Part 3-MCEV Restatement of HY

RNS Number : 7560M

Aviva PLC

04 February 2009

 



Part 3 of 4

Page 22 

MCEV notes to the financial statements

1 - Basis of preparation 

The summarised consolidated income statement and balance sheet on pages 16 to 21 present the group's results and financial position for the life and related businesses on the Market Consistent Embedded Value (MCEV) basis and for its non-life businesses on the International Financial Reporting Standards (IFRS) basis. The MCEV methodology adopted is in accordance with the MCEV Principles published by the CFO Forum in June 2008 with the exception of the use of an adjusted risk-free yield due to current market conditions for immediate annuities in the UK and Netherlands and for immediate annuities, deferred annuities and other contracts in the US.

The CFO Forum MCEV Principles were designed during a period of relatively stable market conditions. As announced on 19 December 2008, the CFO Forum has agreed to conduct a review of the impact of turbulent market conditions on the MCEV Principles, the result of which may lead to changes to the published MCEV Principles or the issuance of guidance. The particular areas under review include implied volatilities, the cost of non-hedgeable risks, the use of swap rates as a proxy for risk-free rates and the effect of liquidity premia.

The directors consider that Aviva's  MCEV methodology represents a more meaningful basis of reporting the value of the group's life and related businesses and the drivers of performance than IFRS methodology. This basis values future cash flows from assets consistently with market prices, including more explicit allowance for the impact of uncertainty in future investment returns and other risks. Embedded value is also consistent with the way pricing is assessed and the business is managed. 

The results for 2007 and 2006 have been audited by our auditors, Ernst & Young LLP. The results for the six month period to 30 June 2008 are unaudited but have been reviewed by our auditors. Their reports can be found on pages 55 and 56.

Covered business

The MCEV 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. 

Covered business includes the group's share of our joint ventures including our arrangement with The Royal Bank of Scotland Group (RBSG) and our associated undertakings in India, China, Turkey, Malaysia, Taiwan and South Korea. 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'.

Adjusted risk-free rate

Aviva's MCEV methodology adopts the CFO Forum Principles and Guidance with the exception of the use of an adjusted risk-free yield due to current market conditions for UK and Netherlands immediate annuities and for immediate annuities, deferred annuities and other contracts in the US. In stable markets, swap curves are an appropriate risk-free rate. However, in the current turbulent market it is possible, for products where backing asset portfolios can be held to maturity, to earn returns in excess of swaps by investing in corporate bonds and credit default swaps (CDS). 

The risk-free rate for these products has therefore been increased above the swap curve due to additional risk-free returns available on backing asset portfolios in the current market. Sensitivity analysis has been provided on page 44 on the additions to the swap curves.

The risk-free rate is taken as the swap yield curve for the currency of the liability, adjusted by:

	31 December 2007 Embedded value	30 June 2008 Embedded value	2007 second-half  new business	2008 first-half  new business
UK, the Netherlands and US immediate annuities, US deferred annuities and other US contracts	0.50%	0.50%	0.25%	0.55%

New business premiums

New business premiums include:

- premiums arising from the sale of new contracts during the period;
- non-contractual additional premiums, including future Department of Work and Pensions (DWP) rebate premiums; and
- expected renewals on new contracts and expected future contractual alterations to new contracts.

The group's definition of new business under MCEV includes contracts that meet the definition of 'non-participating investment' contracts under IFRS.

For products sold to individuals, premiums are considered to represent new business 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.

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Life and pensions operating earnings

For life and pensions operating earnings, Aviva uses normalised investment returns, which are generally expressed as risk free returns plus an asset risk premium. The use of asset risk premiums reflects management's long term expectations of asset returns in excess of the reference rate from investing in different asset classes. This assumption does not impact the embedded value as asset risk premia are not recognised until earned.

MCEV methodology

Overview

Under the MCEV 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, the net worth of that business excludes the interest in the dependent company. 

The embedded value is calculated on an after-tax basis applying current legislation and practice together with future known changes. Where gross results are presented, these have been calculated by grossing up post-tax results at the full rate of corporation tax for each country based on opening period 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. 

Required capital is the market value of assets attributed to the covered business over and above that required to back liabilities for covered business, for which distribution to shareholders is restricted. Required capital is reported net of implicit items permitted on a local regulatory basis to cover minimum solvency margins which are assessed at a local entity level. The level of required capital for each business unit is set equal to the higher of:

-     The level of capital at which the local regulator is empowered to take action;

-     The capital requirement of the business unit under the group's economic capital requirements; and,

-     The target capital level of the business unit.

This methodology reflects the level of capital considered by the directors to be appropriate to manage the business. The same definition of required capital is used for both existing and new business. 

The free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business at the valuation date.

The table below summarises the level of required capital across the business units expressed as a percentage of the EU minimum solvency margin (or equivalent):

	Reviewed  30 June  2008  %	Audited  31 December  2007  %	Audited  31 December  2006  %
United Kingdom1	100% / 110%	100% / 110%	100% / 110%
France	110%	110%	110%
Ireland	150%	150%	150%
Italy2	115%/184%	115% / 184%	115%
Netherlands (including Belgium and Germany) 3	193%	188%	183%
Poland	150%	150%	150%
Spain4	110% / 125%	110% / 125%	110% / 125%
North America	325%	325%	325%

1.    The required capital in the United Kingdom under MCEV is 100% for unit-linked and other non-participating business and 110% for annuity business

2.    Required capital in Italy under MCEV is 184% of the EU minimum for Eurovita and 115% for other companies

3.    Required capital in the Netherlands is 188% for full-year 2007 and 193% for the six months to 30 June 2008. This capital level is the aggregate capital required for the Netherlands.

4.    Required capital in Spain is 125% of the EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies

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Value of in-force covered business (VIF)

The value of in-force covered business consists of the following components:

-    present value of future profits;

-    time value of financial options and guarantees; 

-    frictional costs of required capital; and,

-    cost of residual non-hedgeable risks.

Present value of future profits (PVFP)

This is the present value of the distributable profits to shareholders arising from the in-force covered business projected on a best estimate basis.

Distributable profits generally arise when they are released following actuarial valuations. These valuations are carried out in accordance with any local 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 assumptions of future experience. 

Future profits are projected using best estimate non-economic assumptions and market consistent economic assumptions. In principle, each cash flow is discounted at a rate that appropriately reflects the riskiness of that cash flow, so higher risk cash flows are discounted at higher rates. In practice, the PVFP is calculated using the 'certainty equivalent' approach, under which the reference rate is used for both the investment return and the discount rate. This approach ensures that asset cash flows are valued consistently with the market prices of assets without options and guarantees. Further information on the risk-free rates is given in Note 12.

The PVFP 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.

Time value of financial options and guarantees (TVOG)

The PVFP calculation is based on a single (base) economic scenario. However, a single scenario cannot appropriately allow for the effect of certain product features. If an option or guarantee affects shareholder cash flows in the base scenario, the impact is included in the PVFP and is referred to as the intrinsic value of the option guarantee.

However, future investment returns are uncertain and the actual impact on shareholder profits may be higher or lower. The value of in-force business needs to be adjusted for the impact of the range of potential future outcomes. Stochastic modelling techniques can be used to assess the impact of potential future outcomes, and the difference between the intrinsic value and the total stochastic value is referred to as the time value of the option or guarantee.

Stochastic modelling typically 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. Under a market consistent approach, the economic scenarios generated reflect the market's tendency towards risk aversion. 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. 

Stochastic models are calibrated to market yield curves and volatility levels at the valuation date. Tests are performed to confirm that the scenarios used produce results that replicate the market price of traded instruments. 

Where evidence exists that persistency rates are linked to economic scenarios, dynamic lapse assumptions are set that vary depending on the individual scenarios. This cost is included in the TVOG. Dynamic lapses are modelled for parts of the US and French business. Asymmetries in non-economic assumptions that are linked to economic scenarios, but that have insufficient evidence for credible dynamic assumptions, are allowed for within mean best estimate assumptions.

Frictional costs of required capital

The additional costs to a shareholder of holding the assets backing required capital within an insurance company rather than directly in the market are called frictional costs. They are explicitly deducted from the PVFP. The additional costs allowed for are the taxation costs and any additional investment expenses on the assets backing the required capital. The level of required capital has been set out above in the net worth section.

Frictional costs are calculated by projecting forwards the future levels of required statutory capital. Tax on investment return and investment expenses are payable on the assets backing required capital up until the point that they are released to shareholders.

Cost of residual non-hedgeable risks (CNHR)

The cost of residual non-hedgeable risks (CNHR) covers risks not already allowed for in the time value of options and guarantees or the PVFP. The allowance includes the impact of both non-hedgeable financial and non-financial risks. The most significant risk not included in the PVFP or TVOG is operational risk. 

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Aviva's methodology includes a cost of non-hedgeable risk equivalent to a charge of 2.5% applied to group-diversified capital. The cost has been calculated as a 1.5% charge applied to business unit-level capital, that is, allowing for diversification within a business unit, but not between business units. The charge was set so as to give an aggregate allowance that was in excess of the expected operational risk costs arising from the in-force covered business over its remaining lifetime.

The capital levels used are projected to be sufficient to cover non-hedgeable risks at the 99.5% confidence level one-year after the valuation date. The capital is equal to the capital from the ICA results for those risks considered. The capital has been projected as running off over the remaining life of the in-force portfolio in line with the drivers of the capital requirement.

In addition to the operational risk allowance, financial non-hedgeable risks and other product level asymmetries have been allowed for. These allowances are not material as significant financial non-hedgeable risks and product level asymmetries are either modelled explicitly and included in the TVOG or are included in the PVFP through the use of appropriate best estimate assumptions. Asymmetric risks allowed for in the TVOG or PVFP are described earlier in the Basis of Preparation and in Note 7(c) . No allowance has been made within the cost of non-hedgeable risk for symmetrical risks as these are diversifiable by investors.

Participating business

Future regular bonuses on participating business are projected in a manner consistent with current bonus rates and expected future market-consistent 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 TVOG.

For profit sharing business in continental Europe, where policy benefits and shareholder value depend on the timing of realising gains, the apportionment of unrealised gains between policyholders and shareholders reflect contractual requirements as well as existing practice. Under certain economic scenarios where additional shareholder injections are required to meet policyholder payments, the average additional cost has been included in the TVOG.

The embedded value of the US spread-based products anticipates the application of management discretion allowed for contractually within the policies, subject to contractual guarantees. This includes the ability to change the crediting rates and indexed strategies available within the policy. Consideration is taken of the economic environment assumed in future projections and returns in excess of the reference rate are not assumed. Anticipated market and policyholder reaction to management action has been considered. The anticipated management action is consistent with current decision rules and has been approved and signed off by management and legal counsel.

Consolidation adjustments

The effect of transactions between group life companies such as loans and reinsurance arrangements have been included in the results split by territory in a consistent manner. No elimination is required on consolidation.

As the MCEV 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 MCEV basis.

The capitalised value of the future profits and losses from such service companies are included in the embedded value and value of new business calculations for the relevant business, 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.

The assessments of goodwill, intangibles and pension schemes relating to life insurance business utilise the IFRS measurement basis.

