business - transfer to net worth 341 (341) - Experience variances and operating assumption changes 47 (64) (17) Expected return on shareholders' net worth 105 - 105 Investment return variances and economic assumption changes (9) (102) (111) ------------------------------------------------------------------------------------------------------------------ Life EEV return after tax 204 241 445 Exchange rate movements (256) (63) (319) Amounts injected into life and related businesses 39 - 39 Amounts released from life and related businesses (458) - (458) Transfer from life and related businesses to other segments 15 - 15 ------------------------------------------------------------------------------------------------------------------ Embedded value at the end of the period - Free surplus 1,399 - Required capital* 3,980 Total 5,379 6,094 11,473 ================================================================================================================== * Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. ------------------------------------------------------------------------------------------------------------------ Page 37 Segmental analysis of life and related businesses embedded value Value of in-force Net worth covered business Total -------------------- -------------------------- ---------------- Cost of Required Free Present value required capital* surplus of in-force capital Embedded value 30 June 2005 Â£m Â£m Â£m Â£m Â£m United Kingdom 1,239 475 4,182 (427) 5,469 Continental Europe France 1,072 84 909 (193) 1,872 Ireland 87 190 336 (18) 595 Italy 246 325 164 (53) 682 Netherlands (including Belgium and Luxembourg) 930 694 1,074 (304) 2,394 Poland 95 59 381 (29) 506 Spain 213 23 451 (54) 633 Other 70 80 101 (26) 225 International 296 192 199 (74) 613 ------------------------------------------------------------------------------------------------------------------ 4,248 2,122 7,797 (1,178) 12,989 ================================================================================================================== * Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. Value of in-force Net worth covered business Embedded value -------------------- -------------------------- ---------------- Restated* Restated* Restated* 30 June 30 June 30 June 30 June 30 June 30 June 2005 2004 2005 2004 2005 2004 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom 1,714 1,622 3,755 3,414 5,469 5,036 Continental Europe France 1,156 1,049 716 571 1,872 1,620 Ireland 277 262 318 293 595 555 Italy 571 319 111 108 682 427 Netherlands (including Belgium and Luxembourg) 1,624 1,222 770 1,012 2,394 2,234 Poland 154 121 352 281 506 402 Spain 236 194 397 278 633 472 Other 150 137 75 52 225 189 International 488 453 125 85 613 538 ------------------------------------------------------------------------------------------------------------------ 6,370 5,379 6,619 6,094 12,989 11,473 ================================================================================================================== * Restated for the effect of implementing European Embedded Value Principles. 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, of Â£4,248 million at 30 June 2005 (30 June 2004: Â£3,980 million) is included within the net worth. The value of in-force covered business includes the effect of holding shareholders' capital to support the level of required capital and allowing for projected future releases. This impact reduces the value of in-force covered business at 30 June 2005 by Â£1,178 million (30 June 2004: Â£1,120 million). The embedded value at the end of the six month period 30 June 2005 includes minority interests of Â£903 million (30 June 2004: Â£589 million). This comprises minority interests in France of Â£135 million (30 June 2004: Â£55 million), Italy Â£347 million (30 June 2004: Â£224 million), Netherlands Â£62 million (30 June 2004: Â£52 million), Poland Â£83 million (30 June 2004: Â£65 million), Spain Â£267 million (30 June 2004: Â£191 million) and Other Europe Â£9 million (30 June 2004: Â£2 million). ------------------------------------------------------------------------------------------------------------------ Page 38 Time value of options and guarantees The following table sets out the time value of options and guarantees relating to covered business by territory at 30 June 2005, 30 June 2004 and 31 December 2004. 