Interim Results - Part 4

Aviva PLC 11 August 2005 PART 4 OF 4 -------------------------------------------------------------------------------------------------------------------- Page 67 Statistical supplement Segmental analysis of the components of life EEV operating return 6 months ended 30 June 2005 £m UK France Ireland Italy Netherlands Poland Spain Other International Total Europe New business contribution (after the effect of required capital) 105 48 8 20 18 5 70 2 10 286 Profit from existing business - expected return 203 61 16 16 64 23 23 12 16 434 - experience variances: Maintenance expenses (1) 1 - (1) (6) 3 (2) - (2) (8) Exceptional expenses* (80) 1 (2) - (6) - (1) - - (88) Mortality/Morbidity** 41 11 3 - 8 7 (1) - 3 72 Lapses*** (5) (2) (6) (3) (6) - (3) (3) (1) (29) Other**** 15 7 (2) 1 (3) 2 1 - 1 22 --------------------------------------------------------------------------------------------------------------------- (30) 18 (7) (3) (13) 12 (6) (3) 1 (31) - operating assumption changes: Maintenance expenses - - - - - - - - - - Exceptional expenses - - - - - - - - - - Mortality/Morbidity - - - - - - - - - - Lapses - - - - - - - - - - Other***** - - - - 6 - - 1 - 7 --------------------------------------------------------------------------------------------------------------------- - - - - 6 - - 1 - 7 Expected return on shareholders' net worth 49 31 5 14 40 6 5 2 9 161 --------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 327 158 22 47 115 46 92 14 36 857 ===================================================================================================================== * Exceptional expenses in the UK reflect £30 million relating to the ongoing transformation of the Life business and £50 million of other exceptional project costs associated with regulatory change. ** Mortality experience continues to be better than assumed across most of our businesses, and particularly for protection and annuity business in the UK and AFER in France. *** Lapse experience in the UK has been worse than assumed and mainly relates to with-profit bonds. In Ireland, the adverse persistency has mainly arisen on unit-linked pensions business. In the Netherlands the adverse persistency has mainly arisen on group business. **** In the UK, other experience profits primarily relates to better than assumed default experience on corporate bonds and commercial mortgages. ***** In the Netherlands, other operating assumption changes mainly relates to the reduction of the guaranteed investment return on certain products in Belgium. -------------------------------------------------------------------------------------------------------------------- Page 68 Segmental analysis of the components of life EEV operating return 6 months ended 30 June 2004 £m UK France Ireland Italy Netherlands Poland Spain Other International Total Europe New business contribution (after the effect of required capital) 106 27 11 14 25 4 55 (2) 11 251 Profit from existing business - expected return 200 53 14 15 71 21 21 10 12 417 - experience variances: Maintenance expenses (1) (1) 1 - (2) 2 1 (2) - (2) Exceptional expenses* (32) (1) - - (10) - - (1) (10) (54) Mortality/Morbidity** 17 7 1 - 3 3 1 - 1 33 Lapses*** (14) 2 (8) - - - (1) (1) 2 (20) Other**** 11 (5) - 1 8 1 - 7 - 23 --------------------------------------------------------------------------------------------------------------------- (19) 2 (6) 1 (1) 6 1 3 (7) (20) - operating assumption changes: Maintenance expenses - - - - - - - - 1 1 Exceptional expenses - - - - - - - - - - Mortality/Morbidity - - - - - - - - - - Lapses***** - - (9) - - - - - - (9) Other 7 (1) (1) - 3 - - - - 8 --------------------------------------------------------------------------------------------------------------------- 7 (1) (10) - 3 - - - 1 - Expected return on shareholders' net worth 51 31 7 6 34 4 4 3 11 151 --------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 345 112 16 36 132 35 81 14 28 799 ===================================================================================================================== * Exceptional expenses reflect project spend, including costs associated with the pace of regulatory change in the UK. ** Mortality experience has typically been better than anticipated in many of the group businesses in particular in the UK on annuity and PHI contracts. *** Lapse experience has been adverse in a number of businesses including on savings businesses in the UK, and on some classes of business in Ireland. **** In the UK, other experience profits include exceptional profits arising from better than assumed default experience on corporate bonds and commercial mortgages. ***** In Ireland, lapse assumption changes have been made on unit linked pension business following recent experience. -------------------------------------------------------------------------------------------------------------------- Page 69 Segmental analysis of the components of life EEV operating return Full year 2004 £m UK France Ireland Italy Netherlands Poland Spain Other International Total Europe New business contribution (after the effect of required capital) 215 54 16 34 43 9 121 - 24 516 Profit from existing business - expected return 367 112 30 29 141 45 40 24 31 819 - experience variances: Maintenance expenses* 31 (2) (1) 2 (9) 5 - 1 1 28 Exceptional expenses** (153) - - - (12) - (1) (3) (1) (170) Mortality/Morbidity*** 49 21 7 - 17 8 1 2 5 110 Lapses**** (50) 5 (1) (5) (2) 5 2 (4) 6 (44) Other***** 42 (2) - 3 18 - 2 - (2) 61 ---------------------------------------------------------------------------------------------------------------------- (81) 22 5 - 12 18 4 (4) 9 (15) - operating assumption changes: Maintenance expenses****** 77 - (6) (3) - 14 3 1 4 90 Exceptional expenses******* (34) (2) - - (72) - - - - (108) Mortality/Morbidity 2 - (2) 7 5 (2) - 1 (1) 10 Lapses******** (110) - (16) (3) 9 - 1 1 (1) (119) Other********* 7 37 - 1 79 2 3 (6) (3) 120 ---------------------------------------------------------------------------------------------------------------------- (58) 35 (24) 2 21 14 7 (3) (1) (7) Expected return on shareholders' net worth 108 63 13 14 60 7 8 5 20 298 ---------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 551 286 40 79 277 93 180 22 83 1,611 ====================================================================================================================== * Maintenance expenses in the UK reflect the benefit of cost saving initiatives undertaken. ** Exceptional expenses in the UK reflect costs of £65 million for the restructuring of the business services division and one-off project costs of £88 million associated with the pace of regulatory change. *** Mortality experience across our major businesses continues to be better than our assumptions for protection and annuity business in the UK and protection business in Continental Europe. **** Lapse experience in the UK has been adverse and mainly relates to bonds, protection schemes and pension products. ***** In the UK, other experience profits include £29 million of profits arising from better than assumed default experience on corporate bonds and commercial mortgages. ****** Maintenance expense assumption changes in the UK reflect the benefit of cost saving initiatives coming through. ******* The UK and the Netherlands include capitalised additional future project expenses. ******** Adverse lapse assumption changes in the UK relates to unitised with-profit bonds and unit-linked bonds. In Ireland, lapse assumption changes have been made on unit-linked pensions business following recent experience. ********* Other operating assumptions in the Netherlands relates to positive changes in asset mix and tax reflecting, in part, the fact that the embedded value of Delta Lloyd was previously assessed using a blended average tax rate of 25%, which is below the local corporation tax rate. The calculation has been refined to tax all future profits at the full corporation tax rate at the beginning of the year of 34.5% and to allow explicitly for the tax benefit arising from investing in the '5% holdings' (investments in Dutch companies where at least 5% of the share capital is owned), on which all investment income is tax free. This change results in a £53 million one-off benefit. France includes the benefit of tax assumption changes. France has historically recorded favourable tax operating experience as a result of better than assumed tax on dividend income. Previously the tax assumptions had been set at full corporation tax for all future profits, whereas in fact dividend income from subsidiaries is tax exempt. In 2004, the calculation has been refined such that the future tax benefit arising from dividend from subsidiaries has now been recognised. This change results in a £39 million benefit. -------------------------------------------------------------------------------------------------------------------- Page 70 Supplementary analyses - life and related businesses (a) 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 are NU Life Services Ltd (UK), Morley Fund Management (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: 