Post-balance sheet events 

On 10 September 2008, Aviva plc ('Aviva') announced that its Dutch business, Delta Lloyd Group ('Delta Lloyd') had reached a settlement for compensation with regard to unit-linked insurance policies, which have been the subject of an industry review. The adverse impact on Delta Lloyd's embedded value is expected to be approximately £230 million* (pre-tax). This settlement will be shown as an exceptional item in the Aviva group's results for the year ending 31 December 2008 therefore, £71 million (pre-tax) which has been provided for in the 30 June 2008 results is also treated as an exceptional item. Only a limited impact on IFRS profit is anticipated, as IFRS provisions already established on the basis of Dutch regulatory requirements are considered adequate.

Except for the item above we are aware of no post balance sheet events impacting our half year 2008 and full year 2007 results. 

* €300 million translated at an average exchange rate of €1.29 

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Restatement for the change in accounting policy for latent reserves

As part of the Company's aim to continuously improve the relevance and reliability of its external financial reporting, Aviva undertook a review of the Group's General Insurance Reserving Policy in 2008.

As part of this review the Group concluded that estimating all of our latent claim provisions on an undiscounted basis, and discounting back to current values, represented an improvement to the existing estimation technique. This approach is in line with best practice for long-term liabilities and moves the measurement of latent claims onto a more economic basis, consistent with our internal model for economic capital and the measurement model being proposed for both IFRS Phase II and Solvency II. 

Further this approach improves consistency with the reporting of other long-tail classes of business which are already being discounted, namely certain London Markets latent claims and Netherlands Permanent Health and Injury Business.

Discount rate 

The discount rate that has been applied is based on the relevant swap curve in the relevant currency at the reporting date, having regard to the duration of expected settlement of the claims. The rate, based on the swap curve, is set at the start of the accounting period with any change in discount rates between the start and end of the accounting period being reflected below operating profit as an economic assumption change. The range of rates used is between 3.6% and 6.3 % depending on the duration of the claim and the reporting date. We estimate that latent claims will be payable for around the next 35 to 40 years with an average duration of 15 years.

IFRS Treatment

The application of discounting to all of our latent claims reserves for IFRS purposes represents a change in accounting policy and therefore has been applied retrospectively. The cumulative impact of discounting on our opening position as at 1 January 2007 is £153 million which will be treated as a prior period adjustment. 

The impact of the change in accounting policy on the general insurance and health claims provisions and our results for the six months ended 30 June 2008, the full year ended 31 December 2007 and the opening 1 January 2007 position is set out below.

General insurance and health claims provisions	Reviewed 30 June  2008 £m	Audited 31 December  2007 £m	Audited 1 January 2007 £m
Carrying amount as reported, net of reinsurance	11,410	11,424	10,980
Impact of discounting
Prior period adjustment brought forward	(145)	(153)	(153)
Impact on operating profit	10	12	-
Impact on short term fluctuations and economic assumption changes	(6)	(2)	-
Impact of foreign exchange movements	(1)	(2)	-
	(142)	(145)	(153)
Carrying amount restated, net of reinsurance	11,268	11,279	10,827

The impact on shareholders' funds after tax was £105 million, £107 milion and £112 million at 30 June 2008, 31 December 2007 and 31 December 2006 respectively . 

Restatement for the consolidation of funds

The long-term business net assets on an MCEV basis have been restated to reanalyse the amounts previously classified as minority interest on property investment vehicles to net asset value attributable to unitholders. This change recognises that the property investment vehicles are unit trusts and, as a result, the third party holding should be recognised as a liability rather than a minority interest holding. Prior period comparatives have been restated with a reduction in minority interest and an increase in amounts due to unitholders of £838 million, £758 million and £431 million at 30 June 2008, 31 December 2007 and 31 December 2006 respectively.

During 2008, we identified certain specialised investment vehicles that the group manages required consolidation in accordance with IAS 27. This results in grossing up assets and liabilities for the effect of the third party participation. As a result, the figures for investment property, debt securities, equity securities, other investments and net assets attributable to unitholders as at 31 December 2007 and 31 December 2006 have been restated. 

Neither of these adjustments has any impact on profit or cash flow in any reported period.

Treatment of shares held by employee trusts

Employee share trusts have purchased the Company's shares in the market to satisfy awards under various share plans. At 30 June 2008 and 31 December 2007, these trusts held shares with a cost of £10 million which, on materiality grounds, were included within other financial assets rather than being shown as a deduction from total shareholders' equity in the consolidated balance sheet. In view of the Company's current policy of purchasing shares in the market rather than issuing new shares, which will lead to larger balances on this account, we have restated the 30 June 2008 and 31 December 2007 figures accordingly.

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2 - Translation of foreign exchange

The group's principal overseas operations during the period were located within the Eurozone and the United States. 

The results and cash flows of these operations have been translated at the average rates for that period and the assets and liabilities have been translated at the period end rates as follows:

	30 June  2008	31 December  2007	31 December 2006
Eurozone
- Average rate (€1 equals)	£0.77	£0.68	£0.68
- Period end rate (€1 equals)	£0.79	£0.73	£0.67
United States
- Average rate (US$1 equals)	£0.51	£0.50	£0.54
- Period end rate (US$1 equals)	£0.51	£0.50	£0.51

3 - Analysis of life and pensions MCEV earnings 

The components of the life MCEV earnings in the consolidated income statement have been further analysed in this note.  This analysis is performed in two ways. Part (a) shows the life MCEV earnings gross of both taxes and minorities analysed in total. Part (b) shows, the movement between the opening and closing embedded value with a breakdown into the different components of that embedded value, net of tax and minorities. Part (b) analysis follows the CFO Forum disclosure requirements.

(a) Life and pensions MCEV earnings

 -    In this table the life and pensions MCEV earnings have been broken down into constituent parts. The life and pensions MCEV operating earnings comprise: 

-    the value of new business written during the period;

-    the earnings from existing business; and,

-    the expected investment return on the shareholders' net worth.

-    These components are calculated using economic assumptions as at the start of the year (in-force business) or start of the quarter (new business) and operating (demographic and expenses) assumptions as at the end of the period.

Life and pensions MCEV earnings	Reviewed  6 months 2008 £m	Audited  Full year  2007 £m
Value of new business	352	897
Earnings from existing business
- expected returns at the reference rate	465	877
- expected returns in excess of the reference rate	227	420
- expected returns	692	1,297
- experience variances	42	(111)
- operating assumption changes	(97)	(25)
- other operating variances	(19)	1
Expected return on shareholders' net worth	310	485
Life and pensions operating earnings before tax	1,280	2,544
Economic variances	(4,086)	(19)
Other non-operating variances	(71)	-
Life and pensions earnings before tax	(2,877)	2,525
Tax on operating earnings	(365)	(754)
Tax on other activities	1,206	48
Life and pensions earnings after tax	(2,036)	1,819

There were no separate development costs reported in these periods.

The table above presents a summarised breakdown of the life and pensions MCEV earnings on a gross of minorities basis and gross of tax with tax shown separately. The group favours the gross presentation for consistency with the IFRS results. The table below compares the key items on the different basis as the subsequent analysis is provided predominately on a net of tax and minorities basis as preferred by the CFO Forum Principles.

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	Reviewed 6 months 2008		Audited Full year 2007
Key indicators	Net of minorities  and tax  £m	Gross of minorities  and tax  (as above)  £m	Net of minorities  and tax  £m	Gross of minorities  and tax  (as above)  £m
Value of new business	179	352	504	897
Life and pensions operating earnings	774	1,280	1,567	2,544
Life and pensions earnings	(2,062)	(2,877)	1,619	2,524

 (b) Presentation of analysis of earnings

The following table provides an analysis of the movement in embedded value for the life and related businesses for 30 June 2008 and 31 December 2007. The analysis is shown separately for free surplus, required capital and the value of in-force covered business, and includes amounts transferred between these categories. Included within capital and dividend flows is the transfer to life and related businesses from other segments consisting 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 and minority interests.

	Reviewed 6 months 2008  £m				Audited Full year 2007  £m
	Earnings on MCEV analysis				Earnings on MCEV analysis
	Free surplus	Required capital1	VIF	Total MCEV	Free surplus	Required capital1	VIF	Total MCEV
Opening MCEV	3,204	6,240	8,804	18,248	3,066	5,287	8,153	16,506
New business value	(905)	511	573	179	(1,432)	808	1,128	504
Expected existing business contribution (reference rate)	-	-	306	306	-	-	573	573
Expected existing business contribution (in excess of reference rate)	-	-	155	155	-	-	284	284
Transfers from VIF and required capital to the free surplus	949	(308)	(641)	-	1,683	(439)	(1,244)	-
Experience variances	65	17	(58)	24	271	(13)	(336)	(78)
Assumption changes	182	(109)	(150)	(77)	18	(8)	(40)	(30)
Expected return on shareholders' net worth	111	88	-	199	172	136	-	308
Other operating variance	9	(27)	6	(12)	2	12	(8)	6
Operating MCEV earnings	411	172	191	774	714	496	357	1,567
Economic variances	(1,450)	(97)	(1,243)	(2,790)	37	112	(97)	52
Other non-operating variance	3	(4)	(45)	(46)	-	-	-	-
Total MCEV earnings	(1,036)	71	(1,097)	(2,062)	751	608	260	1,619
Capital and dividend flows	(599)	-	-	(599)	(829)	-	-	(829)
Foreign exchange variance	123	325	352	800	172	308	371	851
Acquired/divested business	79	58	53	190	44	37	20	101
Closing MCEV	1,771	6,694	8,112	16,577	3,204	6,240	8,804	18,248

1.    Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.

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4 - New business

This note gives more detail relating to the value of new business. A geographical breakdown is shown together with a product split at a regional level. There is also more detail on the capital required to write new business, the rate of return achieved and how quickly the initial capital invested is paid back.

The table below sets out the PVNBP, written by the life and related businesses the value of new business and the resulting margin net of tax and minority interests. 

New business sales are expressed as the present value of new business premiums (PVNBP). The PVNBP calculation is equal to total single premium sales received in the period 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 the value of new business, so the components of the new business margin are on a consistent basis.

The value generated by new business written during the period is the present value of the projected stream of after tax distributable profit from that business. The value of new business has been calculated using economic assumptions at the point of sale which has been implemented with the assumptions being taken as those appropriate to the start of each quarter. For interest sensitive contracts that are re-priced more frequently, weekly or monthly economic assumptions have been used and the same operating assumptions as those used to determine the embedded value. The value of new business is shown after the effect of the frictional costs of holding required capital, and after the effect of the costs of residual non-hedgeable risks on the same basis as for the in-force covered business.

