FY 2008 Part 2 of 5

RNS Number : 3472O

Aviva PLC

05 March 2009

 



Part 2 to 5

Page 1

IFRS Basis

Contents

IFRS Basis	1
Pro forma reconciliation of Group operating profit to profit before tax - IFRS basis	2
Earnings per share - IFRS operating profit basis	2
Earnings per share - IFRS basis	2
1.     Basis of preparation - IFRS	3
2.     Exchange rates	5
3.     Geographical analysis of long-term business IFRS operating profit	5
4.      Margin on assets	6
5.      Geographical analysis of fund management	9
6.      Analysis of general insurance and health	11
7.      Analysis of other operations and regional costs	15
8.      Corporate Centre	16
9.      Group debt costs and other interest	16
10.    Long-term business investment return variances and economic assumption changes	17
11.    Non-long-term business economic volatility	17
12.    Impairment of goodwill	18
13.    Integration and restructuring costs	18
14.    Exceptional items	18
Appendix D contains the following detailed disclosures:
D1 - Consolidated income statement	108
D2 - Consolidated statement of recognised income and expense	109
D3 - Reconciliation of movements in consolidated shareholders' equity	109
D4 - Consolidated balance sheet	110
D5 - Consolidated cash flow statement	111
D6 - Subsidiaries	112
D7 - Segmental information	119
D8 - Tax	128
D9 - Earnings per share	130
D10 - Dividends and appropriations	131
D11 - Insurance liabilities	132
D12 - Liability for investment contracts	136
D13 - Reinsurance assets	137
D14 - Effect of changes in assumptions and estimates during the period	139
D15 - Unallocated divisible surplus	140
D16 - Pension Schemes	140
D17 - Borrowings	142
D19 - Risk management	143
D18 - Related parties	148

Page 2 

Pro forma reconciliation of group operating profit to profit before tax - IFRS basis 

2008 €m			2008 £m	Restated 2007 £m
		Operating profit before tax attributable to shareholders' profits
2,118		Long-term business (note 3)	1,694	1,610
154		Fund management (note 5)	123	179
1,498		General insurance and health (note 6)	1,198	1,021
		Other:
(248)		Other operations and regional costs (note 7)	(198)	(74)
(176)		Corporate centre (note 8)	(141)	(157)
(474)		Group debt costs and other interest (note 9)	(379)	(363)
2,872		Operating profit before tax attributable to shareholders' profits	2,297	2,216
		Adjusted for the following:
(2,038)		Investment return variances and economic assumption changes on long-term business (note 10)	(1,631)	15
(1,024)		Short-term fluctuation in return on investments on non-long-term business (note 11)	(819)	(184)
(118)		Economic assumption changes on general insurance and health business (note 6c)	(94)	2
(83)		Impairment of goodwill (note 12)	(66)	(10)
(146)		Amortisation and impairment of intangibles	(117)	(103)
9		Profit on the disposal of subsidiaries and associates (Appendix D6)	7	49
(408)		Integration and restructuring costs (note 13)	(326)	(153)
(689)		Exceptional items (note 14)	(551)	-
(1,625)		(Loss)/profit before tax	(1,300)	1,832
(609)		Tax on operating profit	(487)	(604)
1,128		Tax on other activities	902	270
519			415	(334)
(1,106)		(Loss)/profit for the year	(885)	1,498

Earnings per share - IFRS operating profit basis

For the year ended 31 December 2008

2008			2008	Restated 2007
78.6c		Basic (pence per share)	62.9p	52.8p
77.9c		Diluted (pence per share)	62.3p	52.3p

Earnings per share - IFRS basis

For the year ended 31 December 2008

2008			2008	Restated 2007
(46.0)c		Basic (pence per share)	(36.8)p	48.9p
(46.0)c		Diluted (pence per share)	(36.8)p	48.5p

Page 3 

1 - Basis of preparation

(a)    The results for the year ended 31 December 2008 have been prepared using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). The results in this preliminary announcement have been prepared in accordance with IFRS applicable at 31 December 2008 and have been taken from the group's Annual Report and Accounts which will be available on the company's website on 26 March 2009.

The preliminary announcement for the year ended 31 December 2008 does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The results on an IFRS basis for the full year 2008 and 2007 have been audited by Ernst & Young LLP. The auditor has reported on the 2008 and 2007 financial statements and the report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The group's 2007 Report and Accounts have been filed with the Registrar of Companies.

The preliminary announcement includes the regulated information required to be made public under DTR 4.1.3, as defined in DTR 6.3.5 of the Transparency Directive.

The directors confirm that, to the best of each person's knowledge: 

(a)    the Group financial statements in this report, which have been prepared in accordance with IFRS as adopted by the EU, IFRIC interpretation and those parts of the Companies Act 1985 applicable to companies reporting under IFRS, give a true and fair view of the assets, liabilities, financial position and results of the Group taken as a whole; and 

(b)    the commentary contained in this report includes a fair review of the development and performance of the business and the position of the Group taken as a whole, together with a description of the principal risks and uncertainties that they face.

 (b)    Restatement of prior period figures

    Change to operating segments

In November 2006, the IASB issued IFRS 8, Operating Segments. Although its requirements are applicable for accounting periods beginning on or after 1 January 2009, the Group has decided to adopt IFRS 8 early and reflect its impact in these financial statements. 

The Group has determined its operating segments along regional lines and the results for the year are presented on this basis, using UK Life and UK General Insurance within the United Kingdom, Europe, North America, Asia Pacific and Aviva Investors as the main segments. 

(i)     The UK general insurance business covers the Group's UK general insurance business and includes the results of Aviva Re, the Group's captive reinsurance business and agencies in run off;

(ii)     The UK Life segment includes the result of the UK health business which it manages;

(iii)    Europe incorporates all European operations excluding the UK as set out above;

(iv)     North America is made up of our life business in the United States and general insurance business in Canada;

(v)    Asia Pacific includes all our Asian and Australian businesses; and,

(vi)    Aviva Investors comprises the Aviva Investors UK, France, the United States, Canada and the
international fund management businesses.