31 December 30 June 2005 2004 ------------------------------------------- ----------- Fund Management Non-Insurance Total Total £m £m £m £m United Kingdom 53 (397) (344) (343) France 43 (10) 33 32 Other Europe and International 11 (18) (7) (15) ------------------------------------------------------------------------------------------------------------------- 107 (425) (318) (326) =================================================================================================================== 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 profit and loss account 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 Ltd (NULS) is the main provider of administration services to the UK Life business. NULS incurs substantially all of the UK Life business' operating expenditure, comprising acquisition, maintenance and project costs. Costs are recharged to the UK Life companies (the product companies) on the basis of pre-determined Management Services Agreement (MSA) which was negotiated in 1998 and 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. (b) Pension schemes (i) Treatment of pension scheme deficits for IFRS On the IFRS balance sheet, the amount described as Provisions includes the pension scheme deficits and comprises: 30 June 31 December 2005 2004 £m £m Deficits in the staff pension schemes 1,220 893 Other obligations to staff pension schemes - Insurance policies issued by Group companies 813 813 ------------------------------------------------------------------------------------------------------------------ Total IAS 19 obligations to staff pension schemes 2,033 1,706 Other provisions 468 419 ------------------------------------------------------------------------------------------------------------------ Provisions 2,501 2,125 ================================================================================================================== (ii) Treatment of pension scheme deficits in embedded value The adoption of the EEV principles and the inclusion of NULS in the calculations have resulted in the recognition within EEV of the future funding obligations to the UK pension scheme in relation to both future service costs and pension deficits. The table below shows the component parts of the impact of adopting the EEV principles on the UK life valuation. 30 June 31 December 2005 2004 £m £m Impact of: Increasing maintenance and normal project allowances (128) (124) Increase in future service pension scheme contribution rate from 11% to 29% (31 December 2004: 25%) (123) (126) ------------------------------------------------------------------------------------------------------------------ (251) (250) Pension scheme deficits funding (146) (147) ------------------------------------------------------------------------------------------------------------------- (397) (397) =================================================================================================================== -------------------------------------------------------------------------------------------------------------------- Page 71 Pension costs are accounted in NULS following the 'look-through' principle and are included in the embedded value. The funding rate for the annual pension cost is 29% of pensionable salaries and allowance has been made for the entire contribution reducing the embedded value of UK Life and related business at 30 June 2005 by £123 million (31 December 2004: £126 million). In addition, pension deficit funding equivalent in 2004 to a further 13% of pensionable salaries commenced on 1 January 2004. The NULS share of the total UK pension scheme deficit is approximately 42% and this liability is fully provided for in the UK embedded value. In effect, under the EEV methodology the element of the pension fund deficit which relates to the 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. This is equal to £146 million at 30 June 2005 (31 December 2004: £147 million), which differs from the IAS19 basis of evaluating pension deficits. In quantifying the impact on the embedded value for the UK covered business, the shareholders have been assumed to incur all of the additional contributions except for an amount equivalent to approximately 2% of pensionable salaries which has been attributed to the with-profits funds. This reflects the contractual nature of the current MSA which prevents shareholders from recharging both the increase in future service costs from 11% to 29% (31 December 2004: 25%) of pensionable salaries and the cost of funding the deficit to the UK with-profit funds. Under the MSA, NULS can renegotiate the terms relating to the recharging of the costs to the UK with-profit funds in 2008, subject to regulatory approval. In evaluating the impact on EEV, Aviva has not sought to pre-empt the outcome of this renegotiation. Any changes to the recharges in respect of the pension costs and the pension deficit to the with-profits funds will be reported as profits or losses in the period in which agreement is obtained. (iii) Treatment of pension scheme deficits on the Group embedded value balance sheet The Group has accounted for its pension scheme costs in accordance with IAS 19 for the non life and overseas life businesses. The element of the pension fund deficits which relates to the UK life and other related businesses is included at an amount equivalent to the post-tax contributions discounted using the UK Life business risk discount rate. The following table sets out the pension scheme deficits in the Group embedded value balance sheet. 30 June 31 December 2005 2004 £m £m IAS 19 pension scheme deficits post tax 855 628 Deduct element relating to UK life on IAS 19 basis (239) (216) ------------------------------------------------------------------------------------------------------------------- 616 412 Element relating to UK life funding contributions included within EEV covered business 146 147 ------------------------------------------------------------------------------------------------------------------ Total pension scheme deficits on the embedded value balance sheet 762 559 Deferred tax asset 365 265 ------------------------------------------------------------------------------------------------------------------ Total pension scheme deficits on the embedded value balance sheet pre-tax 1,127 824 Other obligations to staff pension schemes - Insurance policies issued by Group companies 813 813 Other provisions 468 419 ------------------------------------------------------------------------------------------------------------------ Pension obligations and other provisions 2,408 2,056 ================================================================================================================== The pension scheme deficits shown above of £855 million (31 December 2004: £628 million) include the associated deferred tax asset of £365 million (31 December 2004: £265 million). -------------------------------------------------------------------------------------------------------------------- Page 72 (c) Assets under management General Life and related business business and other Group Group 30 June 30 June 30 June 31 December 2005 2005 2005 2004 £m £m £m £m Total IFRS assets included in the balance sheet 211,535 36,760 248,295 239,303 Additional value of in-force long-term business 5,335 - 5,335 5,018 ----------------------------------------------------------------------------------------------------------------- Total EEV assets included in the balance sheet 216,870 36,760 253,630 244,321 Third party funds under management: Unit trusts, Oeics, Peps and Isas 11,207 10,527 Segregated funds 25,831 24,899 ----------------------------------------------------------------------------------------------------------------- Total assets under management 290,668 279,747 ================================================================================================================= -------------------------------------------------------------------------------------------------------------------- Page 73 General insurance business only: geographical analysis (a) General insurance Longer-term Operating Profit investment return Underwriting result --------------------- -------------------- --------------------- 6 months Full year 6 months Full year 6 months Full year 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m United Kingdom 431 788 325 647 106 141 France 14 25 22 39 (8) (14) Ireland 83 135 30 53 53 82 Netherlands 39 51 21 33 18 18 Canada 67 133 53 96 14 37 Other 41 73 32 61 9 12 ----------------------------------------------------------------------------------------------------------------- 675 1,205 483 929 192 276 ================================================================================================================= (b) Combined operating ratio analysis - geographical basis - general insurance business only Claims ratio Expense ratio Combined operating ratio --------------------- -------------------- ------------------------ 6 months Full year 6 months Full year 6 months Full year 2005 2004 2005 2004 2005 2004 % % % % % % United Kingdom 64.3% 64.4% 