Restatement for EEV Part 2

Aviva PLC 13 January 2005 PART 2 OF 3 -------------------------------------------------------------------------------------------------------------------- PAGE 10 Summarised consolidated profit and loss account - European embedded value (EEV) basis For the six months ended 30 June 2004 6 months 6 months Full year 2004 2004 2003 â‚¬m Â£m Â£m Operating profit 1,174 Life EEV operating return 799 1,496 49 Health 33 61 15 Fund management1 10 (4) 901 General insurance 613 911 12 Non-insurance operations2 8 8 (138) Corporate costs (94) (160) (329) Unallocated interest charges (224) (406) -------------------------------------------------------------------------------------------------------------------- Operating profit before tax, 1,684 amortisation of goodwill and exceptional items* 1,145 1,906 (72) Amortisation of goodwill (49) (103) (37) Financial Services Compensation Scheme levy (25) - -------------------------------------------------------------------------------------------------------------------- 1,575 Operating profit before tax 1,071 1,803 (716) Variation from longer-term investment return (487) 779 82 Effect of economic assumption changes 56 (55) (16) Change in the equalisation provision (11) (49) 9 Profit/(loss) on the disposal of subsidiary undertakings 6 (6) (74) Exceptional costs for termination of operations (50) (19) -------------------------------------------------------------------------------------------------------------------- 860 Profit on ordinary activities before tax 585 2,453 Tax on operating profit before amortisation of goodwill (506) and exceptional items (344) (563) 187 Tax credit/(charge) on other ordinary activities 127 (176) -------------------------------------------------------------------------------------------------------------------- 541 Profit on ordinary activities after tax 368 1,714 (113) Minority interests (77) (121) -------------------------------------------------------------------------------------------------------------------- 428 Profit for the financial period 291 1,593 (13) Preference dividends (9) (17) -------------------------------------------------------------------------------------------------------------------- 415 Profit for the financial period attributable to equity shareholders 282 1,576 (310) Ordinary dividends (211) (545) -------------------------------------------------------------------------------------------------------------------- 105 Retained profit for the financial period 71 1,031 ==================================================================================================================== * All operating profit is from continuing operations. 1 Excludes the proportion of the results of Morley's fund management businesses and of our French asset management operation Aviva Gestion d'Actifs (AGA) that arise from the provision of fund management services to our life businesses. These results are included within the life EEV operating return. 2 Excludes the results of Norwich Union Equity Release. Also excludes the proportion of the results of Norwich Union Life Services relating to the services provided to the UK life business. Other subsidiaries providing services to our life businesses do not significantly impact the Group results. These results are included within the life EEV operating return. -------------------------------------------------------------------------------------------------------------------- PAGE 11 Earnings per share - EEV basis For the six months ended 30 June 2004 6 months Full year 2004 2003 Earnings per share Operating profit before amortisation of goodwill and exceptional items, after tax, attributable to equity shareholders* 31.9p 53.0p Profit attributable to equity shareholders 12.5p 70.0p Profit attributable to equity shareholders - diluted 12.4p 69.8p * All operating profit is from continuing operations. Consolidated statement of total recognised gains and losses - EEV basis For the six months ended 30 June 2004 6 months Full year 2004 2003 Â£m Â£m Profit for the financial period * 291 1,593 Foreign exchange (losses)/gains (306) 415 --------------------------------------------------------------------------------------------------------------------- Total recognised (losses)/gains arising in the period (15) 2,008 ===================================================================================================================== * Stated before the effect of foreign exchange movements which are reported within the foreign exchange gain lines. Reconciliation of movements in consolidated shareholders' funds For the six months ended 30 June 2004 6 months Full year 2004 2003 Â£m Â£m Shareholders' funds at the beginning of the period on an achieved profits basis 11,165 9,668 Prior year adjustment (413) (364) --------------------------------------------------------------------------------------------------------------------- Shareholders' funds at the beginning of the period on an EEV basis 10,752 9,304 Total recognised (losses)/gains arising in the period (15) 2,008 Dividends (220) (562) Other movements 27 2 --------------------------------------------------------------------------------------------------------------------- Shareholders' funds at the end of the period on an EEV basis 10,544 10,752 ===================================================================================================================== -------------------------------------------------------------------------------------------------------------------- PAGE 12 Summarised consolidated balance sheet - EEV basis As at 30 June 2004 30 June 31 December 31 December 2004 2003 2002 Â£m Â£m Â£m Assets Goodwill 1,052 1,105 1,040 -------------------------------------------------------------------------------------------------------------------- Investments Land and buildings 607 637 668 Investments in associated undertakings and participating interests 149 279 287 Variable yield securities 2,799 2,967 2,603 Fixed interest securities 9,734 10,098 7,737 Mortgages and loans, net of non-recourse funding 1,350 929 776 Deposits 744 435 550 Other investments 26 34 37 -------------------------------------------------------------------------------------------------------------------- 15,409 15,379 12,658 Reinsurers' share of technical provisions 2,699 2,926 2,882 Reinsurers' share of provision for linked liabilities 636 579 337 Assets of the long-term business 136,613 136,709 123,051 Assets held to cover linked liabilities 42,921 40,665 29,538 Other assets 10,372 10,829 10,994 Acquired value of in-force long-term business 458 488 505 Additional value of in-force long-term business 4,355 4,340 3,553 -------------------------------------------------------------------------------------------------------------------- Total assets 214,515 213,020 184,558 ==================================================================================================================== Capital, reserves and subordinated debt Shareholders' funds Equity 6,177 6,354 5,636 Non-equity 200 200 200 Minority interest 963 953 743 Additional retained profit on an EEV basis 4,167 4,198 3,468 Subordinated debt 2,751 2,814 1,190 -------------------------------------------------------------------------------------------------------------------- Total capital, reserves and subordinated debt 14,258 14,519 11,237 Liabilities Liabilities of the long-term business 121,926 121,125 113,348 Fund for future appropriations 7,816 8,443 3,745 Technical provision for linked liabilities 43,557 41,244 29,875 General insurance liabilities 17,553 17,515 16,031 Borrowings 1,666 1,720 2,042 Other creditors and provisions 7,739 8,454 8,280 -------------------------------------------------------------------------------------------------------------------- Total liabilities, capital, reserves and subordinated debt 214,515 213,020 184,558 ==================================================================================================================== -------------------------------------------------------------------------------------------------------------------- PAGE 13 Segmentation of summarised consolidated balance sheet - EEV basis As at 30 June 2004 Life and General Life and General related business related business businesses and other Group businesses and other Group Group 30 June 30 June 30 June 31 December 31 December 31 December 31 December 2004 2004 2004 2003 2003 2003 2002 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Total assets before acquired additional value of in-force long-term business 180,018 29,684 209,702 177,906 30,286 208,192 180,500 Acquired additional value of in-force long-term business 458 - 458 488 - 488 505 --------------------------------------------------------------------------------------------------------------------- Total assets included in the modified statutory balance sheet 180,476 29,684 210,160 178,394 30,286 208,680 181,005 ===================================================================================================================== Liabilities of the long-term business (173,147) - (173,147) (170,765) - (170,765) (146,930) Liabilities of the general insurance business - (27,110) (27,110) - (27,736) (27,736) (26,391) --------------------------------------------------------------------------------------------------------------------- Net assets on a modified statutory basis 7,329 2,574 9,903 7,629 2,550 10,179 7,684 Additional value of in-force long-term business 1 4,355 - 4,355 4,340 - 4,340 3,553 --------------------------------------------------------------------------------------------------------------------- Net assets on an EEV basis 2 11,684 2,574 14,258 11,969 2,550 14,519 11,237 ===================================================================================================================== Shareholders' capital, share premium, shares held by employee trusts and merger reserves 4,604 4,622 4,710 Modified statutory basis retained profit 1,773 1,932 1,126 Additional retained profit on an EEV basis 4,167 4,198 3,468 --------------------------------------------------------------------------------------------------------------------- Shareholders' funds on an EEV basis 10,544 10,752 9,304 Minority interests 963 953 743 --------------------------------------------------------------------------------------------------------------------- 11,507 11,705 10,047 Subordinated debt 2,751 2,814 1,190 --------------------------------------------------------------------------------------------------------------------- Total