30 June 30 June 31 December 2005 2004 2004 Â£m Â£m Â£m United Kingdom 44 35 44 Continental Europe France 81 66 79 Ireland 2 6 4 Italy 12 11 14 Netherlands (including Belgium and Luxembourg) 97 72 92 Poland 4 4 5 Spain 8 10 9 Other Europe 16 10 18 International 12 8 9 ------------------------------------------------------------------------------------------------------------------- 276 222 274 =================================================================================================================== The time value of options and guarantees (TVOG) is most significant in the United Kingdom, France and the Netherlands. 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. The TVOG has largely remained unchanged over the period. The total movement in the period from 31 December 2004 includes an increase of Â£12 million due to the 50 basis points fall in bond yields in continental Europe during 2005 together with the allowance included in new business contribution of Â£12 million which have largely been offset by the favourable impacts of investment returns and exchange rates. Minority interest in life and related businesses EEV results 6 months to 30 June 2005 Full year 2004 ---------------------------------- -------------- Shareholders' Minority interest interest Group Group Â£m Â£m Â£m Â£m New business contribution before effect of required capital 316 77 393 706 Effect of required capital (88) (19) (107) (190) ------------------------------------------------------------------------------------------------------------------ New business contribution including effect of required capital 228 58 286 516 ================================================================================================================= Life EEV operating return before tax 759 98 857 1,611 ================================================================================================================= Life EEV return before tax 939 106 1,045 1,794 Attributed tax (295) (36) (331) (548) ------------------------------------------------------------------------------------------------------------------ Life EEV return after tax 644 70 714 1,246 ================================================================================================================= Closing life and related businesses embedded value 12,086 903 12,989 13,014 ================================================================================================================= ------------------------------------------------------------------------------------------------------------------ Page 39 Principal economic assumptions - 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. 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. Investment return assumptions are generally derived by major product class, based on hypothecating the assets at the valuation date. 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 2005 2004 2004 2003 2005 2004 2004 2003 Risk discount rate 6.9% 7.3% 7.8% 7.5% 5.9% 6.4% 7.0% 7.0% Pre-tax investment returns: Base government fixed interest 4.2% 4.6% 5.1% 4.8% 3.2% 3.7% 4.3% 4.3% Ordinary shares 7.2% 7.6% 8.1% 7.8% 6.2% 6.7% 7.3% 7.3% Property 6.2% 6.6% 7.1% 6.8% 5.2% 5.7% 6.3% 6.3% Future expense inflation 3.1% 3.3% 3.5% 3.4% 2.5% 2.5% 2.5% 2.5% Tax rate 30.0% 30.0% 30.0% 30.0% 34.9% 34.9% 35.4% 35.4% Required Capital (% EU minimum) 200%/100% 200%/100% 200%/100% 200%/100% 115% 115% 115% 115% Ireland Italy ----------------------------------------- ------------------------------- 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 2005 2004 2004 2003 2005 2004 2004 2003 Risk discount rate 5.9% 6.4% 7.0% 7.0% 5.9% 6.4% 7.0% 7.0% Pre-tax investment returns: Base government fixed interest 3.2% 3.7% 4.3% 4.3% 3.2% 3.7% 4.3% 4.3% Ordinary shares 6.2% 6.7% 7.3% 7.3% 6.2% 6.7% 7.3% 7.3% Property 5.2% 5.7% 6.3% 6.3% 5.2% 5.7% 6.3% 6.3% 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% 39.8% 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 2005 2004 2004 2003 2005 2004 2004 2003 Risk discount rate 5.9% 6.4% 7.0% 7.0% 8.7% 9.7% 11.2% 9.7% Pre-tax investment returns: Base government fixed interest 3.2% 3.7% 4.3% 4.3% 5.0% 6.0% 7.5% 6.0% Ordinary shares 6.2% 6.7% 7.3% 7.3% 8.0% 9.0% 10.5% 9.0% Property 5.2% 5.7% 6.3% 6.3% 7.0% n/a n/a n/a Future expense inflation 2.5% 2.5% 2.5% 2.5% 2.4% 3.4% 4.9% 3.4% Tax rate 31.5% 31.5% 25.0% 25.0% 19.0% 19.0% 19.0% 19.0% Required Capital (% EU minimum) 150% 150% 150% 150% 150% 150% 150% 150% Spain ------------------------------------------ 30 June 31 Dec 30 June 31 Dec 2005 2004 2004 2003 Risk discount rate 5.9% 6.4% 7.0% 7.0% Pre-tax investment returns: Base government fixed interest 3.2% 3.7% 4.3% 4.3% Ordinary shares 6.2% 6.7% 7.3% 7.3% Property 5.2% 5.7% 6.3% 6.3% Future expense inflation 2.5% 2.5% 2.5% 2.5% Tax rate 35.0% 35.0% 35.0% 35.0% Required Capital (% EU minimum) 125%/110% 125%/110% 125%/110% 125%/110% Where there are 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 200% EU minimum for Norwich Union Annuities Ltd and 100% for other companies. Required capital in Spain is 125% EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies. 