11th Aug 2005 07:01
Aviva PLC11 August 2005 PART 2 OF 4 ------------------------------------------------------------------------------------------------------------------Page 24 EEV basis Summarised consolidated income statement - EEV basisFor the six months ended 30 June 2005 Restated* 30 June 6 months 6 months Full year 2005 2005 2004 2004Page •m £m £m £m Operating profit 31 1,242 Life EEV operating return 857 799 1,611 26 Fund management** 18 10 20 53 1,006 General insurance and health 694 583 1,259 Other: 65 Other operations*** 45 (12) (41) 55 (120) Corporate costs (83) (99) (188) 55 (309) Unallocated interest charges (213) (205) (437)------------------------------------------------------------------------------------------------------------------ 1,910 Operating profit before tax 1,318 1,076 2,224 (14) Impairment of goodwill (10) - (41) (12) Amortisation and impairment of other intangibles (8) (1) (3) - Financial Services Compensation Scheme and other levies - (25) (49) 1,216 Variation from longer-term investment return 839 (440) 662 (770) Effect of economic assumption changes (531) 56 (318) 52 210 Profit on the disposal of subsidiaries and associates 145 8 34 52 (20) Integration costs (14) - - 52 - Exceptional costs for termination of operations - (40) (40)------------------------------------------------------------------------------------------------------------------- 2,520 Profit before tax 1,739 634 2,469 (597) Tax on operating profit (412) (350) (618) (171) Tax on profit/(loss) on other activities (118) 101 (32)------------------------------------------------------------------------------------------------------------------- 1,752 Profit for the period 1,209 385 1,819================================================================================================================== Attributable to: 1,623 Equity shareholders of Aviva plc 1,120 308 1,641 129 Minority interests 89 77 178------------------------------------------------------------------------------------------------------------------ 1,752 1,209 385 1,819================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. All profit is from continuing operations.** Excludes the proportion of the results of Morley's fund management businesses and of our French asset management operation Aviva Gestion d'Actifs (AGA) that arises from the provision of fund management services to our Life businesses. These results are included within the Life EEV operating return. *** Excludes the proportion of the results of Norwich Union Life Services relating to the services provided to the UK life business. The results for the six month period to 30 June 2004 also exclude the results of Norwich Union Equity Release (NUER). 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. ------------------------------------------------------------------------------------------------------------------Page 25 Earnings per share - EEV basisFor the six months ended 30 June 2005 Restated*6 months 6 months 6 months Full year 2005 Earnings per share 2005 2004 2004 Operating profit on an EEV basis after tax, attributable to equity shareholders in respect of Aviva Plc 51.6c Continuing operations 35.6p 28.6p 63.1p Profit after tax for the year on an EEV basis, attributable to equity shareholders of Aviva plc 70.0c Basic (pence per share) 48.3p 13.3p 72.0p 69.3c Diluted (pence per share) 47.8p 13.1p 71.4p * Restated for the effect of implementing European Embedded Value principles. Summarised consolidated statement of recognised income and expense - EEV basisFor the six months ended 30 June 2005 Restated* 6 months 6 months Full year 2005 2004 2004 £m £m £m Fair value gains/(losses), net of transfers to the income statement 1 (38) 151Actuarial (losses)/gains and on pension schemes (46) 18 (145)Foreign exchange rate movements (340) (294) 119Aggregate tax effect - shareholder tax 18 41 (15)-------------------------------------------------------------------------------------------------------------------Net (expense)/income recognised directly in equity (367) (273) 110Profit for the period** 1,209 385 1,819------------------------------------------------------------------------------------------------------------------Total recognised income and expense for the period 842 112 1,929================================================================================================================== * Restated for the effect of implementing European Embedded Value principles.** Stated before the effect of foreign exchange rate movements, which are reported within the foreign exchange rate movements line. Summarised consolidated statement of changes in equity - EEV basisFor the six months ended 30 June 2005 Restated* 6 months 6 months Full year 2005 2004 2004 £m £m £mBalance at 1 January 14,011 11,534 11,534Total recognised income and expense for the period 842 112 1,929Dividends and appropriations (note 14) (373) (351) (570)Movement in shares held by employee trusts - 1 1Issue of share capital for the acquisition of RAC 530 - -Other issue of share capital 27 23 25Shares issued in lieu of dividends 12 - 103Issue of direct capital instrument, net of transaction costs of £9 million - - 981Capital contribution from minority shareholders 93 - 4Minority share of dividends declared in the period (36) (41) (41)Minority interest in acquired subsidiaries - - 45------------------------------------------------------------------------------------------------------------------Total equity 15,106 11,278 14,011Minority interests (1,283) (987) (1,160)------------------------------------------------------------------------------------------------------------------Balance at 30 June / 31 December 13,823 10,291 12,851=================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. -------------------------------------------------------------------------------------------------------------------Page 