Aviva plc FY 2007 Part 2

Aviva PLC 28 February 2008 Aviva plc FY07 Part 2 Part 2 of 5 ----------------------------------------------------------------------------------------------------------------------- Page 21 EEV basis Summarised consolidated income statement - EEV basis For the year ended 31 December 2007 Restated Page 2007 2007 2006 â‚¬m Â£m Â£m Operating profit before tax attributable to shareholders' profits 26 4,049 Life EEV operating return 2,753 2,033 34 132 Fund management* 90 96 54 1,519 General insurance and health** 1,033 1,686 Other: 34 (103) Other operations and regional costs*** (70) (23) 57 (231) Corporate centre (157) (160) 58 (534) Group debt costs and other interest (363) (381) ---------------------------------------------------------------------------------------------------------------------- 4,832 Operating profit before tax attributable to shareholders' profits 3,286 3,251 Adjusted for the following: (661) Variation from longer-term investment return on long-term business (450) 319 760 Effect of economic assumption changes on long-term business 517 671 Short-term fluctuation in return of investments backing general insurance (271) and health business (184) 149 67 (15) Impairment of goodwill (10) (94) (131) Amortisation and impairment of intangibles (89) (46) 29 Profit on the disposal of subsidiaries and associates 20 161 53 (225) Integration and restructuring costs (153) (246) ----------------------------------------------------------------------------------------------------------------------- 4,318 Profit before tax 2,937 4,165 (1,459) Tax on operating profit (992) (1,028) 279 Tax on other activities 189 (258) ----------------------------------------------------------------------------------------------------------------------- 3,138 Profit for the year 2,134 2,879 ======================================================================================================================= Attributable to: 2,719 Equity shareholders of Aviva plc 1,869 2,648 419 Minority interests 265 231 ----------------------------------------------------------------------------------------------------------------------- 3,138 2,134 2,879 ======================================================================================================================= All profit is from continuing operations. * Excludes the proportion of the results of Morley's fund management businesses, of our French asset management operation Aviva Gestion d'Actifs (AGA) and other fund management operations within the Group that arises from the provision of fund management services to our Life businesses. These results are included within the Life EEV operating return consistent with CFO Forum EEV Principles. ** Restated 2006 results reflect the adjustment to general insurance and health operating profit for Â£6 million FSCS levy credit, previously reported outside operating profit but included in profit before tax. *** Excludes the proportion of the results of Norwich Union life Services relating to the services provided to the UK life business. These results are included within the Life EEV operating return. Other subsidiaries providing services to our Life businesses do not materially impact the Group results. Earnings per share - EEV basis For the year ended 31 December 2007 2007 Earnings per share 2007 2006 Operating profit on an EEV basis after tax, attributable to ordinary shareholders of Aviva plc 112.5c Basic (pence per share) 76.5p 79.2p 111.5c Diluted (pence per share) 75.8p 78.3p Profit after tax for the year on an EEV basis, attributable to ordinary shareholders of Aviva plc 103.1c Basic (pence per share) 70.1p 105.1p 102.2c Diluted (pence per share) 69.5p 103.9p ---------------------------------------------------------------------------------------------------------------------- Page 22 Consolidated statement of recognised income and expense - EEV basis For the year ended 31 December 2007 2007 2007 2006 â‚¬m Â£m Â£m Fair value gains/(losses) on AFS securities, owner-occupied properties and 66 hedging instruments 45 42 (18) Fair value gains transferred to profit (12) (18) - Impairment losses on revalued assets - (2) 953 Actuarial gains/(losses) on pension schemes 648 (117) Actuarial gains/(losses) on pension schemes transferred to unallocated (90) divisible surplus and other movements (61) 3 1,650 Foreign exchange rate movements 1,122 (401) (361) Aggregate tax effect - shareholder tax (246) 27 ----------------------------------------------------------------------------------------------------------------------- 2,200 Net income/(expense) recognised directly in equity 1,496 (466) 3,138 Profit for the year 2,134 2,879 ---------------------------------------------------------------------------------------------------------------------- 5,338 Total recognised income and expense for the year 3,630 2,413 -======================================================================================================================= Attributable to: 4,697 Equity shareholders of Aviva plc 3,194 2,208 641 Minority interests 436 205 ---------------------------------------------------------------------------------------------------------------------- 5,338 3,630 2,413 ======================================================================================================================= Reconciliation of movements in consolidated shareholders' equity - EEV basis For the year ended 31 December 2007 2007 2007 2006 â‚¬m Â£m Â£m 28,572 Balance at 1 January 20,858 17,546 4,973 Total recognised income and expense for the year 3,630 2,413 (1,193) Dividends and appropriations (871) (762) - Issue of share capital for the acquisition of AmerUs in 2006, net of transaction costs - 892 66 Other issues of share capital, net of transaction costs 48 43 412 Shares issued in lieu of dividends 301 203 421 Capital contribution from minority shareholders 307 397 (90) Minority share of dividends declared in the year (66) (75) 434 Minority interest in acquired/disposed subsidiaries 317 153 68 Reserves credit for equity compensation plans 50 48 ---------------------------------------------------------------------------------------------------------------------- 33,663 Total equity 24,574 20,858 (4,289) Minority interests (3,131) (2,137) ---------------------------------------------------------------------------------------------------------------------- 29,374 Balance at 31 December 21,443 18,721 ====================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 23 Summarised consolidated balance sheet - EEV basis As at 31 December 2007 2007 2007 2006 â‚¬m Â£m Â£m Assets 4,222 Goodwill 3,082 2,910 4,379 Acquired value of in-force business and intangible assets 3,197 2,728 10,934 Additional value of in-force long-term business 7,982 6,794 3,529 Interests in, and loans to, joint ventures 2,576 2,795 1,652 Interests in, and loans to, associates 1,206 895 1,290 Property and equipment 942 904 20,653 Investment property 15,077 15,123 49,579 Loans 36,193 28,574 Financial investments 162,927 Debt securities 118,937 114,466 76,737 Equity securities 56,018 56,762 55,360 Other investments 40,413 33,050 11,108 Reinsurance assets 8,109 7,825 808 Deferred tax assets 590 1,199 515 Current tax assets 376 344 11,824 Receivables and other financial assets 8,629 8,098 6,147 Deferred acquisition costs and other assets 4,487 3,476 4,090 Prepayments and accrued income 2,986 2,585 21,608 Cash and cash equivalents 15,774 13,117 1,545 Assets of operations classified as held for sale 1,128 - ---------------------------------------------------------------------------------------------------------------------- 448,907 Total assets 327,702 301,645 -===================================================================================================================== Equity 897 Ordinary share capital 655 641 6,156 Capital reserves 4,494 4,460 1,612 Other reserves 1,177 531 8,538 Retained earnings 6,233 5,082 10,541 Additional retained profit on an EEV basis 7,694 6,817 --------------------------------------------------------------------------------------------------------------------- 27,744 Equity attributable to ordinary shareholders of Aviva plc 20,253 17,531 1,630 Preference share capital and direct capital instrument 1,190 1,190 4,289 Minority interests 3,131 2,137 --------------------------------------------------------------------------------------------------------------------- 33,663 Total equity 24,574 20,858 ===================================================================================================================== Liabilities 209,644 Gross insurance liabilities 153,040 144,230 134,581 Gross liabilities for investment contracts 98,244 88,358 9,295 Unallocated divisible surplus 6,785 9,465 5,452 Net asset value attributable to unitholders 3,980 3,810 2,653 Provisions 1,937 2,850 3,464 Deferred tax liabilities 2,529 3,077 1,629 Current tax liabilities 1,189 1,262 17,338 Borrowings 12,657 12,137 24,740 Payables and other financial liabilities 18,060 11,364 5,158 Other liabilities 3,765 4,234 1,290 Liabilities of operations classified as held for sale 942 - --------------------------------------------------------------------------------------------------------------------- 415,244 Total liabilities 303,128 280,787 ===================================================================================================================== ---------------------------------------------------------------------------------------------------------------------- 