Restatement for the change in accounting policy for latent reserves 

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

As part of this review, the group concluded that estimating our latent claim provisions on an undiscounted basis, and discounting back to current values, represented an improvement to the existing estimation technique. This approach is in line with best practice for long-term liabilities and moves the measurement of latent claims onto a more economic basis, consistent with our internal model for economic capital and the measurement model being proposed for both IFRS Phase II and Solvency II. This approach also improves consistency with the reporting of other long-tail classes of business which are already being discounted, namely certain London Market latent claims and our Dutch Permanent Health and Injury Business.    

Page 4

1 - Basis of preparation continued

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

The application of discounting to our latent claims reserves represents a change in accounting policy and has therefore been applied retrospectively. The cumulative impact of discounting on our opening reserves as at 1 January 2007 is to reduce insurance liabilities by £214 million and reinsurance assets by £61 million, and to increase retained earnings by £153 million. These have been treated as prior year adjustments in these financial statements.

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

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

The impact on shareholders' funds after tax was £107 million and £112 million at 31 December 2007 and 1 January 2007 respectively.

Consolidation of managed funds

The Group manages a number of specialised investment vehicles around the world, in which our insurance and investment funds have invested. The Group's percentage ownership in these vehicles can fluctuate from day to day according to the Group's and third party participation in them, and control is determined based on an analysis of the guidance in IAS 27. During 2008, we identified that certain such vehicles required consolidation in accordance with IAS 27 which therefore results in grossing up assets and liabilities for the effect of the third party participation.

As a result, certain balance sheet categories have been restated for the gross up. This resulted in increases to cash and cash equivalents (£315 million), investment property (£314 million), debt securities (£2,375 million), equity securities (£2,811 million), and net asset value attributable to unitholders (£1,671 million), and a decrease to other investments (£4,144 million) as at 31 December 2007. The impact on the 2007 income statement has been to restate net investment income and fee and commission expense by reducing both by £139 million and, in the 2007 cash flow statement, to increase cash flows from operating activities by £101 million.

In addition, certain property investment vehicles, which were consolidated in accordance with IAS 27, required restatement in the year ended 31 December 2007 to reanalyse amounts previously classified as minority interests to net asset value attributable to unitholders. This change recognises that the property investment vehicles are unit trusts and, as a result, the third party holding should have been recognised as a liability rather than as a non-controlling interest. Prior year comparatives have been restated with a reduction in minority interests and an increase in amounts due to unitholders of £758 million at 31 December 2007 and £431 million at 1 January 2007.

None of these adjustments has any impact on profit for the period, operating profit or earnings per share in the full year 2007, nor on retained earnings, net assets or total equity at either 1 January 2007 or 31 December 2007.

Page 5

1 - Basis of preparation continued

Treatment of shares held by employee trusts

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

2 - Exchange rates

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

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

	2008	2007
Eurozone
- Average rate (€1 equals)	£0.80	£0.68
- Period end rate (€1 equals)	£0.97	£0.73
United States
- Average rate ($US1 equals)	£0.54	£0.50
- Period end rate ($US1 equals)	£0.69	£0.50

3 - Geographical analysis of long-term business IFRS operating profit

	2008 £m	Restated1 2007 £m
With-profit	289	178
Non-profit	462	545
United Kingdom	751	723
France	275	243
Ireland	61	73
Italy	48	78
Netherlands (including Belgium and Germany)	196	181
Poland	162	110
Spain	155	119
Other Europe	(16)	(27)
Europe	881	777
North America	16	79
Asia	2	(6)
Australia	44	37
Asia Pacific	46	31
Total	1,694	1,610

1. Following the establishment of Aviva Investors, the fund management portion of the US business has been separately identified and transferred to fund management. This has reduced the life 2007 IFRS operating profit by £24 million.

IFRS long-term business operating profit before shareholder tax was £1,694 million (2007 restated: £1,610 million), an increase of 5%.

United Kingdom

On an IFRS basis, life operating profit increased by 4% to £751 million (2007: £723 million), driven by the with-profits business and supported by £124 million profit relating to the shareholder proportion of the special distribution announced in February 2008.

The non-profit result was £462 million (2007: £545 million). The prior year result included a £167 million benefit from the implementation of the reserving changes introduced by PS06/14 from the reserving changes. Underlying earnings were up £84 million reflecting the cumulative benefits of the recent efficiency programmes of £65 million and lower new business strain.

Page 6

3 - Geographical analysis of long-term business IFRS operating profit continued

Europe

In Europe, life IFRS operating profit increased by 13% to £881 million (2007: £777 million). The result has been impacted by the strengthening of the euro which has had a positive impact on all our major markets. 

In France, the operating profit was higher at £275 million (2007: £243 million) with the strength of the euro partly offset by the reduced income from unit-linked sales due to market volatility.  

In Ireland operating profit was £61 million (2007: £73 million) reflecting the costs of migrating to new IT systems. 

In Italy, operating profit was lower at £48 million (2007: £78 million) reflecting provisions to support customers affected by counterparty defaults on structured bond products. 

In the Netherlands operating profit was higher at £196 million (2007: £181 million) with the strengthening of the euro and expense savings being offset by a higher new business strain.

In Poland, operating profit was £162 million (2007: £110 million) reflecting higher management fees and cost efficiencies.  

In Spain, operating profit increased to £155 million (2007: £119 million) primarily driven by higher profits on protection business. This is due to improved claims experience and growth in the underlying portfolio. In addition, protection profits were further enhanced by the acquisition of Cajamurcia in the fourth quarter of 2007.

The operating loss from our other European businesses improved to £16 million (2007: £27 million loss) reflecting the ongoing development of our central and eastern European businesses.

North America

Life operating profit was £16 million (2007 restated: £79 million) driven by lower annuity margins and lower yield on variable rate investments. Annuity margins were adversely impacted by increased option costs and lower account value, driven by underperformance of the equity markets and higher lapse rates.