capital, reserves and subordinated debt 14,258 14,519 11,237 ===================================================================================================================== 1 The analysis between the Group's and the minority interest's share of the additional value of in-force long-term business is as follows: 30 June Movement in 31 December 2004 the period 2003 Â£m Â£m Â£m Group's share included in shareholders' funds 4,167 (31) 4,198 Minority interest share 188 46 142 -------------------------------------------------------------------------------------------------------------------- Balance 4,355 15 4,340 ==================================================================================================================== 2 The analysis of net assets of the life and related businesses on an EEV basis is as follows: 30 June 31 December 2004 2003 Â£m Â£m Embedded value 11,473 11,751 RBSG goodwill 211 218 -------------------------------------------------------------------------------------------------------------------- Long-term business net assets on an EEV basis 11,684 11,969 ==================================================================================================================== -------------------------------------------------------------------------------------------------------------------- PAGE 14 Basis of preparation - EEV basis The consolidated profit and loss account and balance sheet statements on pages 10 to 13 present the Group's results and financial position for the life and related businesses (including Group service companies) on the European Embedded Value (EEV) basis and for its non life businesses on the modified statutory solvency basis. The EEV methodology adopted is in accordance with the EEV principles introduced by the CFO Forum in May 2004. In the Directors' opinion, the EEV basis provides a more accurate reflection of the performance of the Group's life and related operations year on year than results presented under the modified statutory basis. The Directors consider that the EEV methodology is a refinement to the Achieved Profits basis previously adopted by the Group and represents the most meaningful basis of reporting the underlying value in our life business and the underlying drivers of performance. This basis allows for the impact of uncertainty in the future investment returns more explicitly and is consistent with the way the business is priced and managed. The results for 2003 have been audited by the auditors, Ernst & Young LLP. The results for the six month period to 30 June 2004 are unaudited but have been reviewed by Ernst & Young LLP. Their reports in respect of the six month period to 30 June 2004 and the year to 31 December 2003 are shown on pages 49 and 50. Covered business The EEV calculations cover the following lines of business: life insurance, long term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of the other life and related business written in our associated undertakings and joint ventures, as well as the equity release business written in the UK. Covered business includes the Group's share of our joint venture operations including our arrangement with The Royal Bank of Scotland Group (RBSG) and our operations in India and China. For our joint venture with RBSG, the goodwill arising on the acquisition of the associate company, RBS Life Investments Limited, is included within the 'Amortisation of goodwill' on page 10. In addition, the results of Group companies providing administration, investment management and other services and of Group holding companies have been included to the extent that they relate to covered business. Together these businesses are referred to as 'Life and related businesses'. New business premiums New business premiums include: â€¢ premiums arising from the sales of new contracts during the period; â€¢ non-contractual additional premiums, including future Department of Work and Pensions (DWP) rebate premiums; and â€¢ the value of expected renewals on the new contracts and expected future contractual alterations to the new contracts. For products sold to individuals, premiums are generally considered to represent new business in certain circumstances, including where a new contract has been signed, or where underwriting has been performed. Renewal premiums include contractual renewals, non-contractual variations that are reasonably predictable and recurrent single premiums that are pre-defined and reasonably predictable. For group products, new business includes new contracts and increases to aggregate premiums under existing contracts. Renewal premiums are based on the level of premium received during the reporting period and allow for premiums expected to be received beyond the expiry of any guaranteed premium rates. Foreign exchange adjustments Embedded value and other balance sheet items denominated in foreign currencies have been translated to sterling using the appropriate closing exchange rate. New business contribution and other profit and loss items have been translated using an average exchange rate for the relevant period. The closing euro exchange rates used in this announcement are â‚¬1 = Â£0.67 at 30 June 2004, â‚¬1 = Â£0.70 at 31 December 2003 and â‚¬1 = Â£0.65 at 31 December 2002. The average euro exchange rates are â‚¬1 = Â£0.68 for the six months to 30 June 2004 and â‚¬1 = Â£0.69 for the full year 2003. -------------------------------------------------------------------------------------------------------------------- PAGE 15 Methodology Overview Under the EEV methodology, profit is recognised as it is earned over the life of products defined within covered business. The total profit recognised over the lifetime of a policy is the same as under the modified statutory basis of reporting, but the timing of recognition is different. Calculation of the embedded value The shareholders' interest in the life and related businesses is represented by the embedded value. The embedded value is the total of the net worth of the life and related businesses and the value of in-force covered business. Calculations are performed separately for each business and are based on the cash flows of that business, after allowing for both external and intra-group reinsurance. Where one life business has an interest in another life business, the net worth of that business excludes the interest in the dependent company. The embedded value is calculated on an after-tax basis and the profits are then grossed up for tax at the full rate of corporation tax for the United Kingdom and at an appropriate rate for each of the other countries, applying current legislation and practice together with future known changes. Net worth The net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in the non-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets, and consists of the required capital and free surplus. The level of required capital for each business, which ranges between 100% and 200% of the EU minimum solvency requirement for our main European businesses, reflects the level of capital considered by the Directors to be appropriate to manage the business, allowing for our internal assessment of the level of market, insurance and operating risk inherent in the underlying products. The same definition of required capital is used for both existing and new business. The free surplus comprises the market value of shareholder assets in excess of local statutory reserves and required capital. Value of in-force covered business The value of in-force covered business is the present value at the appropriate risk discount rate (which incorporates a risk margin) of the distributable profits to shareholders arising from the in-force covered business projected on a best estimate basis, less a deduction for the cost of holding the required level of capital. Shareholders' distributable profits arise when they are released following actuarial valuations. These valuations are carried out in accordance with statutory requirements designed to ensure and demonstrate solvency in long-term business funds. Future distributable profits will depend on experience in a number of areas such as investment return, discontinuance rates, mortality, administration costs, as well as management and policyholder actions. Releases to shareholders arising in future years from the in-force covered business and associated required capital can be projected using best estimate assumptions of future experience. The value of in-force covered business includes an allowance for the impact of financial options and guarantees arising from best estimate assumptions (the intrinsic value) and from additional costs related to the variability of investment returns (the time value). The intrinsic value is included in the underlying value of the in-force covered business using deterministic assumptions. The time value of financial options and guarantees has been determined using stochastic modelling techniques. Stochastic modelling involves projecting the future cash flows of the business under thousands of economic scenarios that are representative of the possible future outcomes for market variables such as interest rates and equity returns. Allowance is made, where appropriate, for the effect of management and/or policyholder actions in different economic conditions on future assumptions such as asset mix, bonus rates and surrender rates. The time value is determined by deducting the average value of shareholder cash flows under these economic scenarios from the deterministic shareholder value under best estimate assumptions. The cost of holding required capital is the difference between the required capital and the present value at the appropriate risk discount rate of the projected release of the required capital and investment earnings on the assets deemed to back the required capital. The value of in-force covered business includes the capitalised value of profits and losses arising from subsidiary companies providing administration, investment management and other services to the extent that they relate to covered business. This is referred to as the 'look through' into service company expenses. In addition, expenses arising in holding companies that relate directly to acquiring or maintaining covered business have been allowed for. Where external companies provide services to the life and related businesses, their charges have been allowed for in the underlying projected cost base. Risk discount rates