448,907 Total equity and liabilities 327,702 301,645 ====================================================================================================================== ----------------------------------------------------------------------------------------------------------------------- Page 24 Segmentation of summarised consolidated balance sheet - EEV basis As at 31 December 2007 Life and General Life and General related business related business businesses and other Group businesses and other Group 2007 2007 2007 2006 2006 2006 Â£m Â£m Â£m Â£m Â£m Â£m Total assets before acquired additional value of in-force long-term business 278,021 40,001 318,022 255,084 37,961 293,045 Acquired additional value of in-force long-term business 1,698 - 1,698 1,806 - 1,806 ----------------------------------------------------------------------------------------------------------------------- Total assets included in the statutory IFRS balance sheet 279,719 40,001 319,720 256,890 37,961 294,851 Liabilities of the long-term business (264,429) - (264,429) (243,590) - (243,590) Liabilities of the general insurance and other businesses - (38,699) (38,699) - (37,197) (37,197) ----------------------------------------------------------------------------------------------------------------------- Net assets on a statutory IFRS basis 15,290 1,302 16,592 13,300 764 14,064 Additional value of in-force long-term business* 7,982 - 7,982 6,794 - 6,794 ----------------------------------------------------------------------------------------------------------------------- Net assets on an EEV basis** 23,272 1,302 24,574 20,094 764 20,858 ======================================================================================================================= Equity capital, capital reserves, shares held by employee trusts and other reserves 6,326 5,632 IFRS basis retained earnings 6,233 5,082 Additional EEV basis retained profit 7,694 6,817 ----------------------------------------------------------------------------------------------------------------------- Equity attributable to ordinary shareholders of Aviva plc on an EEV basis 20,253 17,531 Preference share capital and direct capital instrument 1,190 1,190 Minority interests 3,131 2,137 ----------------------------------------------------------------------------------------------------------------------- EEV basis total equity 24,574 20,858 ======================================================================================================================= * The analysis between the Group's and the minority interest's share of the additional value of in-force long-term business is as follows: Movement in 2007 2006 the year Â£m Â£m Â£m Group's share included in shareholders' funds 7,694 6,817 877 Minority interest share 578 439 139 Movement in AFS securities (290) (462) 172 ---------------------------------------------------------------------------------------------------------------------- Per balance at 31 December 7,982 6,794 1,188 ====================================================================================================================== ** Analysis of long-term business net assets on an EEV basis is made up as follows: 2007 2006 Â£m Â£m Embedded value 20,319 18,098 RBSG goodwill 217 217 Goodwill and intangible assets allocated to long-term business 2,036 1,527 Notional allocation of IAS 19 pension fund deficit to long-term business***^ (58) (179) Minority interest in property investment vehicles 758 431 ---------------------------------------------------------------------------------------------------------------------- Long-term business net assets on an EEV basis^^ 23,272 20,094 ====================================================================================================================== *** The value of the Aviva Staff Pension Scheme deficit has been notionally allocated between segments, based on current funding and the life proportion has been included within the long-term business net assets on an EEV basis. ^ Effective from 31 December 2006, the pension fund deficit notionally allocated to long-term business is net of the proportion of funding borne by the UK with-profit funds. ^^ The long term business net assets on an EEV basis have been restated to include the minority interest on property investment vehicles held in the UK. This change recognises that the embedded value reflects these investments post minority interest, whereas IFRS reports these investments gross. Prior year comparatives have been restated accordingly. ----------------------------------------------------------------------------------------------------------------------- Page 25 1. Basis of preparation - EEV basis The summarised consolidated income statement and balance sheet on pages 21 to 24 present the Group's results and financial position for the life and related businesses on the European Embedded Value (EEV) basis and for its non-life businesses on the International Financial Reporting Standards (IFRS) basis. The EEV methodology adopted is in accordance with the EEV Principles introduced by the CFO Forum in May 2004 and the Additional Guidance on EEV Disclosures published by the CFO Forum in October 2005. Detailed information on the basis of preparation and EEV methodology is set out in Aviva Plc's 2006 Report and Accounts; any updates are detailed below. The Directors consider that the EEV 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 allows for the impact of uncertainty in the future investment returns more explicitly and is consistent with the way the business is priced and managed. At the time the Group adopted EEV principles in 2004, its approach to establishing economic assumptions, including investment returns, required capital and discount rates, was reviewed by Tillinghast, a firm of actuarial consultants. The approach used by the Group is based on the established 'capital asset pricing model' theory and remains in line with EEV principles and guidance. The results for 2007 and 2006 have been audited by our auditors, Ernst & Young LLP. Their report in respect of 2007 is included in the Report and Accounts on page 246 of that document. The preliminary announcement for the year ended 31 December 2007 does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. Covered business 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, China, Turkey, Malaysia and Taiwan. Risk discount rates Following review at 31 December 2007, the Directors have decided to maintain the life embedded value risk margin at 2.7%. The market assessed risk factor (beta) has reduced since the inital risk margin was orginally set, implying a reduction of the risk in the life business. Management will keep the risk margin under review and will make adjustments as necessary to reflect past trends and future expected trends in the riskiness of the life business, based on the beta. The sensitivity disclosures on pages 39 and 40 indicate the impact to the embedded value that would arise from a change in the risk discount rate. ----------------------------------------------------------------------------------------------------------------------- Page 26 2. Components of life EEV return The life EEV return comprises the following components: â€¢ new business contribution written during the period including value added between the point of sale and end of the period; â€¢ the profit from existing business equal to: - the expected return on the value of the in-force covered business at the beginning of the period, - experience variances caused by the differences between the actual experience during the period and expected experience based on the operating assumptions used to calculate the start of year value, - the impact of changes in operating assumptions including risk margins; â€¢ the expected investment return on the shareholders' net worth, based upon assumptions applying at the start of the year; â€¢ investment return variances caused by differences between the actual return in the period and the expected return based on economic assumptions used to calculate the start of year value; and â€¢ the impact of changes in economic assumptions in the period. The life EEV operating return comprises the first three of these components and is calculated using economic assumptions as at the start of the year and operating (demographic, expenses and tax) assumptions as at the end of the year. Life EEV return 2007 2006 Â£m Â£m New business contribution (after the effect of required capital) 912 683 Profit from existing business - expected return 1,266 1,011 - experience variances (16) (50) - operating assumption changes 114 44 Expected return on shareholders' net worth 477 345 ----------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 2,753 2,033 Investment return variances (450) 319 Effect of economic assumption changes 517 671 ----------------------------------------------------------------------------------------------------------------------- Life EEV return before tax 2,820 3,023 Tax on operating profit (819) (630) Tax charge on other ordinary activities (1) (295) ----------------------------------------------------------------------------------------------------------------------- Life EEV return after tax 2,000 2,098 ======================================================================================================================= There were no separate