Asia Pacific

Life operating profit increased in 2008 to £46 million (2007: £31 million), reflecting lower new business strain from sales and business mix.

4 - Margin on assets

We are committed to improving the explanation of our results to generalist investors. A number of requests have been received to present our long-term business result as a function of funds under management, consistent with practices elsewhere in the savings industry. This disclosure provides an additional perspective on the long-term business performance, as part of our intention to continuously improve the external presentation of our IFRS result and enable these results to be better understood.

This disclosure presents the overall profit from the long-term business as if generated by a margin on the income-bearing assets supporting that business. In the analysis which follows two net margin figures are highlighted. Firstly, the operating profit margin is based on our definition of life operating profit, which excludes the effect of economic volatility in the period. Secondly, the margin based on profit before shareholder tax includes the impact of economic volatility and other non-operating items.

		As margin on average assets (basis points)
2008	Average assets  (£bn)	Operating revenue	Acquisition & Admin costs	Operating profit	Economic items	Other non-operating items	Profit before shareholder tax
UK	119.4	265	(202)	63	(58)	(6)	(1)
France	58.4	112	(65)	47	(15)	-	32
Netherlands	35.9	294	(239)	55	20	(42)	33
Other	48.0	233	(147)	86	(80)	(5)	1
Europe	142.3	199	(137)	62	(28)	(12)	22
North America	22.1	207	(200)	7	(196)	(25)	(215)
Asia Pacific	4.9	452	(358)	94	(213)	-	(119)
Total	288.7	231	(172)	59	(57)	(11)	(8)

Page 7

4 - Margin on assets continued

		As margin on average assets (basis points)
Restated 2007	Average assets  (£bn)	Operating revenue	Acquisition  & Admin  costs	Operating profit	Economic items	Other non-operating items	Profit before shareholder tax
UK	124.0	189	(131)	58	(9)	(1)	49
France	49.2	122	(72)	49	17	-	66
Netherlands	28.8	269	(206)	63	81	(2)	141
Other	40.7	274	(187)	87	(1)	(5)	80
Europe	118.7	210	(144)	65	26	(2)	89
North America	16.5	210	(162)	48	(111)	(33)	(96)
Asia Pacific	5.0	323	(261)	62	2	(3)	61
Total	264.2	202	(141)	61	1	(3)	59

The above tables are based on the IFRS income statement and balance sheet for the long-term business segment:

(i)    average assets is the arithmetic average of the opening and closing balance sheet value of assets, together with non-consolidated funds under management and excluding certain non-financial assets; excluded assets are goodwill, acquired value of in-force business (AVIF) and other intangibles, reinsurance assets, deferred acquisition costs and other assets, and prepayments and accrued income;

(ii)    operating revenue items include premium and investment income, claims and movements in liabilities, based on expected investment returns on financial investments backing shareholder and policyholder funds;

(iii)    acquisition and administration costs include fee and commission expense, other operating expenses and finance costs;

(iv)    operating profit is equal to operating revenue less acquisition and administration costs;

(v)    economic items include the effect of variances between actual and expected investment returns and the impact of changes in economic assumptions on liabilities, which are excluded from operating profit;

(vi)    other non-operating items include impairment of goodwill, amortisation of intangibles other than AVIF, profit on disposal of subsidiaries and integration and restructuring costs; and

(vii)    the final column is based on profit before tax attributable to shareholders' profits, which combines the operating profit, economic items and other non-operating items.

Reconciliation of net margins to segmental result and balance sheet

			2008				Restated 2007
	Profit  £m	Average assets  £bn	Net margin  bps		Profit  £m	Average assets  £bn	Net margin  bps
Long-term business result before tax	(1,310)				1,549
less: tax attributable to policyholder returns	1,068				(15)
Result after policyholder tax	(242)	288.7	(8)		1,534	264.2	59
Operating profit before tax attributable to shareholders' profits	1,694	288.7	59		1,610	264.2	61

			2008				Restated 2007
	Closing  £bn	Average £bn	Opening  £bn		Closing  £bn	Average  £bn	Opening  £bn
Segment assets	307.9		280.4		280.4		255.9
Adjusted for:
Additional funds under management	13.3		11.7		11.7		8.5
Goodwill and other intangibles	(5.4)		(4.0)		(4.0)		(3.6)
Other excluded assets	(15.5)		(11.2)		(11.2)		(9.5)
Asset base	300.3	288.7	276.9		276.9	264.2	251.3

The total operating profit margin on assets reduced from 61 bps in 2007 to 59 bps in 2008. The margin increased in the UK and Asia Pacific regions, with a small reduction in Europe and a larger fall in the USA. The overall margin movement of 2 bps can be further analysed between an increase of 3 bps for growth in operating profit less a reduction of 5 bps to allow for the increased asset base.

Page 8

4 - Margin on assets continued

The deepening global financial crisis has led to significantly negative investment variances in 2008, equating to 57 bps of average assets. The variances primarily relate to debt securities, where the unprecedented widening of credit spreads drove down market values, and to a lesser extent from falling equity and property values. For with-profit and unit-linked business the decline in asset values is largely offset by a corresponding reduction in liabilities. However for other non-profit business and surplus shareholder funds, the reduction in asset values was only partly mitigated by movements in liabilities. The economic items include additional credit default provisions for corporate bonds and commercial mortgages. Although equity markets suffered major downturns, the profit impact was limited by hedging activity in the Netherlands and limited shareholder exposure elsewhere in the Group.

This compares to a broadly neutral net impact of economic items on profit in 2007, with favourable investment variances in the Europe region offset by negative effects in the USA and UK. 

The non-operating items relate mainly to reorganisation costs in the UK and Netherlands and amortisation of other intangibles arising from the acquisition in the USA in 2006.