Under the EEV methodology, a risk discount rate (RDR) is required to express a stream of expected future distributable profits as a single value at a particular date (the present value). It is the interest rate that an investment equal to the present value would have to earn in order to replicate exactly the stream of future profits. The RDR is a combination of a risk free rate to reflect the time value of money plus a risk margin to make prudent allowance for the risk that experience in future years may differ from that assumed. In particular, a risk margin is added to allow for the risk that expected additional returns on certain asset classes (e.g. equities) are not achieved. -------------------------------------------------------------------------------------------------------------------- PAGE 16 Risk discount rates for our life businesses have been calculated using a risk margin based upon a Group Weighted Average Cost of Capital (WACC). The Group WACC is calculated using a gross risk free interest rate, an equity risk margin, a market assessed risk rate (beta), and an allowance for the gearing impact of debt financing (including subordinated debt). The market risk rate captures the market's view of the effect of all types of risk on our business, including operational and other non-economic risk. The RDR is only one component of the overall allowance for risk in EEV calculations. Risk is also allowed for in the cost of holding statutory reserving margins, additional required capital and in the time value of options and guarantees. Hence to derive an RDR the Group WACC is adjusted to reflect the average level of required capital assumed to be held, and to reflect the explicit valuation of the time value of options and guarantees. In order to derive risk discount rates for each of our life businesses, the adjusted Group WACC is expressed as a risk margin in excess of the gross risk free interest rate used in the WACC calculation as described above. Business-specific discount rates are then calculated as the sum of this risk margin and the appropriate local gross risk free rate at the valuation date, based on returns on government bonds. A common risk free rate, and hence a common RDR, is used for all of our businesses within the Eurozone. The same risk margin is used for the United Kingdom and for all businesses within the Eurozone. Additional country-specific risk margins are applied to smaller businesses to reflect additional economic, political and business-specific risk. Within each business, a constant RDR has been applied in all future time periods and in each of the economic scenarios underlying the calculation of the time value of options and guarantees. At each valuation date, the risk margin is reassessed based on current economic factors and is updated only if a significant change has occurred. In particular, changes in risk profile arising from movements in asset mix are allowed for via the updated risk margin calculation. The Group's revised approach to establishing economic assumptions (specifically investment returns, required capital and discount rates) has been reviewed by Tillinghast, a firm of actuarial consultants, who have confirmed to the Directors that, for the life business in aggregate, the approach is based on the well established capital asset pricing model theory and is in line with the EEV Principles and Guidance. Participating business Future regular bonuses on participating business are projected in a manner consistent with current bonus rates and expected future returns on assets deemed to back the policies. For with-profit funds in the United Kingdom and Ireland, for the purpose of recognising the value of the estate, it is assumed that terminal bonuses are increased to exhaust all of the assets in the fund over the future lifetime of the in-force with-profit policies. However, under stochastic modelling there may be some extreme economic scenarios when the total assets in the Group's with-profit funds are not sufficient to pay all policyholder claims. The average additional shareholder cost arising from this shortfall has been included in the time value of options and guarantees. For profit sharing business in Continental Europe, where policy benefits and shareholder value depend on the timing of realising gains, apportionment of unrealised gains between policyholders' benefits and shareholders reflect contractual requirements as well as existing practice. Where under certain economic scenarios additional shareholder injections are required to meet policyholder payments, this additional cost has been included in the time value of options and guarantees. Consolidation adjustments The effect of transactions between our life companies such as loans and reinsurance arrangements has been included in results split by territory in a consistent manner. No elimination is required on consolidation. As the EEV methodology incorporates the impact of profits and losses arising from subsidiary companies providing administration, investment management and other services to the Group's life companies, the equivalent profits and losses have been removed from the relevant segment (non insurance or fund management) and are instead included within the results of life and related businesses. In addition, the underlying basis of calculation for these profits has changed from the modified statutory basis to the EEV basis. The capitalised value of the future profits and losses from such service companies are included in the embedded value and new business contribution calculations for the relevant territory, but the net assets (representing historical profits and other amounts) remain under non insurance or fund management. In order to reconcile the profits arising in the financial period within each segment with the assets on the opening and closing balance sheets, a transfer of modified statutory profits from life and related business to the appropriate segment is deemed to occur. The same approach has been adopted for expenses within our holding companies. -------------------------------------------------------------------------------------------------------------------- PAGE 17 Components of life EEV return The life EEV return comprises the following components: â€¢ new business contribution written during the period including value added between the point of sale and end of the period; â€¢ the profit from existing business equal to: - the expected return on the value of the in-force covered business at the beginning of the period, - experience variances caused by the differences between the actual experience during the period and expected experience based on the operating assumptions used to calculate the start of year value, - the impact of changes in operating assumptions including risk margins; â€¢ the expected investment return on the shareholders' net worth, based upon assumptions applying at the start of the year; â€¢ investment return variances caused by differences between the actual return in the period and the expected return based on economic assumptions used to calculate the start of year value; and â€¢ the impact of changes in economic assumptions in the period. The life EEV operating return comprises the first three of these components and is calculated using economic assumptions as at the start of the year and operating (demographic, expenses and tax) assumptions as at the end of the year. Life EEV return 6 months Full year 2004 2003 Â£m Â£m New business contribution (after the effect of required capital) 251 474 Profit from existing business - expected return 417 761 - experience variances (20) (31) - operating assumption changes - 19 Expected return on shareholders' net worth 151 273 -------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 799 1,496 Investment return variances (202) 696 Effect of economic assumption changes 56 (55) -------------------------------------------------------------------------------------------------------------------- Life EEV return before tax 653 2,137 Tax on operating profit (244) (457) Tax credit/(charge) on other ordinary activities 36 (175) -------------------------------------------------------------------------------------------------------------------- Life EEV return after tax 445 1,505 ==================================================================================================================== There were no separate development costs reported in either period. -------------------------------------------------------------------------------------------------------------------- PAGE 18 New business contribution The following tables set out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out on page 14. The contribution generated by new business written during the period is the present value of the projected stream of after tax distributable profit from that business. New business contribution before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at appropriate rates of tax for other countries. New business contribution has been calculated using the same economic assumptions as those used to determine the embedded value as at the start of the year and operating assumptions used to determine the embedded value as at the end of the year, and is rolled forward to the end of the financial period. New business sales are expressed on two bases: annual premium equivalent (APE), the UK life industry's standard measure, and the present value of future new business premiums (PVNBP). The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate new business contribution, so the components of the new business margin are on a consistent basis. New business contribution is shown before and after the effect of required capital, calculated on the same basis as for in-force covered business. New business New business contribution contribution before the after the Annual premium Present value of effect of effect of equivalent(1) new business premiums required capital required capital ------------------- --------------------- ------------------- ------------------- 6 months Full year 6 months Full year 6 months Full year 6 months Full year 2004 2003 2004 2003 2004 2003 2004 2003 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Life and pensions business United Kingdom 567 1,118 4,299 8,516 127 250 106 212 Continental Europe France 145 241 1,337 2,224 46 72 27 39 Ireland 44 81 267 529 13 28 11 26 Italy 89 194 811 1,752 22 45 14 27 Netherlands (including Belgium and Luxembourg) 119 224 981 1,821 40 