26 Summarised consolidated balance sheet - EEV basisAs at 30 June 2005 Restated*30 June 30 June 30 June 31 December 2005 2005 2004 2004 •m £m £m £m Assets Intangible assets 3,366 Goodwill 2,289 1,137 1,184 1,350 Acquired value of in-force business and other intangible assets 918 466 516 7,709 Additional value of in-force long-term business 5,242 4,493 4,949 1,287 Property and equipment 875 895 812 16,284 Investment property 11,073 10,267 11,057 2,050 Investments in joint ventures 1,394 1,115 1,242 1,313 Investments in associates 893 841 886 Financial investments145,204 Debt securities 98,739 90,348 98,719 70,449 Equity securities 47,905 42,214 47,291 33,432 Other investments 22,734 17,603 20,346 32,237 Loans 21,921 19,098 22,055 12,912 Reinsurance assets 8,780 7,520 8,503 72 Current tax assets 49 8 - 1,234 Deferred tax assets 839 704 908 14,081 Receivables and other financial assets 9,575 6,901 7,509 4,728 Deferred acquisition costs and other assets 3,215 3,645 3,189 3,794 Prepayments and accrued income 2,580 2,285 2,307 21,184 Cash and cash equivalents 14,405 10,002 12,779 163 Assets of operations classified as held for sale 111 - -------------------------------------------------------------------------------------------------------------------372,849 Total assets 253,537 219,542 244,252================================================================================================================== Equity 874 Share capital 594 566 570 6,487 Capital reserves 4,411 3,839 3,878 749 Other reserves 509 237 736 3,056 Retained earnings 2,079 1,107 1,709 7,412 Additional retained profit on an EEV basis 5,040 4,342 4,768------------------------------------------------------------------------------------------------------------------ 18,578 Equity attributable to shareholders of Aviva plc 12,633 10,091 11,661 1,750 Preference share capital and direct capital instrument 1,190 200 1,190 1,887 Minority interests 1,283 987 1,160------------------------------------------------------------------------------------------------------------------ 22,215 Total equity 15,106 11,278 14,011================================================================================================================== Liabilities188,324 Gross insurance liabilities 128,060 113,222 124,122104,419 Gross liability for investment contracts 71,005 58,932 69,555 11,371 Unallocated divisible surplus 7,732 9,128 7,549 3,541 Provisions 2,408 1,803 2,056 1,584 Current tax liabilities 1,077 871 922 2,434 Deferred tax liabilities 1,655 979 1,543 15,735 Borrowings 10,700 8,817 10,090 10,362 Payables and other financial liabilities 7,047 8,639 7,240 9,184 Other liabilities 6,245 3,820 4,917 3,631 Net asset value attributable to unitholders 2,469 2,053 2,247 49 Liabilities of operations classified as held for sale 33 - -------------------------------------------------------------------------------------------------------------------350,634 Total liabilities 238,431 208,264 230,241================================================================================================================== ------------------------------------------------------------------------------------------------------------------372,849 Total equity and liabilities 253,537 219,542 244,252================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. -------------------------------------------------------------------------------------------------------------------Page 27 Segmentation of summarised consolidated balance sheet - EEV basisAs at 30 June 2005 Restated* Restated* Life and General Life and General related business related business Restated* businesses and other Group businesses and other Group Group 30 June 30 June 30 June 30 June 30 June 30 June 31 December 2005 2005 2005 2004 2004 2004 2004 £m £m £m £m £m £m £mTotal assets before acquired additional value of in-force long-term business 211,209 36,760 247,969 184,337 30,336 214,673 238,939Acquired additional value of in-force long-term business 326 - 326 376 - 376 364------------------------------------------------------------------------------------------------------------------Total assets included in the statutory IFRS balance sheet 211,535 36,760 248,295 184,713 30,336 215,049 239,303================================================================================================================== Liabilities of the long-term business (203,113) - (203,113) (177,002) - (177,002) (198,483)Liabilities of the general insurance and other businesses - (35,411) (35,411) - (31,331) (31,331) (31,827)-------------------------------------------------------------------------------------------------------------------Net assets on a statutory IFRS basis 8,422 1,349 9,771 7,711 (995) 6,716 8,993 Pension scheme funding adjustment** 93 - 93 69 - 69 69Additional value of in-force long-term business*** 5,242 - 5,242 4,493 - 4,493 4,949------------------------------------------------------------------------------------------------------------------Net assets on an EEV basis**** 13,757 1,349 15,106 12,273 (995) 11,278 14,011================================================================================================================== Equity capital, capital reserves, shares held by employee trusts and other reserves 5,514 4,642 5,184IFRS basis retained earnings 2,079 1,107 1,709Additional EEV basis retained profit 5,040 4,342 4,768------------------------------------------------------------------------------------------------------------------Equity attributable to shareholders of Aviva plc on an EEV basis 12,633 10,091 11,661Preference share capital and direct capital instrument 1,190 200 1,190Minority interests 1,283 987 1,160------------------------------------------------------------------------------------------------------------------EEV basis total equity 15,106 11,278 14,011================================================================================================================== * Restated for the effect of implementing European Embedded Value principles.