For the UK business, the operating profit margin increased from 58 bps in 2007 to 63 bps in 2008. The 2008 margin includes 10 bps from recognition of the first tranche of a special with-profit bonus distribution, while a lower result from non-participating business reduced the overall margin by 7 bps.

The negative economic variance in the UK incorporates the effect of a £550 million allowance for future defaults in respect of corporate bonds and commercial mortgages supporting our £16 billion UK annuity business. The increase has the effect of doubling the total allowance for credit defaults with respect of these securities which is equivalent to a default allowance of 85 bps over the lifetime of the assets. Also included are specific default provisions of £53 million in relation to corporate bonds and commercial mortgages which have been offset by the annual allowances which we have for these types of securities of £60 million.

The UK margins on assets are blended margins combining our participating (with-profit) and non-participating business. Average assets of the UK with-profits business were £59.9 billion (2007 restated: £63.4 billion) with operating profit of 48 bps (2007 restated: 28 bps). This apparently low return reflects IFRS accounting for the share of bonuses accruing to policyholders, rather than the underlying performance within the participating funds. Average assets of the UK non-participating business were £59.5 billion (2007 restated: £60.6 billion) with operating profit of 75 bps (2007: 89 bps).

The French long-term business shows a stable operating margin progression, based on its well-established portfolios of AFER and other unit-linked investment contracts. The negative economic item in 2008 largely relates to minimum death benefit guarantees affected by market conditions.

In the Netherlands, the reduced operating profit margin was affected by new business strain on corporate pensions business (15 bps) and from strengthening annuitant mortality assumptions (13 bps). Positive economic variances were the result of investment hedging activity.

For this disclosure, Other Europe includes our well-established and profitable operations in Ireland, Italy, Poland and Spain as well as newer developing businesses in central and eastern Europe. Operating margins were generally stable, boosted by high margins on protection business portfolios in Poland and Spain. The newer smaller operations currently make a negative net contribution to margins due to the effect of the low asset base and development costs. Negative economic items were driven by credit spread widening, particularly in Spain.

The North America operating profit margin reduced from 48 bps in 2007 to 7 bps in 2008, with adverse economic conditions leading to investment margin compression, higher DAC amortisation and DAC unlocking. 

The negative economic variance of 196 bps in the USA were driven by realised and unrealised losses on investments as a result of the widening of credit spreads on assets predominantly relating to funding agreement business (122 bps). The assets and liabilities for pre-2008 funding agreements are both carried at fair value, are matched in terms of duration, and the assets are of high quality. However, a temporary accounting mismatch has arisen due to the widening of credit spreads. This has resulted in a temporary adverse movement in the assets not matched by a corresponding movement in the liabilities, which it is anticipated will reverse prior to settlement of the contracts. Asset write-downs represent a further 74 bps of the variance.

The Asia Pacific region combines our well-established profitable business in Australia, which shows high stable operating profit margins, and the new and rapidly developing Asian operations. 

From 2009 we intend to provide further disclosure of IFRS profit drivers, using a format similar to the embedded value analysis of movements. We consider that this will provide more relevant information on the sources of profit for all types of long-term business. In the meantime, however, we believe there is merit in presenting this 'margin on average assets' disclosure as an additional perspective on the financial results of our life businesses.

Page 9

5 - Geographical analysis of fund management

	2008 £m	Restated1 2007 £m
United Kingdom	64	70
Europe	35	43
North America2	14	27
Asia Pacific	1	7
Aviva Investors	114	147
United Kingdom	(18)	(10)
Netherlands	10	23
Other Europe	4	4
Europe	14	27
Asia Pacific	13	15
Total	123	179

1    Full year 2007 has been restated to reflect the new management structure to include France, USA and Canada. Norwich Union's retail investment business and the collective investment business with RBSG do not form part of Aviva Investors UK operations.

2    Following the establishment of Aviva Investors, the fund management portion of the US business has been separately identified and transferred to fund management. This has increased the North America 2007 IFRS operating profit by £24 million.

Our worldwide fund management operating profit decreased by 31% to £123 million (2007 restated: £179 million) on an IFRS basis.

Aviva Investors

On 28 February 2008, as part of the 'one Aviva, twice the value' vision, we announced our plans to combine the asset management companies within Aviva to create a single, globally integrated asset manager to be known as Aviva Investors.

The combined Aviva Investors businesses achieved a reported operating profit of £114 million (2007 restated: £147 million) in a year of unprecedented investment market volatility with all regions experiencing downward pressure on fee income. In the United Kingdom, the decline in operating profit to £64 million (2007: £70 million) was driven by the decline in investment income, partially offset by strong performance fees and higher returns on stock lending activities. The market driven decline in the value of financial investments in North America contributed to the deterioration in the result to £14 million (2007: £27 million). Asia Pacific's result of £1 million (2007: £7 million) was impacted by the costs of developing our distribution reach into this expanding market.

Other fund management businesses

United Kingdom operating loss of £18 million comprises £6 million loss (2007: £1 million) from our Norwich Union retail investment business and £12 million loss (2007: £9 million loss) from our collective investment business with RBSG.

Europe operating profit of £14 million (2007: £27 million) reflected lower investment management fees from funds under management in our Dutch business which has been affected by volatile stock markets.

Asia Pacific, comprising our Navigator business in Australia and Singapore, contributed £13 million (2007: £15 million).

Page 10

5 - Geographical analysis of fund management continued

Total funds under management at 31 December 2008 increased by 6% to £381 billion (2007 restated: £359 billion).

			2008		Restated 2007
	Life and related businesses £m	General business and other £m	Total £m		Total £m
Total IFRS assets included in the balance sheet	307,928	46,634	354,562		321,326
Third party funds under management:
Unit trusts, OEICs, PEPs and ISAs			22,616		24,427
Segregated funds			48,104		50,018
			425,282		395,771
Non-managed assets			(44,176)		(36,342)
Funds under management			381,106		359,429
Managed by:
Aviva Investors			236,178		235,309
Other Aviva managers			120,054		99,906
Total funds managed by Aviva			356,232		335,215
External fund managers			24,874		24,214
Funds under management			381,106		359,429

Funds managed by Aviva Investors were £236 billion (2007: £235 billion) at 31 December 2008. In common with the asset management industry in general, market factors had an adverse impact on the value of our funds under management. However the fall in equity and property capital values and outflows from some open-ended property funds was more than offset by exchange gains as sterling declined against other major currencies towards the end of the year, increasing the value of our non-sterling investments.