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. ------------------------------------------------------------------------------------------------------------------ Page 40 Principal economic assumptions - 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 the Europe and International businesses, as 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 for the stochastic calculation is the distribution of future long-term interest rates, since this is an important factor in the cost of guaranteed annuity options. Summary Statistics The following table sets out the means and standard deviations (StDev) of future returns at 30 June 2005 for the three most significant asset classes. Interest rates are assumed to have a lognormal distribution with an annualised standard deviation of 12% p.a. for the natural logarithm of the interest rate. Mean* StDev** ------------------------------------------ Equities 7.2% 20% Property 6.2% 15% Government Bonds 4.2% 2.5% * 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 1). ** 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. For the UK, the statistics are the same over all projection horizons. The low assumed volatility for bonds reflects the degree of matching, by duration, with the liabilities. 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. Europe and International Model (Excluding UK) 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 1 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 returns at 30 June 2005 for the three most significant asset classes: equities, 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 9 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 41 5- year return 10- year return 20- year return ------------------- ------------------- ------------------- Mean* StDev** Mean* StDev** Mean* StDev** Short Government Bonds 2.7% 1.5% 3.1% 3.1% 3.7% 6.0% Long Government Bonds 3.2% 4.3% 3.7% 3.3% 4.1% 3.7% Equities 6.0% 19.8% 6.2% 19.5% 6.7% 19.1% * 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 1). ** 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. 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. 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 42 Sensitivity analysis - economic assumptions The tables below show the sensitivity of the embedded value as at 30 June 2005 and the new business contribution before the effect of required capital for the six months to 30 June 2005 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. Embedded value As reported on 1% increase in 1% decrease in 1% increase in 1% decrease in (net of tax) page 37 discount rates discount rates interest rates interest rates 30 June 2005 Â£m Â£m Â£m Â£m Â£m United Kingdom 5,469 (375) 400 (215) 225 Continental Europe France 1,872 (125) 140 (75) 65 Ireland 595 (25) 25 (30) 30 Italy 682 (20) 20 25 (40) Netherlands (including Belgium and Luxembourg) 2,394 (110) 130 215 (600) Poland 506 (30) 30 (5) 5 Spain 633 (35) 40 (25) 20 Other 225 (5) 5 - (5) International 613 (25) 30 (20) - ------------------------------------------------------------------------------------------------------------------- 12,989 (750) 820 (130) (300) ==================================================================================================================== 1% increase in 1% decrease in 10% rise in 10% fall in EU Embedded equity/ equity/ equity/ equity/ minimum value As reported on property property property market property market capital (net of tax) page 37 returns returns values values (or equivalent) 30 June 2005 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom 5,469 200 (215) 360 (360) 160 Continental Europe France 1,872 80 (75) 105 (110) 30 Ireland 595 15 (15) 10 (10) 5 Italy 682 10 (10) 10 (10) 10 Netherlands (including Belgium and Luxembourg) 2,394 270 (305) 310 (330) 85 Poland 506 5 (5) 5 (5) 10 Spain 633 - - 5 (5) 5 Other 225 5 (5) 10 (10) 5 International 613 5 (5) 10 (10) 20 ------------------------------------------------------------------------------------------------------------------- 12,989 590 (635) 825 (850) 330 =================================================================================================================== 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 reduction of 50 basis points to the assumed pre-tax investment returns at 30 June 2005 has significantly increased this sensitivity, reflecting