(a) Geographical analysis of new business contribution

	Present value of new  business premiums1		Value of new business2		New business margin3
Life and pensions	Reviewed  6 months 2008 £m	Audited  Full year  2007 £m	Reviewed  6 months 2008  £m	Audited  Full year  2007  £m	Reviewed  6 months 2008  %	Audited  Full year  2007  %
United Kingdom	6,010	11,797	53	195	0.9%	1.7%
France	1,692	3,157	38	81	2.2%	2.6%
Ireland	524	1,335	6	26	1.1%	1.9%
Italy	649	1,284	12	20	1.8%	1.6%
Netherlands (including Belgium and Germany)	1,965	2,941	(31)	3	(1.6)%	0.1%
Poland	827	966	22	34	2.7%	3.5%
Spain	713	1,223	43	57	6.0%	4.7%
Other Europe	667	453	16	4	2.4%	0.9%
Europe	7,037	11,359	106	225	1.5%	2.0%
North America	2,227	3,646	(5)	34	(0.2)%	0.9%
Asia	680	1,133	21	39	3.1%	3.4%
Australia	212	454	4	11	1.9%	2.4%
Asia Pacific	892	1,587	25	50	2.8%	3.2%
Total life and pensions	16,166	28,389	179	504	1.1%	1.8%

1.    PVNBP is calculated net of minorities. 

2.    Value of new business is calculated net of tax and minorities. 

3.    New business margin represents the ratio of the value of new business to PVNBP, expressed as a percentage.

4.    Total long-term savings includes investment sales. Investment sales are calculated as new single premiums plus annualised value of new regular premiums.

A more detailed breakdown of the new business premiums and value of new business can be found in on page 58 and 59.

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(b) Post-tax internal rate of return on life and pensions new business and payback period 

The new business written requires up front capital investment, due to high set-up costs and capital requirements. The internal rate of return (IRR) is a measure of the shareholder return expected on this capital investment. It 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 the value of new business. 

The payback period shows how quickly shareholders can expect the total capital to be repaid. The payback period has been calculated based on undiscounted cash flows and allows for the initial and required capital.

The projected investment returns in both the IRR and payback period calculations assume that equities, properties and bonds earn a return in excess of risk-free consistent with the long-term rate of return assumed in operating earnings.

The IRR on life and pensions new business for the group was 12.9% for the first half of 2008 and full year 2007.

	Reviewed 6 months 2008
	Internal rate  of return  %	Initial  capital  £m	Required capital  £m	Total invested capital  £m
United Kingdom	13%	130	80	210
France	11%	21	60	81
Ireland	9%	35	12	47
Italy	17%	6	23	29
Netherlands (including Belgium and Germany)	6%	73	138	211
Poland	20%	15	7	22
Spain	39%	13	39	52
Other Europe	18%	38	7	45
Europe	13%	201	286	487
North America	11%	61	174	235
Asia	18%	30	12	42
Australia	13%	2	14	16
Asia Pacific	17%	32	26	58
Total	12.9%	424	566	990

	Audited Full year 2007
	Internal rate  of return  %	Initial  capital  £m	Required capital  £m	Total  invested capital  £m	Payback period  years
United Kingdom	13%	256	149	405	8
France	12%	29	107	136	8
Ireland	11%	69	23	92	7
Italy	15%	4	52	56	6
Netherlands (including Belgium and Germany)	6%	78	181	259	22
Poland	23%	18	10	28	4
Spain	28%	24	68	92	3
Other Europe	18%	48	4	52	5
Europe	13%	270	445	715	12
North America	12%	125	280	405	6
Asia	23%	48	11	59	4
Australia	15%	-	23	23	6
Asia Pacific	21%	48	34	82	4
Total	12.9%	699	908	1,607	9

The payback period is only provided for full year 2007 as it will only be updated annually.

The total initial capital for life and pensions new business for half year 2008 of £424 million and for full year 2007 of £699 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 £394 million and £624 million respectively shown on page 28, because the latter amount includes expected profits from the point of sale to the end of the reporting period, partly offset by the cost of holding the initial capital.

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5 - Free surplus emergence 

This note shows how our business generates free surplus. To do this the impact of the business on net worth and required capital is considered separately for existing business and new business.

The following table illustrates the free surplus expected to emerge from existing business into net worth over 2007 the impact of writing new business on the net worth and required capital free surplus levels.  As this new disclosure will be included within the 2008 preliminary results announcement, 2007 comparatives are presented below.

Audited Full year 2007
Existing business						New business			Total business
	Transfer from  VIF to net worth  £m	Return on net worth £m	Impact of experience variances and assumption changes on net worth  £m	Release of required capital to free surplus  £m	Total existing business surplus genera- tion  £m	Impact on  net worth  £m	Reduction in free surplus from required capital  £m	Total new business surplus generation  £m	Total free surplus generation £m
United Kingdom	549	66	225	57	897	(245)	(149)	(344)	503
Europe	537	197	42	118	894	(225)	(345)	(570)	324
North America	103	33	19	133	288	(106)	(280)	(387)	(99)
Asia Pacific	55	12	4	4	67	(47)	(34)	(81)	(14)
Total	1,244	308	282	312	2,146	(624)	(808)	(1,432)	714

6 - Maturity profile of business

This note sets out how the VIF generated by the in-force and new business is modelled as emerging into free surplus over future years. Cashflows are projected on a certainty equivalent basis and are discounted at risk-free rates.

As this new disclosure will be included within the 2008 preliminary results announcement, 2007 comparatives are presented below.

(a) Total in-force business

To show the profile of the VIF emergence the value of VIF in the consolidated balance sheet has been split into five year tranches depending on the date when the profit is expected to emerge.

	Audited Full year 2007
£m	0-5	6-10	11-15	16-20	20+	Total gross of minority interest	Total net of minority interest
United Kingdom	1,574	1,209	615	345	524	4,267	4,267
Europe	2,200	1,170	736	412	332	4,850	3,946
North America	168	129	41	16	(24)	330	330
Asia Pacific	130	105	15	8	11	269	261
Total	4,072	2,613	1,407	781	843	9,716	8,804

(b) New business 

To show the profile of the VIF emergence the value of new business per page 28 has been split into five year tranches depending on the date when the profit is expected to emerge.

	Audited Full year 2007
£m	0-5	6-10	11-15	16-20	20+	Total gross of minority interest	Total net of minority interest
United Kingdom	192	114	55	31	48	440	440
Europe	283	140	91	56	29	599	450
North America	85	61	6	(1)	(11)	140	140
Asia Pacific	46	41	5	3	4	99	98
Total	606	356	157	89	70	1,278	1,128

  Page 32 

7 - Geographical analysis

This note provides a geographical split of the MCEV operating earnings part (a), the embedded value part (b), the risk allowances that are within the VIF, part (c) and the implied discount rates part (d).

(a) Components of life MCEV operating earnings

	Reviewed 6 months 2008
	UK £m	France £m	Ireland £m	Italy £m	Nether-lands £m	Poland £m	Spain £m	Other Europe £m	Europe £m	North America £m	Asia £m	Australia £m	Asia Pacific £m	Total £m
Value of new business	53	38	6	12	(31)	22	43	16	106	(5)	21	4	25	179
Earnings from existing business
- expected existing business contribution (reference rate)	114	47	12	4	36	30	12	7	148	28	6	10	16	306
- expected existing business contribution (in excess of reference rate)	59	12	2	1	54	3	6	-	78	16	1	1	2	155
Experience variances
-maintenance expense	-	-	(3)	-	1	2	(1)	(4)	(5)	-	2	(1)	1	(4)
- project and other related expenses1	(20)	-	(3)	-	(1)	-	(1)	(2)	(7)	(1)	-	-	-	(28)
- mortality/ morbidity2	8	11	1	-	(11)	8	(1)	1	9	1	2	1	3	21
- lapses3	(9)	3	-	-	14	10	(3)	(2)	22	(1)	(8)	1	(7)	5
- other4	24	6	(6)	4	4	1	1	-	10	(3)	(1)	-	(1)	30
Operating assumption changes:
-maintenance expenses	-	-	(1)	-	(4)	-	-	-	(5)	(5)	-	-	-	(10)
- mortality/ morbidity5	-	-	-	-	(89)	-	(1)	-	(90)	-	-	-	-	(90)
- lapses	-	-	-	-	7	-	-	-	7	-	-	-	-	7
- other6	16	(3)	-	4	(1)	-	-	-	-	-	-	-	-	16
Expected return on shareholders' net worth	56	31	10	10	53	5	5	4	118	18	4	3	7	199
Other operating variances7	(1)	(1)	7	(1)	(17)	-	-	-	(12)	-	1	-	1	(12)
Life MCEV operating earnings after tax and minority interests	300	144	25	34	15	81	60	20	379	48	28	19	47	774

1.    Project and other related expenses in the UK reflect project costs associated with strategic initiatives, including developments designed to offer simpler products to customers, and the simplification of systems and processes

2.    Mortality experience continues to be better than the assumptions set across a range of businesses.

3.    Lapse experience has been volatile, in part reflecting wider economic volatility. In the UK, lapse experience for non-profit pension and bond products was worse than expected. In Poland, lapse experience continued to be better than the long-term assumptions for both Life and Pension products. In the Netherlands, the positive lapse variance reflects better than expected persistency in the Group Pensions business.

4.    Other experience profits reflect an accumulation of small items.

5.    Mortality assumption changes in the Netherlands reflect the impact of using a new industry mortality basis.

6.    Other operating assumption changes in the UK reflect the distribution of a special bonus to with profit policyholders,

7.    Other operating variances reflect the impact of various small modelling changes.

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(a) Components of life MCEV operating earnings 

Audited Full year 2007
	UK £m	France £m	Ireland £m	Italy £m	Nether-lands £m	Poland £m	Spain £m	Other Europe £m	Europe £m	North America £m	Asia £m	Australia £m	Asia Pacific £m	Total £m
Value of new business	195	81	26	20	3	34	57	4	225	34	39	11	50	504
Earnings from existing business
- expected existing business contribution (reference rate)	261	90	17	6	66	36	18	8	241	48	9	14	23	573
- expected existing business contribution (in excess of reference rate)	133	20	5	1	95	5	9	-	135	14	1	1	2	284
Experience variances
-maintenance expense	7	1	(2)	3	(3)	2	-	(4)	(3)	(13)	(1)	(2)	(3)	(12)
- project and other related expenses1	(61)	6	(3)	-	(13)	-	(1)	(7)	(18)	-	(1)	-	(1)	(80)
- mortality/ morbidity2	8	18	(1)	-	(1)	10	(3)	2	25	(2)	4	2	6	37
- lapses3	(9)	5	4	(5)	4	13	(1)	1	21	-	(9)	-	(9)	3
- other4	(17)	(14)	(4)	1	12	5	5	1	6	(18)	2	1	3	(26)
Operating assumption changes:
-maintenance expenses5	6	(2)	(2)	-	(12)	4	-	(8)	(20)	(19)	1	-	1	(32)
- project and other related expenses	1	(1)	-	-	(3)	-	-	(9)	(13)	-	-	-	-	(12)
- mortality/ morbidity6	20	(1)	-	1	(24)	11	(5)	2	(16)	-	(7)	3	(4)	-
- lapses	(11)	-	-	-	2	8	(7)	3	6	(3)	(7)	(1)	(8)	(16)
- other7	(22)	85	-	2	(23)	(4)	-	(11)	49	6	(3)	-	(3)	30
Expected return on shareholders' net worth	66	53	15	12	103	5	6	3	197	33	6	6	12	308
Other operating variances8	(2)	-	-	(3)	11	-	(3)	3	8	-	-	-	-	6
Life MCEV operating earnings after tax and minority interests	575	341	55	38	217	129	75	(12)	843	80	34	35	69	1,567

1.    Project and other related expenses in the UK reflect project costs associated with strategic initiatives, including developments designed to offer simpler products to customers, and the simplification of systems and processes. In the Netherlands, project costs mainly represent one-off restructuring costs in the Dutch business.