69 25 29 Poland 18 35 121 226 5 5 4 3 Spain 130 246 1,122 1,964 68 141 55 122 Other Europe 58 101 388 587 1 (1) (2) (6) International 74 187 427 1,190 16 37 11 22 --------------------------------------------------------------------------------------------------------------------- Total (before the effect of required capital) 1,244 2,427 9,753 18,809 338 646 Effect of required capital (87) (172) ------------------------------------------------------------------------------------------------ Total (after the effect of required capital) 251 474 251 474 ===================================================================================================================== (1) APE has been restated to include NUER volumes New business contribution before the effect of required capital includes minority interests in 2004 of Â£56 million (2003: Â£109 million). This comprises minority interests in France of Â£2 million (2003: Â£3 million), Italy Â£13 million (2003: Â£25 million), Netherlands Â£5 million (2003: Â£8 million), Poland Â£1 million (2003: Â£1 million) and Spain Â£35 million (2003: Â£72 million). New business contribution after the effect of required capital includes minority interests in 2004 of Â£42 million (2003: Â£86 million). This comprises minority interests in France of nil (2003: nil), Italy Â£8 million (2003: Â£15 million), Netherlands Â£4 million (2003: Â£7 million), Poland Â£1 million (2003: Â£1 million) and Spain Â£29 million (2003: Â£63 million). -------------------------------------------------------------------------------------------------------------------- PAGE 19 EEV basis - new business contribution before the effect of required capital, tax and minority interest Annual premium Present value of New business equivalent(1) new business premiums contribution 6 months Full year 6 months Full year 6 months Full year 2004 2003 2004 2003 2004 2003 Â£m Â£m Â£m Â£m Â£m Â£m Analysed between: - Bancassurance channels 275 542 2,305 4,440 116 224 - Other distribution channels 969 1,885 7,448 14,369 222 422 ------------------------------------------------------------------------------------------------------------------- Total 1,244 2,427 9,753 18,809 338 646 =================================================================================================================== (1) APE has been restated to include NUER volumes EEV basis - new business contribution after the effect of required capital, tax and minority interest Annual premium Present value of New business equivalent(1) new business premiums contribution(2) 6 months Full year 6 months Full year 6 months Full year 2004 2003 2004 2003 2004 2003 Â£m Â£m Â£m Â£m Â£m Â£m Analysed between: - Bancassurance channels 154 312 1,263 2,499 35 66 - Other distribution channels 928 1,796 7,288 14,148 111 206 ------------------------------------------------------------------------------------------------------------------- Total 1,082 2,108 8,551 16,647 146 272 =================================================================================================================== (1) APE has been restated to include NUER volumes (2) Contribution stated after deducting the effect of required capital, tax and minority interests. Experience variances Experience variances include the impact of the difference between expense, demographic and persistency assumptions, and actual experience incurred in the year. Also included are variances arising from tax, where such variances are due to management action. 6 months 2004 Full year 2003 ------------------------ ------------------------- Originally Originally Restated reported Restated reported Â£m Â£m Â£m Â£m United Kingdom (19) (18) (41) (10) France 2 9 56 54 Netherlands (including Belgium and Luxembourg) (1) (3) (60) (58) Europe 5 6 9 15 International (7) (7) 5 (13) ------------------------------------------------------------------------------------------------------------------- (20) (13) (31) (12) =================================================================================================================== Operating assumption changes Changes in operating assumptions are made when the assumed future levels of expenses, mortality or other operating assumptions are expected to change permanently. 6 months 2004 Full year 2003 ------------------------ ------------------------ Originally Originally Restated reported Restated reported Â£m Â£m Â£m Â£m United Kingdom 7 - 1 (4) France (1) (1) (27) (23) Netherlands (including Belgium and Luxembourg) 3 7 28 21 Europe (10) (10) 23 36 International 1 - (6) 8 ------------------------------------------------------------------------------------------------------------------- - (4) 19 38 =================================================================================================================== Further disclosures on experience variances and operating assumption changes on an EEV basis are provided on page 34. -------------------------------------------------------------------------------------------------------------------- PAGE 20 Geographical analysis of life EEV operating return 6 months Full year 2004 2003 Â£m Â£m United Kingdom 345 597 Continental Europe France 112 228 Ireland 16 57 Italy 36 70 Netherlands (including Belgium and Luxembourg) 132 198 Poland 35 99 Spain 81 165 Other Europe 14 18 International 28 64 ------------------------------------------------------------------------------------------------------------------- 799 1,496 =================================================================================================================== Life EEV operating return includes minority interests in 2004 of Â£83 million (2003: Â£157 million). This comprises minority interests in France of Â£4 million (2003: Â£4 million), Italy Â£20 million (2003: Â£37 million), Netherlands Â£14 million (2003: Â£13 million), Poland Â£5 million (2003: Â£21 million), Spain Â£39 million (2003: Â£81 million) and Other Europe Â£1 million (2003: Â£1 million). -------------------------------------------------------------------------------------------------------------------- PAGE 21 Analysis of movement in life and related businesses embedded value The following tables provide an analysis of the movement in embedded value for the life and related businesses for the 6 months to 30 June 2004 and for the full year to 31 December 2003. The analysis is shown separately for net worth and the value of in force covered business, and includes amounts transferred between these categories. The transfer from life and related businesses to other segments consists of service company profits and losses during the reported period that have emerged from the value of in force. Since the 'look through' into service companies includes only future profits and losses, these amounts must be eliminated from the closing embedded value. All figures are shown net of tax. 6 months 2004 ---------------------------------- Net Value of worth in-force Total Â£m Â£m Â£m Embedded value at the beginning of the period - Free surplus 1,721 - Required capital(1) 4,114 Total 5,835 5,916 11,751 -------------------------------------------------------------------------------------------------------------------- New business contribution (after the effect of required capital) (280) 454 174 Expected return on existing business - return on VIF - 294 294 Expected return on existing business - transfer to net worth 341 (341) - Experience variances and operating assumption changes 47 (64) (17) Expected return on shareholders' net worth 105 - 105 Investment return variances and economic assumption changes (9) (102) (111) -------------------------------------------------------------------------------------------------------------------- Life EEV return after tax 204 241 445 Exchange rate movements (256) (63) (319) Embedded value of businesses acquired - - - Amounts injected into life and related businesses 39 - 39 Amounts released from life and related businesses (458) - (458) Transfer from life and related businesses to other segments 15 - 15 -------------------------------------------------------------------------------------------------------------------- Embedded value at the end of the period - Free surplus 1,399 - Required capital (1) 3,980 Total 5,379 6,094 11,473 ==================================================================================================================== (1) Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. Full year 2003 ---------------------------------- Net Value of worth in-force Total Â£m Â£m Â£m Embedded value at the beginning of the year 4,616 5,169 9,785 -------------------------------------------------------------------------------------------------------------------- New business contribution (after the effect of required capital) (581) 908 327 Expected return on existing business - return on VIF - 533 533 Expected return on existing business - transfer to net worth 774 (774) - Experience variances and operating assumption changes 147 (157) (10) Expected return on shareholders' net worth 190 - 190 Investment return variances and economic assumption changes 395 70 465 -------------------------------------------------------------------------------------------------------------------- Life EEV return after tax 925 580 1,505 Exchange rate movements 222 120 342 Embedded value of businesses acquired 17 47 64 Amounts injected into life and related businesses 231 - 231 Amounts released from life and related businesses (205) - (205) Transfer from life and related businesses to other segments 29 - 29 -------------------------------------------------------------------------------------------------------------------- Embedded value at the end of the year - Free surplus 1,721 - Required capital(1) 4,114 Total 5,835 5,916 11,751 ==================================================================================================================== (1) Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. The embedded value of businesses acquired in 2003 of Â£64 million represents the embedded value of Delta Lloyd ABN AMRO Verzekeringen Holding BV, the insurance company acquired as part of the bancassurance agreement entered into with ABN AMRO NV in the Netherlands. The embedded value at the end of the six month period 30 June 2004 includes minority interests of Â£589 million (2003: Â£568 million). This comprises minority interests in France of Â£55 million (2003: Â£51 million), Italy Â£224 million (2003: Â£222 million), Netherlands Â£52 million (2003: Â£44 million), Poland