development costs reported in these years. ----------------------------------------------------------------------------------------------------------------------- Page 27 3. New business contribution The table below sets out the premium volumes, the contribution from and the resulting margin achieved on new business written by the life and related businesses. The contribution generated by new business written during the year 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 year. New business contribution is shown before and after the effect of required capital, calculated on the same basis as for in-force covered business. New business sales are expressed on two bases: annual premium equivalent (APE) and the present value of new business premiums (PVNBP). The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate new business contribution, so the components of the new business margin are on a consistent basis. (a) Geographical analysis of new business New New business business contribution New business contribution New business Annual Present value before the margin* before after the margin* after premium of new business effect of the effect of effect of the effect of equivalent premiums required capital required capital required capital required capital -------------- --------------- ---------------- ----------------- ----------------- ---------------- 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m % % Â£m Â£m % % Life and pensions United Kingdom 1,498 1,439 11,655 11,146 360 327 3.1% 2.9% 305 263 2.6% 2.4% France 406 391 3,662 3,552 169 153 4.6% 4.3% 117 110 3.2% 3.1% Ireland 256 190 1,730 1,273 30 15 1.7% 1.2% 25 9 1.4% 0.7% Italy 343 323 2,924 2,768 82 70 2.8% 2.5% 61 50 2.1% 1.8% Netherlands (including Belgium and Germany) 335 270 2,944 2,346 93 56 3.2% 2.4% 53 25 1.8% 1.1% Poland 105 72 844 534 35 28 4.1% 5.2% 32 25 3.8% 4.7% Spain 290 248 2,392 2,059 189 184 7.9% 8.9% 173 168 7.2% 8.2% Other Europe 85 63 418 308 - (4) - (1.3)% (5) (6) (1.2)% (1.9)% Europe 1,820 1,557 14,914 12,840 598 502 4.0% 3.9% 456 381 3.1% 3.0% North America 378 97 3,602 884 154 20 4.3% 2.3% 108 8 3.0% 0.9% Asia 160 107 990 685 36 26 3.6% 3.8% 27 22 2.7% 3.2% Australia 80 58 439 297 26 17 5.9% 5.7% 16 9 3.6% 3.0% Asia Pacific 240 165 1,429 982 62 43 4.3% 4.4% 43 31 3.0% 3.2% ------------------------------------------------- ------------------------------------------------------------------- Total life and pensions 3,936 3,258 31,600 25,852 1,174 892 3.7% 3.5% 912 683 2.9% 2.6% ==================================================================== Investment sales 761 534 6,983 4,910 ------------------------------------------------- Total long-term savings (including share of associates and joint ventures)** 4,697 3,792 38,583 30,762 ================================================= * New business margin represents the ratio of new business contribution to PVNBP, expressed as a percentage. ** Total long-term savings includes investment sales. Investment sales are calculated as new single premiums plus annualised value of new regular premiums. ----------------------------------------------------------------------------------------------------------------------- Page 28 3. New business contribution (continued) (b) Analysis of new business by distribution channel (i) Before the effect of required capital, tax and minority interest Annual premium Present value of new New business equivalent business premiums contribution New business margin ----------------------- ----------------------- ----------------------- ----------------------- 2007 2006 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m % % Analysed between: - Principal bancassurance channels 1,016 942 8,281 7,737 397 369 4.8% 4.8% - Other distribution channels 2,920 2,316 23,319 18,115 777 523 3.3% 2.9% --------------------------------------------------------------------------------------------------------------------- Total 3,936 3,258 31,600 25,852 1,174 892 3.7% 3.5% ===================================================================================================================== (ii) After the effect of required capital, tax and minority interest Annual premium Present value of new New business equivalent business premiums contribution New business margin ----------------------- ----------------------- ----------------------- ----------------------- 2007 2006 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m % % Analysed between: - Principal bancassurance channels 590 553 4,730 4,465 133 121 2.8% 2.7% - Other distribution channels 2,839 2,252 22,674 17,607 396 255 1.7% 1.4% -------------------------------------------------------------------------------------------------------------------- Total 3,429 2,805 27,404 22,072 529 376 1.9% 1.7% ==================================================================================================================== (c)Post-tax internal rate of return on life and pensions new business The internal rate of return (IRR) on life and pensions new business for the Group was 14.1% for 2007 (2006: 12.6%). The internal rate of return is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the life time of the business written, including allowance for the time value of options and guarantees, is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is the initial capital required to pay acquisition costs and set up statutory reserves in excess of premiums received ('initial capital'), plus required capital at the same level as for the calculation of new business contribution post cost of capital. 2007 -------------------------------------------------------------------------------------------------------------------- Internal rate of Initial Required Total invested return capital capital capital % Â£m Â£m Â£m United Kingdom 13% 275 138 413 France 13% 30 108 138 Ireland 10% 66 27 93 Italy 17% 6 48 54 Netherlands (including Belgium and Germany) 8% 68 144 212 Poland 22% 20 10 30 Spain 32% 22 73 95 Other Europe 12% 50 4 54 Europe 14% 262 414 676 North America 14% 103 224 327 Asia Pacific 20% 46 34 80 -------------------------------------------------------------------------------------------------------------------- Total 14% 686 810 1,496 ==================================================================================================================== The total initial capital for life and pensions new business for 2007 of Â£686 million (2006: Â£633 million) shown above is expressed at the point of sale. Hence it is higher than the impact of writing that new business on net worth of Â£649 million (2006: Â£602 million) shown on page 31, because the latter amount includes expected profits from the point of sale to the end of the reporting year, partly offset by the cost of holding the initial capital. ----------------------------------------------------------------------------------------------------------------------- Page 29 4. Geographical analysis of the components of life EEV operating return 2007 Â£m Ire Nether Other North Aust Asia UK France -land Italy -lands Poland Spain Europe Europe America Asia -ralia Pacific Total New business contribution (after the effect of required capital) 305 117 25 61 53 32 173 (5) 456 108 27 16 43 912 Profit from existing business - expected return 538 163 45 37 192 62 65 16 580 114 13 21 34 1,266 - experience variances: Maintenance expense 10 4 (4) (2) (3) 3 (1) (5) (8) (2) (1) - (1) (1) Project and other related expenses* (90) 9 (3) - (19) - (2) (8) (23) (17) (2) (3) (5) (135) Mortality /Morbidity** 14 27 (1) 1 7 14 (4) 3 47 (3) 8 3 11 69 Lapses*** (5) 10 3 (6) (9) 23 (9) 3 15 - (4) (1) (5) 5 Other^ 26 3 (5) 7 (3) 9 10 (3) 18 (1) - 3 3 46 ----------------------------------------------------------------------------------------------------------------------- (45) 53 (10) - (27) 49 (6) (10) 49 (23) 1 2 3 (16) - operating assumption changes: Maintenance expenses^^ 7 2 (1) (2) - 5 - (8) (4) (30) 1 - 1 (26) Project and other related expenses (2) (1) - - (7) - - (9) (17) - - - - (19) Mortality /Morbidity^^^ (133) (2) - 3 (31) 14 (8) (1) (25) - (1) 4 3 (155) Lapses# (6) - - (2) 2 35 (16) 4 23 (8) (4) (2) (6) 3 Other## 108 122 - 7 12 - 16 5 162 42 - (1) (1) 311 ----------------------------------------------------------------------------------------------------------------------- (26) 121 (1) 6 (24) 54 (8) (9) 139 4 (4) 1 (3) 114 Expected return on shareholders' net worth 92 83 18 33 158 9 15 3 319 52 6 8 14 477 ----------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 864 537 77 137 352 206 239 (5) 1,543 255 43 48 91 2,753 ======================================================================================================================= * 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 businesses. In the USA, expenses reflect a number of one-off expenses including management incentive rewards, brand awareness and investment in strategic systems. ** Mortality experience continues to be better than the assumptions set across a number of our businesses. *** Lapse experience in Poland continues to be better than the long-term assumptions set for both Life and Pension products. ^ In the UK, other experience profits include better than assumed default experience on corporate bonds and commercial mortgages. ^^ In the USA, expense assumptions have been strengthened following investment to support the growth in the business. ^^^ In the UK, the allowance for annuitant mortality improvement has been strengthened, by