10.8% 10.6% 96% 97% France 72.3% 73.4% 10.3% 12.1% 100% 101% Ireland 59.2% 66.6% 11.1% 10.3% 80% 87% Netherlands 60.0% 59.4% 12.9% 11.9% 94% 95% Canada 66.4% 66.6% 12.5% 12.1% 98% 97% ------------------------------------------------------------------------------------------------------------------ 64.5% 65.0% 11.2% 11.2% 95% 97% ================================================================================================================== Ratios are measured in local currency. The total Group ratios are based on average exchange rates applying to the respective periods. Definitions: Claims ratio - Incurred claims expressed as a percentage of net earned premiums. Expense ratio - Written expenses excluding commissions expressed as a percentage of net written premiums. Commission ratio - Written commissions expressed as a percentage of net written premiums. Combined operating ratio - Aggregate of claims ratio, expense ratio and commission ratio. (c) General insurance business only: class of business analyses (i) United Kingdom Net written premiums Underwriting result Combined operating ratio --------------------- -------------------- ------------------------ 6 months Full year 6 months Full year 6 months Full year 2005 2004 2005 2004 2005 2004 £m £m £m £m % % Personal Motor 774 1,383 (14) (12) 102% 102% Homeowner 572 1,041 25 24 97% 97% Other 309 737 7 9 96% 100% ------------------------------------------------------------------------------------------------------------------ 1,655 3,161 18 21 99% 100% ------------------------------------------------------------------------------------------------------------------ Commercial Motor 364 755 17 19 95% 97% Property 451 924 56 98 85% 88% Other 266 597 15 3 94% 99% ------------------------------------------------------------------------------------------------------------------ 1,081 2,276 88 120 91% 94% ------------------------------------------------------------------------------------------------------------------ £m 2,736 5,437 106 141 96% 97% ================================================================================================================== During the six months to 30 June 2005, annualised rating increases were as follows; personal motor: 5%; homeowners: 6% (including indexation); commercial motor: 3% decrease; commercial property: 1% decrease; and commercial liability: 1%. -------------------------------------------------------------------------------------------------------------------- Page 74 (ii) France Net written premiums Underwriting result Combined operating ratio --------------------- -------------------- ------------------------ 6 months Full year 6 months Full year 6 months Full year 2005 2004 2005 2004 2005 2004 €m €m €m €m % % Motor 221 370 (6) (12) 100% 103% Property and other 264 399 (6) (9) 99% 100% ------------------------------------------------------------------------------------------------------------------ €m 485 769 (12) (21) 100% 101% ------------------------------------------------------------------------------------------------------------------ £m 335 530 (8) (14) 100% 101% ================================================================================================================== (iii) Netherlands Net written premiums Underwriting result Combined operating ratio --------------------- -------------------- ------------------------ 6 months Full year 6 months Full year 6 months Full year 2005 2004 2005 2004 2005 2004 €m €m €m €m % % Property 207 368 23 6 92% 90% Motor 178 347 12 27 93% 95% Liability 48 56 - (12) 102% 119% Other 189 287 (9) 6 105% 97% ------------------------------------------------------------------------------------------------------------------ €m 622 1,058 26 27 94% 95% ------------------------------------------------------------------------------------------------------------------ £m 429 720 18 18 94% 95% ================================================================================================================== (iv) Canada Net written premiums Underwriting result Combined operating ratio --------------------- -------------------- ------------------------ 6 months Full year 6 months Full year 6 months Full year 2005 2004 2005 2004 2005 2004 C$m C$m C$m C$m % % Automobile 863 1,747 11 5 99% 100% Property 418 821 25 79 93% 90% Liability 151 249 (7) (12) 105% 106% Other 22 42 4 14 80% 66% ------------------------------------------------------------------------------------------------------------------ C$m 1,454 2,859 33 86 98% 97% ------------------------------------------------------------------------------------------------------------------ £m 627 1,232 14 37 98% 97% ================================================================================================================== -------------------------------------------------------------------------------------------------------------------- Page 75 Appendix A Group Capital Structure The Group maintains an efficient capital structure from a combination of equity shareholders' funds, preference capital, subordinated debt and borrowings, consistent with the Group's risk profile and the regulatory and market requirements of its business. The European Embedded Value basis provides a more accurate reflection of the performance of the Group's life operations year on year than results under IFRS. Accordingly, the Group's capital structure is analysed on this basis. The Group's capital, from all funding sources, has been allocated such that the capital employed by trading operations is greater than the capital provided by its shareholders and its subordinated debt holders. As a result, the Group is able to enhance the returns earned on its equity capital. Capital employed by segment 30 June 31 December 2005 2004 £m £m Long-term savings 13,757 13,826 General insurance and health 5,485 5,005 Other business 1,714 838 Corporate (365) (372) ------------------------------------------------------------------------------------------------------------------- Total capital employed 20,591 19,297 ------------------------------------------------------------------------------------------------------------------ Financed by Equity shareholders' funds and minority interests 13,916 12,821 Direct capital instrument 990 990 Preference shares 200 200 Subordinated debt 2,789 2,847 External debt 1,550 1,452 Net internal debt 1,146 987 ------------------------------------------------------------------------------------------------------------------ 20,591 19,297 ================================================================================================================== At 30 June 2005 the Group had £20.6 billion (31 December 2004: £19.3 billion) of total capital employed in our trading operations which is efficiently financed by a combination of equity shareholders' funds, preference capital, direct capital instruments, subordinated debt and internal and external borrowings. In the first half of 2005, the total capital employed in our long-term savings operations decreased by £0.1 billion from the previous year end; the capital employed in our general insurance businesses increased by £0.5 billion reflecting the profits in the period; the capital employed in our non-insurance businesses rose by £0.9 billion from £0.8 billion to £1.7 billion reflecting the RAC acquisition. In addition to its external funding sources, the Group has a number of internal debt arrangements in place. These have allowed the assets supporting technical liabilities to be invested into the pool of central assets for use across the Group. They have also enabled the shareholders to deploy cash from some parts of the business to others in order to fund growth. Although intra-group loans in nature, they are counted as part of the capital base for the purpose of capital management. All internal loans satisfy arms length criteria and all interest payments have been made when due. In order to better reflect the underlying level of internal leverage the presentation of internal debt was revised at the 2004 year end. The revised presentation depicts a net debt position which represents the upstream of internal loans from business operations to corporate and holding entities net of tangible assets held by these entities. The corporate net liabilities represent the pension scheme deficit held centrally. The ratio of the Group's external debt plus subordinated debt to shareholders' funds was 29% (31 December 2004: 31%). Fixed charged cover on an EEV basis, which measures the extent to which external interest costs are covered by EEV operating profit, was 9.2 times (31 December 2004: 8.2 times). At 30 June 2005 the market value of the Group's external debt, subordinated debt, preference shares, including both the Aviva plc preference shares and the General Accident plc preference shares of £250 million, within minority interests, and direct capital instrument was £6,383 million (31 December 2004: £5,953 million), with a weighted average cost of 3.8% (31 December 2004: 3.9%). The Group WACC is 7.1% and has been calculated by reference to the cost of equity and cost of debt at the