Â£65 million (2003: Â£72 million), Spain Â£191 million (2003: Â£176 million) and Other Europe Â£2 million (2003: Â£3 million). -------------------------------------------------------------------------------------------------------------------- PAGE 22 Segmental analysis of life and related businesses embedded value Value of in-force Net worth covered business -------------------- ------------------ Present Cost of Required Free value of required capital(1) surplus in-force capital Embedded value 30 June 2004 Â£m Â£m Â£m Â£m Â£m United Kingdom(2) 1,230 392 3,803 (389) 5,036 Continental Europe France 986 63 753 (182) 1,620 Ireland 71 191 310 (17) 555 Italy 211 108 166 (58) 427 Netherlands (including Belgium and Luxembourg) 868 354 1,311 (299) 2,234 Poland 79 42 310 (29) 402 Spain 173 21 329 (51) 472 Other 110 27 83 (31) 189 International 252 201 149 (64) 538 ------------------------------------------------------------------------------------------------------------------- 3,980 1,399 7,214 (1,120) 11,473 =================================================================================================================== (1) Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. (2) The movement in the net worth from that previously reported under Achieved Profits is Â£147 million and relates to the reclassification of NUER's VIF from net worth to the present value of future in-force. Value of in-force Net worth covered business Embedded value ------------------------ ------------------------ ------------------------ 31 December 31 December 31 December 31 December 31 December 31 December 2003 2002 2003 2002 2003 2002 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom(1) 1,995 1,756 3,205 2,848 5,200 4,604 Continental Europe France 1,012 833 547 493 1,559 1,326 Ireland 270 218 307 275 577 493 Italy 348 250 87 84 435 334 Netherlands (including Belgium and Luxembourg) 1,267 859 1,087 896 2,354 1,755 Poland 148 129 306 269 454 398 Spain 187 149 259 190 446 339 Other 140 128 44 36 184 164 International 468 294 74 78 542 372 ------------------------------------------------------------------------------------------------------------------- 5,835 4,616 5,916 5,169 11,751 9,785 =================================================================================================================== (1) The movement in the net worth from that previously reported under Achieved Profits is Â£146 million at 31 December 2003 (31 December 2002: Â£89 million) and relates to the reclassification of NUER's VIF from net worth to the present value of future in-force. The shareholders' net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in the non-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets. Required capital, net of implicit items, of Â£3,980 million at 30 June 2004 (31 December 2003: Â£4,114 million) is included within the net worth. The value of in-force covered business includes the effect of holding shareholders' capital to support the level of required capital and allowing for projected future releases. This impact reduces the value of in-force covered business at 30 June 2004 by Â£1,120 million (31 December 2003: Â£1,049 million). On a statutory solvency basis, the minimum statutory solvency margin requirement supported by shareholders' capital is Â£3,200 million at 30 June 2004 (31 December 2003: Â£3,100 million). The effect of holding the minimum statutory solvency margin reduces the value of in-force covered business at 30 June 2004 by Â£900 million (31 December 2003: Â£900 million). -------------------------------------------------------------------------------------------------------------------- PAGE 23 Time value of options and guarantees The following table sets out the time value of options and guarantees relating to covered business by territory at 30 June 2004, 31 December 2003 and 31 December 2002. 30 June 31 December 31 December 2004 2003 2002 Â£m Â£m Â£m United Kingdom 35 36 26 Continental Europe France 66 71 58 Ireland 6 6 3 Italy 11 10 11 Netherlands (including Belgium and Luxembourg) 72 76 70 Poland 4 4 3 Spain 10 10 9 Other Europe 10 10 10 International 8 9 14 -------------------------------------------------------------------------------------------------------------------- 222 232 204 ==================================================================================================================== The time value of options and guarantees is most significant in the United Kingdom, France and the Netherlands. In the United Kingdom, this relates mainly to no-MVA guarantees on unitised with-profit business and guaranteed annuity rates. In France, this relates mainly to guaranteed crediting rates and surrender values on traditional business including the AFER fund. In the Netherlands, this relates mainly to maturity guarantees on unit linked products and interest rate guarantees on traditional individual and group profit sharing business. Minority interest in life and related businesses EEV results 6 months 2004 ---------------------------------- Shareholders' Minority interest interest Group Â£m Â£m Â£m New business contribution before effect of required capital 282 56 338 Effect of required capital (73) (14) (87) ------------------------------------------------------------------------------------------------------------------- New business contribution including effect of required capital 209 42 251 =================================================================================================================== Life EEV operating return before tax 716 83 799 =================================================================================================================== Life EEV return before tax 564 89 653 Attributed tax (177) (31) (208) ------------------------------------------------------------------------------------------------------------------- Life EEV return after tax 387 58 445 =================================================================================================================== Closing life and related businesses embedded value 10,884 589 11,473 =================================================================================================================== Full year 2003 ---------------------------------- Shareholders' Minority interest interest Group Â£m Â£m Â£m New business contribution before effect of required capital 537 109 646 Effect of required capital (149) (23) (172) ------------------------------------------------------------------------------------------------------------------- New business contribution including effect of required capital 388 86 474 =================================================================================================================== Life EEV operating return before tax 1,339 157 1,496 =================================================================================================================== Life EEV return before tax 2,004 133 2,137 Attributed tax (588) (44) (632) ------------------------------------------------------------------------------------------------------------------- Life EEV return after tax 1,416 89 1,505 =================================================================================================================== Closing life and related businesses embedded value 11,183 568 11,751 =================================================================================================================== -------------------------------------------------------------------------------------------------------------------- PAGE 24 Principal economic assumptions - deterministic calculations Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting period. The same margins are applied on a consistent basis across the Group to gross risk-free yields to obtain investment return assumptions for ordinary shares and property and to produce risk discount rates. Expense inflation is derived as a fixed margin above a local measure of long term price inflation. Risk free rates and price inflation have been harmonised across territories within the Euro currency zone, except for expense inflation in Ireland where significant differences remain. Required capital is shown as a multiple of the EU statutory minimum solvency margin. Investment return assumptions are generally derived by major product class, based on hypothecating the assets at the valuation date. Assumptions about future investment mix are consistent with long-term plans. In most cases, the investment mix is assumed to continue unchanged throughout the projection period. The changes in assumptions between reporting dates reflect the actual movements in risk free yields in the United Kingdom, the Eurozone and other territories. The principal economic assumptions used are as follows: United Kingdom France ---------------------------- ------------------------- 30 Jun 31 Dec 31 Dec 30 Jun 31 Dec 31 Dec 2004 2003 2002 2004 2003 2002 Risk discount rate 7.8% 7.5% 7.2% 7.0% 7.0% 7.0% Pre-tax investment returns: Base government fixed interest 5.1% 4.8% 4.5% 4.3% 4.3% 4.3% Ordinary shares 8.1% 7.8% 7.5% 7.3% 7.3% 7.3% Property 7.1% 6.8% 6.5% 6.3% 6.3% 6.3% Future expense inflation 3.5% 3.4% 2.8% 2.5% 2.5% 2.5% Tax rate 30.0% 30.0% 30.0% 35.4% 35.4% 35.4% Required Capital (% EU minimum) 200%/100% 200%/100% 200%/100% 115% 115% 115% Ireland Italy ---------------------------- ------------------------- 30 Jun 31 Dec 31 Dec 30 Jun 31 Dec 31 Dec 2004 2003 2002 2004 2003 2002 Risk discount rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Pre-tax investment returns: Base government fixed interest 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% Ordinary shares 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% Property 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% Future expense inflation 4.0% 4.0% 4.0% 2.5% 2.5% 2.5% Tax rate 12.5% 12.5% 12.5% 38.3% 38.3% 39.8% Required Capital (% EU minimum) 150% 150% 150% 115% 115% 115% Netherlands Poland ---------------------------- ------------------------- 30 Jun 31 Dec 31 Dec 30 Jun 31 Dec 31 Dec 2004 2003 2002 2004 2003 2002 Risk discount rate 7.0% 7.0% 7.0% 11.2% 9.7% 11.7% Pre-tax investment returns: Base government fixed interest 4.3% 4.3% 4.3% 7.5% 6.0% 8.0% Ordinary shares 7.3% 7.3% 7.3% 10.5% 9.0% 11.0% Property 6.3% 6.3% 6.3% n/a n/a n/a Future expenseinflation 2.5% 2.5% 2.5% 4.9% 3.4% 5.4% Tax rate 25.0% 25.0% 25.0% 19.0% 19.0% 27.0% Required Capital (% EU minimum) 150% 150% 150% 150% 150% 150% Spain ---------------------------- 30 Jun 31 Dec 31 Dec 2004 2003 2002 Risk