Part 2 of 5 HY09 Report

RNS Number : 9698W

Aviva PLC

06 August 2009

 



Part 2 of 5

Page 1

Half Year Report 

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Page 2

Results 

Contents

Group performance		3
Proforma reconciliation to group operating profit to profit after tax - IFRS basis		5
1	Geographical analysis of long-term business IFRS operating profit	6
2	Analysis of general insurance and health	7
3	Geographical analysis of fund management	9
4	Analysis of other operations and regional costs	10
5	Corporate centre	10
6	Group debt costs and other interest	11
7	Long-term business investment return variances and economic assumption changes	11
8	Non-long-term business economic volatility	12
9	Integration and restructuring costs	12
New business		13
Proforma reconciliation to group operating profit to profit after tax - MCEV basis		20
10	Life MCEV operating earnings	21
11	Analysis of life and pensions earnings	23
Capital management		25
Operational cost base		32
Analysis of assets		33
Financial Supplement		47

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Page 3 

Group Performance 

Half year 2009 key financial highlights

	IFRS				MCEV
	6 months  2009 £m	Restated  6 months 2008 £m	Growth %		6 months  2009 £m	Restated  6 months 2008 £m	Growth %
IFRS long-term business profit/ Life MCEV operating return	940	958	(2)%		1,607	1,280	26 %
General insurance and health	545	528	3 %		545	528	3 %
Fund management	35	75	(53)%		(4)	30	(113)%
Other:
Other operations and regional costs	(107)	(66)	(62)%		(99)	(57)	(74)%
Corporate centre	(46)	(71)	35 %		(46)	(71)	35 %
Group debt and other interest costs	(318)	(201)	(58)%		(318)	(201)	(58)%
Operating profit before tax	1,049	1,223	(14)%		1,685	1,509	12 %
Profit/(loss) after tax	747	(84)			1,084	(2,361)
Total dividend per share	9.0p	13.09p			n/a	n/a
Net asset value per share	349p	437p			416p	660p
Diluted earnings per share	24.8p	(4.0)p			38.9p	(91.6)p
Equity shareholders' funds	£9,549m	£11,625m			£11,399m	£17,541m
Return on equity shareholders' funds					16.5%	11.0%1

1.    As at 31 December 2008

IFRS profit after tax of £747 million	Strong improvement in profit after tax benefiting from resilient operating result and improved market conditions.  Change in longer-term investment return (LTIR) rate basis contributed £129 million to operating profit. Diluted earnings per share on an IFRS basis increased to 24.8 pence.
IFRS long-term business operating profit down 2% to £940 million	Result impacted by the prevailing economic climate with lower expected returns, resulting from decreased asset values following falls in financial markets and lower interest rates. UK Life result includes impact of reduced with-profit special distribution bonus of £86 million (H1 2008: £124 million). Asia Pacific benefited from a £58 million one-off release from reserves following an actuarial review of risk margins.
General insurance and health operating profit up 3% to £545 million	General insurance and health operating profit increased by 3% (H1 2008: £528 million). Group underwriting result of £118 million, a strong increase on prior period (H1 2008: £52 million). Reserve releases of £190 million (H1 2008: £230 million), net of reinsurance, from previous accident year and prior.  Longer-term investment return down 9% to £436 million driven by lower asset values and lower interest rates when compared to the prior period. Net written premiums down 15% to £4,947 million (down 4% adjusted for the sale of Delta Lloyd Healthcare), with reductions in the UK partially offset by increases in other regions. COR of 97% in line with H1 2008 and consistent with overall 98% 'meet or beat' target, with improvements in expense and distribution ratios offset by increase in claims costs.
Fund management down to £35 million on an IFRS basis	Operating profit decrease to £35 million reflecting decline in management fee income. Reduction due to significant falls across all major equity markets during the second half of 2008, together with the continued fall in real estate capital values, leading to a reduction in average funds under management for the period compared to the first half of 2008.  Net new business flows of £3 billion, with £2 billion of this from third party clients.
Underlying costs down by 9%	Underlying cost base, excluding foreign exchange and restructuring costs, reduced by 9% over the last 12 months and ahead of our plan to deliver £500 million of cost savings by 2010.
Net asset value of   349 pence per share on an IFRS basis	Reduction in NAV to 349 pence for H1 2009 (FY 2008: 416 pence; H1 2008: 437 pence) impacted by exchange movements of £1,476 million and pension schemes deficit increase of £1,380 million, primarily driven by changes in discount rates and increases in long term inflation assumptions.

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Page 4 

Group performance continued 

New business sales	Worldwide long-term new business sales, including investment products of £19,421 million 6% down compared with H1 2008 (down 16% in local currency). Life and pension sales down 4% to £17,473 million (down 15% in local currency) with higher sales in North America more than offset by reductions across all regions. Bancassurance remains a significant contributor, accounting for almost a third of our global life and pensions sales. Sales through bancassurance channels were £5.4 billion for H1 2009. Overall new business margin of 2.1%, in line with FY08 and a 0.2% increase on H1 2008. IRR on life and pension new business for the group was 9.5% (H1 2008: 12.9%)
MCEV operating profit up 12% to £1,685 million	Life MCEV operating earnings up by 26% to £1,607 million.  Unfavourable movement in experience variance is driven predominately by adverse persistency experience in a number of businesses.  Change in LTIR rate basis contributed £350 million to operating profit.
Net asset value of 416 pence per share on an MCEV basis	Net asset value impacted by increase in pension schemes deficit of £1,380 million and unfavourable exchange movements of £1,746 million. Impact of marking own debt to market would add 67p to MCEV net asset value.
Increase in IGD solvency to £3.2 billion	Strong growth reflects a combination of operating and market performance as well as the benefit of capital management initiatives.   Initiatives in the period include the issue of £0.2 billion of hybrid capital, issuance of hybrid debt in the Netherlands of £0.4 billion and a £0.1 billion benefit from the disposal of the Dutch healthcare business. 40% fall in equities would reduce IGD surplus by £0.3 billion; 40% rise would improve IGD surplus by £0.7 billion.
Liquidity	Strong liquidity position with direct access to £1.1 billion of liquid assets. £2.1 billion of undrawn committed credit facilities provided by a range of leading international banks.
Interim dividend of 9 pence	Interim dividend for 2009 of 9 pence, a reduction of 31% from 2008.
Group's rating from Standard and Poors is AA- ('very strong')	Group's rating from Standard and Poors is AA- ('very strong') with a Negative outlook, and A ('excellent') from A M Best with a Stable outlook. Moody's group rating at Aa3 ('excellent') reaffirmed in May 2009, with a Negative outlook in line with the UK sector. Ratings continue to reflect our strong competitive position, positive strategic management, strong and diversified underlying earnings profile, and robust liquidity.
Sale announced of Australian business for £452 million	Sale of Australian life business for £452 million expected in Q3 2009, a return of 16 times 2008 IFRS earnings. This transaction is expected to contribute around £0.4 billion to IGD surplus on completion.
US listing	Continued to make good progress on our global finance programme, which will bring with it Sarbanes-Oxley compliance. This would enable us to consider a listing of our shares in the US if we choose to do so. Over 20% of our shareholders are in the US.
Asset quality	Quality of Aviva's asset base continues to be strong.  No material deterioration since end 2008 in either credit quality or the proportion of assets which are valued either based on quoted prices in an active market or using models with significant observable market parameters. 94.8% of total debt securities are investment grade, with 1.6% below investment grade and 3.6% not rated. Total corporate debt defaults in H1 2009 of only £15 million and impairments of approximately £50 million (FY 2008: £140 million and £260 million). UK commercial mortgage interest cover constant at 1.3 times. No defaults recorded on bonds and commercial mortgages backing the UK annuity book. Very limited exposure to RMBS (Sub prime, Alt A), ABS, wrapped credit, CDOs and CLOs; these investments represent less than 1.0% of total balance sheet assets.

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Page 5

Proforma reconciliation of group operating profit to profit after tax - IFRS 

For the six month period to 30 June 2009 

	6 months  2009 £m	Restated  6 months  2008 £m	Full year  2008  £m
Operating profit before tax attributable to shareholders' profits
Long-term business
United Kingdom	368	428	751
Europe	478	486	881
North America	24	30	16
Asia Pacific	70	14	46
Total long-term business (note 1)	940	958	1,694
General insurance and health
United Kingdom	284	316	656
Europe	167	137	397
North America	87	76	145
Asia Pacific	7	(1)	-
Total general insurance and health (note 2)	545	528	1,198
Fund management
United Kingdom	2	20	46
Europe	25	33	49
North America	8	13	14
Asia Pacific	-	9	14
Total fund management (note 3)	35	75	123
Other:
Other operations and regional costs (note 4)	(107)	(66)	(198)
Corporate centre (note 5)	(46)	(71)	(141)
Group debt costs and other interest (note 6)	(318)	(201)	(379)
Operating profit before tax attributable to shareholders'	1,049	1,223	2,297
Adjusted for the following:
Investment return variances and economic assumption changes on long-term business (note 7)	155	(636)	(1,631)
Short-term fluctuation in return on investments on non-long-term business (note 8)	(125)	(314)	(819)
Economic assumption changes on general insurance and health business	52	6	(94)
Impairment of goodwill	(5)	(42)	(66)
Amortisation and impairment of intangibles	(58)	(51)	(117)
Profit on the disposal of subsidiaries and associates	20	9	7
Integration and restructuring costs (note 9)	(148)	(132)	(326)
Exceptional items	-	(84)	(551)
Profit/(loss) before tax	940	(21)	(1,300)
Tax on operating profit	(235)	(351)	(487)
Tax on other activities	42	288	902
	(193)	(63)	415
Profit/(loss) for the period	747	(84)	(885)

The six months to 30 June 2008 have been restated to reflect the restatements for the consolidation of managed funds and to reflect the change in accounting policy for latent reserves. More detail is included in the Financial Supplement - A1 Basis of Preparation

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Page 6 

Group operating profit -IFRS continued 

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

	6 months 2009 £m	Restated  6 months  2008 £m	Full year  2008  £m
With-profit	137	202	289
Non-profit	231	226	462
United Kingdom	368	428	751
France	122	145	275
Ireland	29	28	61
Italy	37	37	48
Netherlands (including Belgium and Germany)	148	134	196
Poland	72	76	162
Spain	71	74	155
Other Europe	(1)	(8)	(16)
Europe	478	486	881
North America1	24	30	16
Asia	48	(7)	2
Australia	22	21	44
Asia Pacific	70	14	46
Total	940	958	1,694

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 half year 2008 life IFRS operating profit by £12 million.

IFRS long-term business operating profit before shareholder tax was £940 million (six months to 30 June 2008: £958 million), a decrease of 2% on the prior period.