increasing the minimum rates of improvement. # In Poland lapse assumptions have been changed following continued favourable experience. In Spain, lapse assumptions have been strengthened mainly on risk products. ## In the UK, other operating assumption changes include the reduction in the level of required capital assumed on the company's annuity portfolio. In France, other operating assumption changes reflect increased profitability driven by product development and the increased proportion of unit-linked assets within managed funds, In the USA, other assumption changes relate to the implementation of the AXXX securitisation, an efficient financing solution to free up capital previously held to support excessive regulatory reserves. ----------------------------------------------------------------------------------------------------------------------- Page 30 4. Geographical analysis of the components of life EEV operating return (continued) 2006 Â£m Ire Nether Other North Aust Asia UK France -land Italy -lands Poland Spain Europe Europe America Asia -ralia Pacific Total ----------------------------------------------------------------------------------------------------------------------- New business contribution (after the effect of required capital) 263 110 9 50 25 25 168 (6) 381 8 22 9 31 683 Profit from existing business - expected return 474 142 41 26 158 52 53 9 481 29 10 17 27 1,011 - experience variances: Maintenance expense 13 9 4 (1) (11) 5 (2) (2) 2 - - (2) (2) 13 Project and other related expenses* (149) 1 (4) - (23) - (1) (2) (29) - - - - (178) Mortality /Morbidity** (13) 33 (2) 4 3 16 1 2 57 - 8 7 15 59 Lapses*** (66) 8 (9) (8) 2 21 (1) (2) 11 (9) (6) 3 (3) (67) Other^ 75 20 (9) 6 20 3 11 (1) 50 (2) (2) 2 - 123 ----------------------------------------------------------------------------------------------------------------------- (140) 71 (20) 1 (9) 45 8 (5) 91 (11) - 10 10 (50) - operating assumption changes: Maintenance expenses^^ 58 - (3) - 60 (3) - (11) 43 (12) (1) (5) (6) 83 Project and other related expenses^^^ (46) (2) (22) - (9) - - (3) (36) - - - - (82) Mortality /Morbidity# 57 45 (13) - - 17 - (1) 48 3 4 7 11 119 Lapses## (224) (41) (47) - (14) 17 (21) (1) (107) - - 2 2 (329) Other### 215 9 - 2 19 1 2 3 36 - (1) 3 2 253 ----------------------------------------------------------------------------------------------------------------------- 60 11 (85) 2 56 32 (19) (13) (16) (9) 2 7 9 44 Expected return on shareholders' net worth 87 68 15 31 99 8 11 2 234 15 3 6 9 345 ----------------------------------------------------------------------------------------------------------------------- Life EEV operating return before tax 744 402 (40) 110 329 162 221 (13) 1,171 32 37 49 86 2,033 ======================================================================================================================= * Project and other related expenses in the UK reflect Â£32 million relating to the ongoing transformation of the life business and Â£117 million of other exceptional and project costs associated with strategic initiatives, including developments designed to improve the future new business volumes, and regulatory changes. In the Netherlands, these expenses reflect higher project costs compared to allowances as well as the payment to ABN AMRO in respect of the joint venture operations. ** Mortality experience continues to be better than the assumptions set across many of our businesses. *** Lapse experience in the UK has been worse than assumed and primarily relates to bonds and pensions. In Poland, lapses for both life and pension products have been lower than assumed resulting in the favourable experience variance. ^ In the UK, other experience profits include better than assumed default experience on corporate bonds and mortgages , and the benefit of higher than expected performance fees in Morley. ^^ Maintenance expenses in the UK relate to Morley's change in profit margin. The change in Delta Lloyd is also driven by improved asset management profitability. The adverse movement in North America is due to a reassessment of expenses in our Boston-based operations. ^^^ In the UK, exceptional expenses relate to short-term project costs and capitalisation of reorganisation costs. Ireland reflects changes in expense assumptions regarding the future attribution of investment income and expenses between policyholders and shareholders. # The change in mortality assumptions in the UK includes an alignment in the basis for internal business. Mortality assumptions in France were changed following improvements in mortality experience over the last few years. ## In the UK, the lapse assumption change relates to bonds and pension business while the change in Ireland relates to the Celebration Bond and unit-linked bonds. In France, lapse assumptions have been changed for non-AFER business in Aviva Vie. In Spain, lapse assumptions have been changed for risk business and some savings products. ### In the UK, the assumption changes reflect the beneficial impact of the with-profit funds sharing the pension scheme deficit funding (Â£126 million) and the impact of PS06/14, primarily in reducing the non-profit reserves (Â£50 million). In Delta Lloyd the impact is due to changes to management fee rebates. ----------------------------------------------------------------------------------------------------------------------- Page 31 5. Analysis of movement in life and related businesses embedded value The following tables provide an analysis of the movement in embedded value for the life and related businesses for 2007 and 2006. The analysis is shown separately for net worth and the value of in-force covered business, and includes amounts transferred between these categories. The transfer to life and related businesses from other segments consists of service company profits and losses during the reported year 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. 2007 ---------------------------------- Net Value of worth in-force Total Â£m Â£m Â£m Embedded value at the beginning of the year - Free surplus 3,569 - Required capital* 5,314 Total 8,883 9,215 18,098 ----------------------------------------------------------------------------------------------------------------------- New business contribution (after the effect of required capital) (649) 1,285 636 Expected return on existing business - return on VIF - 892 892 Expected return on existing business - transfer to net worth 1,216 (1,216) - Experience variances and operating assumption changes 342 (270) 72 Expected return on shareholders' net worth 334 - 334 Investment return variances and economic assumption changes 539 (473) 66 ----------------------------------------------------------------------------------------------------------------------- Life EEV return after tax 1,782 218 2,000 Exchange rate movements 572 402 974 Embedded value of business acquired 84 26 110 Net amounts released from life and related businesses (795) - (795) Transfer from life and related businesses to other segments (68) - (68) ----------------------------------------------------------------------------------------------------------------------- Embedded value at the end of the year - Free surplus 4,127 - Required capital* 6,331 Total 10,458 9,861 20,319 ======================================================================================================================= * Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. The embedded value of business acquired in the twelve months to 31 December 2007 of Â£110 million represents the embedded value of Hamilton Life Assurance Company Limited, Area Life International Assurance Limited and Erasmus Groep BV, Caja de Ahorros De Murcia, Aviva SA Emeklilik ve Hayat A.S, CIMB Aviva Takaful Berhad, CIMB Aviva Assurance Berhad and First Aviva Life Assurance Co., Ltd. Required capital has increased in the period by Â£1,017 million. The movement comprises an increase of Â£810 million in relation to new business written, a reduction of Â£372 million regarding in-force business, an increase of Â£197 million due to a reduction in implicit items, Â£46 million additional in-force required capital relating to the acquisitions during the period and a Â£336 million increase due to foreign exchange rate movements. The decrease in the in-force business required capital includes the impact of the higher solvency margin required for certain unit-linked business, following clarification by the French regulator to the industry and the reduction in the level of required capital for UK annuities. 