relevant date. It is based on an equity market premium of 3% and a market beta of 1.46. -------------------------------------------------------------------------------------------------------------------- Page 76 Group capital structure (continued) Deployment of equity shareholders' funds 31 December 30 June 2005 2004 ---------------------------------------------------------------- ----------- Fixed income Other Other net Equities securities investments assets Total Total £m £m £m £m £m £m Assets Long-term savings 686 3,522 1,157 1,923 7,288 7,572 General insurance, health, and other business 3,062 1,160 1,687 (1,272) 4,637 4,859 ----------------------------------------------------------------------------------------------------------------- 3,748 4,682 2,844 651 11,925 12,431 Goodwill 2,506 1,401 Additional and acquired value of in-force long-term business and other intangible assets 6,160 5,465 ----------------------------------------------------------------------------------------------------------------- Assets backing total capital employed in continuing operations 20,591 19,297 External debt (1,550) (1,452) Net Internal debt (1,146) (987) Subordinated debt (2,789) (2,847) ------------------------------------------------------------------------------------------------------------------ 15,106 14,011 Minority interests (1,283) (1,160) Direct Capital Instrument (990) (990) Preference capital (200) (200) ------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 12,633 11,661 ================================================================================================================== Our exposure to equities has decreased from £3.9 billion at 31 December 2004 to £3.7 billion, which represents 18% of our capital employed. Return on capital employed 31 December 30 June 2005 2004 ------------------------------------------ ------------ Normalised after-tax Opening Return Return return equity capital on capital on capital £m £m % % Long-term savings 591 13,826 8.7% 8.9% General insurance and health 447 5,005 18.7% 17.1% Other business 45 838 11.1% (2.0)% Corporate (56) (372) 32.4% 40.9% ------------------------------------------------------------------------------------------------------------------- 1,027 19,297 10.9% 10.4% Borrowings (120) (5,286) 4.6% 3.9% ------------------------------------------------------------------------------------------------------------------- 907 14,011 13.4% 13.9% Minority interests (77) (1,160) 13.7% 17.5% Direct capital instrument - (990) - - Preference capital (9) (200) 8.5% 8.5% ------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 821 11,661 14.6% 13.7% =================================================================================================================== The return on capital is calculated as the after-tax return on opening equity capital, based on Group operating profit, including Life EEV operating return, on continuing operations. ---------------------------------------------------------------------------------------------------------------------- Page 77 Group capital structure (continued) Shareholders' funds, including minority interests 30 June 2005 31 December 2004 Closing shareholders' funds Closing shareholders' funds ----------------------------- ----------------------------- Internally Internally IFRS net generated Total IFRS net generated Total assets AVIF Equity assets AVIF Equity Note £m £m £m £m £m £m Life assurance 1,2 United Kingdom 2,868 2,829 5,697 3,162 2,703 5,865 France 1,149 723 1,872 1,175 644 1,819 Ireland 376 253 629 403 248 651 Italy 606 87 693 478 72 550 Netherlands (including Belgium and Luxembourg) 1,761 649 2,410 1,758 727 2,485 Poland 142 364 506 176 381 557 Spain 717 345 1,062 761 279 1,040 Other Europe 161 64 225 160 53 213 International 642 21 663 735 (89) 646 ----------------------------------------------------------------------------------------------------------------------- 8,422 5,335 13,757 8,808 5,018 13,826 ----------------------------------------------------------------------------------------------------------------------- General insurance and health 2,3 United Kingdom 3,006 3,006 2,504 2,504 France 351 351 416 416 Ireland 453 453 498 498 Netherlands 510 510 461 461 Other Europe 137 137 162 162 Canada 704 704 687 687 Other 324 324 277 277 --------------------------------------------------------------------------------------------------------------------- 5,485 - 5,485 5,005 - 5,005 --------------------------------------------------------------------------------------------------------------------- Other business 2,3 1,714 1,714 838 838 Corporate (365) (365) (372) (372) External debt 4 (1,550) (1,550) (1,452) (1,452) Internal debt (1,146) (1,146) (987) (987) Subordinated debt (2,789) (2,789) (2,847) (2,847) --------------------------------------------------------------------------------------------------------------------- (4,136) - (4,136) (4,820) - (4,820) --------------------------------------------------------------------------------------------------------------------- Shareholders' funds, including minority interests 9,771 5,335 15,106 8,993 5,018 14,011 ===================================================================================================================== Comprising Equities 3,748 3,748 3,881 3,881 Debt and fixed income securities 4,682 4,682 4,802 4,802 Property 1,521 1,521 1,292 1,292 Deposits and other investments 1,323 1,323 1,480 1,480 Intangible assets 5 3,331 5,335 8,666 1,848 5,018 6,866 Other net assets 651 651 976 976 Borrowings (5,485) (5,485) (5,286) (5,286) --------------------------------------------------------------------------------------------------------------------- 9,771 5,335 15,106 8,993 5,018 14,011 ===================================================================================================================== --------------------------------------------------------------------------------------------------------------------- Page 78 Group capital structure (continued) Shareholders' funds, including minority interests (continued) Notes 1. The internally generated AVIF includes an adjustment of £93 million (2004: £69 million) relating to the treatment of the pension fund deficit. 2. Goodwill of £2,506 million (2004: £1,401 million) has been allocated as follows: life assurance £768 million (2004: £812 million); general insurance and health £845 million (2004: £465 million) and other business £893 million (2004: £124 million). 3. Intangibles of £493 million (2004: £65 million) have been allocated as follows: general insurance and health £379 million (2004: £106 million); other businesses £114 million (2004: £46 million). 4. The external borrowings reported in the summary consolidated balance sheet of £10,700 million (2004: £10,090 million) comprise £5,481 million (2004: £5,096 million) securitised mortgage funding, £2,789 million (2004: £2,847 million) subordinated debt, £881 million (2004: £695 million) borrowings by operating businesses and £1,550 million (2004: £1,452 million) borrowings by holding companies of the Group not allocated to operating companies (shown as external debt). 5. Total intangible assets of £8,666 million (2004: £6,866 million) comprise goodwill of £2,506 million (2004: £1,401 million), additional value of in-force long-term business of £5,667 million (2004: £5,400 million) and other intangibles of £493 million (2004: £124 million). The associated deferred tax liability on the other intangibles of £141 million (2004: nil) is included within other net assets. Geographical analysis of return on capital employed For the six months to 30 June 2005 Opening Shareholders' funds including minority Annualised Operating return (Note 1) interests Return on Capital ------------------------- ------------------- ----------------- Note Before tax After tax £m £m £m % Life assurance United Kingdom 327 229 5,865 8.0% France 158 103 1,819 11.6% Ireland 22 19 651 5.9% Italy 47 29 550 10.8% Netherlands (including Belgium and Luxembourg) 115 79 2,485 6.5% Poland 46 36 557 13.3% Spain 92 60 1,040 11.9% Other Europe 14 10 213 9.6% International 36 26 646 8.2% --------------------------------------------------------------------------------------------------------------------- 857 591 13,826 8.7% General insurance and health United Kingdom 363 254 2,504 21.3% France 17 11 416 5.4% Ireland 83 73 498 31.5% Netherlands 55 38 461 17.2% Other Europe 19 12 162 15.4% Canada 67 44 687 13.2% Other 22 15 277 11.1% --------------------------------------------------------------------------------------------------------------------- 626 447 5,005 18.7% Other business 63 45 838 11.1% Corporate (65) (56) (372) 32.4% External debt (45) (38) (1,452) 5.3% Net internal debt 2 (33) (23) (987) 4.7% Subordinated debt (85) (59) (2,847) 4.2% --------------------------------------------------------------------------------------------------------------------- 1,318 907 14,011 13.4% ===================================================================================================================== Notes 1. The operating return is based upon Group operating profit, which is stated before impairment of goodwill, amortisation of additional value of in-force business, exceptional items and tax including policyholder tax, adjusted for the short-term fluctuation in investment return. 