United Kingdom

IFRS operating profit was 14% lower at £368 million (six months to 30 June 2008: £428 million) driven by the fall in asset market values which have resulted in a lower shareholders' share of the with-profit special distribution bonus at £86 million (six months to 30 June 2008: £124 million). This has been compounded by reduced regular and terminal bonus payments.

Despite reduced annual management income, the non-profit result increased by 2% to £231 million (six months to 30 June 2008: £226 million) as we start to see the benefits of our successful operational efficiency initiatives.

Europe

In Europe, operating profit was £478 million (six months to 30 June 2008: £486 million), a 2% decrease on the prior period reflecting reduced management fees earned on unit-linked business and lower expected returns on assets under management. Offsetting these factors we have benefited from foreign exchange strengthening, principally on the euro.

In Italy, an increase in profits from existing business offset the increase in new business strain arising from sales growth of 45% in constant currency. This performance reflects a £2 million contribution from Aviva Assicurazioni Vita (formally UBI Vita) which was acquired in June 2008.

The Netherlands result increased by 10% to £148 million (six months to 30 June 2008: £134 million) reflecting currency strengthening and lower new business strain driven by a decrease in corporate pension sales offset by lower return on opening assets values.

North America

Life operating profit decreased by 20% to £24 million (six months to 30 June 2008: £30 million). The favourable impact of new business and the actions management has taken to improve life and annuity profitability was offset by margin compression, including higher option costs, and the impact of higher lapse experience.

Asia Pacific

Life operating profit increased to £70 million (six months to 30 June 2008: £14 million). The result benefited from a one-off release of reserves in Singapore of £58 million following an actuarial review of risk margins.

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Page 7 

2 - Analysis of general insurance and health 

	Underwriting result				Longer-term investment return				Operating profit2
	6 months 2009 £m	6 months 2008 £m	Full year  2008  £m		6 months 2009 £m	6 months 2008 £m	Full year  2008  £m		6 months 2009 £m	Restated  6 months 2008 £m	Full year  2008  £m
General insurance
United Kingdom1,2	63	32	70		227	286	579		282	314	642
France	7	2	28		24	23	53		31	25	81
Ireland	15	8	(3)		33	33	67		47	41	63
Netherlands	6	18	54		53	39	92		59	56	146
Other	1	5	-		23	17	45		24	22	45
Europe	29	33	79		133	112	257		161	144	335
North America	21	15	21		66	61	124		87	76	145
Asia Pacific	-	(2)	(5)		1	-	1		1	(2)	(4)
	113	78	165		427	459	961		531	532	1,118
Health insurance
United Kingdom	-	(1)	8		2	3	6		2	2	14
France	(2)	(1)	11		7	6	15		5	5	26
Ireland	1	-	4		-	-	1		1	-	5
Netherlands3	-	(25)	(11)		-	12	42		-	(12)	31
Europe	(1)	(26)	4		7	18	58		6	(7)	62
Asia Pacific	6	1	4		-	-	-		6	1	4
	5	(26)	16		9	21	64		14	(4)	80
Total	118	52	181		436	480	1,025		545	528	1,198

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

2.    Operating profit includes an unfavourable impact of £9 million resulting from unwind of discount (30 June 2008: £4 million; 31 December 2008: £8 million).

3.    Prior period results include Delta Lloyd health which was sold 1 January 2009.

Group operating profit from general insurance and health businesses increased by 3% to £545 million (six months to 30 June 2008 restated: £528 million). The general insurance and health underwriting result increased to £118 million (six months to 30 June 2008: £52 million).

We continue to apply our reserving policy consistently and the reserves in the group are set conservatively with the aim to protect against adverse future claims experience and development. Our business is predominantly short tail in nature and loss development experience is generally stable. As a result of the conservatism applied in setting the reserves, there are releases of £190 million, net of reinsurance, in 2009 which reflect releases from the 2008 accident year and prior (six months to 30 June 2008: £230 million).  

The worldwide general insurance combined operating ratio (COR) was 97% (six months to 30 June 2008: 97%) in line with the group's 'meet or beat' target. The worldwide GI expense ratio has decreased to 12.3% (six months to 30 June 2008: 12.7%) reflecting cost savings from our efficiency programmes and actions taken across the group to manage the cost base.

The longer term investment return (LTIR) on general insurance and health business assets was lower at £436 million (six months to 30 June 2008: £480 million).

United Kingdom

The results for the United Kingdom include our general insurer Aviva General Insurance UK, our group captive reinsurer Aviva Re and agencies in run-off. Operating profit of £282 million (six months to 30 June 2008 restated: £314 million) includes a contribution of £35 million (six months to 30 June 2008: £19 million) from Aviva Re.

Aviva General Insurance UK operating profit for the first half of 2009 has reduced by 16% to £247 million (six months to 30 June 2008 restated: £295 million). The result includes savings on prior year claims development of £88 million (six months to 30 June 2008 restated: £153 million) and a reduction in investment returns to £217 million (six months to 30 June 2008: £273 million) due to a combination of lower interest rates, investment mix and lower asset value at the beginning of the year. The combined operating ratio is 99% (six months to 30 June 2008: 98%).

Within the combined operating ratio, the focus we have placed on controlling distribution costs has resulted in a reduction in commission and expense ratios when compared with the first half of 2008. The commission ratio has improved to 22% (six months to 30 June 2008: 25%), reflecting our work to reshape the book so that the business we write through brokers and partners is on more acceptable terms, as well as a reduction in creditor business. The expense ratio has fallen to 11.7% (six months to 30 June 2008: 12.8%) as we continue to realise the benefits from our transformation programmes in Operations and IT, together with actions undertaken to manage the cost base to an appropriate level in the light of lower net written premiums. This means that our distribution ratio (commissions and expenses) has improved from 40% in 2007 and 37% in 2008 to 34% for the half year 2009.

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Page 8

Group operating profit - IFRS continued 

2 - Analysis of general insurance and health continued

We are making excellent progress on the second phase of our transformation programme announced in June 2008. The current phase includes the consolidation of the business into nine modern insurance 'centres of excellence', an exercise that is running ahead of plan and we are already undertaking over 60% of our business within these centres. In addition, we anticipate that re-engineering will reduce the number of processes by half across all locations and products. The overall programme remains on track to deliver annualised savings of £150 million by 2010, with further savings of £30 million realised in the first half of 2009 in addition to the £27 million already recognised in 2008.

The improvement in the commission and expense ratios has been offset by deterioration in the claims ratio in the first half of 2009, reflecting the lower levels of prior year savings and increased creditor claims. The actions we have initiated on delivering insurance excellence by reshaping the book, introducing sophisticated pricing techniques and enhanced risk selection are already benefiting underlying performance and we are confident this will translate into a lower claims ratio in the near future.

The first half of 2009 saw rate increases above the level of claims inflation in all major classes for the first time in around five years. Our rating action within personal lines in the first half of the year has been broadly consistent with that of the market as a whole. As a result we are achieving an average premium increase of 6% in personal motor and 5% in homeowner. The commercial lines market appears to be hardening slowly and remains price competitive. We are maintaining our pricing discipline across new business and renewals and we continue to carry positive rate increases across the whole of our commercial portfolio, achieving an overall average increase of 5% in the first half of the year. This increase together with indexation mean that for the first time in five years premium adequacy levels are improving and are growing above claims inflation. 

Europe

Aviva Europe's general insurance and health business continues to perform well against a backdrop of increasing price competition across a number of countries. Net written premiums for the region were £1,738 million (six months to 30 June 2008: £2,183 million). Adjusting for the sale of Delta Lloyd health (six months to 30 June 2008: £671 million), net written premiums, on an underlying basis, are flat with the exception of Ireland, as a result of the continuation of aggressive competition and difficult trading conditions dominating the Irish general insurance market.

General insurance and health operating profit was £167 million, up 22% (six months to 30 June 2008 restated: £137 million) with the result including the beneficial impact of the euro strengthening. Underwriting result for the region was up against the prior period to £28 million (six months to 30 June 2008: £7 million) with the impact of bad weather in France offset by reserve margin releases. In addition we have seen lower large claims experience which has been offset partly by volume impacts. Longer-term investment return was up 8% to £140 million (six months to 30 June 2008: £130 million) reflecting currency strengthening. On an underlying basis, return was down due to a reduced asset base and lower interest rates.

Our combined operating ratio of 96% is within the group's 'meet or beat' target (six months to 30 June 2008: 95%).  

In the Netherlands, net written premiums reduced to £677 million (six months to 30 June 2008: £1,231 million) following the sale of the health business to OWM CZ Groep Zorgverkeraar on 1 January 2009. Operating profit increased to £59 million (six months to 30 June 2008: £44 million) reflecting the £12 million loss incurred by the health business in the prior period. The general insurance COR worsened to 97% (six months to 30 June 2008: 92%) due to pressure on motor premium rates and a deterioration in claims experience.

North America

Net written premiums of our Canadian business increased by 15% to £889 million (six months to 30 June 2008: £771 million), underlying increase of 4%. Commercial lines premiums continue to show growth in a competitive market with limited opportunities for rate increases. Personal line premiums grew 2% in local currency, primarily on better homeowner retention. Personal auto premiums were flat as we maintained our focus on profit over volume.

The underwriting result was higher at £21 million (six months to 30 June 2008: £15 million) with a combined operating ratio of 97% (six months to 30 June 2008: 98%). Our claims ratio increased slightly, driven by higher loss severity and reduced favourable prior year development but this was more than offset by actions to reduce commissions and expense levels.

Operating profit increased to £87 million (six months to 30 June 2008: £76 million) reflecting increased sales volumes, the improvement in our underwriting result and foreign exchange movements.

Asia Pacific

Net written premiums in the general insurance and health businesses increased to £22 million (six months to 30 June 2008: £14 million), primarily due to new business initiatives in Singapore.  

Total operating profit improved to £7 million (six months to 30 June 2008: £1 million loss). This result mainly reflected a £5 million benefit from a one-off release of reserves following a review of risk margins in the health business in Singapore and better claims performance in Malaysia following the exit from unprofitable business lines.

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Page 9

Group operating profit - IFRS continued 

2 - Analysis of general insurance and health continued

Combined operating ratios - general insurance business only

	Claims ratio				Expense ratio				Combined operating ratio
	6 months 2009 £m	6 months 2008 £m	Full year  2008  £m		6 months 2009 £m	6 months 2008 £m	Full year  2008  £m		6 months 2009 £m	6 months 2008 £m	Full year  2008  £m
United Kingdom1	65.8%	60.2%	62.0%		11.7%	12.8%	12.1%		99%	98%	99%
France	68.4%	70.0%	68.2%		9.5%	8.7%	9.7%		96%	96%	96%
Ireland	65.1%	71.2%	74.3%		18.2%	15.2%	16.9%		94%	98%	103%
Netherlands	66.2%	60.3%	57.2%		12.5%	14.7%	18.2%		97%	92%	94%
Europe	65.8%	66.3%	64.0%		12.6%	12.3%	15.1%		96%	95%	97%
North America	65.2%	64.7%	64.4%		13.7%	14.2%	15.0%		97%	98%	99%
Total	65.3%	62.5%	62.6%		12.3%	12.7%	13.4%		97%	97%	98%

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.