2006 ---------------------------------- Net Value of worth in-force Total Â£m Â£m Â£m Embedded value at the beginning of the year - Free surplus 2,772 - Required capital* 4,448 Total 7,220 7,893 15,113 ----------------------------------------------------------------------------------------------------------------------- New business contribution (after the effect of required capital) (602) 1,071 469 Expected return on existing business - return on VIF - 710 710 Expected return on existing business - transfer to net worth 1,023 (1,023) - Experience variances and operating assumption changes 400 (415) (15) Expected return on shareholders' net worth 239 - 239 Investment return variances and economic assumption changes 355 340 695 ---------------------------------------------------------------------------------------------------------------------- Life EEV return after tax 1,415 683 2,098 Exchange rate movements (189) (120) (309) Embedded value of business acquired 675 759 1,434 Net amounts released from life and related businesses (253) - (253) Transfer to life and related businesses from other segments 113 - 113 UK pension fund deficit borne by UK with-profit funds transferred to analysis of net assets on an EEV basis** (98) - (98) ----------------------------------------------------------------------------------------------------------------------- Embedded value at the end of the year - Free surplus 3,569 - Required capital* 5,314 Total 8,883 9,215 18,098 ======================================================================================================================= * Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. ** The impact of the operating assumption change reflecting the UK with-profits funds contribution to the UK pension scheme deficit funding has been removed from the Life EEV analysis as the pension fund deficit notionally allocated to long-term business net assets on an EEV basis is net of the proportion of funding borne by the UK with-profit funds. ----------------------------------------------------------------------------------------------------------------------- Page 32 6. Segmental analysis of life and related businesses embedded value Value of in-force 2007 Net worth covered business Total ----------------- -------------------- --------------- Present Cost of Required Free value of required capital* surplus in-force capital Embedded value Â£m Â£m Â£m Â£m Â£m United Kingdom 1,307 1,338 4,816 (355) 7,106 France 1,510 74 1,416 (340) 2,660 Ireland 267 213 564 (45) 999 Italy 305 464 299 (61) 1,007 Netherlands (including Belgium and Germany) 1,456 1,557 1,605 (442) 4,176 Poland 129 128 726 (41) 942 Spain 316 87 714 (69) 1,048 Other Europe 24 33 110 (11) 156 Europe 4,007 2,556 5,434 (1,009) 10,988 North America** 776 46 918 (152) 1,588 Asia Pacific 241 187 281 (72) 637 ----------------------------------------------------------------------------------------------------------------------- Total 6,331 4,127 11,449 (1,588) 20,319 ======================================================================================================================- * Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. ** AmerUs holding company debt amounting to Â£349 million at 31 December 2007 (2006: Â£362 million) has been included within other operations. Value of in-force 2006 Net worth covered business Total ------------------ ------------------- -------------- Present Cost of Required Free value of required capital* surplus in-force capital Embedded value Â£m Â£m Â£m Â£m Â£m United Kingdom 1,334 641 5,103 (442) 6,636 France 1,143 250 1,142 (244) 2,291 Ireland 254 143 535 (40) 892 Italy 320 329 206 (63) 792 Netherlands (including Belgium and Germany) 1,067 1,701 1,461 (362) 3,867 Poland 105 107 540 (33) 719 Spain 273 37 606 (59) 857 Other Europe 18 25 75 (12) 106 Europe 3,180 2,592 4,565 (813) 9,524 North America 618 211 794 (145) 1,478 Asia Pacific 182 125 204 (51) 460 ----------------------------------------------------------------------------------------------------------------------- Total 5,314 3,569 10,666 (1,451) 18,098 ======================================================================================================================= * Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins. The shareholders' net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in the non-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets. Required capital, net of implicit items, is included within the net worth. The value of in-force covered business includes 'cost of required capital' - the effect of holding shareholders' capital to support the level of required capital and allowing for projected future releases. ----------------------------------------------------------------------------------------------------------------------- Page 33 7. Time value of options and guarantees The following table sets out the time value of options and guarantees relating to covered business by territory. 2007 2006 ------- ------- Â£m Â£m United Kingdom 50 50 France 89 77 Ireland 2 2 Italy 22 17 Netherlands (including Belgium and Germany) 129 146 Poland 4 4 Spain 4 4 Other Europe 1 - Europe 251 250 North America 85 68 Asia Pacific 6 4 ----------------------------------------------------------------------------------------------------------------------- Total 392 372 ======================================================================================================================= The time value of options and guarantees (TVOG) is most significant in the United Kingdom, France, the Netherlands and the United States. In the United Kingdom, this relates mainly to non-market value adjustment (MVA) guarantees on unitised with-profit business and guaranteed annuity rates. In France, this relates mainly to guaranteed crediting rates and surrender values on traditional business including the AFER fund. In the Netherlands, this relates mainly to maturity guarantees on unit-linked products and interest rate guarantees on traditional individual and group profit sharing business. In the United States, this relates to crediting rate, death benefit and surrender guarantees on life business. The TVOG has increased by Â£20 million to Â£392 million reflecting the impact of adverse investment variances. 8.Analysis of service companies and fund management businesses within embedded value The EEV methodology incorporates the impact of profits and losses arising from subsidiary undertakings providing administration, investment management and other services where these arise in relation to covered business. The principal subsidiaries of the Aviva group providing such services include NU Life Services Limited (UK), Morley (UK) and Aviva Gestion d'Actifs (France). The following table provides an analysis of the elements within the life and other related business embedded value: 2007 2006 --------------------------------- ---------- Fund Other management operations Total Total Â£m Â£m Â£m Â£m United Kingdom 148 (146) 2 (28) France 143 26 169 71 Netherlands 92 (59) 33 7 Other 27 8 35 30 ----------------------------------------------------------------------------------------------------------------------- Total 410 (171) 239 80 ======================================================================================================================= The 'look-through' value attributable to fund management is based on the level of after-tax profits expected to be earned in the future over the outstanding term of the covered business in respect of services provided to the Group's life operations. The EEV basis income statement excludes the actual statutory basis profits arising from the provision of fund management services to the Group's life businesses. The EEV income statement records the experience profit or loss compared to the assumed profitability, the return on the in-force value arising from the unwind at the relevant risk discount rate and the effect on the in-force value of changes to economic assumptions. NU Life Services Limited (NULS) is the main provider of administration services to the UK Life business. NULS incurs substantially all of the UK businesses 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 Agreements (MSAs) which will be reviewed in 2008. The EEV principles 'look-through' the contractual terms of the MSA to the underlying expenses of NULS. Accordingly the actual maintenance expenses and a 'normal' annual level of project expense allowances have been applied to the product companies. Under EEV, any further one-off project expenditure is reported as experience losses when incurred. ----------------------------------------------------------------------------------------------------------------------- Page 34 9.Geographical analysis of fund management operating profit The summarised consolidated income statement - EEV basis, includes profit from the Group's fund management operations as analysed below. As explained in note 8, this excludes the proportion of the results of Morley's fund management businesses, of our French asset management operation Aviva Gestion d'Actifs (AGA) and other fund management operations within the Group that arises from the provision of fund management services to our Life businesses. These results are included within the Life EEV operating return. 2007 2006 Â£m Â£m UK business 40 35 International business 11 9 ---------------------------------------------------------------------------------------------------------------------- Morley 51 44 Royal Bank of Scotland (9) (7) Norwich Union investment funds (1) 1 ----------------------------------------------------------------------------------------------------------------------- United Kingdom 41 38 France 10 10 Netherlands 17 33 Other Europe 4 3 ----------------------------------------------------------------------------------------------------------------------- Europe 31 46 North America 3 3 Asia Pacific 15 9 ---------------------------------------------------------------------------------------------------------------------- Total 90 96 ======================================================================================================================= 10. Analysis of other operations and regional costs The summarised consolidated income statement - EEV basis, includes the results of the Group's other operations as analysed below. Where subsidiaries provide services to our life business, that proportion has been excluded. These results are included within the life EEV operating return. 