discount rate 7.0% 7.0% 7.0% Pre-tax investment returns: Base government fixed interest 4.3% 4.3% 4.3% Ordinary shares 7.3% 7.3% 7.3% Property 6.3% 6.3% 6.3% Future expense inflation 2.5% 2.5% 2.5% Tax rate 35.0% 35.0% 35.0% Required Capital (% EU minimum) 125%/110% 125%/110% 125%/110% Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for credit risk. Required capital in the United Kingdom is 200% EU minimum for Norwich Union Annuities Ltd and 100% for other companies. Required capital in Spain is 125% EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies. Other economic assumptions Required capital relating to with-profit business is assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders. Bonus rates on participating business have been set at levels consistent with the economic assumptions and Aviva's medium-term bonus plans. The distribution of profit between policyholders and shareholders within the with-profit funds assumes that the shareholder interest in conventional with-profit business in the United Kingdom and Ireland continues at the current rate of one-ninth of the cost of bonus. -------------------------------------------------------------------------------------------------------------------- PAGE 25 Principal economic assumptions - stochastic calculations The time value of options and guarantees calculation allows for expected management and policyholder actions in response to varying future investment conditions. The management actions modelled include changes to asset mix and bonus rates. Modelled policyholder actions are described under 'Other assumptions'. This section describes the models used to generate future investment simulations, and gives some sample statistics for the simulations used. Two separate models have been used, for the UK businesses and for the Europe and International businesses, as these models better reflect the characteristics of the businesses. United Kingdom Model Overall asset returns have been generated assuming that the portfolio total return has a lognormal distribution. The mean and standard deviation of the overall asset return have been calculated using the asset mix of the fund and assumptions for the mean and standard deviation of each asset class, together with correlations between them. Asset Classes The significant asset classes for UK participating business are equities, property and long term fixed rate bonds. Summary Statistics The following table sets out the means and standard deviations (St Dev) of future returns at 31 December 2003 for the three most significant asset classes. The figures at 31 December 2002 and 30 June 2004 are similar. Mean(1) St Dev(2) ------- --------- Equities 7.8% 20.0% Property 6.8% 15.0% Government Bonds 4.8% 2.5% (1) Means have been calculated by accumulating a unit investment for the required number of years in each simulation, averaging the accumulation across all simulations, and converting the result to an equivalent annual rate (by taking the nth root of the average accumulation minus 1). (2) Standard deviations have been calculated by accumulating a unit investment for the required number of years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by the projection period (n years) and taking the square root. This makes the result comparable to implied volatilities quoted in investment markets. For the UK, the statistics are the same over all projection horizons. The low assumed volatility for bonds reflects the degree of matching, by duration, with the liabilities. Assumptions are also required for correlations between asset classes. These have been set based on an internal assessment of historical data. Returns for corporate fixed interest investments in each scenario are equal to the return on Government bonds plus a fixed additional amount, based on current spreads less a margin for credit risk. Continental Europe and International Model Government nominal interest rates are generated by a model that projects a full yield curve at annual intervals. The model assumes that the logarithm of the short rate follows a mean reverting process subject to two normally distributed random shocks. This ensures that nominal interest rates are always positive, the distribution of future interest rates remains credible, and the model can be calibrated to give a good fit to the initial yield curve. The total annual return on equities is calculated as the return on 1 year bonds plus an excess return. The excess return is assumed to have a lognormal distribution. The model also generates property total returns and real yield curves, although these are not significant asset classes for Aviva outside the UK. Asset Classes The most important assets are fixed rate bonds of various durations. In some businesses equities are also an important asset class. Summary Statistics The following table sets out the means and standard deviations of future euro returns at 31 December 2003 for the three most significant asset classes: equities, short term bonds (defined to be of 1 year duration) and long term bonds (defined to be 10 year zero coupon bonds). In the accumulation of 10 year bonds, it is assumed that these are held for one year, sold as 9 year bonds then the proceeds are reinvested in 10 year bonds, although in practice businesses follow more complex asset strategies or tend to adopt a buy and hold strategy. The results at 31 December 2002 and 30 June 2004 are similar. 5- year return 10- year return 20- year return Mean(1) St Dev(2) Mean(1) St Dev(2) Mean(1) St Dev(2) --------------------------------------------------------------------------------------------- Short Government Bonds 3.3% 1.9% 4.0% 4.1% 4.8% 7.7% Long Government Bonds 4.1% 5.4% 4.7% 4.2% 5.2% 4.5% Equities 6.7% 20.2% 7.3% 19.9% 7.7% 20.0% Correlations between asset classes have been set using the same approach as described for the United Kingdom. -------------------------------------------------------------------------------------------------------------------- PAGE 26 Other assumptions Taxation Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have been announced. Demographic assumptions Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva's recent operating experience. Where appropriate, surrender and option take up rate assumptions that vary according to the investment scenario under consideration have been used in the calculation of the time value of options and guarantees, based on our assessment of likely policyholder behaviour in different investment scenarios. Expense assumptions Management expenses and operating expenses of holding companies attributed to life and related businesses have been included in the EEV calculations and split between expenses relating to the acquisition of new business, the maintenance of business in-force and project expenses. Future expense assumptions include an allowance for maintenance expenses and a proportion of recurring project expenses. Certain expenses of an exceptional nature, when they occur, are identified separately and are generally charged as incurred. No future productivity gains have been anticipated. Where subsidiary companies provide administration, investment management or other services to businesses included in the European embedded value calculations, the value of profits or losses arising from these services have been included in the embedded value and new business contribution. Other It has been assumed that there will be no changes to the methods and bases used to calculate the statutory technical provisions and current surrender values, except where driven by varying future investment conditions under stochastic economic scenarios. -------------------------------------------------------------------------------------------------------------------- PAGE 27 Sensitivity analysis - economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2003 and the new business contribution before the effect of required capital for the full year 2003 to: â€¢ one percentage point increase and decrease in the discount rates; â€¢ one percentage point increase and decrease in interest rates, including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates); â€¢ one percentage point increase and decrease in the assumed investment returns for equity and property investments, excluding any consequential changes to the risk discount rate; â€¢ 10% rise and fall in market value of equity and property assets (not applicable for new business contribution); and â€¢ decrease in the level of required capital to 100% EU minimum (or equivalent) (not applicable for new business contribution). In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns. Embedded value As reported 1% increase in 1% decrease in 1% increase in 1% decrease in 31 December 2003 on page 22 discount rates discount rates interest rates interest rates Â£m Â£m Â£m Â£m Â£m United Kingdom 5,200 (290) 310 (165) 165 Continental Europe France 1,559 (100) 110 (65) 50 Ireland 577 (25) 30 - - Italy 435 (15) 20 10 (15) Netherlands (including Belgium and Luxembourg) 2,354 (160) 200 70 (215) Poland 454 (20) 25 - - Spain 446 (25) 25 (15) 15 Other 184 (5) 5 10 (20) International 542 (20) 20 (20) 20 -------------------------------------------------------------------------------------------------------------------- 11,751 (660) 745 (175) 0 ==================================================================================================================== 1% increase 1% decrease 10% rise 10% fall As in equity/ in equity/ in equity/ in equity/ EU reported property property property property minimum Embedded value on page 22 returns returns market values market values capital 31 December 2003 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom 5,200 175 (185) 250 (250) 120 Continental Europe France 1,559 55 (55) 140 (180) 30 Ireland 577 15 (15) 25 (25) 5 Italy 435 20 (20) 5 (5) 5 Netherlands (including Belgium and Luxembourg) 2,354 175 (175) 300 (300) 100 Poland 454 5 (5) 5 (5) 10 Spain 446 5 (5) 5 (5) 5 Other 184 10 (10) 10 (20) 10 International 542 - - 5 (5) 25 -------------------------------------------------------------------------------------------------------------------- 11,751 460 (470) 745 (795) 310 ==================================================================================================================== -------------------------------------------------------------------------------------------------------------------- PAGE 28 As reported 1% increase in 1% decrease in 1% increase in 1% decrease in New business