the level of the guarantees relative to the interest rate assumption. ------------------------------------------------------------------------------------------------------------------ Page 43 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 before required capital As reported 1% increase in 1% decrease in 1% increase in 1% decrease in (gross of tax) on page 32 discount rates discount rates interest rates interest rates 6 months to 30 June 2005 Â£m Â£m Â£m Â£m Â£m United Kingdom 135 (28) 28 (11) 10 Continental Europe France 71 (7) 9 (1) 1 Ireland 9 (1) 2 - - Italy 33 (1) 1 1 (2) Netherlands (including Belgium and Luxembourg) 39 (8) 10 12 (25) Poland 5 (1) 1 - - Spain 80 (7) 8 (3) 3 Other 3 (1) 1 1 1 International 18 (3) 3 3 (5) -------------------------------------------------------------------------------------------------------------------- 393 (57) 63 2 (17) ==================================================================================================================== New business contribution before required capital As reported 1% increase in 1% decrease in (gross of tax) on page 32 equity/property returns equity/property returns 6 months to 30 June 2005 Â£m Â£m Â£m United Kingdom 135 12 (13) Continental Europe France 71 2 (2) Ireland 9 1 (1) Italy 33 - - Netherlands (including Belgium and Luxembourg) 39 7 (10) Poland 5 - - Spain 80 - - Other 3 1 - International 18 - - ------------------------------------------------------------------------------------------------------------------- 393 23 (26) ==================================================================================================================== One of the key assumptions underpinning the new business contribution is the appropriate level of required capital supporting different types of products. The effect of the assumptions relating to levels of required capital is most significant in relation to annuity business written in the UK. Aviva believes that, based on its current assessment of the risks associated with annuities, particularly in relation to longevity risk, the appropriate level of capital required to support the risks for this business is equivalent to 200% of the required minimum margins (RMM), notwithstanding the prudent margins incorporated in the technical provisions. Changing the assumption of the required capital backing annuities to 100%, increases the reported value of new business contribution reported after the effect of required capital for the six months to 30 June 2005 by Â£11 million and increases the embedded value by Â£160 million, as shown on page 42. ------------------------------------------------------------------------------------------------------------------ Page 44 Sensitivity analysis - non-economic assumptions The tables below show the sensitivity of the embedded value as at 30 June 2005 and the new business contribution before the effect of required capital for the six months to 30 June 2005 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€¢ 10% decrease in both mortality and morbidity rates. In each sensitivity calculation, all other assumptions remain unchanged. 10% decrease in 10% decrease in Embedded value As reported maintenance 10% decrease in mortality/ (net of tax) on page 37 expenses lapse rates morbidity rates 30 June 2005 Â£m Â£m Â£m Â£m United Kingdom 5,469 140 45 (110) Continental Europe France 1,872 30 25 30 Ireland 595 10 5 5 Italy 682 5 5 - Netherlands (including Belgium and Luxembourg) 2,394 75 5 (60) Poland 506 15 25 15 Spain 633 10 20 10 Other 225 5 5 - International 613 10 10 10 ------------------------------------------------------------------------------------------------------------------- 12,989 300 145 (100) ==================================================================================================================== New business contribution 10% decrease in 10% decrease in before required capital As reported maintenance 10% decrease in mortality/ (gross of tax) on page 32 expenses lapse rates morbidity rates 6 months to 30 June 2005 Â£m Â£m Â£m Â£m United Kingdom 135 7 8 8 Continental Europe France 71 2 3 3 Ireland 9 - 1 - Italy 33 1 - - Netherlands (including Belgium and Luxembourg) 39 4 4 (1) Poland 5 - 1 1 Spain 80 3 8 5 Other 3 - 1 - International 18 1 1 2 ------------------------------------------------------------------------------------------------------------------- 393 18 27 18 =================================================================================================================== 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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