Funds managed by other Aviva managers increased by 20% to £120 billion (2007: £100 billion). The increase is driven by favourable movement in the euro on funds managed in the Netherlands, the funds acquired in Swiss Life and an increase in cash or cash equivalents held by our businesses.

Page 11

6 - Analysis of general insurance and health

	Net written premiums			Underwriting result			Longer-term  investment return			Operating profit
	2008 £m	Restated 2007 £m		2008 £m	Restated 2007 £m		2008 £m	Restated 2007 £m		2008 £m	Restated 2007 £m
General insurance
United Kingdom1	5,024	5,490		63	(221)		579	642		642	421
France	678	574		28	7		53	47		81	54
Ireland	494	474		(4)	101		67	61		63	162
Netherlands	1,028	788		54	120		92	73		146	193
Other	417	308		-	10		45	31		45	41
Europe	2,617	2,144		78	238		257	212		335	450
North America	1,601	1,412		21	18		124	136		145	154
Asia Pacific	6	5		(5)	-		1	-		(4)	-
	9,248	9,051		157	35		961	990		1,118	1,025
Health insurance
United Kingdom	389	407		8	(5)		6	5		14	-
France	204	159		11	4		15	12		26	16
Ireland	19	-		4	-		1	-		5	-
Netherlands	1,250	929		(11)	(45)		42	21		31	(24)
Europe	1,473	1,088		4	(41)		58	33		62	(8)
Asia Pacific	27	23		4	3		-	1		4	4
	1,889	1,518		16	(43)		64	39		80	(4)
Total	11,137	10,569		173	(8)		1,025	1,029		1,198	1,021

1.    United Kingdom includes Aviva Re and agencies in run-off.

The group's net written premiums from its worldwide general insurance and health businesses increased by 5% to £11,137 million for the year (2007 restated: £10,569 million). 

Group operating profit from general insurance and health businesses increased by 17% to £1,198 million (2007 restated: £1,021 million). The general insurance and health underwriting result increased to £173 million (2007 restated: £8 million loss) reflecting the absence of adverse weather costs of £475 million in the UK partly offset by lower prior year releases across the group of £840 million (2007: £969 million) and the impact of competitive markets in Ireland and the Netherlands. The worldwide general insurance combined operating ratio (COR) improved to 98% (2007 restated: 100%) in line with the group's 'meet or beat' target. 

The worldwide GI expense ratio has decreased to 13.4% (2007 restated: 13.9%), primarily driven by cost savings achieved by the UK, France and the Netherlands.

The longer-term investment return (LTIR) on general insurance and health business assets was slightly lower at £1,025 million (2007 restated: £1,029 million) resulting from changes in asset mix due to equity de-risking that took place in the latter half of 2007 and lower levels of investments following payment of flood claims in the United Kingdom partly offset by higher expected rates of return.

United Kingdom

General insurance and health

The results for the United Kingdom include our general insurer Norwich Union Insurance, our healthcare business, our group captive reinsurer Aviva Re and agencies in run-off. Combined general insurance and health net written premiums reduced by 8% to £5,413 million (2007 restated: £5,897 million). General insurance net written premiums have decreased to £5,024 million (2007 restated: £5,490 million) and to £389 million (2007: £407 million) for health. Operating profit of £642 million (2007 restated: £421 million) includes contributions of £97 million (2007: £53 million) from Aviva Re, which benefited from a one-off commutation of £30 million in the year. 

Norwich Union Insurance

Norwich Union insurance continues to be the leading provider of general insurance in the United Kingdom. We provide a range of insurance products focused on personal and small business customers, together with roadside assistance through the RAC.

The continuing tough market conditions and our focus on sustainable profitability rather than volumes are reflected in our financial performance in 2008. We have seen net written premiums fall 8% to £4,981 million in 2008 (2007: £5,440 million). While all business lines have been affected the decline was most notable in creditor, where volumes have fallen by around 30% reflecting distributor response to the issues with payment protection insurance and the decline in lending.

Page 12

6 - Analysis of general insurance and health continued

In personal lines we have achieved motor rating increases of 5% (2007: 6%). Following our initiatives to improve the price competitiveness of our direct channel, we have focused on better quality risks resulting in a reduction in our average premium levels. Homeowner rates have increased by 9% (2007: 7%). While overall rating in personal lines has been marginally better than headline claims inflation, the impact of claims farming and an increase in bodily injury claims have adversely impacted profitability.

The commercial market has remained particularly price competitive. Against this backdrop we have reversed the trend of declining rates seen in the past four years, achieving an overall rate increase in 2008 of 3% (a 5% improvement on the 2% reduction in 2007). Our stance on commercial pricing is underlined by the implementation of the second phase of rating action in the final quarter of the year. While this represents a significant improvement on recent trends, the rating achieved in the year remained below the level of claims inflation and has also contributed to a reduction in volumes.

Operating profit for the year rose to £566 million (2007 restated: £368 million) with an improved combined operating ratio of 99% (2007 restated: 106%). The principal factor in the improved profitability for the general insurance business was that weather related claims were in line with normal expectations compared with a £475 million adverse impact in 2007. This benefit was partly offset by a reduction in the savings on prior year claims development to £285 million (2007 restated: £430 million, including £215 million of a non-recurring nature), the impact of difficult market conditions and a reduction in long-term investment returns to £549 million (2007: £613 million). These factors have outweighed the earned benefits we have derived from our initiatives to deliver cost savings and control claims inflation.

Total prior year releases in 2008 were £285 million. This is down on the £430 million released last year and we would expect future contributions from prior year releases to decline further.