2.    Mortality experience continues to be better than the assumptions set across a range of businesses.

3.    Lapse experience in Poland continues to be better than assumptions set across both Life and Pensions businesses.

4.    Other experience profits reflect an accumulation of small items, including an increased allowance for operational risk in the USA.

5.    Maintenance expense assumptions have been strengthened in the USA following investment to support the growth of the business, and in the Netherlands following a review of expenses.

6.    Mortality assumptions in the UK reflect changes to the anti-selection loading on annuities. In the Netherlands, the mortality assumption strengthening reflected a partial implementation of a new industry mortality basis.

7.    In France, other operating assumption changes reflect increased profitability driven by product development and the increased proportion of unit-linked assets within managed funds.

8.    Other operating variances in the Netherlands relate to changes in asset management fees.

  Page 34

(b) Embedded value

	Reviewed 30 June 2008
	Net worth		VIF  £m	Total Embedded value  £m
	Free surplus £m	Required capital1  £m
United Kingdom	931	1,395	3,450	5,776
France2	(58)	1,260	1,135	2,337
Ireland	156	205	502	863
Italy	217	227	157	601
Netherlands (including Belgium and Germany)	516	1,936	885	3,337
Poland	69	134	933	1,136
Spain	83	191	360	634
Other Europe	35	26	150	211
Europe	1,018	3,979	4,122	9,119
North America3	(305)	1,039	240	974
Asia	110	66	228	404
Australia	17	215	72	304
Asia Pacific	127	281	300	708
Total	1,771	6,694	8,112	16,577

1.    Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.

2.    France has a positive surplus on a statutory basis.

3.    Aviva USA's holding company debt amounting to £356 million at 30 June 2008 has been included within non-covered business

	Audited 31 December 2007
	Net worth		VIF  £m	Total Embedded value  £m
	Free surplus  £m	Required capital1  £m
United Kingdom	1,255	1,389	4,267	6,911
France	28	1,280	1,228	2,536
Ireland	159	201	465	825
Italy	208	156	125	489
Netherlands (including Belgium and Germany)	1,247	1,713	856	3,816
Poland	111	116	816	1,043
Spain	61	175	334	570
Other Europe	32	24	122	178
Europe	1,846	3,665	3,946	9,457
North America2	(70)	946	330	1,206
Asia	124	53	190	367
Australia	49	187	71	307
Asia Pacific	173	240	261	674
Total	3,204	6,240	8,804	18,248

1.    Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.

2.    Aviva USA's holding company debt amounting to £349 million at 31 December 2007 has been included within non-covered business 

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. This is split between required capital, net of implicit items, and free surplus.

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Page 35 

	Audited 31 December 2006
	Net worth		Total
	Free Surplus £m	Required capital1  £m	VIF  £m	Embedded value  £m
United Kingdom	970	1,294	4,271	6,535
France	220	962	993	2,175
Ireland	113	193	433	739
Italy	177	132	90	399
Netherlands (including Belgium and Germany)	1,296	1,428	697	3,421
Poland	93	94	638	825
Spain	41	152	318	511
Other Europe	27	19	86	132
Europe	1,967	2,980	3,255	8,202
North America2	(4)	829	443	1,268
Asia	92	31	117	240
Australia	41	153	67	261
Asia Pacific	133	184	184	501
Total	3,066	5,287	8,153	16,506

1.    Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.

2.    Aviva USA's holding company debt amounting to £362 million at 31 December 2006 has been included within non-covered business

(c) Risk allowances within the present value of in-force ('VIF') 

Within the VIF in the tables above there are additional allowances for risks not included within the basic present value of future profits calculation. These are set out below:

	Reviewed 30 June 2008
	PVFP  £m	Frictional costs  £m	Non-hedgeable risks  £m	Time value of financial options and guarantees  £m	VIF  £m
United Kingdom	3,893	(200)	(154)	(89)	3,450
France	1,712	(150)	(133)	(294)	1,135
Ireland	530	(10)	(17)	(1)	502
Italy	200	(24)	(7)	(12)	157
Netherlands (including Belgium and Germany)	1,550	(306)	(76)	(283)	885
Poland	1,029	(19)	(69)	(8)	933
Spain	411	(20)	(26)	(5)	360
Other Europe	158	(4)	(3)	(1)	150
Europe	5,590	(533)	(331)	(604)	4,122
North America	516	(110)	(27)	(139)	240
Asia	256	(10)	(9)	(9)	228
Australia	130	(34)	(18)	(6)	72
Asia Pacific	386	(44)	(27)	(15)	300
Total	10,385	(887)	(539)	(847)	8,112

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(c ) Risk allowances within the present value of in-force ('VIF') 

	Audited 31 December 2007
	PVFP  £m	Frictional costs  £m	Non-hedgeable risks  £m	Time value of financial options and guarantees  £m	VIF  £m
United Kingdom	4,698	(183)	(154)	(94)	4,267
France	1,713	(132)	(126)	(227)	1,228
Ireland	491	(9)	(16)	(1)	465
Italy	160	(17)	(9)	(9)	125
Netherlands (including Belgium and Germany)	1,422	(263)	(67)	(236)	856
Poland	897	(15)	(60)	(6)	816
Spain	378	(17)	(22)	(5)	334
Other Europe	128	(3)	(3)	-	122
Europe	5,189	(456)	(303)	(484)	3,946
North America	581	(105)	(28)	(118)	330
Asia	210	(7)	(7)	(6)	190
Australia	123	(30)	(16)	(6)	71
Asia Pacific	333	(37)	(23)	(12)	261
Total	10,801	(781)	(508)	(708)	8,804

	Audited 31 December 2006
	PVFP  £m	Frictional costs  £m	Non-hedgeable risks  £m	Time value of financial options and guarantees  £m	VIF  £m
United Kingdom	4,711	(175)	(147)	(118)	4,271
France	1,419	(107)	(115)	(204)	993
Ireland	456	(8)	(14)	(1)	433
Italy	116	(13)	(5)	(8)	90
Netherlands (including Belgium and Germany)	1,244	(217)	(62)	(268)	697
Poland	703	(12)	(45)	(8)	638
Spain	354	(14)	(18)	(4)	318
Other Europe	92	(3)	(3)	-	86
Europe	4,384	(374)	(262)	(493)	3,255
North America	626	(104)	(20)	(59)	443
Asia	126	(3)	(4)	(2)	117
Australia	106	(22)	(12)	(5)	67
Asia Pacific	232	(25)	(16)	(7)	184
Total	9,953	(678)	(445)	(677)	8,153

The TVOG is most significant in the United Kingdom, France, the Netherlands and the United States. In the United Kingdom, this relates mainly to unitised with-profit business without market value adjustment (MVA) guarantees, guaranteed annuity rates and negative equity guarantees on equity release business. In France, this relates mainly to surrender value guarantees and investment rate guarantees on some traditional business. In the Netherlands, this relates mainly to maturity guarantees on unit-linked products and interest rate guarantees on traditional individual and group profit sharing business. In the United States, this relates to crediting rate, death benefit and surrender guarantees on life business.

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(d) Implied risk discount rates

In the valuation of a block of business, the implied discount rate is the rate of discount such that a traditional embedded value for the business equates to the MCEV. 

The cashflows projected are the expected future cashflows including expected investment cashflows from equities, bonds and properties earning a risk premium in excess of risk free, statutory reserves and required capital. The risk premiums used are consistent with those used in the expected existing business contribution within operating earnings. As the risk premiums are positive, a discount rate higher than risk-free is required to give a value equal to the market-consistent embedded value.

Average derived risk discount rates are shown below for the embedded value and the value of new business. 

Audited Full year 2007	New business  %	Total in-force business  %
United Kingdom	10.2%	8.4%
France	5.3%	6.8%
Ireland	6.4%	6.2%
Italy	5.9%	6.5%
Netherlands (including Belgium and Germany)	9.1%	9.0%
Poland	7.1%	7.2%
Spain	5.6%	6.5%
Other Europe	10.1%	11.3%
Europe	6.8%	7.5%
North America	19.3%	14.3%
Asia	8.5%	9.5%
Australia	9.0%	9.1%
Asia Pacific	8.5%	9.4%
Average	9.1%	8.0%

8 - Analysis of service companies and fund management businesses within embedded value

This note details the value of service companies and fund management businesses that has been included within the embedded value due to the ''look through'' approach specified by the MCEV methodology.

Aviva's MCEV methodology incorporates the impact of earnings arising from subsidiary undertakings providing administration, investment management and other services where these arise in relation to covered business. The principal subsidiaries of the Aviva group providing such services include NU Life Services Limited (UK) and Aviva Investors (UK and France). The following table provides an analysis of the elements within the life and other related business embedded value:

	Reviewed 6 months 2008			Audited  Full year  2007
	Fund management £m	Other operations  £m	Total  £m	Total £m
United Kingdom	139	(141)	(2)	2
France	133	37	170	186
Netherlands	100	(62)	38	33
Other	29	10	39	35
Total	401	(156)	245	256

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 MCEV basis income statement excludes the actual statutory basis profits arising from the provision of fund management services to the group's life businesses. The MCEV income statement records the experience profit or loss compared to the assumed profitability, the expected return on the in-force value and the effect on the in-force value of changes to economic assumptions. 

NU Life Services Limited (NULS) is the main provider of administration services to the UK Life business. NULS incurs substantially all of the UK businesses' operating expenditure, comprising acquisition, maintenance and project costs. 
Costs are recharged to the UK Life companies (the product companies) on the basis of predetermined Management Services Agreements (MSAs). 

  Page 38

9 - Geographical analysis of fund management operating earnings

This note sets out further information on the operating earnings from fund management set out in the summarised consolidated income statement. These are unchanged from the previously reported numbers.

The summarised consolidated income statement - MCEV basis, includes earnings from the Group's fund management operations as analysed below. As explained in note 8, this excludes the proportion of the results of Aviva Investors fund management businesses and other fund management operations within the group that arise from the provision of fund management services to our Life businesses. These results are included within the Life MCEV operating earnings.

	Reviewed  6 months 2008  £m	Audited  Full year  2007  £m
United Kingdom	13	40
Europe	6	15
North America	1	3
Asia	-	6
Aviva Investors	20	64
United Kingdom	(8)	(10)
Netherlands	6	17
Other Europe	3	4
Asia	9	15
Total	30	90

10 - Analysis of other operations and regional costs 

This note sets out further information on the operating earnings from other operations set out in the summarised consolidated income statement. These are unchanged from the previously reported numbers.

Where subsidiaries provide services to our life business, that proportion has been excluded. These results are included within the life MCEV operating return. 