** The difference in pension scheme funding arises on the embedded value balance sheet as the element of the pension scheme deficit which relates to UK Life and other related businesses is now incorporated within shareholders' funds at an amount equivalent to the post-tax contributions discounted using the UK Life business risk discount rate.*** The analysis between the Group's and the minority interest's share of the additional value of in-force long-term business is as follows: 30 June 31 December Movement in 2005 2004 the period £m £m £m Group's share included in shareholders funds 5,040 4,768 272Minority interest share 295 250 45Difference in pension scheme funding (93) (69) (24)------------------------------------------------------------------------------------------------------------------Balance at 30 June / 31 December 5,242 4,949 293================================================================================================================= **** Analysis of net assets on an EEV basis is made up as follows: Restated* 30 June 30 June 31 December 2005 2004 2004 £m £m £mLong-term business net assets on an EEV basis 13,757 12,273 13,826-----------------------------------------------------------------------------------------------------------------Comprises:Embedded value 12,989 11,473 13,014RBSG goodwill 217 217 217Goodwill allocated to long-term business 551 583 595-----------------------------------------------------------------------------------------------------------------Long-term business net assets on an EEV basis 13,757 12,273 13,826================================================================================================================= * Restated for the effect of implementing European Embedded Value principles. -----------------------------------------------------------------------------------------------------------------Page 28 Basis of preparation - EEV basis The consolidated income statement and balance sheet on pages 24 to 27 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. In the Directors' opinion, the EEV basis provides a more accurate reflection of the performance of the Group's life and related operations year on year than results presented under the IFRS basis. The Directors consider that the EEVmethodology is a refinement to the Achieved Profits basis previously adopted by the Group and represents a more meaningful basis of reporting the underlying value in our life business and the underlying drivers of performance. This basis allows for the impact of uncertainty in the future investment returns more explicitly and is consistentwith the way the business is priced and managed. The Group's revised approach to establishing economic assumptions (specifically investment returns, required capital and discount rates) was reviewed by Tillinghast, a firm of actuarial consultants, as part of the restatement work.The approach is based on the well established capital asset pricing model theory and is in line with the EEV Principles and Guidance. In addition, the results of our equity release business have been reclassified from non-insurance operations to life insurance operations. This has resulted in assets, liabilities and operating profits being reclassified out ofnon-insurance segments and into life segments. Comparatives for 30 June 2004 have been restated accordingly and the impact of the reclassification on consolidated shareholders' funds and consolidated profit for the six months to30 June 2004 is nil. The results for the six month period to 30 June 2005 and 30 June 2004 are unaudited but have been reviewed by the auditors, Ernst & Young LLP. Their report in respect of 30 June 2005 is included in the Interim Report on page 58of that document. The interim accounts do not constitute statutory accounts as defined by Section 240 of theCompanies Act 1985. Covered business The EEV calculations cover the following lines of business: life insurance, long term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fundbusiness and our share of the other life and related business written in our associated undertakings and joint ventures, as well as the equity release business written in the UK. The adoption of IFRS has resulted in no change tothe Group's definition of new business and so includes contracts that meet the definition of "non-participating investment" contracts under IFRS. Covered business includes the Group's share of our joint venture operations including our arrangement with The RoyalBank of Scotland Group (RBSG) and our operations in India and China. In addition, the results of Group companiesproviding significant administration, investment management and other services and of Group holding companies have been included to the extent that they relate to covered business. Together these businesses are referred to as "Lifeand related businesses". New business premiums New business premiums include: • premiums arising from the sales of new contracts during the period; • non-contractual additional premiums, including future Department of Work and Pensions (DWP) rebate premiums; and • expected renewals on new contracts and expected future contractual alterations to new contracts. For products sold to individuals, premiums are generally considered to represent new business in certain circumstances, including where a new contract has been signed, or where underwriting has been performed. Renewalpremiums include contractual renewals, non-contractual variations