3 - Geographical analysis of fund management operating profit

	6 months 2009 £m	Restated  6 months  20082 £m	Full year  2008  £m
United Kingdom	14	28	64
Europe	15	20	35
North America	8	13	14
Asia Pacific	(1)	-	1
Aviva Investors1	36	61	114
United Kingdom	(12)	(8)	(18)
Netherlands	9	10	10
Other Europe	1	3	4
Europe	10	13	14
Asia Pacific	1	9	13
Total	35	75	123

1.    Half year 2008 has been restated to reflect the new management structure of Aviva Investors to include France, USA and Canada. Aviva'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, previously recognised in long-term business, has been separately identified and transferred to fund management. This has increased the half year 2008 life IFRS operating profit by £12 million.

Our worldwide fund management operating profit decreased to £35 million (six months to 30 June 2008: £75 million) on an IFRS basis.

Aviva Investors

Operating profit reduced to £36 million (six months to 30 June 2008 restated: £61 million) reflecting the significant decline in management fees seen in the period. The decline in fees can be attributed to the decrease across all major equity markets during the second half of 2008 and the continued fall in real estate capital values, resulting in a reduction in average funds under management when compared to the prior period.

Other fund management businesses

United Kingdom operating loss of £12 million comprises £1 million loss (six months to 30 June 2008: £2 million loss) from our Aviva UK retail investment business and £11 million loss (six months to 30 June 2008: £6 million loss) from our collective investment business with Royal Bank of Scotland Group due to a decline in sales.

Europe operating profit of £10 million (six months to 30 June 2008: £13 million) reflected lower investment management fees from funds under management due to volatile stock markets.

Asia Pacific, comprising our Navigator business in Australia and Singapore, contributed £1 million (six months to 30 June 2008:    £9 million).

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Page 10

Group operating profit - IFRS continued 

3 - Geographical analysis of fund management continued

Total funds under management at 30 June 2009 decreased by 7% to £352 billion (31 December 2008: £379 billion).

	30 June 2009				Restated  31 December 2008
	Life and related businesses £m	General business and other £m	Total £m		Total £m
Total IFRS assets included in the balance sheet	288,657	42,835	331,492		354,562
Third party funds under management:
Unit trusts, OEICs, PEPs and ISAs			19,250		20,876
Segregated funds			42,878		48,104
			393,620		423,542
Non-managed assets			(41,720)		(44,176)
Funds under management			351,900		379,366
Managed by:
Aviva Investors			222,120		236,178
Other Aviva managers			106,580		118,314
Total funds managed by Aviva			328,700		354,492
External fund managers			23,200		24,874
Funds under management			351,900		379,366

Funds managed by Aviva Investors were £222 billion (31 December 2008 £236 billion). The decrease reflects the decline across all major equity markets during the second half of 2008 and in property capital values.  

4 - Analysis of other operations and regional costs

	6 months 2009				6 months 2008				Full year 2008
	Regional Costs £m	Other Operat-ions £m	Total £m		Regional Costs £m	Other Operat-ions £m	Total £m		Regional Costs £m	Other Operat-ions £m	Total £m
United Kingdom	-	(36)	(36)		-	(33)	(33)		-	(12)	(12)
Europe	(11)	(37)	(48)		(12)	(10)	(22)		(28)	(123)	(151)
North America	(9)	1	(8)		(5)	1	(4)		(14)	2	(12)
Asia Pacific	(15)	-	(15)		(7)	-	(7)		(23)	-	(23)
Total	(35)	(72)	(107)		(24)	(42)	(66)		(65)	(133)	(198)

Other operations and regional costs increased to £107 million (six months to 30 June 2008: £66 million) driven by the loss in the Netherlands of £23 million relating to the banking and retail mortgage operations, in line with the second half of 2008.  The increases in regional costs for North America and Asia Pacific are driven by foreign exchange movements and increases in headcount and property expenses.

5 - Corporate centre

	6 months 2009 £m	6 months 2008 £m	Full year  2008  £m
Project spend	(2)	(20)	(34)
Share awards and other incentive schemes	(6)	(8)	(10)
Central spend	(38)	(43)	(97)
Total	(46)	(71)	(141)

The corporate centre costs for the period reduced to £46 million (six months to 30 June 2008: £71 million) due to lower central spend resulting from the implementation of costs saving initiatives and reduced project spend. 

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6 - Group debt costs and other interest

	6 months 2009 £m	6 months 2008 £m	Full year  2008  £m
External
Subordinated debt	(139)	(94)	(229)
Other	(26)	(34)	(57)
Internal	(121)	(95)	(197)
Net finance (charge)/income on UK pension schemes	(32)	22	104
Total	(318)	(201)	(379)

Group debt costs and other interest of £318 million (six months to 30 June 2008: £201 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 £165 million (six months to 30 June 2008: £128 million) reflecting higher interest on subordinated debt, due to the hybrid debt issued in 2008 and 2009, offset by lower commercial paper interest as proceeds from the issue were used to repay some commercial paper. Internal interest costs increased to £121 million (six months to 30 June 2008: £95 million) driven by changes to our internal loan balances. 

The UK pension scheme net charge which represents the difference between the expected return on pension scheme assets and the interest charged on pension scheme liabilities. The net pension charge increased to £32 million (six months to 30 June 2008: £22 million income) reflecting lower rates of return on asset values offset by higher discount rates on liabilities.

7 - 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 were as follows:

	Long-term business
	6 months 2009 £m	6 months 2008 £m	Full year  2008  £m
Investment variances and economic assumptions	155	(636)	(1,631)

(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.

Within the 2008 results, the expected rate of investment return was calculated by reference to the one year swap rate in the relevant currency plus an appropriate risk premium for equities and properties. For 2009, the group considers that the return over the typical duration of the assets held is more appropriate and is more consistent with the group's expectation of long term rates of return. Therefore, the expected return on equities and properties has been calculated by reference to the 10 year swap rate in the relevant currency plus an appropriate risk premium. 

If the IFRS operating profit had been calculated by reference to the one year swap rate, IFRS operating profit would have been    £120 million lower. There is no impact on IFRS profit before tax.

The principal assumptions underlying the calculation of the expected investment return for equities and property are:

	Equities				Properties
	6 months 2009 %	6 months 2008 %	Full year  2008  %		6 months 2009 %	6 months 2008 %	Full year  2008  %
United Kingdom	7.0%	7.6%	9.2%		5.5%	6.6%	7.7%
Eurozone	7.3%	7.4%	8.3%		5.8%	6.4%	6.8%

For fixed interest securities classified as fair value through profit and loss, the expected investment returns are based on average prospective yields for the actual assets held. 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.

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Group operating profit - IFRS continued 

8 - Non-long-term business economic volatility

	Non-long-term business
	6 months 2009 £m	6 months 2008 £m	Full year  2008  £m
Net investment income	497	239	522
Internal charges included under other headings	(116)	31	(73)
	381	270	449
Analysed between:
Longer term investment return, reported within operating profit	506	584	1,268
Short-term fluctuations in investment return, reported outside operating profit	(125)	(314)	(819)
	381	270	449

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

For the general insurance, health and other businesses, we have calculated the longer-term investment return using the revised economic assumptions for equities and properties as noted above. The change in the underlying reference rate results in a £9 million increase to operating profit. There is no impact on IFRS profit before tax.

For other operations, the longer-term investment return mainly reflects net interest income earned in the Netherlands bank and retail mortgage divisions.

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

	30 June  2009	30 June  2008	31 December 2008
Debt securities	9,975	10,578	11,275
Equity securities	1,104	1,130	993
Properties	234	294	278
Cash and cash equivalents	2,393	3,354	3,407
Other	3,864	3,023	3,623
Total	17,570	18,379	19,576

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
	6 months 2009 %	6 months 2008 %	Full year  2008  %		6 months 2009 %	6 months 2008 %	Full year  2008  %
United Kingdom	7.0%	7.6%	9.2%		5.5%	6.6%	7.7%
France	7.3%	7.4%	8.3%		5.8%	6.4%	6.8%
Ireland	7.3%	7.4%	8.3%		5.8%	6.4%	6.8%
Netherlands	7.3%	7.4%	8.3%		5.8%	6.4%	6.8%
Canada	6.1%	7.6%	7.7%		4.6%	6.6%	6.2%

The underlying reference rates are at B12 within the MCEV financial supplement.

9 - Integration and restructuring costs

Integration and restructuring costs were £148 million (six months to 30 June 2008: £132 million) and represents expenditure related to cost saving programmes announced in prior years and further integration and restructuring projects across the Group.

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New business 

	Present value of new  business premiums				Value of new business				New business margin
Life and pensions  (gross of tax and minority interest)	6 months 2009 £m	Restated  6 months 2008 £m	Restated  Full year 2008  £m		6 months 2009 £m	Restated  6 months 2008 £m	Restated  Full year 2008  £m		6 months 2009 %	Restated  6 months 2008 %	Restated  Full year 2008  %
United Kingdom	4,735	6,010	11,858		101	73	204		2.1%	1.2%	1.7%
France	2,440	2,062	3,880		72	69	135		3.0%	3.3%	3.5%
Ireland	426	699	1,299		4	8	15		0.9%	1.1%	1.2%
Italy	2,198	1,305	2,331		81	35	71		3.7%	2.7%	3.0%
Netherlands (including Belgium and Germany)	1,780	2,085	4,097		(34)	(29)	(47)		(1.9)%	(1.4)%	(1.1)%
Poland	554	951	1,842		27	31	65		4.9%	3.3%	3.5%
Spain	1,245	1,295	2,489		78	116	202		6.3%	9.0%	8.1%
Other Europe	208	667	1,014		6	19	29		2.9%	2.8%	2.9%
Europe	8,851	9,064	16,952		234	249	470		2.6%	2.7%	2.8%
North America	3,189	2,227	5,715		16	(8)	55		0.5%	(0.4)%	1.0%
Asia	532	684	1,351		6	26	30		1.1%	3.8%	2.2%
Australia	166	212	369		10	6	13		6.0%	2.8%	3.5%
Asia Pacific	698	896	1,720		16	32	43		2.3%	3.6%	2.5%
Total life and pensions	17,473	18,197	36,245		367	346	772		2.1%	1.9%	2.1%