2007 2006 Â£m Â£m United Kingdom (8) 36 Europe (45) (53) North America (4) - Asia Pacific (13) (6) ----------------------------------------------------------------------------------------------------------------------- Total (70) (23) ======================================================================================================================= ----------------------------------------------------------------------------------------------------------------------- Page 35 11. Summary of minority interest in life and related businesses' EEV results* 2007 Â£m Nether Asia Shareholder France Ireland Italy -lands Poland Spain Europe Pacific Total interest Group Minority Interest New business contribution before effect of required capital 25 6 48 6 4 103 192 1 193 981 1,174 Effect of required capital (11) (1) (13) (3) - (9) (37) - (37) (225) (262) ----------------------------------------------------------------------------------------------------------------------- New business contribution after effect of required capital 14 5 35 3 4 94 155 1 156 756 912 -====================================================================================================================== Life EEV operating return before tax 43 20 75 21 25 124 308 3 311 2,442 2,753 ======================================================================================================================= Life EEV return after tax 23 15 76 8 23 75 220 2 222 1,778 2,000 ----------------------------------------------------------------------------------------------------------------------- Closing life and related businesses' embedded value 214 243 532 127 119 473 1,708 11 1,719 18,600 20,319 ======================================================================================================================= 2006 Â£m Nether Asia Shareholder France Ireland Italy -lands Poland Spain Europe Pacific Total interest Group Minority interest New business contribution before effect of required capital 24 3 41 9 4 93 174 1 175 717 892 Effect of required capital (9) (2) (12) (2) (1) (7) (33) - (33) (176) (209) ----------------------------------------------------------------------------------------------------------------------- New business contribution after effect of required capital 15 1 29 7 3 86 141 1 142 541 683 -====================================================================================================================== Life EEV operating return before tax 33 (11) 60 30 25 108 245 2 247 1,786 2,033 -====================================================================================================================== Life EEV return after tax 16 (7) 46 22 24 79 180 4 184 1,914 2,098 ======================================================================================================================= Closing life and related businesses' embedded value 162 216 413 102 118 366 1,377 10 1,387 16,711 18,098 ======================================================================================================================= * There are no minorities in the United Kingdom or North America. ----------------------------------------------------------------------------------------------------------------------- Page 36 12. Principal economic assumptions (a) Deterministic calculations Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting year. The same margins are applied on a consistent basis across the Group to gross risk-free yields to obtain investment return assumptions for ordinary shares and property and to produce risk discount rates. Additional country- specific risk margins are applied to smaller businesses to reflect additional economic, political and business-specific risk, which result in the application of risk margins ranging from 3.7% to 8.7% in our eastern European and Asian business operations. Expense inflation is derived as a fixed margin above a local measure of long-term price inflation. Risk free rates and price inflation have been harmonised across territories within the Euro currency zone, except for expense inflation in Ireland where significant differences remain. Required capital is shown as a multiple of the EU statutory minimum solvency margin or equivalent. Investment return assumptions are generally derived by major product class, based on hypothecating the assets at the valuation date. Future assumed reinvestment rates are consistent with implied market returns at 31 December 2007. Rates have been derived using rates from the current yield curve at a duration based on the term of the liabilities, or directly from forward yield curves where considered appropriate. Assumptions about future investment mix are consistent with long-term plans. In most cases, the investment mix is assumed to continue unchanged throughout the projection period. The changes in assumptions between reporting dates reflect the actual movements in risk free yields in the United Kingdom, the Eurozone and other territories. The principal economic assumptions used are as follows: United Kingdom France ------------------------------------ ------------------------------------- 2007 2006 2005 2007 2006 2005 Risk discount rate 7.3% 7.3% 6.8% 7.1% 6.7% 6.0% Pre-tax investment returns: Base government fixed interest 4.6% 4.6% 4.1% 4.4% 4.0% 3.3% Ordinary shares 7.6% 7.6% 7.1% 7.4% 7.0% 6.3% Property 6.6% 6.6% 6.1% 6.4% 6.0% 5.3% Future expense inflation 3.5% 3.4% 3.2% 2.5% 2.5% 2.5% Tax rate 28.0% 30.0% 30.0% 34.4% 34.4% 34.4% Required Capital (% EU minimum) 100% 150%/100% 150%/100% 115% 115% 115% ----------------------------------------------------------------------------------------------------------------------- Ireland Italy ---------------------------------- ------------------------------------- 2007 2006 2005 2007 2006 2005 Risk discount rate 7.1% 6.7% 6.0% 7.1% 6.7% 6.0% Pre-tax investment returns: Base government fixed interest 4.4% 4.0% 3.3% 4.4% 4.0% 3.3% Ordinary shares 7.4% 7.0% 6.3% 7.4% 7.0% 6.3% Property 6.4% 6.0% 5.3% 6.4% 6.0% 5.3% Future expense inflation 4.0% 4.0% 4.0% 2.5% 2.5% 2.5% Tax rate 12.5% 12.5% 12.5% 32.4% 38.3% 38.3% Required Capital (% EU minimum) 150% 150% 150% 115% 115% 115% ---------------------------------------------------------------------------------------------------------------------- Netherlands Poland ------------------------------------ ------------------------------------- 2007 2006 2005 2007 2006 2005 Risk discount rate 7.1% 6.7% 6.0% 9.4% 8.7% 8.6% Pre-tax investment returns: Base government fixed interest 4.4% 4.0% 3.3% 5.7% 5.0% 4.9% Ordinary shares 7.4% 7.0% 6.3% 8.7% 8.0% 7.9% Property 6.4% 6.0% 5.3% n/a n/a n/a Future expense inflation 2.5% 2.5% 2.5% 4.1% 3.4% 3.3% Tax rate 25.5% 25.5% 29.1% 19.0% 19.0% 19.0% Required Capital (% EU minimum) 150% 150% 150% 150% 150% 150% ----------------------------------------------------------------------------------------------------------------------- Spain United States ------------------------------------ ------------------------------------- 2007 2006 2005 2007 2006* 2005 Risk discount rate 7.1% 6.7% 6.0% 6.7% 7.4% 7.2% Pre-tax investment returns: Base government fixed interest 4.4% 4.0% 3.3% 4.0% 4.7% 4.5% Ordinary shares 7.4% 7.0% 6.3% 7.0% 7.7% n/a Property 6.4% 6.0% 5.3% n/a n/a n/a Future expense inflation 2.5% 2.5% 2.5% 3.0% 3.0% 3.0% Tax rate 30.0% 30.0% 35.0% 35.0% 35.0% 35.0% Required Capital (% EU minimum, or equivalent) 125%/110% 125%/110% 125%/110% 250% 250% 200% ----------------------------------------------------------------------------------------------------------------------- * The principal economic assumptions used for AmerUs Group Co. at the date of acquisition were as follows: risk discount rate of 7.2%, pre-tax investment returns of 4.6% for base government fixed interest and required capital of 250%. For service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company. Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for credit risk. Following the change made to the required capital in Norwich Union Annuity Limited (NUA), required capital in the United Kingdom is now 100%. Required capital in Spain is 125% EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies. The level of required capital for the US business is 250% of the risk based capital, at the company action level, set by the National Association of Insurance Commissioners. The required capital is equivalent to 5% of the insurance liabilities on a local regulatory basis which is broadly equivalent to the required capital we hold for our main European businesses. ----------------------------------------------------------------------------------------------------------------------- Page 37 12. Principal economic assumptions (continued) Other economic assumptions Required capital relating to with-profit business is assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders. Bonus rates on participating business have been set at levels consistent with the economic assumptions and Aviva's medium-term bonus plans. The distribution of profit between policyholders and shareholders within the with-profit funds assumes that the shareholder interest in conventional with-profit business in the United Kingdom and Ireland continues at the current rate of one ninth of the cost of bonus. (b)Stochastic calculations The time value of options and