2. The return before tax of £(33) million comprises investment return of £68 million and unallocated interest of £(101) million. --------------------------------------------------------------------------------------------------------------------- Page 79 Group capital structure (continued) Geographical analysis of return on capital employed (continued) Year ended 31 December 2004 Opening shareholders' funds Restated including minority operating return (Note 1) interests Return on Capital ------------------------- ------------------- ----------------- Note Before tax After tax £m £m £m % Life assurance United Kingdom 551 385 5,439 7.1% France 286 185 1,559 11.9% Ireland 40 35 613 5.7% Italy 79 49 436 11.2% Netherlands (including Belgium and Luxembourg) 277 201 2,461 8.2% Poland 93 75 458 16.4% Spain 180 117 916 12.8% Other Europe 22 14 78 17.9% International 83 60 598 10.0% ------------------------------------------------------------------------------------------------------------------- 1,611 1,121 12,558 8.9% General insurance and health United Kingdom 662 484 2,711 17.9% France 33 21 435 4.8% Ireland 135 118 391 30.2% Netherlands 90 67 311 21.5% Other Europe 32 20 109 18.3% Canada 133 86 618 13.9% Other 41 29 246 11.8% ------------------------------------------------------------------------------------------------------------------- 1,126 825 4,821 17.1% Other business (21) (14) 683 (2.0)% Corporate (160) (81) (198) 40.9% External debt (77) (65) (1,879) 3.5% Net internal debt 2 (86) (61) (1,613) 3.8% Subordinated debt (169) (118) (2,838) 4.2% ------------------------------------------------------------------------------------------------------------------- 2,224 1,607 11,534 13.9% =================================================================================================================== Notes 1. The operating return is based upon Group operating profit, which is stated before impairment of goodwill, amortisation of additional value of in-force business, exceptional items and tax including policyholder tax, adjusted for the short-term fluctuation in investment return. 2. The return before tax of £(86) million comprises investment return of £133 million and unallocated interest of £(219) million. Strategic Investments The Group has certain equity investments which are classified as strategic. The market value of these holdings and the percentage of the issued share capital of these companies held by the Group are as follows: Long Term business General & other Market value Proportion held -------------------- -------------------- -------------------- -------------------- 30 June 31 December 30 June 31 December 30 June 31 December 30 June 31 December 2005 2004 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m % % Munich Ruckversicherungs Gesellschaft 114 205 157 179 271 384 2.0% 2.5% Unicredito Italiano 277 283 248 255 525 538 2.9% 2.8% Societe Generale - 242 - 2 - 244 - 1.1% ------------------------------------------------------------------------------------------------ 391 730 405 436 796 1,166 ================================================================================================ --------------------------------------------------------------------------------------------------------------------- Page 80 Appendix B First time adoption First time adoption of International Financial Reporting Standards The Group has adopted International Financial Reporting Standards (IFRS) for the first time in preparing these financial statements for the six months ended 30 June 2005. The date of transition to IFRS is 1 January 2004. During 2005, the Group has already published the following restated UK GAAP financial information onto an IFRS basis: • Restated preliminary opening balance sheet as at 1 January 2004 under International Financial Reporting Standards, published in Appendix B to Aviva plc preliminary announcement 2004 on 9 March 2005 and also on pages 114 to 126 of Aviva plc Annual report and accounts for 2004, including auditors' opinion on page 127. • Release to the market on 5 July 2005, 'Impact of international financial reporting standards on the results for 31 December 2004', including the auditors' opinion on pages 33 and 34, containing restated 31 December 2004 financial information as follows: • summarised consolidated pro forma operating profit statement and notes to the analysis of adjustments as a result of the transition to IFRS; • summarised consolidated statement of recognised income and expense; • summarised consolidated statement of changes in equity; • summarised consolidated balance sheet and notes to the analysis of adjustments as a result of the transition to IFRS; • summarised consolidated income statement - EEV basis; • summarised consolidated balance sheet - EEV; and • the Group's IFRS accounting policies. In addition, a further update was given on the opening summarised consolidated balance sheet as at 1 January 2004, to take into account changes in IFRS since the publication of the Aviva plc preliminary announcement 2004 on 9 March 2005. In order to show comparative balances, a reconciliation of equity reported under UK GAAP to equity reported under IFRS as at 30 June 2004 and a reconciliation of profit and loss reported under UK GAAP to profit and loss reported under IFRS for the six months ended 2004 are shown below. Reconciliation of equity reported under UK GAAP to equity reported under IFRS: As at 30 June 2004 £m Equity as reported under UK GAAP (MSSB) 7,152 Adjusted for: Investment valuation (note 1) 46 Insurance changes (note 2) 302 Employee benefits (note 3) (806) Goodwill and other intangibles (note 4) 100 Dividend recognition (note 5) 220 Deferred tax (note 6) (348) Borrowings and cash (note 7) (26) Other items (note 8) 76 -------------------------------------------------------------------------------------------------------------------- Equity as reported under IFRS 6,716 ==================================================================================================================== Notes to the analysis of adjustments to equity as at 30 June 2004 as a result of the transition to IFRS Note 1: Investment valuation The adjustments in respect of investment valuation arise from the following: £m Increase in valuation of debt securities 1,367 Change in valuation of certain mortgages 123 Other sundry adjustments 5 -------- 1,495 ======== a) Debt securities Under UK GAAP, equity securities and unit trusts are carried at current value. Debt and other fixed income securities are also carried at current value, with the exception of many non-linked long-term business debt securities and fixed income securities, which are carried at amortised cost. As a result of applying IAS 39, the Group now carries all investments in debt and equity securities at fair value. The change in valuation of debt securities from amortised cost to fair value increases the valuation of investments by £1,367 million at 30 June 2004. This change in the valuation of debt securities is largely offset by corresponding movements in the unallocated divisible surplus and technical liabilities. The net impact on shareholders' funds at 30 June 2004 is £46 million. --------------------------------------------------------------------------------------------------------------------- Page 81 b) Commercial mortgages backing certain annuity business Under IFRS, the Group has chosen to move certain of its commercial mortgage portfolio to an active fair valuation basis in accordance with IAS 39, which has increased the value of investments by £123 million. The annuity liabilities which are backed by these assets have been correspondingly revalued, reflecting the use of current interest rates. Consequently, there is an increase in shareholders' funds at 30 June 2004 of £33 million. Revaluation reserve Under IFRS, certain investment gains are recorded as a separate component of shareholders' equity, whereas under UK GAAP they would be included in retained earnings. Separate revaluation reserves are created for: • Changes in the fair value of securities classified as available for sale; • Changes in the value of owner-occupied property; • Exchange differences arising from the translation of the net investment in foreign subsidiaries, associates and joint ventures and from borrowings designated as hedges of such items; and • Changes in the fair value of derivatives that are designated and qualify as cash flow hedges. The amounts included in the above reserves are, where appropriate, net of deferred tax and impairment losses. The above requirements have resulted in a transfer from retained earnings of £237 million into separate revaluation reserves at 30 June 2004. Note 2: Insurance changes The impact on shareholders' funds of insurance changes is as follows: £m Derecognition of claims equalisation provision 375 Change in valuation of reinsurance treaties (42) Application of an active liability