		Present value of new  business premiums				Value of new business				New business margin
Life and pensions  (net of tax and minority interest)		6 months 2009 £m	Restated  6 months  2008 £m	Restated  Full year  2008  £m		6 months 2009 £m	Restated  6 months  2008 £m	Restated  Full year  2008  £m		6 months 2009 %	Restated  6 months  2008 %	Restated  Full year  2008  %
United Kingdom		4,735	6,010	11,858		72	53	147		1.5%	0.9%	1.2%
France	2,019	1,692	3,281		40	38	79		2.0%	2.2%	2.4%
Ireland	320	524	974		3	6	10		0.9%	1.1%	1.0%
Italy	994	649	980		25	12	21		2.5%	1.8%	2.1%
Netherlands (including Belgium and Germany)	1,661	1,965	3,868		(28)	(25)	(48)		(1.7)%	(1.3)%	(1.2)%
Poland	480	827	1,604		19	22	46		4.0%	2.7%	2.9%
Spain	676	705	1,357		26	38	68		3.8%	5.4%	5.0%
Other Europe	208	667	1,014		5	16	24		2.4%	2.4%	2.4%
Europe	6,358	7,029	13,078		90	107	200		1.4%	1.5%	1.5%
North America	3,189	2,227	5,715		16	(5)	36		0.5%	(0.2)%	0.6%
Asia	528	680	1,344		5	21	24		0.9%	3.1%	1.8%
Australia	166	212	369		7	4	9		4.2%	1.9%	2.4%
Asia Pacific	694	892	1,713		12	25	33		1.7%	2.8%	1.9%
Total life and pensions		14,976	16,158	32,364		190	180	416		1.3%	1.1%	1.3%

United Kingdom

Against the backdrop of sustained challenging market conditions, the UK life business has continued to manage for value with a focus on capital discipline and reducing the operating cost base.

The successful rebrand of Norwich Union to Aviva took place on 1 June 2009. Alongside this, and as part of our simplification agenda and commitment to deliver service excellence, we launched two new online services, Aviva for Advisers and the Customer Portal. Both portals make it easier to interact with us, giving customers and advisers more information and control over their products.

Life and pension sales were 21% lower at £4,735 million compared to the first half of 2008 (six months to 30 June 2008: £6,010 million), with collective investments sales of £418 million (six months to 30 June 2008: £840 million). Despite lower sales our first quarter life and pension market share increased to 11.9%1 (Q12008: 11.0%) demonstrating that in a market that has contracted by 32%1 since the second quarter of 2008, a flight to quality is taking place reflecting our customer focus and understanding, financial strength, diversified product offering and wide distribution reach.  

1. Source: Quarter 2009 ABI data 

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Page 14 

New business continued 

Our joint venture with the Royal Bank of Scotland continued to deliver a strong performance, with life and pension sales increasing by 9% to £692 million (six months to 30 June 2008: £635 million) driven by an almost 50% growth in pension sales. 

Commission reductions across individual pensions, group pensions and bonds, and a change in business mix have all contributed to a strengthening of margin over the 2008 year-end position by 0.4% to 2.1%. Following the trend seen in the first quarter, the amount of capital2 we consumed during the first half of the year was £136 million (six months to 30 June 2008: £210 million) equating to 2.9% of PVNBP (six months to 30 June 2008: 3.5%). Through our business simplification initiatives we remain on track to eliminate the expense overrun by the end of 2009 despite the reduction in volumes. 

Total pension sales were £2,089 million (six months to 30 June 2008: £2,410 million), with the slowdown in salary increases as a result of the recession having a particular impact on incremental business. However, we are seeing real momentum following the launch of our market-leading Pension Tracker. We have increased the number of Employee Benefit Consultants, from 17 to 22, who have included us on their panel of providers with whom they will place new business and we have secured 170 new group pension plan schemes during the first half of 2009 including the largest scheme yet written at £90 million PVNBP.

Overall protection sales were £461 million (six months to 30 June 2008: £606 million), down 24% mainly due to regulatory changes significantly impacting creditor sales. Protection sales excluding creditor were £441 million (six months to 30 June 2008: £467 million). Our on-line Simplified Life proposition continues to differentiate us in this market, generating on average over 1,600 applications per week, an increase of 80% over 2008. The recently launched free life cover for new parents, raising awareness of the need to plan financial protection, clearly demonstrates how our new brand is delivering on its promise of building financial services around the needs of our customers.

Total annuity sales were £833 million (six months to 30 June 2008: £1,286 million). Our focus on driving greater value led to a reduction in individual annuity sales to £750 million, 14% lower than the equivalent period in 2008.  In addition, our continued discipline of not pursuing business falling below our minimum level of return has resulted in reduced bulk purchase annuities sales of £83 million (six months to 30 June 2008: £418 million).  

In line with our stance on profitability, bond sales reduced to £1,219 million (six months to 30 June 2008: £1,628 million). We remain committed to writing business at acceptable levels of return in this market which has experienced a contraction of 55%1 since the second quarter of 2008.

Sales of equity release have grown to £133 million (six months to 30 June 2008: £80 million) as a result of  higher sales through penetration of the IFA market and proposition enhancements.

The economic environment has remained volatile in the first half of 2009 and we expect this to persist throughout the remainder of the year. We will continue to build on the momentum established through our well-defined strategy, and focus further on generating greater value through enhanced interactions with our existing customers, reshaping our distribution relationships, and driving significant profitable growth in the corporate sector and our risk business.

Europe

In Europe, life and pensions sales were £8,851 million (six months to 30 June 2008: £9,064 million) across our broad geographical portfolio. Excluding the one-off sales in the prior year, this is a strong performance set against the continuing economic uncertainty. The result has been achieved through the strength and diversity of our businesses, with the bancassurance channel selling particularly well in Italy and France. Margin decreased to 2.6% (six months to 30 June 2008: 2.7%) principally reflecting the impact of a one-off portfolio transfer in the prior period. Excluding Delta Lloyd, the margin was 3.8% (six months to 30 June 2008: 4.0%).

In France sales were up 18% as a result of the strengthened euro. On a local currency basis, sales increased by 2% despite lower unit-linked sales which continue to be affected by uncertainties in the financial markets. We have seen higher sales of guaranteed products with many of our customers selecting these products as an attractive and safe investment. The value of new business rose to £72 million (six months to 30 June 2008: £69 million) with a margin of 3.0% (six months to 30 June 2008: 3.3%) driven by the current change in the market away from unit-linked volumes.

In Ireland, sales were down 47% on a local currency basis reflecting the sharp decline in the life and pensions market attributable to the current recession. There is lower demand across both retail and bancassurance channels with consumers being influenced by volatile equity markets, the slowdown in economic growth and property market uncertainty. Value of new business was £4 million (six months to 30 June 2008: £8 million) and margin was reduced to 0.9% (six months to 30 June 2008: 1.1%).

In Italy, sales increased by 68% to £2,198 million (six months to 30 June 2008: £1,305 million). This was a 48% increase on a local currency basis. This significant increase reflects strong sales of protection products and also the high demand for our profit sharing products offering attractive guarantees sold through UniCredit. Aviva Assicurazioni Vita (formally UBI Vita), acquired in June 2008, contributed sales of £359 million. The increase in protection sales and overall increase in volumes led to an improved value of new business of £81 million (six months to 30 June 2008: £35 million) with the margin rising to 3.7% (six months to 30 June 2008: 2.7%).

1. Source: Quarter 1 2009 ABI data

2. Initial capital and associated required capital 

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New business 

In Spain, sales decreased by 4%, down 17% on a local currency basis, to £1,245 million (six months to 30 June 2008: £1,295 million) reflecting lower protection and pension sales and the inclusion in the prior period of a one-off transfer of £151 million as a result of the distribution agreement entered into with Caja Murcia. Adjusting for this, savings sales were slightly ahead of the prior year reflecting the attractive returns on offer, which offset lower pension and protection sales driven by adverse economic conditions. Value of new business was down to £78 million (six months to 30 June 2008: £116 million) with a reduction in margin to 6.3% (six months to 30 June 2008: 8.8%) as 2008 included the one-off transfers from Caja Murcia.

In Poland, life and pension sales were 42% lower than half year 2008, down 37% on a local currency basis. The prior year included a special promotion through Deutsche Bank for short-term endowment policies which attracted significant volumes but on a comparatively lower margin. This change in business mix, coupled with the move towards regular premiums resulted in an improvement in the margin to 4.9% (six months to 30 June 2008: 3.3%) despite the value of new business falling slightly to £27 million (six months to 30 June 2008: £31 million).

Other Europe includes a number of markets which, although currently experiencing challenging conditions, have high potential for future growth. Sales in these markets were down 69% on a local currency basis with the largest reduction in Romania, where the prior period included £410 million of initial contributions from the launch of compulsory pensions. Sales in Turkey were slightly higher reflecting both an increase in policies sold and a focus on higher premium business. Across the rest of the markets volumes declined reflecting difficult market conditions. The value of new business was £6 million (six months to 30 June 2008: £18 million), however, the margin increased slightly to 2.9% (six months to 30 June 2008: 2.8%).

Sales through Delta Lloyd were 15% down on the prior year reflecting the challenging market conditions whilst the prior period included £758 million of corporate pension scheme sales. In addition, there has been continued strong competition from the banking sector particularly on annuity products. Swiss Life Belgium, acquired in June 2008, contributed sales of £241 million, whilst the prior period included £758 million of one-off corporate pension scheme sales. The value of new business was a loss of £34 million (six months to 30 June 2008: £29 million loss) resulting in a margin of (1.9)% (six months to 30 June 2008: (1.3%)). 

North America

Aviva USA reported an increase of 43% in new business sales to £3,189 million (six months to 30 June 2008: £2,227 million) on a sterling basis and on a local currency basis growth was 8%. While sales for the first half of the year remained strong, as customers seek products with guarantees during the current economic turbulence and recognise Aviva as one of the stronger market participants, compared to the second half of 2008 sales were down 8% on a sterling basis. We expect this trend to continue in the second half of the year consistent with our strategic goals to manage our production levels by changing our overall business mix to moderate annuity sales and grow our life insurance business.

Sales of annuities increased by 78% to £2,815 million (six months to 30 June 2008: £1,579 million). Demand has exceeded our desired production and, as a result, we have taken a number of actions to ensure we manage the business mix for the year. Re-pricing, commission reductions and production limits, as well as the elimination of non-core distribution relationships should have a positive effect on our new business margins for the full year 2009. 