guarantees calculation allows for expected management and policyholder actions in response to varying future investment conditions. The management actions modelled include changes to asset mix and bonus rates. Modelled policyholder actions are described under 'Other assumptions'. This section describes the models used to generate future investment simulations and gives some sample statistics for the simulations used. Two separate models have been used, for the UK businesses and for International businesses, to better reflect the characteristics of the businesses. United Kingdom Model Overall asset returns have been generated assuming that the portfolio total return has a lognormal distribution. The mean and standard deviation of the overall asset return have been calculated using the evolving asset mix of the fund and assumptions over the mean and standard deviation of each asset class, together with the correlations between them. Asset Classes The significant asset classes for UK participating business are equities, property and long-term fixed rate bonds. The most significant assumption is the distribution of future long-term interest rates, since this is the most important factor in the cost of guaranteed annuity options. Summary Statistics The following table sets out the mean and standard deviations (StDev) of future returns at 31 December 2007 for the three most significant asset classes. Interest rates are assumed to have a lognormal distribution with an annualised standard deviation of 11.5% p.a. for the natural logarithm of the interest rate. Mean* StDev** ---------------------------------------------------------------------------------------------------------------------- Equities 7.6% 20% Property 6.6% 15% Government Bonds 4.6% 3.25-4.5%*** * Means have been calculated by accumulating a unit investment for the required number of years in each simulation, averaging the accumulation across all simulations, and converting the result to an equivalent annual rate (by taking the nth root of the average accumulation minus one). ** Standard deviations have been calculated by accumulating a unit investment for the required number of years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by the projection period (n years) and taking the square root. This makes the result comparable to implied volatilities quoted in investment markets. *** Depending on the duration of the portfolio. For the UK, the statistics are the same over all projection horizons. Assumptions are also required for correlations between asset classes. These have been set based on an assessment of historical data. Returns for corporate fixed interest investments in each scenario are equal to the return on Government bonds plus a fixed additional amount, based on current spreads less a margin for credit risk. International Model Government nominal interest rates are generated by a model that projects a full yield curve at annual intervals. The model assumes that the logarithm of the short rate follows a mean reverting process subject to two normally distributed random shocks. This ensures that nominal interest rates are always positive, the distribution of future interest rates remains credible, and the model can be calibrated to give a good fit to the initial yield curve. The total annual return on equities is calculated as the return on one year bonds plus an excess return. The excess return is assumed to have a lognormal distribution. The model also generates property total returns and real yield curves, although these are not significant asset classes for Aviva outside the UK. Asset Classes The most important assets are fixed rate bonds of various durations. In some businesses equities are also an important asset class. Summary Statistics The following table sets out the means and standard deviations of future euro and US dollar returns at 31 December 2007 for the three most significant asset classes: equities (in the case of euro), short-term bonds (defined to be of one year duration) and long-term bonds (defined to be 10 year zero coupon bonds). In the accumulation of 10 year bonds, it is assumed that these are held for one year, sold as nine year bonds then the proceeds are reinvested in 10 year bonds, although in practice businesses follow more complex asset strategies or tend to adopt a buy and hold strategy. Correlations between asset classes have been set using the same approach as described for the United Kingdom. ----------------------------------------------------------------------------------------------------------------------- Page 38 12. Principal economic assumptions (continued) (b) Stochastic calculations (continued) 5 - year return 10 - year return 20 - year return -------------------------------------------------------------------------------------------------------------------- Mean* StDev** Mean* StDev** Mean* StDev** -------------------------------------------------------------------------------------------------------------------- Euro Short Government Bonds 4.0% 1.9% 4.1% 3.7% 4.4% 6.6% Long Government Bonds 4.7% 4.8% 4.7% 3.6% 4.7% 3.9% Equities 7.3% 19.5% 7.3% 19.2% 7.3% 19.2% US dollar Short Government Bonds 3.4% 1.7% 3.9% 3.7% 4.3% 6.6% Long Government Bonds 4.2% 4.9% 4.6% 3.6% 4.8% 4.1% * 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 one). ** Standard deviations have been calculated by accumulating a unit investment for the required number of years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by the projection period (n years) and taking the square root. This makes the result comparable to implied volatilities quoted in investment markets. (c) Other assumptions Taxation Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have been announced. Demographic assumptions Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva's recent operating experience. Where appropriate, surrender and option take up rate assumptions that vary according to the investment scenario under consideration have been used in the calculation of the time value of options and guarantees, based on our assessment of likely policyholder behaviour in different investment scenarios. Expense assumptions Management expenses and operating expenses of holding companies attributed to life and related businesses have been included in the EEV calculations and split between expenses relating to the acquisition of new business, the maintenance of business in-force and project expenses. Future expense assumptions include an allowance for maintenance expenses and a proportion of recurring project expenses. Certain expenses of an exceptional nature, when they occur, are identified separately and are generally charged as incurred. No future productivity gains have been anticipated. Where subsidiary companies provide administration, investment management or other services to businesses included in the European Embedded Value calculations, the value of profits or losses arising from these services have been included in the embedded value and new business contribution. Valuation of debt Borrowings in the EEV consolidated balance sheet are valued on an IFRS basis, consistent with the primary financial statements. At 31 December 2007 the market value of the Group's external debt, subordinated debt, preference shares including General Accident plc preference shares of Â£250 million (classified as minority interests) and direct capital Instrument was Â£5,774 million (2006: Â£5,991 million). 2007 2006 Â£m Â£m Borrowings per summarised consolidated balance sheet - EEV basis 12,657 12,137 Add: amount included within held for sale 12 - Less: Securitised mortgage funding (7,295) (7,068) ----------------------------------------------------------------------------------------------------------------------- Borrowings excluding non-recourse funding - EEV basis 5,374 5,069 Less: Operational financing by businesses (1,063) (874) ----------------------------------------------------------------------------------------------------------------------- External debt and subordinated debt - EEV basis 4,311 4,195 Add: Preference shares (including General Accident plc) and direct capital instrument 1,440 1,440 ----------------------------------------------------------------------------------------------------------------------- External debt, subordinated debt, preference shares and direct capital instrument - EEV basis 5,751 5,635 Effect of marking these instruments to market 23 356 ----------------------------------------------------------------------------------------------------------------------- Market value of external debt, subordinated debt, preference shares and direct capital instrument 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 39 13.Sensitivity analysis (a)Economic assumptions The following tables show the sensitivity of the embedded value as at 31 December 2007 and the new business contribution before the effect of required capital for 2007 to: â€¢ one percentage point increase and decrease in discount rates; â€¢ one percentage point increase and decrease in interest rates, including all consequential changes (including assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates); â€¢ one percentage point increase and decrease in the assumed investment returns for equity and property investments, excluding any consequential changes to the risk discount rate; â€¢ 10% rise and fall in market value of equity and property assets (not applicable for new business