that are reasonably predictable and recurrent single premiums that are pre-defined and reasonably predictable. For group products, new business includes new contracts and increases to aggregate premiums under existing contracts.Renewal premiums are based on the level of premium received during the reporting period and allow for premiumsexpected to be received beyond the expiry of any guaranteed premium rates. Foreign exchange adjustments Embedded value and other balance sheet items denominated in foreign currencies have been translated to sterling usingthe appropriate closing exchange rate. New business contribution and other income statement items have been translatedusing an average exchange rate for the relevant period. The exchange rates adopted in this announcement are shown onpage 50. EEV methodology Overview Under the EEV methodology, profit is recognised as it is earned over the life of products defined within covered business. The total profit recognised over the lifetime of a policy is the same as under the IFRS basis of reporting, but the timing of recognition is different. Calculation of the embedded value The shareholders' interest in the life and related businesses is represented by the embedded value. The embedded value is the total of the net worth of the life and related businesses and the value of in-force covered business.Calculations are performed separately for each business and are based on the cash flows of that business, after allowing for both external and intra-group reinsurance. Where one life business has an interest in another life business, the net worth of that business excludes the interest in the dependent company. -----------------------------------------------------------------------------------------------------------------Page 29 The embedded value is calculated on an after-tax basis applying current legislation and practice together with futureknown changes. Profits are then grossed up for tax at the full rate of corporation tax for the UK and at anappropriate rate for each of the other countries based on opening year tax rates. Net worth The net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in thenon-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets, and consists of the required capital and free surplus. The level of required capitalfor each business, which ranges between 100% and 200% of the EU minimum solvency requirement for our main European businesses, reflects the level of capital considered by the Directors to be appropriate to manage the business, allowing for our internal assessment of the level of market, insurance and operating risk inherent in the underlyingproducts. The same definition of required capital is used for both existing and new business. The free surplus comprises the market value of shareholder assets in excess of local statutory reserves and required capital. Value of in-force covered business The value of in-force covered business is the present value at the appropriate risk discount rate (which incorporates a risk margin) of the distributable profits to shareholders arising from the in-force covered business projected ona best estimate basis, less a deduction for the cost of holding the required level of capital. In the UK, shareholders' distributable profits arise when they are released following actuarial valuations. These valuations are carried out in accordance with statutory requirements designed to ensure and demonstrate solvency inlong-term business funds. Future distributable profits will depend on experience in a number of areas such as investment return, discontinuance rates, mortality, administration costs, as well as management and policyholder actions. Releases to shareholders arising in future years from the in-force covered business and associated required capital can be projected using best estimate assumptions of future experience. In overseas businesses generally, there are similar requirements restricting payments to shareholders from life businesses. The value of in-force covered business includes an allowance for the impact of financial options and guarantees arising from best estimate assumptions (the intrinsic value) and from additional costs related to the variability ofinvestment returns (the time value). The intrinsic value is included in the underlying value of the in-force coveredbusiness using deterministic assumptions. The time value of financial options and guarantees has been determined usingstochastic modelling techniques. Stochastic modelling involves projecting the future cash flows of the business under thousands of economic scenarios that are representative of the possible future outcomes for market variables such as interest rates and equity returns. Allowance is made, where appropriate, for the effect of management and/or policyholder actions in different economic conditions on future assumptions such as asset mix, bonus rates and surrender rates. The time value is determined by deducting the average value of shareholder cash flows under these economic scenarios from the deterministic shareholder value under best estimate assumptions. The cost of holding required capital is the difference between the required capital and the present value at the appropriate risk discount rate of the projected release of the required capital and investment earnings on the assetsdeemed to back the required capital. Where the required capital is covered by policyholder assets, for example in theUK with-profit funds, there is no impact of cost of capital on shareholder value. The assets regarded as covering therequired capital are those that the operation deems appropriate. The value of in-force covered business includes the capitalised value of profits and losses arising from subsidiary companies providing