2008 saw a step change in our operational efficiency. Our expense ratio improved from 13.9% in 2007 to 12.1%, despite an overall reduction in business volumes. This has been achieved by £265 million of cost savings in the year, including £200 million from the first phase of our programme announced in October 2007. In June 2008 we announced details of the second phase of the programme to transform our business. This phase will improve service and drive growth and involves the redesign of the operations function, simplification of processes, improvements in customer services and the consolidation of expertise into seven modern insurance centres of excellence in the UK. We expect this phase, together with additional actions being taken in other areas (most notably in the IT function), will deliver further cost savings of £150 million per annum by 2010. 

The actions taken to reduce distribution costs and the impact of claims ratio improvements arising from rating and risk selection will result in real improvements in the current year profitability. All this gives us confidence in delivering a UK general insurance COR in 2009 in line with our worldwide 'meet or beat' target of 98%, without the benefit of historical levels of prior year support. 

Health

Total health insurance operating profit increased to £14 million (2007: £nil) resulting from pricing decisions throughout the year to improve margins, tighter expense controls and exiting unprofitable international markets.

Europe

Aviva Europe's net written premiums increased by 27% to £4,090 million (2007: £3,232 million). Against a backdrop of increasing price competition across a number of countries operating profit decreased to £397 million (2007: £442 million). This result has been favourably impacted the development of new distribution channels, product launches in the year across a number of our businesses and the strengthening of the euro, offset by the current competitive nature of the insurance markets particularly in Ireland and the Netherlands.

In France we recorded net written premiums of £882 million (2007: £733 million) and an operating profit of £107 million (2007: £70 million). An increase in the general insurance underwriting result to £28 million (2007: £7 million) reflected favourable claims experience due to better than expected weather claims and an increase in premiums. The general insurance COR improved to 96% (2007: 99%).

General insurance operating profit in Ireland decreased to £63 million (2007: £162 million) driven by storms in July and August, intensive competitive pressure in the market and the Irish economy slipping into recession. The combined operating ratio worsened to 103% (2007: 80%) reflecting increased claims frequency, some large claims and adverse weather experience, which resulted in an underwriting result of £4 million loss (2007:£101 million profit). Net written premiums were £494 million (2007: £474 million).  The health business recorded net written premiums for the first time of £19 million following the acquisition of VIVAS Health, now rebranded to Hibernian Aviva Health. Since acquisition the number of lives insured by Hibernian Aviva Health has grown in excess of 30%, making it the fastest growing health insurer in Ireland.

In the Netherlands, our general insurance and health business recorded an operating profit of £177 million (2007: £169 million). Net written premiums increased to £2,278 million (2007: £1,717 million) driven by the strength of the euro and competitively priced health products. 

Page 13

6- Analysis of general insurance and health continued

The general insurance business in the Netherlands recorded an operating profit of £146 million (2007: £193 million) and the COR worsened to 94% (2007: 85%) reflecting pressure on premium rates and deterioration in claims, particularly motor. The motor portfolio has seen strong price competition in 2008 although rates are now showing signs of recovery. The health business reported an operating profit of £31 million (2007: £24 million loss) reflecting rating improvements and favourable prior year run-off. The Dutch health business has been shown as held for sale at 31 December 2008 as we have previously announced the sale of this business to OWM CZ Groep Zorgverkeraar (CZ). This transaction completed on 1 January 2009. During 2008 Delta Lloyd commenced selling its products to CZ's existing customer base. 

Our other general insurance operations in Italy, Turkey and Poland contributed operating profit of £45 million (2007: £41 million) and net written premiums of £417 million (2007: £308 million) with particularly strong growth in Italy reflecting the new bancassurance agreement with Banco Popolare. 

North America

Net written premiums of our Canadian business increased by 13% to £1,601 million (2007: £1,412 million) with growth across all lines and the acquisition of National Home Warranty in July 2008. On a constant currency basis, net written premiums increased by 4%.

The underwriting result was higher at £21 million (2007: £18 million) with a COR of 99% (2007: 98%). Favourable prior year development was offset by tough market conditions in the insurance cycle, weather related costs and restructuring and strategic spend.

Operating profit of £145 million (2007: £154 million) was impacted by lower investment income following the equity de-risking that took place in the latter half of 2007.

Asia Pacific

The businesses in Asia Pacific reported an increase in net written premiums to £33 million (2007: £28 million) predominantly driven by the contribution of the Malaysian general insurance business which commenced operations in the latter half of 2007. Operating profit of £4 million (2007: £4 million) from the health business has been offset by a £4 million loss (2007: £nil) in the general insurance business due to costs incurred in closing the Malaysian motor portfolio.

 (a) Combined operating profit ratios - general insurance business only

	Claims ratio			Expense ratio			Combined operating ratio
	2008 %	Restated 2007 %		2008 %	Restated 2007 %		2008 %	Restated 2007 %
United Kingdom1	62.0%	65.9%		12.1%	13.9%		99%	106%
France	68.2%	72.7%		9.7%	10.2%		96%	99%
Ireland	74.3%	54.2%		16.9%	14.3%		103%	80%
Netherlands	57.2%	45.1%		18.2%	18.8%		94%	85%
Canada	64.4%	65.9%		15.0%	13.6%		99%	98%
Total	62.6%	63.7%		13.4%	13.9%		98%	100%

1 United Kingdom excluding Aviva Re and agencies in run-off.

Ratios are measured in local currency. The total Group ratios are based on average exchange rates applying to the respective periods.

Definitions:
Claims ratio	-    Incurred claims expressed as a percentage of net earned premiums.
Expense ratio	-     Written expenses excluding commissions expressed as a percentage of net written premiums.
Commission ratio	-     Written commissions expressed as a percentage of net written premiums.
Combined operating ratio	-     Aggregate of claims ratio, expense ratio and commission ratio.