	Reviewed 6 months 2008			Audited Full Year 2007
	Regional costs  £m	Other operations £m	Total  £m	Regional costs  £m	Other operations £m	Total  £m
United Kingdom	-	(33)	(33)	-	(8)	(8)
Europe	(12)	(1)	(13)	(11)	(34)	(45)
North America	(5)	1	(4)	(2)	(2)	(4)
Asia Pacific	(9)	2	(7)	(3)	(10)	(13)
Total	(26)	(31)	(57)	(16)	(54)	(70)

  Page 39

11 - Summary of minority interest in life and related businesses' MCEV results 

Reviewed  6 months 2008	France  £m	Ireland £m	Italy  £m	Netherlands  £m	Poland £m	Spain £m	Europe  £m	Asia Pacific £m	Total  £m	Shareholders' interest  £m	Group £m
New business contribution, net of tax	7	1	12	3	3	48	74	-	74	179	253
Life MCEV operating earnings after tax	14	9	35	10	12	61	141	-	141	774	915
Life MCEV earnings after tax	(7)	(6)	27	(18)	8	22	26	-	26	(2,062)	(2,036)
Closing covered businesses' embedded value	243	279	620	159	169	520	1,990	12	2,002	16,577	18,579

Audited  Full year 2007	France  £m	Ireland £m	Italy  £m	Netherlands  £m	Poland £m	Spain £m	Europe  £m	Asia Pacific £m	Total  £m	Shareholders' interest  £m	Group £m
New business contribution, net of tax	14	6	27	3	5	70	125	1	126	504	630
Life MCEV operating earnings after tax	32	19	46	19	18	88	222	1	223	1,567	1,790
Life MCEV earnings after tax	24	15	65	13	22	57	196	3	199	1,619	1,818
Closing covered businesses' embedded value	235	266	551	158	154	472	1,836	12	1,848	18,248	20,096

There are no minority interests in the United Kingdom or North America.

12 - Assumptions used in the calculation of MCEV

(a) 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. 

In setting the risk-free rate we have, wherever possible used the mid-price swap yield curve for an AA-rated bank. 

The curve is extrapolated if necessary to get rates suitable to the liabilities. For markets in which there is no reliable swap yield curve the relevant government bond yields are used. 

Required capital is shown as a multiple of the EU statutory minimum solvency margin or equivalent.

The adjustments made to swap rates to derive a risk-free rate for UK and Netherlands immediate annuities and immediate annuities, deferred annuities and all other US business are shown below the reference rate table.

The principal economic assumptions used are as follows:

Reference rate and expense inflation

	United Kingdom			Eurozone (excluding the Netherlands)
	30 June  2008	31 December  2007	31 December  2006	30 June  2008	31 December  2007	31 December 2006
Reference rate - term 1 year	6.38%	5.74%	5.58%	5.39%	4.75%	4.03%
Reference rate - term 5 years	6.12%	5.09%	5.38%	5.12%	4.56%	4.13%
Reference rate - term 10 years	5.66%	5.01%	5.11%	5.05%	4.72%	4.20%
Reference rate - term 15 years	5.33%	4.92%	4.91%	5.11%	4.86%	4.27%
Reference rate - term 20 years	5.04%	4.83%	4.75%	5.08%	4.91%	4.31%
Expense inflation	4.40%	3.63%	3.48%	2.90%	2.89%	2.82%

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12 - Assumptions used in the calculation of MCEV continued 

(a) Economic assumptions - Deterministic calculations continued 

	Netherlands1			Poland
	30 June  2008	31 December  2007	31 December  2006	30 June  2008	31 December  2007	31 December 2006
Reference rate - term 1 year	5.11%	4.70%	4.07%	6.94%	6.24%	4.60%
Reference rate - term 5 years	4.72%	4.55%	4.12%	6.44%	5.78%	5.27%
Reference rate - term 10 years	4.84%	4.74%	4.21%	5.94%	5.49%	5.24%
Reference rate - term 15 years	5.03%	4.90%	4.30%	5.74%	5.38%	5.24%
Reference rate - term 20 years	5.09%	4.98%	4.34%	5.68%	5.35%	5.24%
Expense inflation	2.91%	2.96%	2.54%	5.88%	4.67%	3.06%

				United States
				30 June  2008	31 December  2007	31 December 2006
Reference rate - term 1 year				3.04%	4.22%	5.33%
Reference rate - term 5 years				3.95%	4.18%	5.10%
Reference rate - term 10 years				4.58%	4.67%	5.19%
Reference rate - term 15 years				4.81%	4.89%	5.27%
Reference rate - term 20 years				5.04%	4.98%	5.31%
Expense inflation				3.00%	3.45%	3.24%

1.    The economic assumptions used in the Netherlands differ from those in the Eurozone as the Dutch bank swap rate is used in the Netherlands.

For service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company. 

In current markets, the following adjustments are made to the swap rate for UK and Netherlands immediate annuities and all US contracts. The risk-free rate is taken as the swap yield curve for the currency of the liability, adjusted by:

	31 December 2007 Embedded value	30 June 2008 Embedded value	2007 second-half  New business	2008 first-half New business
UK, and Netherlands immediate annuities and immediate annuities, deferred annuities and other US contracts	0.50%	0.50%	0.25%	0.55%

Risk premium - used for operating profit, Implied Discount Rates (IDR), Internal Rates of Return (IRR) and payback period

For life and pensions operating earnings, Aviva uses normalised investment returns, which are generally expressed as risk free returns plus an asset risk premium. The use of asset risk premia only impacts operating earnings as expected returns reflect management's long term expectations of asset returns in excess of the reference rate from investing in different asset classes. This assumption does not impact the balance sheet embedded value or value of new business as asset risk premia are not recognised until earned. The asset risk premia set out in the table below are added to the 1 year reference rate to calculate expected returns.

	All territories
	30 June  2008	31 December  2007
Equity risk premium	3.5%	3.5%
Property risk premium	2.0%	2.0%

Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for 
credit risk. 

Required capital and tax

	Tax rates1			Required capital (% EU minimum or equivalent)
	30 June  2008	31 December  2007	31 December  2006	30 June  2008	31 December  2007	31 December  2006
United Kingdom	28.0%	28.0%	30.0%	100% / 110%	100% / 110%	100% / 110%
France	34.4%	34.4%	34.4%	110%	110%	110%
Ireland	12.5%	12.5%	12.5%	150%	150%	150%
Italy	32.4%	32.4%	38.3%	115%/184%	115% / 184%	115%
Netherlands	25.5%	25.5%	25.5%	193%	188%	183%
Poland	19.0%	19.0%	19.0%	150%	150%	150%
Spain	30.0%	30.0%	30.0%	110% / 125%	110% / 125%	110% / 125%
United States	35.0%	35.0%	35.0%	325%	325%	325%

1. Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have been announced.   

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12 - Assumptions used in the calculation of MCEV continued 

Other economic assumptions

Required capital relating to with-profit business is assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders. Bonus rates on participating business have been set at levels consistent with the economic assumptions. The distribution of profit between policyholders and shareholders within the with-profit funds assumes that the shareholder interest in conventional with-profit business in the United Kingdom and Ireland continues at the current rate of one-ninth of the cost of bonus.

(b) Economic Assumptions - Stochastic calculations

The calculation of time value of options and guarantees allows for expected management and policyholder actions in response to varying future investment conditions. The management actions modelled include changes to asset mix, bonus rates and rates of interest and other guarantees granted to policyholders. Modelled policyholder actions are described under 'Other assumptions'.

The embedded value of the US spread based products anticipates the application of management discretion allowed for contractually within the policies, subject to contractual guarantees. This includes the ability to change the crediting rates and indexed strategies available within the policy. Consideration is taken of the economic environment assumed in future projections and returns in excess of the reference rate are not assumed. Anticipated market and policyholder reaction to management action has been considered. The anticipated management action is consistent with current decision rules and has been approved and signed off by management and legal counsel.

Model - United Kingdom, Europe (excluding Delta Lloyd) and North America

Swap rates are generated by a model, the Libor Market Model (LMM), that projects a full swap curve at monthly intervals. Forward rates are assumed to have a log-normal distribution which guarantees non-negative interest rates. The model is calibrated to at-the-money swaptions of a variety of terms and tenors. Swaption volatilities are taken from Bloombergs. Tests have been performed to ensure that sufficient scenarios have been used that the result converges to the stochastic value of the business being valued.

The total annual return on equities is calculated as the return on one year swaps plus an excess return. This excess return is modelled using a log-normal model where volatility varies by time horizon. This allows the model to capture the term structure of implied volatilities. The model is calibrated to at-the-money options of a variety of terms. Option volatilities are taken from a survey of investment banks.

The model also generates property total returns and real yield curves, although these are not significant asset classes for Aviva outside the UK. In the absence of liquid market data, the volatilities of these asset classes are based on historic data.

Assumptions for correlations between asset classes have been set based on historic data.

Model -Netherlands

In the Netherlands, yield curves are based on De Nederlandsche Bank (DNB) yield curve data

The interest rate model used is a short rate G2++ model. The model is calibrated to the DNB yield curve and the swaption implied volatilities. Swaption implied volatilities are taken from  Bloomberg. 

The equity model is a Heston model. The model considers an equity volatility surface in the market and covers strike levels between 0.8 and 1.2. The model is calibrated to the same DNB curves used in interest rate model. The option volatilites used for year-end 2006 and year-end 2007 are DJ Eurostoxx 50-quotes (28/12/07) taken from Bloomberg. For half year 2008 the model was calibrated to DJ Eurostoxx 50-quotes provided by a market maker.

The inflation model used is based on the standard Jarrow-Yildirim inflation model which connects real and nominal yields and an inflation index. This is calibrated to ZCII quotes on HICPxT-index.

Asset classes

The significant asset classes for UK participating business are equities, property and long-term fixed rate bonds. The most significant assumption is the distribution of future long-term interest rates, since this is the most important factor in the cost of guaranteed annuity options.

For many businesses, including US, France and Netherlands, the most important assets are fixed rate bonds of various durations. In some businesses, most notably the UK, equities and property are also important asset classes.

  Page 42 

12 - Assumptions used in the calculation of MCEV continued 

Summary statistics

Swaption implied volatilities

The implied volatility is that determined by Black's formula to reproduce the market price of the option. The following table sets out the model swaption implied volatilities used at 30 June 2008, 31 December 2007 and 31 December 2006.