administration, investment management and other services to the extent that they relate tocovered business. This is referred to as the "look through" into service company expenses. In addition, expenses arising in holding companies that relate directly to acquiring or maintaining covered business have been allowed for.Where external companies provide services to the life and related businesses, their charges have been allowed for in the underlying projected cost base. Risk discount rates Under the EEV methodology, a risk discount rate (RDR) is required to express a stream of expected future distributableprofits as a single value at a particular date (the present value). It is the interest rate that an investmentequal to the present value would have to earn in order to be able to replicate exactly the stream of future profits. The RDR is a combination of a risk free rate to reflect the time value of money plus a risk margin to make prudentallowance for the risk that experience in future years may differ from that assumed. In particular, a risk margin is added to allow for the risk that expected additional returns on certain asset classes (e.g. equities) are notachieved. Risk discount rates for our life businesses have been calculated using a risk margin based upon a Group Weighted Average Cost of Capital (WACC). The Group WACC is calculated using a gross risk free interest rate, an equity risk margin, a market assessed risk factor (beta), and an allowance for the gearing impact of debt financing (including subordinated debt). The market assessed risk factor captures the market's view of the effect of all types of risk on our business, including operational and other non-economic risk. The RDR is only one component of the overall allowance for risk in EEV calculations. Risk is also allowed for in the cost of holding statutory reserving margins, additional required capital and in the time value of optionsand guarantees. Hence to derive an RDR the Group WACC is adjusted to reflect the average level of required capital assumed to be held, and to reflect the explicit valuation of the time value of options and guarantees. -----------------------------------------------------------------------------------------------------------------Page 30 In order to derive risk discount rates for each of our life businesses, the adjusted Group WACC is expressed as a risk margin in excess of the gross risk free interest rate used in the WACC calculation as described above.Business-specific discount rates are then calculated as the sum of this risk margin and the appropriate local gross risk free rate at the valuation date, based on returns on government bonds. A common risk free rate, and hence acommon RDR, is used for all of our businesses within the Eurozone. Additional country-specific risk margins are applied to smaller businesses to reflect additional economic, political and business-specific risk. Within eachbusiness, a constant RDR has been applied in all future time periods and in each of the economic scenarios underlying the calculation of the time value of options and guarantees. At each valuation date, the risk margin is reassessed based on current economic factors and is updated only if a significant change has occurred. In particular, changes in risk profile arising from movements in asset mix are allowed for via the updated risk margin calculation. Participating business Future regular bonuses on participating business are projected in a manner consistent with current bonus rates and expected future returns on assets deemed to back the policies. For with-profit funds in the UK and Ireland, for the purpose of recognising the value of the estate, it is assumed that terminal bonuses are increased to exhaust all of the assets in the fund over the future lifetime of the in-forcewith-profit policies. However, under stochastic modelling there may be some extreme economic scenarios when the total assets in the group's with-profit funds are not sufficient to pay all policyholder claims. The average additionalshareholder cost arising from this shortfall has been included in the time value of options and guarantees. For profit sharing business in continental Europe, where policy benefits and shareholder value depend on the timing of realising gains, apportionment of unrealised gains between policyholders' benefits and shareholders reflectcontractual requirements as well as existing practice. Where under certain economic scenarios additional shareholderinjections required to meet policyholder payments, the average additional cost has been included in the timevalue of options and guarantees. Consolidation adjustments The effect of transactions between our life companies such as loans and reinsurance arrangements has been included inresults split by territory in a consistent manner. No elimination is required on consolidation. As the EEV methodology incorporates the impact of profits and losses arising from subsidiary companies providing administration, investment management and other services to the Group's life companies, the equivalent profits and losses have been removed from the relevant segment (non insurance or fund management) and are instead included withinthe results of life and related businesses. In addition, the underlying basis of calculation for these profits haschanged from the IFRS basis to the EEV basis. The capitalised value of the future profits and losses from such service companies are included in the embedded valueand new business contribution calculations for the relevant territory, but the net assets (representinghistorical profits and other amounts) remain under non insurance or fund management. In order to reconcile the profitsarising in the financial period within each segment with the assets on the opening and closing