valuation basis in the Netherlands 20 Change in value of non-participating investment contracts and other sundry items (51) ------- 302 ======= The principal changes to the Group's insurance accounting upon transition to IFRS are discussed further below. a) Product classification International Financial Reporting Standard 4, Insurance Contracts (IFRS4) requires all products issued to be classified for accounting purposes into either insurance or investment contracts, depending on whether significant insurance risk exists. In the case of a life contract, insurance risk exists if the amount payable on death differs from the amount payable if the policyholder survives. The Group has deemed insurance risk to be significant if the difference exceeds 5% of the policy value, though the classification would be similar if a 10% test had been used. Following a detailed review, 61% of life policy reserves on an MSSB basis at 30 June 2004 have been classified as insurance and 24% have been classified as participating investment contracts (being those investment contracts containing a discretionary participating feature as defined within IFRS4) and both classes will continue to be accounted for under the Group's existing accounting policies. The remaining 17% have been classified as non-participating investment contracts and therefore are required to be accounted for under IAS39 and International Accounting Standard 18 - Revenue (IAS18). Virtually all our general insurance products are classified as insurance. The product classification change results in technical provisions being allocated between insurance and investment contracts and £58,932 million of liabilities classified as investment contracts. b) Equalisation provision An equalisation provision is recorded in the balance sheet of individual general insurance companies in the UK and in a limited number of other countries, to eliminate, or reduce, the volatility in incurred claims arising from exceptional levels of claims in certain classes of business. The provision is required by law even though no actual liability exists at the balance sheet date and is included in the UK GAAP consolidated balance sheet. The annual change in the equalisation provision is recorded in the UK GAAP profit and loss account. Under IFRS, no equalisation provision is recorded, as no actual liability exists at the balance sheet date. There is an increase of £375 million in shareholders' funds as a result of the removal of the equalisation provision. c) Reinsurance treaties Following a full review of all our reinsurance contracts, a small number of the Group's reinsurance treaties have been revalued under IFRS, leading to a reduction in the value of reinsurance assets of £42 million. The majority of these changes relate to participating contracts and so these value changes affect principally the unallocated divisible surplus rather than shareholders' funds. ---------------------------------------------------------------------------------------------------------------------- Page 82 d) Application of an active liability valuation basis in the Netherlands The conversion to IFRS has been a particular issue in the Dutch industry where traditionally both bond investments and associated insurance liabilities have been held at amortised cost. IAS 39 requires bonds to be held at fair value and hence to prevent an equity mis-match, the Group has chosen to move to a more active liability valuation basis for its insurance liabilities within the Netherlands. Gross liabilities increased by £23 million as a result of this change at 30 June 2004. Having applied an active basis for valuing liabilities on traditional gross and individual savings business, the amount representing undistributed gains on investments backing these products, which were previously booked to the fund for future appropriations under UK GAAP, of £43 million has been released to equity. e) Non-participating investment contracts and other sundry items The liability for those contracts classified as non-participating investment contracts is valued in accordance with IAS 39. The majority of the Group's contracts classified as non-participating investment contracts are unit-linked contracts and have been valued at fair value. For unit-linked contracts the fair value liability is deemed to equal the current unit fund value, plus positive non-unit reserves if required on a fair value basis. This replaces the reserve held under UK GAAP which equals the unit fund value plus any positive or negative non-unit reserves determined on the local valuation basis, which differs from that required on a fair value basis. In addition to the change in liability valuation, the accounting for deferred acquisition costs has been revised in accordance with IAS18. This restricts the types of acquisition costs that can be deferred leading to a reduction in deferred acquisition costs as compared to UK GAAP. The net impact on shareholders' funds of the above changes and of other sundry items is £51 million. Note 3: Employee benefits Under the Group's UK GAAP pension policy, as set out in Statement of Standard Accounting Practice, Accounting for Pensions Cost (SSAP24), the cost of providing pension benefits is expensed using actuarial valuation methods which gives a substantially even charge over the expected service lives of employees and results in either a prepayment or an accrual to the extent that this charge does not equate to the cash contributions made into the schemes. Under International Accounting Standard 19, Employee Benefits (IAS19), the projected benefit obligation is matched against the fair value of the underlying assets and other unrecognised actuarial gains and losses in determining the pension expense for the year. Any pension asset or obligation must be recorded in the balance sheet. Aviva has not applied the 'corridor approach' to valuing pension deficits. This change in accounting has resulted in the removal of the Group's SSAP24 balances, a net debtor of £276 million, after allowing for deferred tax, at 30 June 2004 and the recognition of a deficit of £530 million, net of deferred tax, valued in accordance with IAS19. This gives an overall impact on shareholders' funds of £806 million at 30 June 2004. The Group has assumed that substantially all of the pension deficit will fall to be borne by the shareholders. This is particularly relevant to the UK pension scheme deficit, which forms the majority of the deficit recognised by the Group. Costs, including pension costs, are charged to the UK Life companies and with-profits funds on the basis of a pre-determined Management Services Agreement (MSA). As reported at the time of the conversion to EEV, where similar assumptions have been made in connection with deficit funding, under the MSA, NU Life Services Ltd can renegotiate the terms relating to the recharging of the costs to the UK with profits funds in 2008, subject to regulatory approval. In evaluating the impact on IFRS, Aviva has not sought to pre-empt the outcome of this renegotiation. Any changes to the recharges in respect of the pension deficit will be credited to equity in the period agreement is obtained. In some countries, the pension schemes have invested in the Group's Life funds. IAS 19 requires the liquidity of the scheme's assets to be considered and if these are non-transferable, the presentation of the total obligation to the scheme must include these amounts. The Group has chosen to review its presentation of these investments. Non-transferable obligations to staff pension schemes included within technical provisions under UK GAAP are deducted from Insurance liabilities and included within Provisions under IFRS. Note 4: Goodwill / Other intangibles Under IAS 36, Impairment of Assets, goodwill is no longer amortised but is tested for impairment, at least annually. Any goodwill amortised prior to the date of transition (1 January 2004) or, for goodwill arising before 1 January 1998, eliminated against shareholders' funds has not been reinstated. Amortisation charged in 2004 under UK GAAP is not charged to profit under IFRS to the extent that it does not relate to an impairment and hence shareholders' funds upon conversion to IFRS increase. In addition, negative goodwill of £37 million at 30 June 2004 previously recognised under UK GAAP is included directly in retained earnings. IFRS 3 Business combinations requires that intangible assets such as customers lists, which can be separately identified and valued, must be recognised separately in the balance sheet. The Group has applied IFRS 3 to acquisitions since 1 January 2004, which has resulted in £8 million of goodwill being reclassified as other intangibles upon conversion to IFRS. --------------------------------------------------------------------------------------------------------------------- Page 83 Note 5: Dividend recognition Under UK GAAP, dividends are accrued in the period to which they relate regardless of when they are declared and approved. Under IAS10, Events after the Balance Sheet Date, shareholders' dividends are accrued only when declared