Life product sales, which mainly include indexed universal life and term assurance products, were £374 million for the first half of 2009 (six months to 30 June 2008: £273 million). Life product sales were up 3% on a local currency basis compared to the second half of 2008, although there is a trend of reduced life sales in the overall market due to the economic decline. Despite the current trends, we are optimistic that the steps we are taking now will position us for future growth. These steps include expanding into the brokerage general agency market and our CPA Wealthstar Initiative. We continue to evaluate funding agreement sale opportunities against our overall strategy on a case-by-case basis, and as a result there were no funding agreement sales in the first half of 2009 (six months to 30 June 2008: £375 million).  

New business contribution has improved to £16 million (six months to 30 June 2008: £8 million loss) and overall margin was 0.5% (six months to 30 June 2008: (0.4)%) in part driven by the annuity actions taken by management set out above.

Asia Pacific

Life and pension sales across the Asia Pacific region were 22% below the prior year at £698 million (six months to 30 June 2008: £896 million). This mainly reflects the uncertainty associated with the current economic conditions across the region. Customers remain cautious about investing in unit-linked savings products and in the low interest rate environment bank deposits are comparatively more attractive, especially where guaranteed by governments, than insurance savings products. The reduction has been offset by sales from the South Korea joint venture which first reported in the second half of 2008 and now represents 18% of life and pension sales in the region. The value of new business fell 50% to £16 million (six months to 30 June 2008: £32 million), resulting in a new business margin of 2.3% (six months to 30 June 2008: 3.6%).

Within the overall regional total, sales of life and pension products in Asia fell by 22% to £532 million (six months to 30 June 2008: £684 million) with new business margin down to 1.1% (six months to 30 June 2008: 3.8%). This has mainly been driven by change in the projection term assumptions for Hong Kong, China, India and Singapore. Reduced sales volumes also reflect the scaling back of capital intensive products in Hong Kong, Taiwan and Malaysia, offset by new sales from the South Korea joint venture. 

In Australia, life and pension sales in the first six months of the year were down by 22% to £166 million (six months to 30 June 2008: £212 million) due to the closure of a capital protection product at the end of 2008 and lower superannuation and group risk sales resulting from less fluidity in the employment market. This was partly offset by an increase in higher margin protection sales which improved the overall margin to 6.0% (six months to 30 June 2008: 2.8%).

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Page 16 

New business continued 

Geographical analysis of life, pension and investment sales

	Present value of new business premiums
	6 months  2009 £m	Restated 6 months  2008 £m	Sterling  growth  %	Local  currency  growth  %
Life and pensions
Individual pensions	1,918	2,038	(6)%	(6)%
Group pensions	171	372	(54)%	(54)%
Annuities	833	1,286	(35)%	(35)%
Bonds	1,219	1,628	(27)%	(27)%
Protection	461	606	(24)%	(24)%
Equity release	133	80	66%	66%
United Kingdom	4,735	6,010	(21)%	(21)%
Euro funds	1,986	1,374	45%	25%
Unit-linked funds	338	587	(42)%	(50)%
Protection business	116	101	15%	(1)%
France	2,440	2,062	18%	2%
Life and savings	160	306	(48)%	(55)%
Pensions	266	393	(32)%	(42)%
Ireland	426	699	(39)%	(48)%
Italy	2,198	1,305	68%	45%
Life	369	530	(30)%	(40)%
Pensions	1,411	1,555	(9)%	(22)%
Netherlands (including Belgium and Germany)	1,780	2,085	(15)%	(26)%
Life and savings	168	472	(64)%	(63)%
Pensions	386	479	(19)%	(12)%
Poland	554	951	(42)%	(37)%
Life and savings	997	874	14%	(2)%
Pensions	248	421	(41)%	(49)%
Spain	1,245	1,295	(4)%	(17)%
Other Europe	208	667	(69)%	(69)%
Europe	8,851	9,064	(2)%	(13)%
Life	374	273	37%	3%
Annuities	2,815	1,579	78%	34%
Funding agreements	-	375	(100)%	(100)%
North America	3,189	2,227	43%	8%
Australia	166	212	(22)%	(23)%
Singapore	90	168	(46)%	(57)%
Hong Kong	52	164	(68)%	(76)%
India	43	119	(64)%	(67)%
China	167	162	3%	(25)%
South Korea	127	-	100%	100%
Other Asia	53	71	(25)%	(39)%
Asia Pacific	698	896	(22)%	(32)%
Total life and pensions	17,473	18,197	(4)%	(15)%

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Page 17 

Geographical analysis of life, pension and investment sales continued

	6 months  2009 £m	Restated 6 months  2008 £m	Sterling  growth  %	Local  currency  growth  %
Investment sales
United Kingdom1	418	840	(50)%	(50)%
Netherlands	357	221	62%	39%
Poland	23	46	(50)%	(46)%
Other business	400	259	54%	33%
Europe	780	526	48%	29%
Australia	518	840	(38)%	(39)%
Singapore	232	211	10%	(12)%
Asia Pacific	750	1,051	(29)%	(34)%
Total investment sales	1,948	2,417	(19)%	(26)%
Total long-term savings sales	19,421	20,614	(6)%	(16)%

1.    UK regular premium investment sales include SIPP products. These are similar in nature to pension products and their payment pattern is stable and predictable and accordingly they have been capitalised. Regular premium SIPP sales for the 6 months to 30 June 2009 totalled £2.3 million (2008: £15.7 million) and have been capitalised using a weighted average capitalisation factor of 5.0 (2008: 5.0). As such, regular premium SIPP sales have produced an overall contribution to investment sales of £11.5 million (2008: £78 million) out of the UK investment sales of £418 million (2008: £840 million).

Analysis of sales via bancassurance channels

	Present value of new business premiums
	6 months  2009 £m	Restated 6 months  2008 £m	Sterling  growth  %	Local  currency  growth  %
Life and pensions
United Kingdom	692	635	9%	9%
France	647	495	31%	13%
Ireland	195	365	(47)%	(54)%
UniCredit Group	1,094	589	86%	60%
Banca Popolare	51	128	(60)%	(66)%
Banca delle Marche	4	14	(71)%	(79)%
Eurovita	695	540	29%	11%
Unione di Banche	261	-	100%	100%
Italy	2,105	1,271	66%	43%
Netherlands	243	244	0%	(14)%
Poland	15	292	(95)%	(95)%
Bancaja	264	309	(16)%	(26)%
Caixa Galicia	105	140	(26)%	(35)%
Unicaja	486	330	45%	27%
Caja España	152	119	27%	10%
Caja de Granada	47	56	(18)%	(28)%
Cajamurcia	59	200	(71)%	(75)%
Spain	1,113	1,154	(4)%	(17)%
Other Europe	18	28	(36)%	(36)%
Europe	4,336	3,849	13%	(3)%
North America	-	6	(100)%	(100)%
Asia Pacific	253	357	(29)%	(40)%
Total life and pensions	5,281	4,847	9%	(4)%
Investment sales
United Kingdom	88	242	(64)%	(64)%
Total bancassurance sales	5,369	5,089	5%	(7)%

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Page 18

New business continued 

Post-tax internal rate of return on life and pensions new business 

The new business written requires up front capital investment, due to high set-up costs and capital requirements. The internal rate of return (IRR) is a measure of the shareholder return expected on this capital investment. It is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the life time of the business written, including allowance for the time value of options and guarantees, is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is the initial capital required to pay acquisition costs and set up statutory reserves in excess of premiums received ('initial capital'), plus required capital at the same level as for the calculation of the value of new business. 

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

The IRR on life and pensions new business for the group was 9.5% (30 June 2008: 12.9%; 31 December 2008: 11.4%)

30 June 2009	Internal rate  of return  %	Initial  capital  £m	Required  capital £m	Total  invested  capital  £m
United Kingdom	13%	77	59	136
France	10%	17	84	101
Ireland	5%	26	12	38
Italy	10%	14	93	107
Netherlands (including Belgium and Germany)	5%	59	51	110
Poland	23%	10	4	14
Spain	27%	13	41	54
Other Europe	14%	19	3	22
Europe	11%	158	288	446
North America	7%	139	285	424
Asia	5%	31	12	43
Australia	11%	1	18	19
Asia Pacific	7%	32	30	62
Total	9.5%	406	662	1,068

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

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Post-tax internal rate of return on life and pensions new business continued

31 December 2008	Internal rate  of return  %	Initial  capital  £m	Required capital  £m	Total  invested capital  £m
United Kingdom	14%	157	136	293
France	9%	35	118	153
Ireland	8%	53	24	77
Italy	14%	9	48	57
Netherlands (including Belgium and Germany)	5%	277	244	521
Poland	21%	31	12	43
Spain	37%	28	75	103
Other Europe	13%	57	9	66
Europe	11%	490	530	1,020
North America	11%	124	489	613
Asia	13%	64	23	87
Australia	12%	3	30	33
Asia Pacific	12%	67	53	120
Total	11.4%	838	1,208	2,046

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Proforma reconciliation of group operating profit to profit after tax - MCEV basis 

For the six month period to 30 June 2009 

	6 months 2009 £m	Restated  6 months  2008 £m	Restated  Full year  2008  £m
Operating profit before tax attributable to shareholders' profits
Long-term business
United Kingdom	345	417	883
Europe	1,105	729	1,647
North America	120	73	201
Asia Pacific	37	61	79
	1,607	1,280	2,810
General insurance and health	545	528	1,198
Fund management1	(4)	30	42
Other:
Other operations and regional costs2	(99)	(57)	(163)
Corporate centre	(46)	(71)	(141)
Group debt costs and other interest	(318)	(201)	(379)
Operating profit before tax attributable to shareholders' profits	1,685	1,509	3,367
Adjusted for the following:
Economic variances on long-term business	(29)	(4,086)	(12,059)
Short-term fluctuation in return on investments on non-long-term business	(125)	(314)	(819)
Economic assumption changes on general insurance and health business	52	6	(94)
Impairment of goodwill	(5)	(42)	(66)
Amortisation and impairment of intangibles	(52)	(44)	(108)
Profit on the disposal of subsidiaries and associates	20	9	7
Integration and restructuring costs	(148)	(132)	(326)
Exceptional items3	(218)	(155)	(754)
Profit/(loss) before tax	1,180	(3,249)	(10,852)
Tax on operating profit	(416)	(453)	(841)
Tax on other activities	320	1,341	4,253
	(96)	888	3,412
Profit/(loss) for the period	1,084	(2,361)	(7,440)

The six months to 30 June 2008 and full year 2008 results have been restated for the adjustment to reflect the reclassification of premium increases on Spanish Annual Renewable Term (ART) business and for the extension of the liquidity premium to additional businesses. More detail is included in the Financial Supplement - B1 Basis of Preparation. 

1.    Excludes the proportion of the results of Aviva Investors fund management businesses and other fund management operations within the group that arise from the provision of fund management services to our life businesses. These results are included within the life MCEV operating earnings consistent with Aviva's MCEV methodology.