	30 June 2008 Swap length				31 December 2007 Swap length				31 December 2006 Swap length
Option length	10 years	15 years	20 years	25 years	10 years	15 years	20 years	25 years	10 years	15 years	20 years	25 years
UK sterling
10 years	n/a	n/a	11.8%	n/a	n/a	n/a	10.9%	n/a	n/a	n/a	12.5%	n/a
15 years	n/a	n/a	11.9%	n/a	n/a	n/a	10.8%	n/a	n/a	n/a	12.7%	n/a
20 years	n/a	n/a	12.1%	n/a	n/a	n/a	10.8%	n/a	n/a	n/a	12.7%	n/a
25 years	n/a	n/a	12.4%	n/a	n/a	n/a	10.9%	n/a	n/a	n/a	12.6%	n/a
Euro
10 years	11.3%	11.0%	10.5%	10.1%	11.7%	11.1%	10.6%	10.3%	13.3%	12.7%	12.2%	11.8%
15 years	10.8%	10.7%	10.3%	9.9%	11.4%	10.9%	10.5%	10.2%	12.7%	12.2%	11.7%	11.3%
20 years	10.4%	9.9%	9.5%	9.2%	10.6%	10.2%	9.9%	9.7%	12.0%	11.5%	11.0%	10.6%
25 years	9.9%	9.4%	9.1%	8.8%	10.3%	9.9%	9.6%	9.4%	11.4%	10.9%	10.5%	10.1%
Netherlands
10 years	11.3%	11.2%	11.3%	11.4%	11.1%	10.9%	10.7%	10.7%	12.5%	12.1%	11.8%	11.6%
15 years	10.8%	10.6%	10.7%	10.8%	10.7%	10.4%	10.2%	10.3%	11.9%	11.5%	11.2%	11.0%
20 years	10.8%	10.5%	10.4%	10.5%	10.3%	10.0%	9.8%	9.8%	11.7%	11.2%	10.8%	10.7%
25 years	10.1%	10.3%	10.1%	10.2%	10.1%	9.8%	9.4%	9.4%	11.3%	10.9%	10.5%	10.4%
US dollar
10 years	18.3%	15.7%	13.6%	11.9%	17.1%	15.0%	13.4%	12.2%	11.4%	10.5%	9.7%	9.0%
15 years	15.7%	13.2%	11.3%	9.8%	15.0%	13.2%	11.9%	10.9%	10.2%	9.3%	8.7%	8.1%
20 years	13.4%	11.3%	9.6%	8.4%	13.3%	11.8%	10.7%	10.0%	9.0%	8.3%	7.7%	7.2%
25 years	12.0%	10.2%	8.8%	8.0%	12.4%	11.2%	10.3%	9.8%	8.3%	7.6%	7.1%	6.7%

Equity implied volatilities

The implied volatility is that determined by the Black-Scholes' formula to reproduce the market price of the option. The following table sets out the model equity implied volatilities used at 30 June 2008, 31 December 2007 and 31 December 2006.

30 June 2008	Country
Option length	UK	France	Italy	Ireland	Netherlands	Spain	US
5 years	25.8%	26.0%	22.4%	24.6%	24.0%	24.8%	23.8%
10 years	27.2%	27.5%	24.4%	25.9%	25.5%	26.0%	25.9%
15 years	27.7%	29.5%	24.6%	26.9%	26.5%	27.3%	28.0%

31 December 2007	Country
Option length	UK	France	Italy	Ireland	Netherlands	Spain	US
5 years	23.7%	26.2%	23.7%	24.6%	26.5%	25.5%	23.4%
10 years	25.2%	27.5%	26.0%	26.7%	28.9%	27.2%	25.1%
15 years	25.8%	29.1%	26.0%	28.2%	29.5%	28.3%	27.0%

31 December 2006	Country
Option length	UK	France	Italy	Ireland	Netherlands	Spain	US
5 years	17.3%	19.5%	18.9%	19.6%	19.9%	18.7%	16.1%
10 years	20.1%	20.8%	22.0%	22.4%	21.7%	20.5%	18.6%
15 years	21.8%	22.1%	23.1%	24.2%	22.0%	22.0%	21.0%

Property implied volatilities

Best estimate levels of volatility have been used, in the absence of meaningful option prices from which implied levels of volatility can be derived.

For the UK and the Netherlands, model property implied volatility is 15% for 31 December 2006, 31 December 2007 and 30 June 2008.

Page 43 

Demographic assumptions

Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva's recent operating experience with a view to giving a best estimate of future experience. We have anticipated future changes in experience where that is appropriate, e.g. we have allowed for improvements in future policyholder longevity. 

We have set the assumptions based on a best estimate of outcome of shareholder outcomes. In particular, where the policyholder behaviour varies with economic experience, we have set assumptions which are dynamic, i.e. vary depending on the economic assumptions. For example, 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.

Additionally, where demographic experience is not driven by economic scenarios but is asymmetric on a stand-alone basis, the best estimate assumption considers the weighted-average expected experience, not simply the median or most likely outcome. 

Expense assumptions

Management expenses and operating expenses of holding companies attributed to life and related businesses have 
been included in the MCEV 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 our life businesses, the value of profits or losses arising from these services have been included in the embedded value and value of new business. 

Non-hedgeable risk

A charge of 2.5% has been applied to the group-diversified capital required on a 1-in-200 one-year basis over the remaining lifetime of in-force business.

Valuation of debt

Borrowings in the MCEV consolidated balance sheet are valued on an IFRS basis, consistent with the primary financial statements. At 30 June 2008 the market value of the Group's external debt, subordinated debt, preference shares including General Accident plc preference shares of £250 million (classified as minority interests) and direct capital instrument was £5,753 million (31 December 2007: £5,774 million). 

	Reviewed  30 June  2008  £m	Audited  31 December 2007  £m	Audited  31 December 2006  £m
Borrowings per summarised consolidated balance sheet - MCEV basis	13,373	12,657	12,137
Add: amount included within held for sale	13	12	-
Less: Securitised mortgage funding	(7,620)	(7,295)	(7,068)
Borrowings excluding non-recourse funding - MCEV basis	5,766	5,374	5,069
Less: Operational financing by businesses	(1,134)	(1,063)	(874)
External debt and subordinated debt - MCEV basis	4,632	4,311	4,195
Add: Preference shares (including General Accident plc) and direct capital instrument	1,440	1,440	1,440
External debt, subordinated debt, preference shares and direct capital instrument - MCEV basis	6,072	5,751	5,635
Effect of marking these instruments to market	(319)	23	356
Market value of external debt, subordinated debt, preference shares and direct capital instrument	5,753	5,774	5,991

Other

It has been assumed that there will be no changes to the methods and bases used to calculate the statutory technical provisions and current surrender values, except where driven by varying future investment conditions under stochastic economic scenarios.

  Page 44 

13 - Sensitivity analysis

In this note the sensitivity of both our embedded value and value of new business is presented. There are sensitivities  to the economic assumptions used and the non-economic assumptions.

(a) Economic assumptions

The following tables show the sensitivity of the embedded value and the value of new business to:

• Using swap yields as the risk-free rate     

• one and two percentage point increase and decrease in the risk-free rate, including all consequential changes (including assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);

-    10% increase and decrease in market values of equity and property assets; 

-    25% increase in equity and swaption volatilities;

-    50 basis point increase and decrease in credit spreads; and

-    decrease in the level of required capital to 100% EU minimum (or equivalent) .

There is also sensitivity for shareholders' funds to a fall in equity markets on page 50. 

In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns. Some of the sensitivity scenarios may have consequential effects on valuation bases, where the basis for certain blocks of business is actively updated to reflect current economic circumstances. Consequential valuation impacts on the sensitivities are allowed for where an active valuation basis is used. Where businesses have a target asset mix, the portfolio is re-balanced after a significant market movement otherwise no re-balancing is assumed.

For new business, the sensitivities reflect the impact of a change immediately after inception of the policy. 

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. 

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%-2% movement in the interest rate for the Netherlands and US, where there is a significant amount of business with investment return guarantees.

Embedded value

				Risk free rates
Embedded value (net of tax and minority interest) 30 June 2008 reviewed	As reported on page 34 £m	Risk free rate as swap yields  £m	1% increase £m	1% decrease £m	2% increase £m	2% decrease £m
United Kingdom	5,776	(540)	(123)	(148)	(253)	(288)
France	2,337	-	(145)	93	(310)	90
Ireland	863	-	(45)	51	(90)	108
Italy	601	-	6	(32)	7	(83)
Netherlands (including Belgium and Germany)	3,337	(31)	75	(271)	66	(931)
Poland	1,136	-	(24)	24	(46)	52
Spain	634	-	(17)	17	(35)	32
Other Europe	211	-	(4)	5	(8)	9
Europe	9,119	(31)	(154)	(113)	(416)	(723)
North America	974	(217)	(169)	122	(362)	134
Asia	404	-	(2)	(7)	(10)	(26)
Australia	304	-	(9)	9	(19)	21
Asia Pacific	708	-	(11)	2	(29)	(5)
Total	16,577	(788)	(457)	159	(1,060)	(306)

____________________

Page 45 

13 - Sensitivity Analysis continued 

Embedded value continued 

		Equity/property
Embedded value (net of tax and minority interest) 30 June 2008 reviewed	As reported on page 34 £m	Market values		Volatility 25% increase £m
		10% increase £m	10% decrease £m
United Kingdom	5,776	463	(326)	(17)
France	2,337	205	(211)	(154)
Ireland	863	24	(24)	-
Italy	601	7	(7)	1
Netherlands (including Belgium and Germany)	3,337	428	(428)	(105)
Poland	1,136	22	(22)	-
Spain	634	11	(12)	(2)
Other Europe	211	1	(1)	-
Europe	9,119	698	(705)	(260)
North America	974	-	-	-
Asia	404	12	(12)	-
Australia	304	7	(7)	-
Asia Pacific	708	19	(19)	-
Total	16,577	1,180	(1,050)	(277)

Embedded value (net of tax and minority interest) 30 June 2008 reviewed	As reported on page 34 £m	Swaption implied volatilities 25% increase £m	Corporate bond credit spreads		EU minimum capital (or equivalent) £m
			50bps  increase £m	50bps decrease £m
United Kingdom	5,776	-	(581)	638	11
France	2,337	(53)	(58)	65	19
Ireland	863	-	-	-	3
Italy	601	(1)	(6)	6	7
Netherlands (including Belgium and Germany)	3,337	(7)	(191)	191	83
Poland	1,136	-	-	-	6
Spain	634	-	(46)	46	2
Other Europe	211	-	-	-	2
Europe	9,119	(61)	(301)	308	122
North America	974	(54)	(308)	327	76
Asia	404	-	(10)	9	5
Australia	304	-	-	-	4
Asia Pacific	708	-	(10)	9	9
Total	16,577	(115)	(1,200)	1,282	218

____________________

Page 46 

				Risk free rates
Embedded value (net of tax and minority interest) 31 December 2007 Audited	As reported  on page 34 £m	Risk free rate as swap yields £m	1% increase £m	1% decrease £m	2% increase £m	2% decrease £m
United Kingdom	6,911	(528)	(103)	116	(223)	222
France	2,536	-	(116)	79	(226)	91
Ireland	825	-	(38)	43	(77)	91
Italy	489	-	6	(30)	9	(71)
Netherlands (including Belgium and Germany)	3,816	(28)	85	(485)	93	(1,372)
Poland	1,043	-	(21)	22	(42)	47
Spain	570	-	(17)	16	(34)	30
Other Europe	178	-	(1)	2	(4)	5
Europe	9,457	(28)	(102)	(353)	(281)	(1,179)
North America	1,206	(171)	(197)	125	(412)	120
Asia	367	-	1	(7)	-	(27)
Australia	307	-	(7)	8	(16)	19
Asia Pacific	674	-	(6)	1	(16)	(8)
Total	18,248	(727)	(408)	(111)	(932)	(845)