contribution on page 18 discount rates discount rates interest rates interest rates Full year 2003 Â£m Â£m Â£m Â£m Â£m United Kingdom 250 (45) 45 (20) 20 Continental Europe France 72 (7) 9 (1) - Ireland 28 (4) 5 - - Italy 45 (2) 3 (1) 1 Netherlands (including Belgium and Luxembourg) 69 (15) 20 5 (25) Poland 5 (1) 1 - - Spain 141 (10) 11 (2) - Other (1) (1) 1 1 1 International 37 (6) 7 (1) 1 -------------------------------------------------------------------------------------------------------------------- 646 (91) 102 (19) (2) ==================================================================================================================== As reported 1% increase in 1% decrease in New business contribution on page 18 equity/property returns equity/property returns Full year 2003 Â£m Â£m Â£m United Kingdom 250 27 (33) Continental Europe France 72 3 (3) Ireland 28 2 (2) Italy 45 - - Netherlands (including Belgium and Luxembourg) 69 14 (13) Poland 5 - - Spain 141 - - Other (1) - - International 37 - - -------------------------------------------------------------------------------------------------------------------- 646 46 (51) ==================================================================================================================== The results of the sensitivities at 30 June 2004 are similar. -------------------------------------------------------------------------------------------------------------------- PAGE 29 Sensitivity analysis - non-economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2003 and the new business contribution before the effect of required capital for the full year 2003 to the following changes in non-economic assumptions: â€¢ 10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of Â£10pa would represent an expense assumption of Â£9pa). Where there is a 'look through' into service company expenses, the fee charged by the service company is unchanged while the underlying expense decreases; â€¢ 10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5%pa would represent a lapse rate of 4.5%pa); â€¢ 10% decrease in both mortality and morbidity rates. In each sensitivity calculation, all other assumptions remain unchanged. 10% decrease in 10% decrease in As reported maintenance 10% decrease in mortality / Embedded value on page 22 expenses lapse rates morbidity rates 31 December 2003 Â£m Â£m Â£m Â£m United Kingdom 5,200 150 20 (80) Continental Europe France 1,559 25 15 25 Ireland 577 5 5 15 Italy 435 5 - 5 Netherlands (including Belgium and Lumxembourg) 2,354 65 5 (25) Poland 454 15 20 10 Spain 446 5 15 5 Other 184 - - - International 542 10 10 10 -------------------------------------------------------------------------------------------------------------------- 11,751 280 90 (35) ==================================================================================================================== 10% decrease in 10% decrease in As reported maintenance 10% decrease in mortality / New business contribution on page 18 expenses lapse rates morbidity rates Full year 2003 Â£m Â£m Â£m Â£m United Kingdom 250 14 11 8 Continental Europe France 72 2 2 2 Ireland 28 2 1 1 Italy 45 1 1 1 Netherlands (including Belgium and Luxembourg) 69 10 1 5 Poland 5 1 1 1 Spain 141 4 12 7 Other (1) - - 1 International 37 2 3 3 -------------------------------------------------------------------------------------------------------------------- 646 36 32 29 ==================================================================================================================== The results of the sensitivities at 30 June 2004 are similar. -------------------------------------------------------------------------------------------------------------------- PAGE 30 Other notes 1. Earnings per share (a) Basic earnings per share 6 months 2004 Full year 2003 ------------------------------- ------------------------------ Net of tax, Net of tax, minorities minorities and and Before preference Per Before preference Per tax dividends share tax dividends share Â£m Â£m p Â£m Â£m p Operating profit 1,145 719 31.9 1,906 1,193 53.0 Adjusted for the following items: - Amortisation of goodwill (49) (49) (2.2) (103) (103) (4.6) - Financial Services Compensation Scheme Levy (25) (18) (0.8) - - - - Exceptional costs for termination of operations (50) (42) (1.9) (19) (16) (0.7) - Variation from longer-term investment return (487) (368) (16.3) 779 582 25.8 - Effect of economic assumption changes 56 42 1.9 (55) (40) (1.7) - Change in the equalisation provision (11) (8) (0.4) (49) (34) (1.5) - Profit/(loss) on the disposal of subsidiary undertakings 6 6 0.3 (6) (6) (0.3) -------------------------------------------------------------------------------------------------------------------- Profit attributable to equity shareholders 585 282 12.5 2,453 1,576 70.0 ==================================================================================================================== Earnings per share has been calculated based on the operating profit before amortisation of goodwill and exceptional items, after tax, attributable to equity shareholders, for continuing and for total operations, as well as on the profit attributable to equity shareholders. The Directors believe the former two earnings per share figures provide a better indication of operating performance. The calculation of basic earnings per share uses a weighted average of 2,252 million (2003: 2,251 million) ordinary shares in issue, after deducting shares owned by the employee share trusts as required by FRS14 'Earnings per share'. The actual number of shares in issue at 30 June 2004 was 2,257 million (31 December 2003: 2,257 million). (b) Diluted earnings per share 6 months 2004 Full year 2003 --------------------------- --------------------------- Weighted Weighted average average number of Per number of Per Total shares share Total shares share Â£m m p Â£m m p Profit attributable to equity shareholders 282 2,252 12.5 1,576 2,251 70.0 Dilutive effect of share awards and options - 18 (0.1) - 8 (0.2) -------------------------------------------------- --------------------------------------------------------------- Diluted earnings per share 282 2,270 12.4 1,576 2,259 69.8 ==================================================================================================================== -------------------------------------------------------------------------------------------------------------------- PAGE 31 2. Non-insurance operations - operating result 30 June Full year 2004 2003 Â£m Â£m Hill House Hammond 1 4 Personal finance subsidiaries - - Norwich Union Life Services 1 2 Your Move 8 1 Other (2) 1 ------------------------------------------------------------------------------------------------------------------- 8 8 =================================================================================================================== The business of Norwich Union Equity Release and the profits or losses of Norwich Union Life Services on services provided to the UK life business have been incorporated in the results of the covered business and reclassified within the life EEV operating return. As a consequence, the operating result from non-insurance operations on the modified statutory basis has increased by Â£23 million in the six months ended 30 June 2004 (31 December 2003: Â£72 million). 3. Impact of Changes in Expense Allowances The EEV methodology incorporates the impact of profits and losses arising from subsidiary undertakings providing administration, investment management and other services where these arise in relation to covered business. The principal subsidiaries of the Aviva group providing such services are NU Life Services Ltd (UK), Morley Fund Management (UK) and Aviva Gestion d'Actifs (France). The following table analyses the effect of incorporating such profits and losses within the life and other related business embedded value: 30 June 31 December 31 December 2004 2003 2002 ------------------------------------------- ----------- ----------- Fund Management Non-Insurance Total Total Total Â£m Â£m Â£m Â£m Â£m United Kingdom 51 (429) (378) (388) (372) France 38 (11) 27 27 22 Other Europe and International 11 (31) (20) (21) (30) -------------------------------------------------------------------------------------------------------------------- 100 (471) (371) (382) (380) ==================================================================================================================== The 'look-through' value attributable to fund management is based on the level of after-tax profits expected to be earned in the future over the outstanding term of the covered business in respect of services provided to the Group's life operations. The EEV basis profit and loss account excludes the actual statutory basis profits arising from the provision of fund management services to the Group's life businesses. Instead the EEV profit and loss account records the experience profit or loss compared to the assumed profitability, the return on the in-force value arising from the unwind at the relevant risk discount rate and the effect on the in-force value of changes to economic assumptions. Furthermore fund management service profits are also taken into account in valuing new business contribution. NU Life Services Ltd (NULS) is the main provider of administration services to the UK Life business. NULS incurs substantially all of the UK Life business' operating expenditure, comprising acquisition, maintenance and project costs. Costs are recharged to the UK Life companies (the product companies) on the basis of pre-determined Management Services Agreement (MSA) which was negotiated in 1998 and will be reviewed in 2008. In overview under the terms of the MSA NULS recharges the product companies as follows: â€¢ all acquisitions related expenses; â€¢ maintenance expenses on the basis of contractual allowances by product type; â€¢ project costs incurred by NULS on behalf of and for the benefit of the product companies in areas of product development, expansion of distribution capability, compliance with new regulation etc. Under the Achieved Profits basis of reporting, the embedded value of the product companies was calculated by reference to the allowances under the MSA and not by reference to the underlying expenses in NULS. The result of NULS was included on a statutory basis and broadly comprised the difference between costs incurred and costs recharged to the product companies. The reported pre-tax profitability of NULS in recent reporting periods