2.    Excludes the proportion of the results of subsidiaries providing services to the Life business. These results are included within the life MCEV operating earnings.

3.    Exceptional item of £218 million for the six month period to 30 June 2009 is in relation to legislation changes on pensions in Poland.

Total MCEV operating profit before shareholder tax was £1,685 million (six months to 30 June 2008: £1,509 million), an increase of 12%. Within this total the long-term business operating profit before shareholder tax was £1,607 million (six months to 30 June 2008: £1,280 million), an increase of 26%. This includes the impact, reported through expected returns, of a change in the basis of setting normalised investment returns consistently with IFRS. If the previous basis, which referenced the one year swap rate, had been used the total expected return would have been around £350 million lower. There is no impact on MCEV profit before tax.

Within the 2008 results, the expected rate of investment return was calculated by reference to the one year swap rate in the relevant currency plus an appropriate risk premium for equities and properties. For 2009, the group considers that the return over the typical duration of the assets held is more appropriate and is more consistent with the group's expectation of long term rates of return. Therefore, the expected return on equities and properties has been calculated by reference to the ten year swap rate in the relevant currency plus an appropriate risk premium. For fixed interest investments a similar change has been made to reflect the actual duration of the assets held. 

This mainly impacts Aviva UK and the Netherlands, where the additional investment earnings on assets backing the policyholder liabilities flow straight to shareholders. In the US, the assumed return on bonds net of defaults, includes a partial recovery of the unrealised losses reported in previous periods through expected returns on existing business and on shareholders' net worth of £134 million. 

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Proforma reconciliation of group operating profit to profit after tax - MCEV basis continued  

Economic variances in 2009 of £29 million reflect the large benefit from the reduction in credit spreads on corporate bonds, offset by the reduction in the adjustment to risk free rates and adverse experience on equities and property of approximately £4 billion, £3 billion adverse and £1 billion adverse respectively. In 2008, the loss of £12,058 million was driven by bond yields falling in the United Kingdom and Eurozone, significant falls in equity markets down between 30% and 50% and credit spreads widening significantly in the final quarter of 2008.

10 - Life MCEV operating earnings

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

• the value of new business written during the period;

• the earnings from existing business; and,

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

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

Life and pensions MCEV earnings		6 months 2009 £m	Restated  6 months  2008 £m	Full year  2008  £m
Value of new business		367	346	772
Earnings from existing business
- expected returns at the reference rate		300	464	992
- expected returns in excess of the reference rate		601	219	429
- expected returns		901	683	1,421
- experience variances		(175)	44	(224)
- operating assumption changes	86	(97)	(165)
- other operating variances	173	(5)	305
Expected return on shareholders' net worth	255	309	701
Life and pensions operating earnings before tax		1,607	1,280	2,810
Economic variances	(29)	(4,086)	(12,058)
Other non-operating variances1	(218)	(71)	(329)
Life and pensions earnings/(loss) before tax		1,360	(2,877)	(9,577)
Tax on operating earnings	(435)	(365)	(823)
Tax on other activities	145	1,206	3,678
Life and pensions earnings/(loss) after tax		1,070	(2,036)	(6,722)

1.    Exceptional item of £218 million for the six month period to 30 June 2009 is in relation to legislation changes on pensions in Poland

United Kingdom

MCEV operating earnings are 17% lower at £345 million (six months to 30 June 2008: £417 million).  

Value of New Business is £101 million (six months to 30 June 2008: £73 million), an increase of 38%, driven by a number of factors including reduced commission and sales expenses and a change in business mix to higher margin annuity business.

Expected return is £194 million (six months to 30 June 2008: £240 million), with the reduction driven by lower real world returns and lower opening assets compared to 2008.

Variances and assumption changes on existing business were £18 million unfavourable (six months to 30 June 2008: £26 million favourable). The 2009 negative result is primarily driven by an adverse persistency variance of £17 million in respect of the loss of a single corporate contract. The positive variance in 2008 includes the benefit of the special distribution to with-profit policyholders of  £22 million. 

Expected returns on shareholders' net worth were £68 million (six months to 30 June 2008: £78 million), a reduction of 13% as a result of lower real world returns.

Europe

Total regional operating return has increased to £1,105 million (six months to 30 June 2008: £729 million), an increase of 52% with the strengthening of the euro contributing around one third of the improvement. 

Value of New Business was £234 million (six months to 30 June 2008: £249 million), a reduction of 6%, with the decrease largely driven by a reduction in sales volumes. Increased contributions from Italian protection and profit sharing products has been more than offset by decreases in Spain and Other Europe where, in 2008, there were one off positive contributions from Caja Murcia and Romanian pensions business respectively.

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Page 22

10 - Life MCEV operating earnings continued

Expected returns were £542 million (six months to 30 June 2008: £353 million). After allowing for movements in currency this increase is largely explained by the expected reduction in the allowance for short term investment guarantees that is included in the MCEV balance sheet in France of £130 million. This allowance is expected to be released evenly through 2009.

Variances and assumption changes on existing business were £196 million (six months to 30 June 2008: £65 million adverse). In 2009 positive variances from modelling refinements in France and the Netherlands (£120 million), assumption changes in the Netherlands to reflect revisions to investment and bonus strategies in Germany as this business is repositioned (£116 million) and continued positive mortality experience across the region (£18 million) have been partially offset by negative lapse experience, mainly in Spain, Ireland and France (£86 million in total) driven by the general economic downturn. A number of customer retention initiatives are being put in place to address this issue.

Expected returns on shareholders net worth were £133 million (six months to 30 June 2008: £192 million), a reduction of 31%. This a result of lower real world returns and lower opening shareholder assets compared to 2008.

North America

Operating earnings have increased to £120 million (six months to 30 June 2008: £73 million), a growth of 64%, with the strengthening of the US dollar contributing around half of this improvement. 

Value of new business was £16 million (six months to 30 June 2008: £8 million loss), with the improvement driven by management action on pricing and commission during the period.

Expected return was £147 million (six months to 30 June 2008: £67 million). Within this total, default assumptions have been strengthened, reducing expected return by approximately £60 million but this has been more than offset by the recognition of    £134 million of expected reduction, in line with the assumed investment return, of unrealised losses on corporate bonds backing policyholder liabilities which are being held to maturity.

Variances and assumption changes on existing business were £90 million unfavourable (six months to 30 June 2008: £14 million unfavourable), with the deterioration principally driven by spread compression in the current economic environment (£74 million unfavourable) and negative lapse experience (£8 million unfavourable).

Expected returns on shareholders net worth were £47 million (six months to 30 June 2008: £28 million) being impacted in the same way as expected returns.

Asia Pacific

Operating earnings have decreased to £37 million (six months to 30 June 2008: £61 million), a reduction of 39%.  

Value of new business was £16 million (six months to 30 June 2008: £32 million), a reduction of 50%, driven by lower sales volumes and changed policy duration assumptions in Hong Kong, China, India and Singapore. 

Expected returns were £18 million (six months to 30 June 2008: £23 million), a reduction of 22% on lower opening assets.

Variances and assumption changes on existing business were £4 million adverse (six months to 30 June 2008: £5 million adverse), largely reflecting the negative lapse variances across the region of £24 million which were partially offset by positive modelling variances of £17 million.

Expected returns on shareholders net worth was £7 million (six months to 30 June 2008: £11 million) with the change the result of lower real world returns.

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Page 23 

11 - Analysis of life and pensions earnings

The following table provides an analysis of the movement in embedded value for covered business. The analysis is shown separately for free surplus, required capital and the value of in-force covered business, and includes amounts transferred between these categories. Included within capital and dividend flows is the transfer to Life and related businesses from other segments consisting of service company profits and losses during the reported period that have emerged from the value of in-force. Since the 'look through' into service companies includes only future profits and losses, these amounts must be eliminated from the closing embedded value. All figures are shown net of tax and minority interests.

30 June 2009	Free surplus £m	Required  capital1 £m	VIF  £m	Total  MCEV  £m
Opening MCEV	1,348	8,148	5,060	14,556
New business value	(990)	562	618	190
Expected existing business contribution (reference rate)	-	-	207	207
Expected existing business contribution (in excess of reference rate)	-	-	427	427
Transfers from VIF and required capital to the free surplus	884	(344)	(540)	-
Experience variances	110	(5)	(238)	(133)
Assumption changes	16	(17)	60	59
Expected return on shareholders' net worth	110	63	-	173
Other operating variance	(26)	(31)	164	107
Operating MCEV earnings	104	228	698	1,030
Economic variances	863	(438)	(258)	167
Other non-operating variances	(1)	-	(149)	(150)
Total MCEV earnings/(loss)	966	(210)	291	1,047
Capital and dividend flows	(48)	-	-	(48)
Foreign exchange variance	(51)	(788)	(455)	(1,294)
Acquired/divested business	2	-	-	2
Closing MCEV	2,217	7,150	4,896	14,263

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

Restated 30 June 2008	Free surplus £m	Required  capital1 £m	VIF  £m	Total  MCEV  £m
Opening MCEV	3,204	6,240	8,945	18,389
New business value	(905)	511	574	180
Expected existing business contribution (reference rate)	-	-	306	306
Expected existing business contribution (in excess of reference rate)	-	-	149	149
Transfers from VIF and required capital to the free surplus	949	(308)	(641)	-
Experience variances	65	17	(58)	24
Assumption changes	182	(109)	(150)	(77)
Expected return on shareholders' net worth	111	88	-	199
Other operating variance	9	(27)	11	(7)
Operating MCEV earnings	411	172	191	774
Economic variances	(1,450)	(97)	(1,243)	(2,790)
Other non-operating variances	3	(4)	(45)	(46)
Total MCEV (loss)/ earnings	(1,036)	71	(1,097)	(2,062)
Capital and dividend flows	(599)	-	-	(599)
Foreign exchange variance	123	325	363	811
Acquired/divested business	79	58	53	190
Closing MCEV	1,771	6,694	8,264	16,729

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

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Page 24 

11 - Analysis of life and pensions earnings continued

31 December 2008	Free surplus £m	Required  capital1  £m	VIF  £m	Total  MCEV  £m
Opening MCEV	3,204	6,240	8,945	18,389
New business value	(1,867)	1,109	1,174	416
Expected existing business contribution (reference rate)	-	-	654	654
Expected existing business contribution (in excess of reference rate)	-	-	291	291
Transfers from VIF and required capital to the free surplus	1,926	(637)	(1,289)	-
Experience variances	154	3	(284)	(127)
Assumption changes	563	(114)	(584)	(135)
Expected return on shareholders' net worth	270	182	-	452
Other operating variance	44	(29)	194	209
Operating MCEV earnings	1,090	514	156	1,760
Economic variances	(3,140)	(433)	(4,606)	(8,179)
Other non-operating variances	(104)	19	(147)	(232)
Total MCEV (loss)/earnings	(2,154)	100	(4,597)	(6,651)
Capital and dividend flows	(63)	-	-	(63)
Foreign exchange variance	459	1,597	738	2,794
Acquired/divested business	(98)	211	(26)	87
Closing MCEV	1,348	8,148	5,060	14,556

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

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Page 25  

Capital Management 

Capital management objectives

Aviva's capital management philosophy is focused on capital efficiency and effective risk management to support the dividend policy and earnings per share growth. Overall capital risk appetite is set and managed with reference to the requirements of a range of different stakeholders including shareholders, policyholders, regulators and rating agencies. In managing capital we seek to:

• maintain sufficient, but not excessive, financial strength to support new business growth and satisfy the requirements of our regulators and other stakeholders and thus give both our customers and shareholders assurance of our financial strength;

• optimise our overall debt to equity structure to enhance our returns to shareholders, subject to our capital risk appetite and balancing the requirements of the range of stakeholders;

• retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit facilities and access to a range of capital markets;

• allocate capital rigorously across the group, to drive value adding growth in accordance with risk appetite; and

• declare dividends on a basis judged prudent, while retaining capital to support future business growth, using dividend cover on an IFRS operating earnings after tax basis in the 1.5 to 2.0 times range as a guide.