13 - Sensitivity Analysis continued 

Embedded value (net of tax and minority interest) 31 December 2007 Audited			Equity/property
	As reported  on page 34 £m	Market values		Volatility  25% increase £m
		10% increase £m	10% decrease £m
United Kingdom	6,911	457	(461)	(24)
France	2,536	161	(164)	(116)
Ireland	825	23	(23)	-
Italy	489	6	(7)	1
Netherlands (including Belgium and Germany)	3,816	457	(473)	(70)
Poland	1,043	20	(20)	-
Spain	570	11	(11)	(3)
Other Europe	178	1	(1)	-
Europe	9,457	679	(699)	(188)
North America	1,206	-	-	-
Asia	367	11	(11)	-
Australia	307	7	(7)	3
Asia Pacific	674	18	(18)	3
Total	18,248	1,154	(1,178)	(209)

Embedded value (net of tax and minority interest) 31 December 2007 Audited	As reported  on page 34 £m	Swaption implied volatilities 25% increase £m	Corporate bond credit spreads		EU minimum capital (or equivalent) £m
			50bps  increase £m	50bps decrease £m
United Kingdom	6,911	-	(622)	685	10
France	2,536	(42)	(35)	43	17
Ireland	825	-	-	-	3
Italy	489	(1)	(6)	6	5
Netherlands (including Belgium and Germany)	3,816	(45)	(81)	81	20
Poland	1,043	-	-	-	6
Spain	570	-	(42)	42	2
Other Europe	178	-	-	-	1
Europe	9,457	(88)	(164)	172	54
North America	1,206	(88)	(284)	294	72
Asia	367	-	(11)	10	4
Australia	307	-	-	-	3
Asia Pacific	674	-	(11)	10	7
Total	18,248	(176)	(1,081)	1,161	143

Page 47

13 - Sensitivity Analysis continued 

Value of new business

Value of new business (net of tax and minority interest) 6 months 2008 reviewed				Risk free rates
	As reported on page 29 £m	Risk free rate as swap yields £m	1% increase £m	1% decrease £m	2% increase £m	2% decrease £m
United Kingdom	53	(57)	2	(6)	4	(15)
France	38	-	(2)	1	(4)	3
Ireland	6	-	(1)	1	(1)	2
Italy	12	-	-	-	-	(2)
Netherlands (including Belgium and Germany)	(31)	-	4	(11)	7	(52)
Poland	22	-	(1)	1	(1)	1
Spain	43	-	(2)	2	(4)	5
Other Europe	16	-	(1)	2	(3)	4
Europe	106	-	(3)	(4)	(6)	(39)
North America	(5)	(24)	(21)	21	(53)	21
Asia	21	-	1	(2)	1	(6)
Australia	4	-	(1)	1	(1)	2
Asia Pacific	25	-	-	(1)	-	(4)
Total	179	(81)	(22)	10	(55)	(37)

Value of new business (net of tax and minority interest) 6 months 2008 reviewed		Equity/property
	As reported on page 29 £m	Market values		Volatility  25% increase £m
		10% rise £m	10% fall £m
United Kingdom	53	2	(2)	(1)
France	38	1	-	-
Ireland	6	1	(1)	-
Italy	12	-	-	-
Netherlands (including Belgium and Germany)	(31)	3	(2)	(2)
Poland	22	-	-	-
Spain	43	-	-	-
Other Europe	16	-	-	-
Europe	106	5	(3)	(2)
North America	(5)	-	-	-
Asia	21	-	-	-
Australia	4	-	-	-
Asia Pacific	25	-	-	-
Total	179	7	(5)	(3)

	As reported on page 29 £m	Swaption implied volatilities 25% increase £m	Corporate bond credit spreads		EU minimum capital (or equivalent) £m
Value of new business (net of tax and minority interest) 6 months 2008 reviewed			50bps increase  £m	50bps decrease  £m
United Kingdom	53	-	(49)	51	1
France	38	(1)	-	-	1
Ireland	6	-	-	-	-
Italy	12	-	-	-	-
Netherlands (including Belgium and Germany)	(31)	(1)	(2)	2	1
Poland	22	-	-	-	-
Spain	43	-	(2)	2	-
Other Europe	16	-	-	-	-
Europe	106	(2)	(4)	4	2
North America	(5)	(6)	(29)	30	9
Asia	21	-	-	-	1
Australia	4	-	-	-	-
Asia Pacific	25	-	-	-	1
Total	179	(8)	(82)	85	13

  Page 48 

13 - Sensitivity Analysis continued 

Value of new business continued

				Risk free rates
Value of new business (net of tax and minority interest) 31 December 2007 audited	As reported  on page 29 £m	Risk free rate as swap yields £m	1% increase £m	1% decrease £m	2% increase £m	2% decrease £m
United Kingdom	195	(19)	(2)	1	(6)	(1)
France	81	-	(2)	4	(7)	7
Ireland	26	-	(2)	3	(4)	5
Italy	20	-	-	(1)	(1)	(4)
Netherlands (including Belgium and Germany)	3	-	11	(25)	9	(95)
Poland	34	-	(1)	1	(2)	2
Spain	57	-	(3)	3	(5)	7
Other Europe	4	-	-	-	(1)	1
Europe	225	-	3	(15)	(11)	(77)
North America	34	(8)	(39)	27	(89)	3
Asia	39	-	5	(6)	9	(19)
Australia	11	-	(1)	1	(2)	3
Asia Pacific	50	-	4	(5)	7	(16)
Total	504	(27)	(34)	8	(99)	(91)

Value of new business (net of tax and minority interest) 31 December 2007 audited		Equity/property
	As reported  on page 29 £m	Market values		Volatility  25% increase £m
		10% increase £m	10% decrease £m
United Kingdom	195	5	(5)	(3)
France	81	1	-	1
Ireland	26	2	(2)	-
Italy	20	-	-	-
Netherlands (including Belgium and Germany)	3	2	(2)	(3)
Poland	34	-	-	-
Spain	57	-	-	-
Other Europe	4	-	-	-
Europe	225	5	(4)	(2)
North America	34	-	-	-
Asia	39	-	-	-
Australia	11	-	-	-
Asia Pacific	50	-	-	-
Total	504	10	(9)	(5)

Value of new business (net of tax and minority interest) 31 December 2007 audited	As reported  on page 29 £m	Swaption implied volatilities 25% increase £m	Corporate bond credit  spreads		EU minimum capital (or equivalent) £m
			50bps  increase  £m	50bps decrease  £m
United Kingdom	195	-	(110)	72	1
France	81	(1)	-	-	1
Ireland	26	-	-	-	-
Italy	20	-	-	-	-
Netherlands (including Belgium and Germany)	3	-	(7)	7	2
Poland	34	-	-	-	1
Spain	57	-	(2)	3	-
Other Europe	4	-	-	-	-
Europe	225	(1)	(9)	10	4
North America	34	(11)	(44)	46	17
Asia	39	-	-	-	1
Australia	11	-	-	-	-
Asia Pacific	50	-	-	-	1
Total	504	(12)	(163)	128	23

  Page 49

13 - Sensitivity Analysis continued 

 (b) Non-economic assumptions

The following table below shows the sensitivity of the embedded value and the value of new business to the following changes in non-economic assumptions:

-    10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of £10 p.a. would represent an expense assumption of £9 p.a.). Where there is a 'look through' into service company expenses the fee charged by the service company is unchanged while the underlying expense decreases;

-    10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% p.a. would represent a lapse rate of 
4.5% p.a.); and

-    5% decrease in both mortality and morbidity rates disclosed separately for life assurance and annuity business. 

No future management actions are modelled in reaction to the changing non-economic assumptions. In each sensitivity calculation all other assumptions remain unchanged. No changes to valuation bases have been included.

Embedded value

Embedded value (net of tax) 30 June 2008 reviewed	As reported on page 34 £m	10% decrease in maintenance expenses £m	10% decrease in lapse rates £m	5% decrease in mortality/ morbidity rates - life assurance £m	5% decrease in mortality/ morbidity rates -annuity business £m
United Kingdom	5,776	164	95	72	(298)
France	2,337	52	58	24	(2)
Ireland	863	16	21	10	(4)
Italy	601	5	4	1	-
Netherlands (including Belgium and Germany)	3,337	126	11	13	(47)
Poland	1,136	36	71	14	-
Spain	634	7	40	12	(3)
Other Europe	211	6	14	2	-
Europe	9,119	248	219	76	(56)
North America	974	34	8	26	(6)
Asia	404	11	6	4	-
Australia	304	7	16	10	-
Asia Pacific	708	18	22	14	-
Total	16,577	464	344	188	(360)

Embedded value (net of tax) 31 December 2007 audited	As reported on page 34 £m	10%  decrease in maintenance expenses £m	10%  decrease in lapse rates £m	5% decrease in mortality/ morbidity  rates - life  assurance £m	5% decrease in mortality/ morbidity  rates -  annuity business £m
United Kingdom	6,911	183	100	70	(212)
France	2,536	48	54	23	-
Ireland	825	16	20	10	(3)
Italy	489	4	3	1	-
Netherlands (including Belgium and Germany)	3,816	102	13	10	(46)
Poland	1,043	31	62	13	-
Spain	570	7	33	9	(2)
Other Europe	178	6	10	1	-
Europe	9,457	214	195	67	(51)
North America	1,206	30	7	26	(8)
Asia	367	10	5	3	(1)
Australia	307	6	14	8	(2)
Asia Pacific	674	16	19	11	(3)
Total	18,248	443	321	174	(274)

Page 50 

13 - Sensitivity Analysis continued 

Value of new business continued 

Value of new business (net of tax) 6 months 2008 reviewed	As reported on page 29 £m	10% decrease in maintenance expenses £m	10% decrease in lapse rates £m	5% decrease in mortality/ morbidity rates- life assurance £m	5% decrease in mortality/ morbidity rates  - annuity business £m
United Kingdom	53	10	8	10	(11)
France	38	2	1	1	-
Ireland	6	1	2	-	-
Italy	12	-	-	-	-
Netherlands (including Belgium and Germany)	(31)	1	-	1	2
Poland	22	1	3	1	-
Spain	43	2	6	2	-
Other Europe	16	1	2	-	-
Europe	106	8	14	5	2
North America	(5)	2	1	3	(1)
Asia	21	5	2	2	-
Australia	4	1	1	1	-
Asia Pacific	25	6	3	3	-
Total	179	26	26	21	(10)

Value of new business (net of tax) 31 December 2007 audited	As reported on page 29 £m	10%  decrease in maintenance expenses £m	10%  decrease in lapse rates £m	5% decrease in mortality/ morbidity rates - life assurance £m	5% decrease in mortality/ morbidity rates - annuity business £m
United Kingdom	195	14	13	19	(15)
France	81	3	2	2	-
Ireland	26	2	4	-	-
Italy	20	1	-	-	-
Netherlands (including Belgium and Germany)	3	2	1	1	-
Poland	34	2	4	1	-
Spain	57	1	7	2	-
Other Europe	4	1	1	-	-
Europe	225	12	19	6	-
North America	34	4	2	6	(1)
Asia	39	5	3	1	-
Australia	11	1	2	2	-
Asia Pacific	50	6	5	3	-
Total	504	36	39	34	(16)

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.