balance sheets, atransfer of IFRS profits from life and related business to the appropriate segment is deemed to occur. An equivalent approach has been adopted for expenses within our holding companies. -----------------------------------------------------------------------------------------------------------------Page 31 Components of life EEV return The life EEV return comprises the following components: • new business contribution written during the period including value added between the point of sale and end of the period;• 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; • the expected investment return on the shareholders' net worth, based upon assumptions applying at the start of the year;• 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 • 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 theperiod. Restated* 6 months 6 months Full year 2005 2004 2004Life EEV return £m £m £m New business contribution (after the effect of required capital) 286 251 516Profit from existing business - expected return 434 417 819 - experience variances (31) (20) (15) - operating assumption changes 7 - (7)Expected return on shareholders' net worth 161 151 298------------------------------------------------------------------------------------------------------------------Life EEV operating return before tax 857 799 1,611 Investment return variances 719 (202) 501Effect of economic assumption changes (531) 56 (318)------------------------------------------------------------------------------------------------------------------Life EEV return before tax 1,045 653 1,794Tax on operating profit (266) (244) (490)Tax (charge)/credit on other ordinary activities (65) 36 (58)------------------------------------------------------------------------------------------------------------------Life EEV return after tax 714 445 1,246================================================================================================================== * Restated for the effect of implementing European Embedded Value principles. There were no separate development costs reported in these periods. ------------------------------------------------------------------------------------------------------------------Page 32 New business contribution The following tables set out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out on page 28. The contribution generated by new business written during the period is the present value of the projected stream of after tax distributable profit from that business. New business contribution before tax is calculated by grossing upthe contribution after tax at the full corporation tax rate for UK business and at appropriate rates of tax for other countries. New business contribution has been calculated using the same economic assumptions as those used to determine the embedded value as at the start of the year and operating assumptions used to determine the embedded value as at the end of the year, and is rolled forward to the end of the financial period. New business sales are expressed on two bases: annual premium equivalent (APE) and the present value of future new business premiums (PVNBP). The PVNBP calculation is equal to total single premium sales received in the year plus thediscounted 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 regularpremiums for each product are the same as those used to calculate new business contribution, so the components of thenew business margin are on a consistent basis. New business contribution is shown before and after the effect of required capital, calculated on the same basis as for in-force covered business. New business New business contributon contribution Annual premium Present value of new before the effect of after the effect of equivalent* business premiums required capital required capital ------------------ ---------------------- ----------------- -------------------- Restated** Restated** Restated** 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 2005 2004 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m £m £mLife and pensions business United Kingdom 536 567 4,244 4,299 135 127 105 106Continental EuropeFrance 202 145 1,854 1,337 71 46 48 27Ireland 51 44 349 267 9 13 8 11Italy 145 89 1,333 811 33 22 20 14Netherlands (including Belgium and Luxembourg) 138 119 1,241 981 39 40 18 25Poland 17 18 112 121 5 5 5 4Spain 113 130 965 1,122 80 68 70 55Other Europe 55 58 364 388 3 1 2 (2)International 89 74 554 427 18 16 10 11-------------------------------------------------------------------------------------------------------------------Total (before the effect of required capital) 1,346 1,244 11,016 9,753 393 338Effect of required capital (107) (87)-----------------------------------------------------------------------------------------------Total (after the effect of required capital) 286 251 286 251================================================================================================================== * United Kingdom APE has been restated to include NUER APE volumes of £18 million (six months 30 June 2004: £20 million) ** Restated for the effect of implementing European Embedded Value Principles. New business contribution before the effect of required capital includes minority interests for the six months to 30June 2005 of £77 million (six months to 30 June 2004: £56 million). This comprises minority interests in France of £11 million (six months to 30 June 2004: £2 million), Italy £20 million (six months to 30 June 2004: £13 million), Netherlands £5 million (six months to 30 June 2004: £5 million), Poland £1 million (six months to 30 June 2004: £1 million) and Spain £40 million (six months to 30 June 2004: £35 million). New business contribution after the effect of required capital includes minority interests for the six months to 