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6 - Analysis of general insurance and health continued

(b)    Combined operating profit ratio analysis - class of business analysis

(i)    United Kingdom (excluding group reinsurance and agencies in run-off)

	Net written premium			Underwriting result			Combined operating ratio
	2008 £m	Restated 2007 £m		2008 £m	Restated 2007 £m		2008 %	Restated 2007 %
Personal
Motor	1,329	1,431		(37)	(25)		103%	102%
Homeowner	1,188	1,223		(57)	(296)		104%	124%
Other	602	797		4	10		103%	100%
	3,119	3,451		(90)	(311)		103%	110%
Commercial
Motor	577	636		28	61		95%	91%
Property	774	807		(6)	(175)		100%	124%
Other	511	546		85	180		85%	68%
	1,862	1,989		107	66		94%	98%
Total	4,981	5,440		17	(245)		99%	106%

During the year to 31 December 2008, annualised rating increases were as follows: personal motor 5%; homeowner 9%; commercial motor 3%; commercial property 3%; and, commercial liability 2%. 

 (ii)    France

	Net written premium			Underwriting result			Combined operating ratio
	2008 £m	2007 £m		2008 £m	2007 £m		2008 %	2007 %
Motor	290	254		-	(2)		100%	101%
Property and other	388	320		28	9		93%	97%
Total	678	574		28	7		96%	99%

 (iii)    Ireland

	Net written premium			Underwriting result			Combined operating ratio
	2008 £m	2007 £m		2008 £m	2007 £m		2008 %	2007 %
Motor	243	232		9	51		99%	81%
Property and other	251	242		(13)	50		107%	80%
Total	494	474		(4)	101		103%	80%

 (iv) Netherlands

	Net written premium			Underwriting result			Combined operating ratio
	2008 £m	2007 £m		2008 £m	2007 £m		2008 %	2007 %
Motor	323	267		8	42		98%	84%
Property	343	249		(2)	19		98%	93%
Liability	78	61		14	13		81%	79%
Other	284	211		34	46		87%	77%
Total	1,028	788		54	120		94%	85%

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6 - Analysis of general insurance and health continued

(b) Combined operating profit ratio analysis - class of business analysis continued

(v) Canada

	Net written premium			Underwriting result			Combined operating ratio
	2008 £m	2007 £m		2008 £m	2007 £m		2008 %	2007 %
Motor	880	795		47	7		95%	99%
Property	512	450		(50)	10		110%	96%
Liability	166	143		15	(5)		90%	103%
Other	43	24		9	6		73%	68%
Total	1,601	1,412		21	18		99%	98%

(c) Economic assumption changes

The discount rate that has been applied to latent claims reserves is based on the swap rate in the relevant currency having regard to the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims which span over 35 years, with the average duration being between 9 and 15 years depending on the geographical region. Any change in discount rates between the start and the end of the accounting period is reflected below operating profit as an economic assumption change. The sharp decline in interest rates in the second half of 2008 has resulted in an increase in the net discounted provision of £94 million.

(d) Exceptional strengthening of latent claims provisions

Separately and in addition to the decision to discount latent claims, our estimation of latent claims reserves in 2008 has been revised to reflect increasing market trends observed in mesothelioma claims. The majority of the Group's latent claims reserves relate to mesothelioma based risks in the UK.

The Institute of Actuaries' Asbestos Working Party report in 2008 contributed to our view that experience variances, which we had previously perceived as normal short-term volatility, reflected a real worsening of expected ultimate claims experience. The market trend in mesothelioma claims has been fully reflected as a significant one-off strengthening of gross latent claims reserves in 2008 of £356 million, with a corresponding increase of £52 million in reinsurance recoverable. The net increase of £304 million comprises £668 million on an undiscounted basis and discounting of £364 million. Due to its size and the fact that this related to discontinued business, this one-off strengthening has been reported as an exceptional item below operating profit. 

Whilst this is a significant step change, it should be noted that this reflects the long-term impact of the settlement of latent claims currently running at £30 million per annum, of which £25 million related to mesothelioma. The number of claims is currently predicted to rise slightly in the period to 2015 and then diminish slowly over the next 30 years to 2045.

7 - Analysis of other operations and regional costs

			2008				Restated 2007
	Regional Costs £m	Other Operations £m	Total £m		Regional Costs £m	Other Operations £m	Total £m
United Kingdom	-	(12)	(12)		-	(8)	(8)
Europe	(28)	(123)	(151)		(11)	(38)	(49)
North America	(14)	2	(12)		(2)	(2)	(4)
Asia Pacific	(23)	-	(23)		(13)	-	(13)
Total	(65)	(133)	(198)		(26)	(48)	(74)

United Kingdom

The £12 million loss for the period (2007: £8 million loss) mainly comprises a £23 million loss arising from the Lifetime wrap platform partly offset by profits from the Norwich Union Insurance non-insurance operations. Following a strategic review of the Lifetime platform, a decision has been made to enter into a strategic partnership with Scottish Friendly to run the Lifetime back office administration and migrate the wrap onto their existing platform. 

Europe

Regional costs of £28 million (2007: £11 million) reflects the first full year of regional operations. Other operations losses of £123 million (2007: £38 million) include holding company costs in a number of our markets, principally France, Italy and the Netherlands. Additional costs of £30 million have been incurred this year in relation to the implementation of the global financial strategy and other projects. In addition, Delta Lloyd's banking and retail mortgage divisions reported an operating loss of £22 million (2007: £8 million profit) as a result of the adverse economic climate, and in Italy we incurred a loss of £6 million in our distribution associate Banca Network Investimenti, acquired in December 2007. The 2007 result benefitted from a one-off pension scheme adjustment in France of £17 million.

Page 16

7 - Analysis of other operations and regional costs continued

North America

The 2008 loss of £12 million (2007: £4 million loss) is driven by regional costs of £14 million offset by operating profit from the Canadian brokerage business. The increase in regional costs is due to the opening of the regional office late in 2007, and the one-off costs associated with staffing the office.