Group shareholder funds 

	Reviewed 30 June 2008				Audited 31 December 2007
	As reported £bn	Equities down 10%		Interest rates up 1% £bn	As reported £bn	Equities down 10%		Interest rates up 1% £bn
Group shareholder funds		Direct £bn	Indirect £bn			Direct £bn	Indirect £bn
Long-term savings1	20.9	(0.4)	(0.5)	(0.4)	22.4	(0.5)	(0.5)	(0.5)
General insurance and other	5.8	(0.4)	-	(0.3)	6.5	(0.4)	-	(0.4)
Borrowings2	(5.5)	-	-	-	(5.2)	-	-	-
Shareholders' funds	21.2	(0.8)	(0.5)	(0.7)	23.7	(0.9)	(0.5)	(0.9)

These sensitivities assume a full tax charge/credit on market value appreciation/falls.

1.    Assumes MCEV assumptions adjusted to reflect revised bond yields.

2.    Comprising internal, external and subordinated debt.

3.    The table above incorporates the effect on the value of the pension scheme assets of a 10% decrease in equity and a 1% increase in fixed income bond yields. The latter sensitivity also assumes an equivalent movement in both inflation and discount rate (i.e. no change to real interest rates) and therefore, incorporates the offsetting effects of these items on the pension scheme liabilities. A 1% increase in the real interest rate only has the effect of reducing the pension scheme liability by £1.5 billion at 30 June 2008 and £1.4 billion at 31 December 2007 thereby enhancing shareholders' funds by £1.2 billion at 30 June 2008 and £1.1 billion at 31 December 2007 (after deducting tax).

  Page 51 

14 - Return on capital employed  

This note gives details of the return on the capital employed in our business.

Shareholders' funds, including minority interests

	30 June 2008 closing shareholders' funds			31 December 2007 closing shareholders' funds			31 December 2006 closing shareholders' funds
	IFRS net assets £m	Internally generated AVIF £m	Total equity £m	IFRS net assets £m	Internally generated AVIF £m	Total equity £m	IFRS net assets £m	Internally generated AVIF £m	Total equity £m
Life and pensions
United Kingdom	3,564	2,387	5,951	3,670	3,484	7,154	3,326	3,303	6,629
France	1,504	1,076	2,580	1,447	1,323	2,770	1,221	1,134	2,355
Ireland	988	300	1,288	943	286	1,229	971	132	1,103
Italy	1,171	279	1,450	1,020	238	1,258	688	164	852
Netherlands (including Belgium and Germany)	2,464	989	3,453	2,994	950	3,944	2,860	654	3,514
Poland	253	1,058	1,311	276	926	1,202	202	744	946
Spain	1,168	737	1,905	1,122	624	1,746	845	567	1,412
Other Europe	494	(174)	320	346	(68)	278	61	71	132
Europe	8,042	4,265	12,307	8,148	4,279	12,427	6,848	3,466	10,314
North America	2,112	(364)	1,748	2,202	(227)	1,975	2,315	(237)	2,078
Asia Pacific	674	254	928	619	222	841	409	166	575
	14,392	6,542	20,934	14,639	7,758	22,397	12,898	6,698	19,596
General insurance and health
United Kingdom	2,750	-	2,750	3,049	-	3,049	2,984	-	2,984
France	274	-	274	301	-	301	333	-	333
Ireland	474	-	474	435	-	435	434	-	434
Netherlands	723	-	723	756	-	756	684	-	684
Other Europe	308	-	308	295	-	295	161	-	161
Europe	1,779	-	1,779	1,787	-	1,787	1,612	-	1,612
North America	771	-	771	732	-	732	670	-	670
Asia Pacific	17	-	17	26	-	26	22	-	22
	5,317	-	5,317	5,594	-	5,594	5,288	-	5,288
Fund management and other business	841	-	841	1,186	-	1,186	1,179	-	1,179
Corporate	(32)	-	(32)	(31)	-	(31)	(19)	-	(19)
Subordinated debt	(3,911)	-	(3,911)	(3,054)	-	(3,054)	(2,937)	-	(2,937)
External debt	(721)	-	(721)	(1,257)	-	(1,257)	(1,258)	-	(1,258)
Net internal debt	(1,212)	-	(1,212)	(1,146)	-	(1,146)	(1,406)	-	(1,406)
Shareholders' funds, including minority interests	14,674	6,542	21,216	15,931	7,758	23,689	13,745	6,698	20,443
Comprising:
Equities	10,517	-	10,517	11,741	-	11,741	14,343	-	14,343
Property	3,120	-	3,120	3,886	-	3,886	2,832	-	2,832
Cash' loans and debt securities	11,338	-	11,338	12,132	-	12,132	7,255	-	7,2
Other investments	2,423	-	2,423	1,865	-	1,865	1,446	-	1,446
Other net assets and pension liability	(13,315)	-	(13,315)	(14,732)	-	(14,732)	(12,925)	-	(12,925)
Intangible assets	6,435	6,542	12,977	6,496	7,758	14,254	5,855	6,698	12,553
Borrowing	(5,844)	-	(5,844)	(5,457)	-	(5,457)	(5,061)	-	(5,061)
	14,674	6,542	21,216	15,931	7,758	23,689	13,745	6,698	20,443

IFRS net assets have been restated to reflect the impact of change in general insurance reserves of £105 million, £107 million and £112 million offset by the consolidation of funds adjustments of £(838) million, £(758) million and £(431) million and change in shares held by employee trusts of £(10) million, £(10) million and nil at 30 June 2008, 31 December 2007 and 31 December 2006 respectively. Details are on page 26.

Page 52 

Analysis of return on capital employed

The analysis of return on equity shareholders' funds set out below incorporates the impact of the change to MCEV as well as the revision to the general insurance reserving policy. In addition to these accounting changes, the presentation format has also been revised to show returns on equity shareholders' funds at business level excluding goodwill and intangibles, with the impact of these items on Group return on equity shareholders' funds shown separately. This presentational change allows for returns on capital at the operational level to be based on the tangible capital employed at business level (including value of in-force business), whilst still retaining accountability at an aggregate group level for the requirement to generate returns on capital invested in goodwill and intangibles.

	Operating return		Opening shareholders' funds (including goodwill and minority interest) £m	Opening shareholders' funds (including minority interest) £m	Annualised return on economic capital %
Reviewed 30 June 2008	Before tax £m	After tax £m
Life and pensions
United Kingdom	417	300	7,154	6,888	8.7%
France	241	158	2,770	2,770	11.4%
Ireland	40	34	1,229	1,091	6.2%
Italy	101	69	1,258	1,040	13.3%
Netherlands (including Belgium and Germany)	35	25	3,944	3,939	1.3%
Poland	114	93	1,202	1,197	15.5%
Spain	173	121	1,746	1,042	23.2%
Other Europe	24	20	278	177	22.6%
Europe	728	520	12,427	11,256	9.2%
North America	74	48	1,975	1,206	8.0%
Asia Pacific	61	47	841	688	13.7%
	1,280	915	22,397	20,038	9.1%
General insurance and health
United Kingdom	271	190	3,049	2,557	14.9%
France	30	19	301	301	12.6%
Ireland	41	36	435	353	20.4%
Netherlands	44	32	756	734	8.7%
Other Europe	22	15	295	187	16.0%
Europe	137	102	1,787	1,575	13.0%
North America	77	50	732	729	13.7%
Asia Pacific	(1)	(1)	26	26	(7.7)%
	484	341	5,594	4,887	14.0%
Fund management	30	21	355	305	13.8%
Other business	(57)	(40)	831	(595)	13.4%
Corporate	(49)	(54)	(31)	(31)	348.4%
Subordinated debt	(94)	(67)	(3,054)	(3,054)	4.4%
External debt	(34)	(24)	(1,257)	(1,257)	3.8%
Net internal debt	(51)	(36)	(1,146)	(1,146)	6.3%
	1,509	1,056	23,689	19,147	11.0%
Less:
Minority interest		(156)	(2,501)	(2,501)	12.5%
Direct capital instruments		-	(990)	(990)	-
Preference capital		(9)	(200)	(200)	8.6%
Operating return		891	19,998	15,456	11.5%
Goodwill and intangibles1				4,542
Operating return (including goodwill and intangibles)		891	19,998	19,998	8.9%

1. Goodwill and intangibles comprises £3,082 million of goodwill in subsidiaries, £1,407 million of intangibles in subsidiaries, £197 million of goodwill and intangibles in joint ventures and £310 million of goodwill in associates, net of associated deferred tax liabilities of £454 million.

  Page 53 

14 - Return on capital employed continued 

Analysis of return on employed capital

	Operating return		Opening shareholders' funds (including goodwill and intangibles)  £m	Opening shareholders' funds (excluding goodwill and intangibles £m	Return on capital  %
Audited 31 December 2007	Before tax £m	After tax £m
Life and pensions
United Kingdom	822	575	6,629	6,394	9.0%
France	568	373	2,355	2,355	15.8%
Ireland	85	74	1,103	977	7.6%
Italy	137	84	852	841	10.0%
Netherlands (including Belgium and Germany)	316	236	3,514	3,508	6.7%
Poland	181	147	946	946	15.5%
Spain	233	163	1,412	894	18.2%
Other Europe	(17)	(12)	132	132	(9.1)%
Europe	1,503	1,065	10,314	9,653	11.0%
North America	124	81	2,078	1,267	6.4%
Asia Pacific	95	70	575	511	13.7%
	2,544	1,790	19,596	17,825	10.0%
General insurance and health
United Kingdom	294	206	2,984	2,487	8.3%
France	70	45	333	333	13.5%
Ireland	162	142	434	359	39.6%
Netherlands	169	123	684	682	18.0%
Other Europe	41	29	161	161	18.0%
Europe	442	339	1,612	1,535	22.1%
North America	154	101	670	667	15.1%
Asia Pacific	4	3	22	22	13.6%
	894	649	5,288	4,711	13.8%
Fund management	90	63	305	243	25.9%
Other business	(70)	(49)	874	(458)	10.7%
Corporate	(82)	(95)	(19)	(19)	500.0%
Subordinated debt	(179)	(125)	(2,937)	(2,937)	4.3%
External debt	(79)	(55)	(1,258)	(1,258)	4.4%
Net internal debt	(53)	(37)	(1,406)	(1,406)	2.6%
	3,065	2,141	20,443	16,701	12.8%
Less:
Minority interest		(265)	(1,817)	(1,817)	14.6%
Direct capital instruments		(37)	(990)	(990)	3.7%
Preference capital		(17)	(200)	(200)	8.5%
Operating return		1,822	17,436	13,694	13.3%
Goodwill and intangibles1				3,742
Operating return (including goodwill and intangibles)		1,822	17,436	17,436	10.4%

1. Goodwill and intangibles comprises £2,910 million of goodwill in subsidiaries, £830 million of intangibles in subsidiaries and £280 million of goodwill in associates, net of associated deferred tax liabilities of £278 million.

End of part 3 of 4

 

END

 

 

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