30 June 2005 of £58 million (six months to 30 June 2004: £42 million). This comprises minority interests in France of £6 million (six months to 30 June 2004: nil), Italy £12 million (six months to 30 June 2004: £8 million), Netherlands £4 million (six months to 30 June 2004: £4 million), Poland £1 million (six months to 30 June 2004: £1 million) andSpain £35 million (six months to 30 June 2004: £29 million). -------------------------------------------------------------------------------------------------------------------Page 33 EEV basis - new business contribution before the effect of required capital, tax and minority interest Annual premium Present value of new New business equivalent* business premiums contribution ---------------------- -------------------- ------------------ Restated** Restated** 6 months 6 months 6 months 6 months 6 months 6months 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m Analysed between: - Bancassurance channels 369 275 3,222 2,305 149 116 - Other distribution channels 977 969 7,794 7,448 244 222------------------------------------------------------------------------------------------------------------------Total 1,346 1,244 11,016 9,753 393 338================================================================================================================== * APE has been restated to include NUER volumes.** Restated for the effect of implementing European Embedded Value Principles. EEV basis - new business contribution after the effect of required capital, taxand minority interest Annual premium Present value of new New business equivalent* business premiums contribution** ---------------------- -------------------- ------------------ Restated*** Restated*** 6 months 6 months 6 months 6 months 6 months 6months 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m Analysed between: - Bancassurance channels 197 154 1,678 1,263 42 35- Other distribution channels 955 948 7,597 7,288 116 111------------------------------------------------------------------------------------------------------------------Total 1,152 1,102 9,275 8,551 158 146================================================================================================================== * APE has been restated to include NUER volumes.** Contribution stated after deducting the effect of required capital, tax and minority interests.*** Restated for the effect of implementing European Embedded Value Principles. 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 12.7% for the six months to 30 June 2005 (full year to 31 December 2004: 12.3%). 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 optionsand 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. 6 months 2005 ----------------------------------------------------------------------------- Internal rate of Total invested return Initial capital Required capital capital % £m £m £m UK 11% 174 82 256 Continental Europe France 13% 10 48 58Ireland 11% 13 6 19Italy 13% 5 32 37Netherlands (including Belgium and Luxembourg) 8% 22 37 59Poland 18% 4 2 6Spain 26% 8 30 38Other Europe 11% 9 9 18 International 15% 13 19 32------------------------------------------------------------------------------------------------------------------Total 13% 258 265 523================================================================================================================== The total initial capital for life and pensions new business for the six months to 30 June 2005 of £258 million (six months to 30 June 2004: £309 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 £210 million (six months to 30 June 2004: £280 million) shown on page 36, because the latter amount includes expected profits from the point of sale to the end of the reporting period, partly offset by the expected return on the initial capital. ------------------------------------------------------------------------------------------------------------------Page 34 Aviva's reported internal rates of return calculations are based on the total invested capital used to support the writing of the new business. However, this underestimates the returns due to the Group's shareholders as the total invested capital includes the cash flows attributable to both the Group's debt holders as well as the Group's shareholders. As the cost of debt capital is significantly lower than the Group's IRRs this underestimates thereturns on new business for our shareholders measured through the reported internal rate of return calculations. The Group could equally have defined the internal rate of return calculations based on the cash flows that are attributable to the Group's shareholders as opposed to total cash flows. The effect on the reported calculation of the internal rates of return on this basis is to increase the IRR for UK Life from 11.4% to 13.6%. The revised calculation assumes that the external capital composition of the Group, 30% debtand 70% equity, is used to finance the initial and required capital, and allows for the cost of debt by deducting therelevant proportion of the Group's debt serving costs from the future cash flows earned over the lifetime of theproducts. The leveraged new business returns comfortably exceed the Group's cost of equity at 30 June 2005 of 8.6% (based on a risk free rate of 4.2%, an equity risk margin of 3% and a market assessed beta of 1.46). Experience variances Experience variances include the impact of the difference between expense, demographic and persistency assumptions, and actual experience incurred in the year. Also included are variances arising from tax, where such variances are dueto management action. Restated* 6 months 6 months Full year 2005 2004 2004 £m £m £m United Kingdom (30) (19) (81)France 18 2 22Netherlands (including Belgium and Luxembourg) (13) (1) 12Related Shares:
Aviva