and appropriately approved. This has increased shareholders' funds by £220 million. Note 6: Deferred taxes Under UK GAAP, provision is made for deferred tax assets and liabilities, using the liability method, arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in a tax computation. No provision is made for tax that might arise on undistributed earnings of subsidiaries unless a binding agreement for distribution exists. Deferred tax is recognised as a liability or asset if the transactions or events that give the entity an obligation to pay more tax in future or a right to pay less tax in future have occurred by the balance sheet date. The Group policy is to discount its deferred tax balances. Under International Accounting Standard 12, Income taxes (IAS12), deferred taxes are provided under the liability method for all relevant temporary differences, being the difference between the carrying amount of an asset or liability in the balance sheet and its value for tax purposes. IAS 12 does not require all temporary differences to be provided for, in particular the Group does not provide for deferred tax on undistributed earnings of subsidiaries where the Group is able to control the timing of the distribution and the temporary difference created is not expected to reverse in the foreseeable future. Deferred tax assets are recognised for unused tax losses and other deductible temporary differences to the extent that it is probable that future taxable profit will be utilised against the unused tax losses and credits. Discounting is prohibited under IAS12. The changes to deferred tax arise from the removal of discounting, changes to the valuation of the Group's assets and liabilities under IFRS and presentational changes to disclosure of tax assets and liabilities. The main net increases in deferred tax at 30 June 2004 that reduce shareholders' funds are: £m Reversal of discounting (the total discounting applied to UK GAAP deferred tax liabilities was £210 million, of which £166 million relates to non-life and shareholders' interests) 166 Deferred tax impact of the removal of the equalisation provision 119 Deferred tax impact of other changes to technical provisions, valuation of investments and other sundry adjustments 63 ------- Net decrease to shareholders' funds 348 ======= Note 7: Borrowings and cash IFRS requires a number of presentational changes to borrowings and cash. The most significant change is that the linked presentation can no longer be adopted for the Group's borrowing securitised on certain of its mortgage portfolios. This increases borrowings and investments by £3,774 million. The equity impact of £26 million relates to the use of the fair value option to mortgages of the UK equity release business, the loan notes which are securitised upon them and backing derivatives. This has increased borrowings by £97 million. Additionally, £6,906 million of the Group's investments meet the definition of cash equivalents and so have been reclassified to 'cash and cash equivalents'. Note 8: Other items The other changes that arise as a result of the transition to IFRS are principally reclassifications and presentational changes. The total effect of the other changes to shareholders' funds is £76 million. The other significant reclassification and presentational changes which have no impact on shareholders' funds are: • Assets held to cover linked liabilities of £42,921 million are no longer disclosed in a single line but have been reported in the various asset classifications. Of this amount assets of £3,675 million have been netted off technical liabilities, reducing the gross assets and investment contract liabilities of the Group. There is no impact on profit or shareholders' funds as a result of this change. • Technical provisions are disclosed as either insurance contracts or investment contracts, reflecting the product classification included in Note 2(a). The Group held investment contracts of £58,932 million at 30 June 2004. • The assets and liabilities of the banking business are no longer disclosed entirely in 'other debtors' and 'other creditors' but have been reported in the appropriate balance sheet classifications. • Owner occupied properties have been reclassified from 'investment property' to property and equipment. We continue to hold these properties at fair value. • Mutual funds have been consolidated as these vehicles meet the definition of a subsidiary. This has resulted in an increase in gross assets of £2,053 million, representing the part of the funds owned by third parties. This third party interest is recorded in the line 'net assets attributable to unitholders' within liabilities. The consolidation of mutual funds has no impact on shareholders' funds or profit after tax. --------------------------------------------------------------------------------------------------------------------- Page 84 Reconciliation of profit and loss reported under UK GAAP to profit and loss reported under IFRS: For the six months ended 30 June 2004 £m Profit as reported under UK GAAP (MSSB) 263 Adjusted for: Investment and insurance liabilities (14) Employee benefits (note 3) (18) Goodwill (note 4) 51 Other items (14) Deferred tax 1 --------------------------------------------------------------------------------------------------------------------- Profit/(loss) as reported under IFRS 269 --------------------------------------------------------------------------------------------------------------------- Notes to the analysis of adjustments to the reconciliation of profit and loss reported under UK GAAP to profit and loss reported under IFRS for the six months ended 30 June 2004 Note 1: Investment valuation The main investment valuation change upon conversion to IFRS is that assets, which are not classified as being held to maturity, are required to be held at fair value. Under UK GAAP certain of the Group's bonds were held at amortised cost. This change in valuation of debt securities resulted in a £1,367 million increase in the valuation of securities at 30 June 2004. Most of this change was offset by corresponding movements in the unallocated divisible surplus and technical liabilities. However, there was a residual uplift which resulted in a positive increase in the Group's shareholders' funds and the year on year movement in respect of those investments classified as 'at fair value through profit or loss' is reported as increased profits in the income statement. In addition changes to investment accounting have resulted in £1 million of investment gains being reclassified from short term fluctuations to the life operating profit. Note 2: Insurance liabilities Insurance changes consist of: • The removal of the claims equalisation provision, improving profit before tax by £11 million but with no impact on operating profit; • The revaluation of liabilities and deferred acquisition costs on those contracts classified as non-participating investment contracts reducing operating profit by £43 million; • The revaluation of certain life reinsurance treaties, increasing operating profit by £6 million; • Other sundry changes to our general insurance business reserves increasing operating profit in 2004 by £3 million. Note 3: Employee benefits The overall impact of adopting IAS 19 Employee benefits and IFRS 2 Share based compensation has been to increase costs by £18 million in 2004. The increase in costs partly reflects the fact that IAS 19 has used a more current actuarial valuation to measure the ongoing pension service cost. The charge under UK GAAP was based on the SSAP 24 valuation which for the main UK scheme, as disclosed in the 2004 Report and Accounts, was last updated for financial reporting purposes in April 2002. Note 4: Goodwill Goodwill is no longer amortised under IFRS but is subject to annual impairment review. The UK GAAP amortisation charge was £49 million for the six months ended 30 June 2004. No additional impairment arose as a result of the transition to IFRS. A further £2 million credit arises to profit before tax, as goodwill previously charged directly to reserves was deducted from profit upon disposal of subsidiaries under UK GAAP. Under IFRS no such deduction is required. This change has no impact on operating profit or shareholders' funds. Consolidated cash flow statement The principal differences between the cash flow statement under UK GAAP and IFRS are the different definitions of cash and cash equivalents and the inclusion of the cash generated and consumed by the long-term businesses. ---------------------------------------------------------------------------------------------------------------------- Page 85 Shareholder services Scrip dividend The Aviva Scrip Dividend Scheme (the 'Scheme') provides shareholders with the option of receiving new ordinary shares instead of cash dividends. Shareholders who have not already joined the Scheme but wish to do so should contact Lloyds TSB Registrars at the address on page 86 and request a mandate form. The mandate form will need to be received by Lloyds TSB Registrars no later than 20 October 2005 in order to be effective