on an MSSB basis was as follows: 6 months Full year 2004 2003 Â£m Â£m Norwich Union Life Services (15) (54) ==================================================================================================================== -------------------------------------------------------------------------------------------------------------------- PAGE 32 In overview, the reported losses reflected, in part, the fact that NULS has been incurring maintenance expenses overruns since 2002. In addition, significant project expenditure has been incurred on productivity and cost saving initiatives including branch closures, transformation and outsourcing projects, which was not fully recharged and, consequently, was reported as losses in NULS. The EEV principles 'look-through' the contractual terms of the MSA to the underlying expenses of NULS. Accordingly the actual maintenance expenses and a 'normal' annual level of project expense allowances have been applied to the product companies, reducing the overall embedded value of the UK Life operations. Under EEV, any further one-off project expenditure is reported as experience losses when incurred. Furthermore, the adoption of the EEV principles and the inclusion of NULS in the calculations have resulted in the recognition within EEV of the future funding obligations to the UK pension scheme in relation to both future service costs and pension deficits. The overall impact of adopting the EEV principles on UK Life business valuation is as follows: 30 June 31 December 31 December 2004 2003 2002 Â£m Â£m Â£m Impact of: Increasing maintenance and normal project allowances (176) (182) (183) Increase in future service pension scheme contribution rate from 11% to 25% (121) (117) (108) ------------------------------------------------------------------------------------------------------------------- (297) (299) (291) Pension scheme deficit funding (132) (137) (128) ------------------------------------------------------------------------------------------------------------------- (429) (436) (419) =================================================================================================================== Previously under both Achieved Profits basis and Modified Statutory basis reporting pension costs were accounted in NULS in accordance with SSAP 24. This resulted in a pension cost charge to the statutory result of NULS of 11% of pensionable salaries for the six months ended 30 June 2004 (2003: 11%). The funding rate for the annual pension cost was increased to 25% of pensionable salaries with effect from 1 January 2003. In accordance with SSAP24, only 11% of pensionable salaries was charged to the profit and loss account with the remaining 14% treated as prepayment. Under the EEV methodology, allowance has been made for the entire contribution reducing the embedded value of UK Life and related business at 30 June 2004 by Â£121 million (31 December 2003: Â£117 million). In addition, pension deficit funding equivalent in 2004 to a further 13% of pensionable salaries commenced on 1 January 2004. The NULS share of the total UK pension scheme deficit is approximately 42% and this liability is fully provided for in the UK embedded value. In effect, under the EEV methodology the element of the pension fund deficit which relates to the UK life and other related businesses is now incorporated within shareholders' funds at an amount equivalent to the post-tax contributions discounted using the UK Life business risk discount rate. This is equal to Â£132 million at 30 June 2004 (2003: Â£137 million), which differs from the FRS17 basis of evaluating pension deficits. In quantifying the impact on the embedded value for the UK covered business, the shareholders have been assumed to incur all of the additional contributions except for an amount equivalent to approximately 2% of pensionable salaries which has been attributed to the with-profits funds. This reflects the contractual nature of the current MSA which prevents shareholders from recharging both the increase in future service costs from 11% to 25% of pensionable salaries and the cost of funding the deficit to the UK with profit funds. Under the MSA, NULS can renegotiate the terms relating to the recharging of the costs to the UK with profit funds in 2008, subject to regulatory approval. In evaluating the impact on EEV, Aviva has not sought to pre-empt the outcome of this renegotiation. Any changes to the recharges in respect of the pension costs and the pension deficit to the with-profits funds will be reported as profits or losses in the period agreement is obtained. The following table sets out the elements of FRS17 basis deficit excluded from the restated shareholders' funds reported on page 11 of this announcement. 30 June 31 December 2004 2003 Â£m Â£m FRS 17 pension scheme deficit post tax (521) (583) Element relating to UK life covered business 206 211 -------------------------------------------------------------------------------------------------------------------- Element relating to non-life business (315) (372) Deduct: SSAP24 prepayment (276) (251) -------------------------------------------------------------------------------------------------------------------- Deduction required from restated shareholders' funds to incorporate pension deficit in full as a liability (591) (623) ==================================================================================================================== The element of the FRS 17 pension scheme deficit relating to covered business in Ireland and the Netherlands has not been adjusted for in the table above, because the funding arrangements in these territories have not changed. -------------------------------------------------------------------------------------------------------------------- PAGE 33 4. Return on capital employed 6 months 2004 Full year 2003 ------------------------------------------------------ -------------- Normalised after- Opening equity Return on capital Return on tax return capital (annualised) capital Â£m Â£m % % Long-term savings 555 11,969 9.5% 10.4% General insurance and health 419 4,481 19.6% 16.4% Other business 12 725 3.3% (0.7%) Corporate (23) 2,934 (1.6%) (1.5%) ------------------------------------------------------------------------------------------------------------------- 963 20,109 9.8% 9.7% Borrowings (162) (8,404) 3.9% 4.3% ------------------------------------------------------------------------------------------------------------------- 801 11,705 14.2% 13.4% Minority interests (73) (953) 15.9% 17.9% Preference capital (9) (200) 8.5% 8.5% ------------------------------------------------------------------------------------------------------------------- Equity shareholders' funds 719 10,552 14.1% 13.1% =================================================================================================================== 5. Sensitivity analysis - Group shareholders' funds The sensitivity of the Group's shareholders' funds at 31 December 2003 to a 10% fall in global equity markets or a rise of 1% in global interest rates is as follows: 31 December Equities Interest 2003 down 10% rates up 1% Â£bn Â£bn Â£bn Long-term savings (1) 12.0 11.3 11.8 General insurance and other 8.1 7.9 7.8 Borrowings (2) (8.4) (8.4) (8.4) ------------------------------------------------------------------------------------------------------------------- Shareholders' funds 11.7 10.8 11.2 =================================================================================================================== (1) Assumes EEV assumptions adjusted to reflect revised bond yields. (2) Comprising internal, external and subordinated debt. These sensitivities assume a full tax charge/credit on market value appreciation/falls. -------------------------------------------------------------------------------------------------------------------- PAGE 34 6. Segmental analysis of the components of life EEV operating return 6 months to Other 30 June 2004 (Â£m) UK France Ireland Italy Netherlands Poland Spain Europe International Total New business contribution (after the effect of required capital) 106 27 11 14 25 4 55 (2) 11 251 Profit from existing business - expected return 200 53 14 15 71 21 21 10 12 417 - experience variances: Exceptional expenses (32) (1) - - (10) - - (1) (10) (54) Mortality/Morbidity 17 7 1 - 3 3 1 - 1 33 Lapses (14) 2 (8) - - - (1) (1) 2 (20) Other 10 (6) 1 1 6 3 1 5 - 21 -------------------------------------------------------------------------------------- (19) 2 (6) 1 (1) 6 1 3 (7) (20) - operating assumption changes: Maintenance expenses - - - - - - - - 1 1 Mortality/Morbidity - - - - - - - - - - Lapses - - (9) - - - - - - (9) Other 7 (1) (1) - 3 - - - - 8 -------------------------------------------------------------------------------------- 7 (1) (10) - 3 - - - 1 - Expected return on shareholders' net worth 51 31 7 6 34 4 4 3 11 151 ---------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 345 112 16 36 132 35 81 14 28 799 ====================================================================================================================== Full Year to Other 31 December 2003 (Â£m) UK France Ireland Italy Netherlands Poland Spain Europe International Total New business contribution (after the effect of required capital) 212 39 26 27 29 3 122 (6) 22 474 Profit from existing business - expected return 335 104 29 27 146 51 32 17 20 761 - experience variances: Exceptional expenses (63) (12) - (1) (35) - (4) 1 (2) (116) Mortality/Morbidity 22 14 3 3 (3) 7 2 2 4 54 Lapses (29) (1) (22) (2) (11) 5 (3) 2 3 (58) Other 29 55 8 7 (11) 8 5 (12) - 89 -------------------------------------------------------------------------------------- (41) 56 (11) 7 (60) 20 - (7) 5 (31) - operating assumption changes: Maintenance expenses 7 (21) 2 - 1 51 (9) 4 1 36 Mortality/Morbidity 22 - 10 - 2 (20) 13 1 (1) 27 Lapses (46) - (10) (4) (2) (3) 1 - (3) (67) Other 18 (6) - 1 27 (13) (1) - (3) 23 -------------------------------------------------------------------------------------- 1 (27) 2 (3) 28 15 4 5 (6) 19 Expected return on shareholders' net worth 90 56 11 12 55 10 7 9 23 273 ---------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 597 228 57 70 198 99 165 18 64 1,496 ======================================================================================================================= END OF PART 2 OF 3 This information is provided by RNS The company news service from the London Stock Exchange

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