Targets are established in relation to regulatory solvency, ratings, liquidity and dividend capacity and are a key tool in managing capital in accordance with our risk appetite and the requirements of our various stakeholders.

Capital employed by segment

The table below shows how our capital, on an MCEV basis, is deployed by segment and how that capital is funded.

	30 June  2009 £m	Restated  31 December 2008 £m
Long-term savings	18,812	19,784
General insurance and health	4,404	5,516
Fund management	261	340
Other business	5	(326)
Corporate1	(33)	(30)
Total capital employed	23,449	25,284
Financed by
Equity shareholders' funds	11,399	13,379
Minority interests	2,719	3,080
Direct capital instrument	990	990
Preference shares	200	200
Subordinated debt	4,541	4,606
External debt	1,283	919
Net internal debt2	2,317	2,110
Total capital employed	23,449	25,284

1.    The 'corporate' net liabilities represent the element of the pension scheme deficit held centrally. 

2.    In addition to our external funding sources, we have certain internal borrowing arrangements in place which allow some of the assets that support technical liabilities to be invested in a pool of central assets for use across the group. These internal debt balances allow for the capital allocated to business operations to exceed the externally sourced capital resources of the group. Net internal debt represents the balance of the amounts due from corporate and holding entities, less the tangible net assets held by these entities. Although intra-group in nature, they are included as part of the capital base for the purpose of capital management. These arrangements arise in relation to the following:

• Certain subsidiaries, subject to continuing to satisfy stand alone capital and liquidity requirements, loan funds to corporate and holding entities, these loans satisfy arms length criteria and all interest payments are made when due. 

• Aviva International Insurance (AII) Ltd acts as both a UK general insurer and as the primary holding company for our foreign subsidiaries. Internal capital management mechanisms in place allocate a portion of the total capital of the company to the UK general insurance operations. These mechanisms also allow for some of the assets backing technical liabilities to be made available for use across the group. Balances in respect of these arrangements are also treated as internal debt for capital management purposes.

Total capital employed is financed by a combination of equity shareholders' funds, preference capital, subordinated debt and borrowings (including internal borrowings as described in footnote 2 above). 

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Page 26 

Capital Management continued 

Capital employed by segment continued

At 30 June 2009 we had £23.4 billion (31 December 2008: £25.3 billion) of total capital employed in our trading operations, measured on an MCEV basis. The decrease over the period is driven by the impact of foreign exchange rate losses and actuarial losses on the staff pension schemes, which have more than offset the benefit of operating earnings and market gains. 

In April 2009 we issued a private placement of £245 million equivalent of Lower Tier 2 hybrid in a dual tranche transaction (£200 million on 1 April 2009 and a further €50 million on 30 April 2009). These transactions had a positive impact on group IGD solvency and economic capital measures.

Financial leverage, the ratio of external senior and subordinated debt to MCEV capital and reserves, was 41.3% (31 December 2008: 33.6%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by MCEV operating profit was 9.6 times (31 December 2008: 9.2 times).

At 30 June 2009 the market value of our external debt, subordinated debt, preference shares (including both Aviva plc preference shares and General Accident plc preference shares of £250 million, within minority interest), and direct capital instrument was £5,422 million (31 December 2008: £4,911 million), with a weighted average cost of 8.2% (31 December 2008: 8.8%). The group Weighted Average Cost of Capital (WACC) is 8.9% (31 December 2008: 8.3%) and has been calculated by reference to the cost of equity and the cost of debt at the relevant date. The cost of equity at 30 June 2009 was 9.3% based on a risk free rate of 3.7%, an equity risk premium of 4.0% and a market beta of 1.4.

Regulatory capital

Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Financial Services Authority (FSA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate group level, where we have a regulatory obligation to have a positive position at all times. This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the UK and Ireland with-profit life funds. The minimum solvency requirement for our European businesses is based on the Solvency 1 Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our major non-European businesses (the US, Australia and Canada) a risk charge on assets and liabilities approach is used.

Regulatory capital - Group: European Insurance Groups Directive (IGD)

	UK life  funds £bn	Other business £bn	30 June  2009 £bn	31 December  2008 £bn
Insurance Groups Directive (IGD) capital resources	3.6	10.2	13.8	15.5
Less: capital resource requirement	(3.6)	(7.0)	(10.6)	(13.5)
Insurance Group Directive (IGD) excess solvency	-	3.2	3.2	2.0
Cover over EU minimum (calculated excluding UK life funds)			1.5 times	1.3 times

The EU Insurance Groups Directive (IGD) regulatory capital solvency surplus has increased by £1.2 billion since 31 December 2008 to £3.2 billion. This increase reflects a combination of operating and market performance as well as the benefit of a number of capital management initiatives, which demonstrate the considerable levers available to the group to manage the IGD position. Following individual guidance from the FSA we now recognise surpluses in the non-profit funds of our UK life and pensions business which is available for transfer to shareholders of £0.4 billion (31 December 2008 £0.4 billion). The IGD is a pure aggregation test with no credit given for the considerable diversification benefits of Aviva. 

The key movements over the period are set out in the following table: 

	£bn
IGD solvency surplus at 31 December 2008	2.0
Operating profit and other income	0.5
Market movements	0.2
2008 final dividend net of scrip	(0.3)
Hybrid debt	0.2
Issuance of hybrid debt in the Netherlands	0.4
Sale of Dutch healthcare business	0.1
Recognition of non-regulated entities	0.5
Loss of implicit items	(0.1)
Increase in CRR	(0.1)
Other	(0.2)
Estimated IGD solvency surplus at 30 June 2009	3.2

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Page 27

Regulatory capital continued

Initiatives in the period include the issue of £0.2 billion of hybrid capital, issuance of hybrid debt in the Netherlands of £0.4 billion and a £0.1 billion benefit from the disposal of the Dutch healthcare business. The change in the value of non-regulated entities includes the recognition of intellectual property rights and movements in the value of distribution companies. The introduction of the scrip scheme with the 2008 full year dividend, allowing investors the option of receiving dividends in the form of new Aviva shares, also provided a capital benefit of nearly £0.2 billion with a take up rate of 35%. While not reflected in the half year numbers, the recently announced sale of the Australian Life business will deliver a £0.4 billion IGD contribution on completion.

IGD Levers

As outlined in March this year, and as demonstrated above, the group has a number of ongoing options available to increase the IGD surplus. These include underlying operational levers and various innovative capital raising options. Driving increased capital generation from underlying earnings improvements through, for example, productivity and cost saving initiatives is a primary focus. We also manage growth driven capital consumption through absolute volume levels and product mix decisions, where we are able to direct growth to the most capital efficient products. Asset liability management and hedging strategies are used to manage volatility, and there is scope to further increase protection through additional hedging activity should this be required. Reinsurance is another mechanism available through which risk exposures and capital requirements can be managed. The value represented by the life in-force book continues to represent a significant source of value against which further securitisation transactions could be undertaken.

Regulatory capital - Long-term businesses

For our non-participating worldwide life assurance businesses, our capital requirements, expressed as a percentage of the EU minimum, are set for each business unit as the higher of:

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

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

• The target capital level of the business unit.

The required capital across our life businesses varies between 100% and 325% of EU minimum or equivalent. The weighted average level of required capital for our non-participating life business, expressed as a percentage of the EU minimum (or equivalent) solvency margin has decreased to 133% (31 December 2008: 142%).

These levels of required capital are used in the calculation of the group's embedded value to evaluate the cost of locked in capital. At 30 June 2009 the aggregate regulatory requirements based on the EU minimum test amounted to £5.7 billion (31 December 2008: £6.0 billion). At this date, the actual net worth held in our long-term business was £9.4 billion (31 December 2008: £9.5 billion) which represents 165% (31 December 2008: 157%) of these minimum requirements.

Regulatory capital - UK Life with-profits funds

The available capital of the with-profit funds is represented by the realistic inherited estate. The estate represents the assets of the long-term with-profit funds less the realistic liabilities for non-profit policies within the funds, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs, guarantees and promises. Realistic balance sheet information is shown below for the three main UK with-profit funds: CGNU Life, Commercial Union Life Assurance Company (CULAC) and Aviva Life & Pensions (UKL&P) (formerly known as (Norwich Union Life & Pensions (NUL&P)). These realistic liabilities have been included within the long-term business provision and the liability for insurance and investment contracts on the consolidated IFRS balance sheet at 30 June 2009 and 31 December 2008.

	30 June 2009						31 December 2008
	Estimated realistic assets £bn	Realistic liabilities1 £bn	Estimated realistic inherited estate2 £bn	Estimated risk capital margin3 £bn	Estimated excess £bn		Estimated excess £bn
CGNU Life	11.9	(11.4)	0.5	(0.3)	0.2		0.3
CULAC	11.8	(11.1)	0.7	(0.3)	0.4		0.3
UKL&P4	19.4	(18.0)	1.4	(0.4)	1.0		0.5
Aggregate	43.1	(40.5)	2.6	(1.0)	1.6		1.1

1.    These realistic liabilities include the shareholders' share of future bonuses of £0.5 billion (31 December 2008: £0.8 billion). Realistic liabilities adjusted to eliminate the shareholders' share of future bonuses are £40.0 billion (31 December 2008: £43.2 billion). These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.4 billion, £1.5 billion and £3.5 billion for CGNU Life, CULAC and UKL&P respectively (31 December 2008: £1.4 billion, £1.5 billion and £4.1 billion).