contribution); and â€¢ decrease in the level of required capital to 100% EU minimum (or equivalent) (not applicable for new business contribution). In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns. Some of the sensitivity scenarios may have consequential effects on valuation bases, where the basis for certain blocks of business is actively updated to reflect current economic circumstances. Consequential valuation impacts on the sensitivities are allowed for where an active valuation basis is used. Where businesses have a target asset mix, the portfolio is re-balanced after a significant market movement otherwise no re-balancing is assumed. Embedded value As reported on 1% increase in 1% decrease in 1% increase in 1% decrease in (net of tax) page 31 discount rates discount rates interest rates interest rates 31 December 2007 Â£m Â£m Â£m Â£m Â£m United Kingdom 7,106 (465) 540 (390) 460 France 2,660 (170) 195 (150) 135 Ireland 999 (40) 45 (40) 50 Italy 1,007 (25) 30 (55) (35) Netherlands (including Belgium and Germany) 4,176 (205) 245 5 (220) Poland 942 (50) 55 (20) 20 Spain 1,048 (50) 60 (30) 30 Other Europe 156 (5) 5 - - Europe 10,988 (545) 635 (290) (20) North America 1,588 (85) 95 (165) 160 Asia Pacific 637 (20) 25 (10) 5 ----------------------------------------------------------------------------------------------------------------------- Total 20,319 (1,115) 1,295 (855) 605 ======================================================================================================================= Embedded value As reported 1% increase in 1% decrease in 10% rise in 10% fall in EU minimum (net of tax) on page 31 equity /property equity/property equity /property equity /property capital 31 December returns returns market values market values (or equivalent) 2007 Â£m Â£m Â£m Â£m Â£m Â£m United Kingdom 7,106 225 (225) 435 (445) - France 2,660 100 (95) 130 (135) 55 Ireland 999 15 (15) 30 (30) 15 Italy 1,007 5 (5) 15 (25) 10 Netherlands(including Belgium and Germany) 4,176 265 (275) 475 (470) 125 Poland 942 10 (15) 20 (20) 15 Spain 1,048 10 (10) 15 (15) 5 Other Europe 156 - - - (5) - Europe 10,988 405 (415) 685 (700) 225 North America 1,588 15 (20) - - 90 Asia Pacific 637 5 (5) 10 (10) 10 ----------------------------------------------------------------------------------------------------------------------- Total 20,319 650 (665) 1,130 (1,155) 325 ======================================================================================================================= ----------------------------------------------------------------------------------------------------------------------- Page 40 13. Sensitivity analysis (continued) (a) Economic assumptions (continued) In general, the magnitude of the sensitivities will reflect the size of the embedded values, though this will vary as the sensitivities have different impacts on the different components of the embedded value. In addition, other factors can have a material impact, such as the nature of the options and guarantees, as well as the types of investments held. The interest rate sensitivity will vary significantly by territory, depending on the type of business written: for example, where non-profit business is well matched by backing assets, the favourable impact of reducing the risk discount rate is the dominant factor. Sensitivities will also vary according to the current economic assumptions, mainly due to the impact of changes to both the intrinsic cost and time value of options and guarantees. Options and guarantees are the main reason for the asymmetry of the sensitivities where the guarantee impacts to different extents under the different scenarios. This can be seen in the sensitivity of a 1% movement in the interest rate for the Netherlands, where there is a significant amount of business with investment return guarantees. Sensitivities to a 1% movement in the equity/property return will only impact the value of the in-force covered business, whereas a 10% movement in equity/property values may impact both the net worth and the value of in-force, depending on the allocation of assets. New business contribution before required capital As reported on 1% increase in 1% decrease in 1% increase in 1% decrease in (gross of tax) page 26 discount rates discount rates interest rates interest rates 31 December 2007 Â£m Â£m Â£m Â£m Â£m United Kingdom 360 (53) 64 (17) 21 France 169 (15) 17 (2) - Ireland 30 (5) 6 (3) 4 Italy 82 (4) 4 - (3) Netherlands(including Belgium and Germany) 93 (27) 33 7 (21) Poland 35 (4) 4 (1) 1 Spain 189 (12) 14 (5) 5 Other Europe - - - 1 (1) Europe 598 (67) 78 (3) (15) North America 154 (11) 11 (15) 5 Asia Pacific 62 (6) 7 6 (7) ----------------------------------------------------------------------------------------------------------------------- Total 1,174 (137) 160 (29) 4 ======================================================================================================================= New business contribution before required capital As reported 1% increase in 1% decrease in (gross of tax) on page 26 equity /property returns equity/property returns 31 December 2007 Â£m Â£m Â£m United Kingdom 360 31 (31) France 169 8 (6) Ireland 30 3 (3) Italy 82 1 (1) Netherlands(including Belgium and Germany) 93 45 (45) Poland 35 1 (1) Spain 189 2 (2) Other Europe - - (1) Europe 598 60 (59) North America 154 7 (7) Asia Pacific 62 4 (3) ----------------------------------------------------------------------------------------------------------------------- Total 1,174 102 (100) ======================================================================================================================= ----------------------------------------------------------------------------------------------------------------------- Page 41 13. Sensitivity analysis (continued) (b) Non-economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2007 and the new business contribution before the effect of required capital for 2007 to the following changes in non-economic assumptions: â€¢ 10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of Â£10 pa would represent an expense assumption of Â£9pa). Where there is a 'look through' into service company expenses the fee charged by the service company is unchanged while the underlying expense decreases; â€¢ 10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% pa would represent a lapse rate of 4.5% pa); â€¢ 5% decrease in both mortality and morbidity rates disclosed separately for life assurance and annuity business. No future management actions are modelled in reaction to the changing non-economic assumptions. In each sensitivity calculation all other assumptions remain unchanged. No changes to valuation bases have been included. 5% decrease in 5% decrease in Embedded value 10% decrease in mortality/ mortality/ (net of tax) As reported maintenance 10% decrease in morbidity rates morbidity rates 31 December 2007 on page 31 expenses lapse rates -life assurance -annuity business Â£m Â£m Â£m Â£m Â£m United Kingdom 7,106 165 95 50 (140) France 2,660 40 40 25 (5) Ireland 999 15 25 5 (5) Italy 1,007 5 5 - - Netherlands (including Belgium and Germany) 4,176 95 15 20 (55) Poland 942 20 45 10 - Spain 1,048 15 50 15 (5) Other Europe 156 5 5 - - Europe 10,988 195 185 75 (70) North America 1,588 30 10 10 - Asia Pacific 637 10 10 10 - ----------------------------------------------------------------------------------------------------------------------- Total 20,319 400 300 145 (210) ======================================================================================================================= 5% decrease in 5% decrease in New business contribution 10% decrease in mortality/ mortality/ before required capital As reported maintenance 10% decrease in morbidity rates morbidity rates (grosss of tax) on page 26 expenses lapse rates -life assurance -annuity business 31 December 2007 Â£m Â£m Â£m Â£m Â£m United Kingdom 360 19 23 15 (11) France 169 5 8 4 - Ireland 30 2 6 1 - Italy 82 2 2 1 - Netherlands(including Belgium and Germany) 93 10 6 3 (14) Poland 35 2 4 2 - Spain 189 5 19 5 - Other Europe - 1 1 (1) - Europe 598 27 46 15 (14) North America 154 4 3 3 - Asia Pacific 62 6 5 3 - ----------------------------------------------------------------------------------------------------------------------- Total 1,174 56 77 36 (25) ======================================================================================================================= The demographic sensitivities shown above represent a standard change to the assumptions for all products. Different products will be more or less sensitive to the change and impacts may partially offset. ----------------------------------------------------------------------------------------------------------------------- End of part 2 of 5 ----------------------------------------------------------------------------------------------------------------------- This information is provided by RNS The company news service from the London Stock Exchange

Companies

Aviva (AV.)

Friday, 10th January 2025

COMPANIES COVERED:

SBRY CKN APH

Alliance Pharma jumps as takeover news announced and Clarkson advances on modest profit upgrade but Sainsbury continues slide as costs rise and non-food sales slow.

Full Archive

UK 100

Latest directors dealings

9 hours ago FRP Advisory Group
10 hours ago Marks Electrical Group
10 hours ago CLS Holdings
10 hours ago QinetiQ Group
10 hours ago Spectris

All directors dealings today