for the 2005 interim dividend. Dividend payments direct to your bank account As an alternative to having dividends paid by cheque, shareholders can, if they wish, have them credited directly into their bank or building society account on the dividend payment date. For overseas shareholders, Transcontinental Account Payment Service (TAPS) is available, which allows shareholders in many countries to have dividends credited direct to their bank accounts in local currencies. To obtain further details and a mandate form please contact the Company's registrar at the address on page 86. For those private shareholders who currently receive dividends paid directly into their bank or building society account, it is now the Company's practice to issue one consolidated tax voucher each year instead of a voucher with each dividend payment. Shareholders who do not wish to receive this service and wish to continue to receive tax vouchers with each dividend may elect to do so by contacting the Company's registrar at the address on page 86. E-Communications Shareholders can receive communications electronically by logging onto www.aviva.com/shareholders and registering for shareholder e-communications. Shareholders will be able to access details of their Aviva shareholding online, elect to receive the Report and Accounts and other shareholder documentation electronically, update their address details online and elect to have their dividends paid directly into their bank or building society account. Share price Shareholders can access the current share price of Aviva ordinary shares at www.aviva.com or alternatively can call 0906 843 2197*. Share dealing facilities The Company has arranged the following services that can be used to buy or sell Aviva shares. Alternatively, if shareholders hold a share certificate they can also use any bank, building society or stockbroker offering share dealing facilities. If shareholders are in any doubt about buying or selling their shares they should seek professional financial advice. Share dealing facilities for UK shareholders/share account members To buy and sell shares over the telephone or internet shareholders can contact Shareview Dealing, arranged through Lloyds TSB Registrars. For telephone purchases or sales call 0870 850 0852** between 8.00am and 4.30pm, Monday to Friday and for internet purchases or sales log on to www.shareview.co.uk/dealing To buy or sell shares over the telephone, shareholders can contact Barclays Stockbrokers on 0870 549 3002** (if they hold a share certificate) or 0870 549 3001** (if they hold a share account statement). NatWest Stockbrokers provide a Share Dealing Service at certain branches for Aviva Share Account holders only. For more information contact NatWest Stockbrokers on 0845 122 0689. NatWest Stockbrokers Limited is operated by a joint venture between The Royal Bank of Scotland Group plc and The Toronto-Dominion Bank. Registered Number: 1959479 England. Registered Office: Waterhouse Square, 138-142 Holborn, London EC1N 2TH. Member of the London Stock Exchange and OFEX. Authorised and regulated by the Financial Services Authority. Share dealing facilities for overseas shareholders To sell Aviva shares over the telephone, shareholders can contact Barclays Stockbrokers on +44 (0)141 352 3959. Non UK residents will need to provide various documentation in order to use this service and details will be provided on registration. Please note that regulations prevent this service being offered to US residents. Settlement proceeds will be sent to either a UK sterling bank account or by sterling cheque. Amalgamating your shares If shareholders receive more than one copy of any shareholder communication, it may be because Aviva has more than one record of shareholdings in their name. To ensure that shareholders do not receive duplicate mailings in future, they can have all their shares amalgamated into one account by contacting Lloyds TSB Registrars at the address on page 86. ShareGift The Orr Mackintosh Foundation operates a purely voluntary charity share donation scheme for shareholders who wish to dispose of small numbers of shares whose value makes it uneconomical to sell them. Details of the scheme are available from ShareGift at www.sharegift.org or can be obtained from the Company's registrar. Shareholders with disabilities Alternative versions of this publication (including braille, large print and audio-tape) are available on request from the Company's registrar. * Calls are currently charged at 60 pence per minute at all times. The average time to access the share price is approximately one minute. ** All 0870 numbers are charged at national rates, and are only available if you are calling from the UK. For your protection and ours, to check instructions and maintain high quality service standards, we may record and monitor calls made to or from Barclay's Stockbrokers. New Business Development hours are 8.00am - 6pm Monday - Friday, excluding Bank Holidays. --------------------------------------------------------------------------------------------------------------------- Page 86 Group financial calendar for 2005 --------------------------------------------------------------------------------------------------------------------- Announcement of unaudited six months' interim results 11 August Announcement of third quarter long-term savings new business figures 27 October Ordinary Shares Ex-dividend date 17 August Record date 19 August Scrip dividend price available 24 August Last date for scrip dividend mandate forms to be received in order to be effective for 2005 interim dividend 20 October Dividend payment date 17 November Preference Shares Second dividend payment for 8 3/8% cumulative irredeemable preference shares 30 September Second dividend payment for 8 3/4% cumulative irredeemable preference shares 31 December --------------------------------------------------------------------------------------------------------------------- Useful contact details Detailed below are various addresses that shareholders may find useful if they have a query in respect of their shareholding. Please quote Aviva plc, as well as the name and address in which the shares are held, in all correspondence. ------------------------------------------------------------------------------------------------------------------- General shareholding, The Causeway administration queries Worthing and Aviva share account queries Lloyds TSB Registrars West Sussex BN99 6DA 0870 600 3952 ------------------------------------------------------------------------------------------------------------------- Corporate and single company Peps Tay House 300 Bath Street Barclays Stockbrokers Limited Glasgow G2 4LH 0870 514 3263 ------------------------------------------------------------------------------------------------------------------- Individual Savings Accounts (ISAs) The Causeway Lloyds TSB Registrars Worthing (ISA Manager) West Sussex BN99 6DA 0870 242 4244 ------------------------------------------------------------------------------------------------------------------- Internet sites Aviva owns various internet sites, most of which interlink with each other. ------------------------------------------------------------------------------------------------------------------- Aviva Group www.aviva.com ------------------------------------------------------------------------------------------------------------------- UK long-term savings and general insurance www.norwichunion.com ------------------------------------------------------------------------------------------------------------------- Fund management www.morleyfm.com ------------------------------------------------------------------------------------------------------------------- Aviva worldwide internet sites www.aviva.com/websites ------------------------------------------------------------------------------------------------------------------- Corporate social responsibility (CSR) Aviva's CSR policy and programme continues to take firmer roots within the business and to generate support with staff, shareholders and customers. For Aviva, CSR is defined as embracing corporate performance in respect of standards of business conduct, human rights, the environment and health and safety, as well as the promotion of good and fair relations with employees, customers, suppliers and the community. Trust and integrity are integral to the wellbeing of a financial services company and therefore the Group sees CSR as presenting a vital business opportunity. Aviva's CSR performance is also highly ranked by growing numbers of research agencies and investment houses. More details can be found on our website at www.aviva.com/csr A PDF version of this announcement can be found at www.aviva.com Aviva plc Registered Office: St Helen's, 1 Undershaft, London EC3P 3DQ Telephone +44 (0)20 7283 2000 www.aviva.com Registered in England Number: 2468686 END OF PART 4 OF 4 END OF ANNOUNCEMENT This information is provided by RNS The company news service from the London Stock Exchange

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