Asia Pacific

The reported loss of £23 million (2007: £13 million loss) is driven by the regional costs, including one-off costs associated with staffing the offices.

8 - Corporate centre

	2008 £m	2007 £m
Project spend	(34)	(26)
Share awards and other incentive schemes	(10)	(17)
Central spend	(97)	(114)
Total	(141)	(157)

The corporate centre costs for the period reduced to £141 million (2007: £157 million) due to lower central spend and staff incentive costs. Within this total, project spend was £34 million (2007: £26 million), driven by the corporate centre's share of the ongoing implementation of the global finance strategy. This project has allowed us to deliver our results on an MCEV basis and will allow us to deliver Solvency II and comply with Sarbanes-Oxley (which would support a potential US listing). Further expenditure to deliver this project is also included in each region's operating profit.

9 - Group debt cost and other interest

	2008 £m	2007 £m
External
Subordinated debt	(229)	(179)
Other	(57)	(80)
Internal	(197)	(179)
Net finance income on pensions schemes	104	75
Total	(379)	(363)

Group debt costs and other interest of £379 million (2007: £363 million) comprise internal and external interest on borrowings, subordinated debt and intra-group loans not allocated to local business operations. External interest costs increased to £286 million (2007: £259 million) reflecting higher interest in subordinated debt, due to the hybrid debt issue in May 2008 and August 2008, offset by lower commercial paper interest as proceeds from the issue were used to repay some commercial paper. Internal interest costs increased to £197 million (2007: £179 million) driven by changes to our internal loan balances. 

Also included is UK net pension income which represents the expected return on pension scheme assets less the interest charge on pension scheme liabilities. Net pension income increased to £104 million (2007: £75 million) reflecting higher expected rates of return on assets offset by higher discount rates on liabilities.

Interest on the £990 million direct capital instrument issued in 2004 is not included within group debt costs as it is instead treated as an appropriation of profits retained in the period. 

Page 17

10 - Long-term business investment return variances and economic 
assumption changes

(a)    Definitions 

Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.

 (b)    Economic volatility 

The investment variances and economic assumption changes excluded from the long-term business operating profit are as follows:

	Long-term business
	2008 £m	2007 £m
Investment variances and economic assumption changes	(1,631)	15

(c)    Assumptions 

The expected rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification under IFRS.

Where assets are classified as fair value through profit or loss, the group has applied the same 'real-world' economic assumptions for fixed interest securities, equities and properties as are used under MCEV principles. 2007 rates were based on EEV returns. The principal assumptions underlying the calculation of the expected investment return are:

	Fixed interest			Equities			Properties
	2008 %	2007 %		2008 %	2007 %		2008 %	2007 %
United Kingdom	5.7%	4.6%		9.2%	7.6%		7.7%	6.6%
Eurozone	4.8%	4.0%		8.3%	7.0%		6.8%	6.0%

Where fixed interest securities are classified as available for sale, such as in the United States, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.

11 - Non-long-term business economic volatility

	Non-long-term business
	2008 £m	2007 £m
Net investment income	522	1,115
Internal charges included under other headings	(73)	18
	449	1,133
Analysed between:
Longer term investment return, reported within operating profit	1,268	1,317
Short-term fluctuations in investment return, reported outside operating profit	(819)	(184)
	449	1,133

Actual income and longer-term investment return both contain the amortisation of the discount/premium arising on the acquisition of fixed income securities.

The longer-term investment return is calculated separately for each principal non long-term business unit. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of investment return. The longer-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer-term return for other investments is the actual income receivable for the period.

Page 18

11 - Non-long-term business economic volatility continued

The Group has calculated the longer-term investment return for its general insurance and health business using the same start of year economic assumptions for equities and properties as those used for MCEV reporting.

The total assets supporting the general insurance and health business, which contribute towards the longer-term return are:

	2008 £m	2007 £m
Debt securities	11,275	10,757
Equity securities	993	1,195
Properties	278	360
Cash and cash equivalents	3,407	3,178
Other	3,623	2,801
Total	19,576	18,291

The principal assumptions underlying the calculation of the longer-term investment return are:

	Longer-term rates of return  Equities			Longer-term rates of return  Property
	2008 %	2007 %		2008 %	2007 %
United Kingdom	9.2%	7.6%		7.7%	6.6%
France	8.3%	7.0%		6.8%	6.0%
Ireland	8.3%	7.0%		6.8%	6.0%
Netherlands	8.3%	7.0%		6.8%	6.0%
Canada	7.7%	7.1%		6.2%	6.1%

From other operations, the longer term return mainly reflects the interest income earned in the Netherlands

bank and retail mortgage divisions. 

12 - Impairment of goodwill

Impairment of goodwill of £66 million (2007: £10 million) is mainly driven by impairments in the Netherlands and on an Italian associate.

13 - Integration and restructuring costs

Integration and restructuring costs incurred in the year amounted to £326 million (2007: £153 million). This includes £287 million for the cost savings initiatives in the UK life and general insurance businesses and Europe, which have delivered £340 million annualised cost savings in the year. Also included are integration costs of £39 million which mainly relate to the work to set up our global asset management operation, Aviva Investors. 

14 - Exceptional items

We have reported exceptional items of £551 million (2007: £nil) in the year. These include £142 million for the transfer of the lifetime wrap platform and writedown in preparation for sale of the British School of Motoring in the UK and closure of the structured settlement business in the US. The costs also include £304 million after reinsurance for the discounted cost of strengthening our latent claims provisions, mainly in the UK, and £126 million for the settlement agreed by our Netherlands life business for its unit-linked policyholders, following an industry-wide challenge on the level of fees. The remaining balance relates to brand migration costs of £37 million offset by £58 million benefit from settlement of a disputed Australilan tax liability and the consequent release of a provision for interest charges.

Under MCEV exceptional items were £754 million, reflecting the higher cost of the Netherlands unit-linked settlement on an MCEV basis.

End of part 2 of 5

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END

 

 

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