2.    Estimated realistic inherited estate at 31 December 2008 was £0.7 billion, £0.7 billion and £1.2 billion for CGNU Life, CULAC and UKL&P respectively.

3.    The risk capital margin (RCM) is 2.6 times covered by the inherited estate (31 December 2008: 1.8 times). 

4.    The UKL&P fund includes the Provident Mutual (PM) fund which has realistic assets and liabilities of £1.6 billion, and therefore does not impact the realistic inherited estate.

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Page 28 

Capital Management continued 

Regulatory capital continued

Investment mix

The aggregate investment mix of the assets in the three main with-profit funds was:

	30 June  2009  %	31 December 2008  %
Equity	14%	24%
Property	10%	12%
Fixed interest	66%	56%
Other	10%	8%

The equity backing ratios, including property, supporting with-profit asset shares are 50% in CGNU Life, CULAC and 43% in UKL&P. With-profit new business is mainly written through CGNU Life.

UK Life reattribution 

In May 2009, following discussions with the Policyholder Advocate, we announced a new offer to almost one million eligible policyholders. The new offer is more flexible, with future changes in the value of the estate being reflected in the payouts customers elect to receive. Final payments will be based on the average valuation of the estate from June to August, and we expect to start making payments in November, following High Court approval. The estimated estate value at the end of June was £1.2 billion. If policyholders choose not to accept the payment, they will continue to receive normal bonuses and it will have no impact on the security or performance of their investments.

To date approximately 70 percent of policyholders have responded to the offer with 96 percent accepting. Based on this response we are confident that in the remaining 6-8 weeks before the court process begins we will achieve our targeted 80 percent acceptance.

Rating agency capital

Agency ratings are an important indicator of financial strength and support access to debt markets as well as providing assurance to business partners and policyholders over our ability to service contractual obligations. In recognition of this we have solicited relationships with a number of rating agencies. Rating agencies generally assign ratings based on an assessment of a range of financial (e.g. capital strength, gearing, liquidity and fixed charge cover ratios) and non financial (e.g. competitive position and quality of management) factors. 

As a part of this, certain rating agencies have proprietary capital models which they use to assess available capital resources against capital requirements as a component of their overall criteria for assigning ratings. Managing our capital and liquidity position in accordance with our target rating levels is a core consideration in all material capital management and capital allocation decisions.

The group's overall financial strength is reflected in our ratings. In May 2009 Moody's reaffirmed the group's rating at Aa3 ('excellent') with a Negative outlook, in line with the UK sector. The group's rating from Standard and Poors is AA- ('very strong') with a Negative outlook, and A ('excellent') from A M Best with a Stable outlook. These ratings continue to reflect our strong competitive position, positive strategic management, strong and diversified underlying earnings profile and robust liquidity position.

Economic capital

We use a risk-based capital model to assess economic capital requirements and to aid in risk and capital management across the group. The model is based on a framework for identifying the risks to which business units, and the group as a whole, are exposed. A mixture of scenario based approaches and stochastic models are used to capture market risk, credit risk, insurance risk and operational risk. Scenarios are specified centrally to provide consistency across businesses and to achieve a minimum standard. Where appropriate, businesses also supplement these with additional risk models specific to their own risk profile. When aggregating capital requirements at business unit and group level, we allow for diversification benefits between risks and between businesses, with restrictions to allow for non-fungibility of capital when appropriate. This means that the aggregate capital requirement is less than the sum of capital required to cover all of the individual risks.

This model is used to support our Individual Capital Assessments (ICA) which are reported to the FSA for all our UK regulated insurance businesses. The FSA uses the results of our ICA process when setting target levels of capital for our UK regulated insurance businesses. In line with FSA requirements, the ICA estimates the capital required to mitigate the risk of insolvency to a 99.5% confidence level over a one year time horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial tests.

The financial modelling techniques employed in economic capital enhance our practice of risk and capital management. They enable understanding of the impact of the interaction of different risks allowing us to direct risk management activities appropriately. These same techniques are employed to enhance product pricing and capital allocation processes. Unlike more traditional regulatory capital measures, economic capital also recognises the value of longer term profits emerging from in-force and new business, allowing for consideration of longer term value emergence as well as shorter term net worth volatility in our risk and capital management processes. We continue to develop our economic capital modelling capability for all our businesses as part of our development programme to increase the focus on economic capital management. Further developments are planned to meet the emerging requirements of the Solvency II framework and external agencies.

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Solvency II

Solvency II represents new EU legislation which totally redefines prudential supervision of EU insurers. It aims to establish a new economic risk sensitive approach to capital and solvency calculation and a new harmonised EU supervisory regime which places importance on effective internal governance and risk management practices, which Aviva supports as offering a blueprint for industry best practice. To that end, we continue to be an active participant in the key European industry working groups who provide the voice of industry in ongoing negotiations in Brussels. The first stage of the Solvency II project reached a conclusion in May 2009, with the 'Level 1 Framework Directive' formally adopted by the European Parliament. Full implementation of Solvency II will be required in October 2012.

Financial flexibility

The group's borrowings are comprised primarily of long dated hybrid instruments with maturities spread over many years, minimising refinancing risk. In addition to central liquid asset holdings of £1.1 billion, the group also has access to unutilised committed credit facilities of £2.1 billion provided by a range of leading international banks. Many of the IGD levers discussed above also support broader financial flexibility where, for example, securitisation transactions can be structured to provide liquidity as well as solvency capital benefits.

Capital generation and utilisation

As part of our capital management processes, we regularly review the generation and deployment of capital. The table below demonstrates the net capital generation of the group based on MCEV net worth before and after investment variances.

	30 June  2009  £bn	Restated  30 June  20081  £bn	Restated 31 December  20081  £bn
Operational capital generation:
Life in-force profits	0.8	1.0	2.4
New business strain	(0.4)	(0.4)	(0.8)
Non-life profits	0.3	0.3	0.8
Operational capital generated	0.7	0.9	2.4
Increase in capital requirements	(0.2)	(0.4)	(0.8)
Free operational capital generated	0.5	0.5	1.6
Interest cost	(0.2)	(0.1)	(0.3)
External dividend	(0.5)	(0.6)	(1.0)
Scrip dividend	0.2	0.2	0.2
Capital generation after financing	-	-	0.5
Capital released from disposals	0.1	-	-
Capital raising	0.2	0.8	1.0
Issuance of hybrid debt in the Netherlands	0.4	-	-
Cost of acquisitions	-	(0.3)	(0.3)
Qualifying assets acquired net of capital requirements	-	0.1	0.1
Pension funding, restructuring costs and exceptional items	(0.1)	(0.4)	(0.9)
Foreign exchange impact on surplus capital	(0.2)	0.1	0.2
Other	-	(0.1)	0.1
Net capital generated before investment return and economic variances	0.4	0.2	0.7
Investment return variances and economic variances	0.8	(1.7)	(3.9)
Net capital generated/(consumed) after investment return and economic variances	1.2	(1.5)	(3.2)

1.    In prior periods the effect of economic variances on life required capital has been included within the 'increase in capital requirements' line in determining 'free operational capital generated'. We have revised this approach, and have restated prior periods accordingly, to transfer the effect of economic variances on required capital to the 'investment return variances and economic variances' line. This has the effect of decreasing 'free operational capital generated' by £0.1 billion and £0.4 billion in the period to 30 June 2008 and    31 December 2008 respectively. The 30 June 2008 comparatives have been restated to reflect the move to MCEV from EEV, including presentation of numbers on a net of minorities' basis. 

Free operational capital generated represents the net of the following:

• Operating profits emerging in net worth for the life in-force business, net of new business strain, and IFRS operating profits earned by non-life businesses. 

• The increase in capital requirements of ongoing businesses. Capital requirements represent target operating capital levels rather than regulatory minimum levels as this is considered a better reflection of capital utilised in the business. For the life businesses this is the capital used in the calculation of embedded value to evaluate the cost of locked in capital. For general insurance businesses we have calculated target capital based on two times the regulatory minimum. Where appropriate, the increase in capital requirements shown has been adjusted for the impact of foreign exchange movements, economic variances and other one off changes to required capital.

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Page 30 

Capital Management continued 

Sensitivity analysis

The sensitivity of the group's total equity on an MCEV basis and IFRS basis at 30 June 2009 to a 10% fall in global equity markets, a rise of 1% in global interest rates or a 0.5% increase in credit spreads is as follows:

MCEV basis			30 June  2009 £bn	Equities down 10%		Interest rates up 1% £bn	0.5% increased credit spread £bn
Restated  31 December 2008 £bn				Direct £bn	Indirect £bn
19.8		Long-term savings1	18.8	(0.3)	(0.4)	(0.3)	(1.4)
5.5		General insurance and other	4.6	(0.3)	-	(0.5)	0.4
(7.6)		Borrowings2	(8.1)	-	-	-	-
17.7		Total equity	15.3	(0.6)	(0.4)	(0.8)	(1.0)

IFRS basis						Interest rates up 1% £bn	0.5% increased credit spread £bn
31 December 2008 £bn				30 June  2009 £bn	Equities  down 10%
16.6		Long-term savings		16.2	(0.3)	(0.8)	(0.4)
5.5		General insurance and other		4.6	(0.3)	(0.5)	0.4
(7.6)		Borrowings2		(8.1)	-	-	-
14.5		Total equity		12.7	(0.6)	(1.3)	-

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

2.    Comprising internal, external and subordinated debt, net of corporate tangible net assets.

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

The tables above incorporates the effect on the value of the pension scheme assets and liabilities of a 10% decrease in equity markets, a 1% increase in fixed income bond yields and a 0.5% increase in credit spreads. 

The interest rate sensitivity also assumes an equivalent movement in both inflation and discount rate (i.e. no change to real interest rates) and therefore incorporates the offsetting effects of these items on the pension scheme liabilities. A 1% increase in the real interest rate has the effect of reducing the pension scheme liability by £1.6 billion.

The 0.5% increased credit spread sensitivities for MCEV and IFRS do not make an allowance for any adjustment to risk-free interest rates. MCEV sensitivities assume that the credit spread movement relates to credit risk and not liquidity risk; in practice, credit spread movements may be partially offset due to changes in liquidity risk. Life IFRS sensitivities provide for any impact of credit spread movements on liability valuations. The MCEV and IFRS sensitivities also include the allocation of staff pension scheme sensitivities, which assume inflation rates and government bond yields remain constant. In practice, the sensitivity of the business to changes in credit spreads is subject to a number of complex interactions. The impact of the credit spread movements will be related to individual portfolio composition and may be driven by changes in credit or liquidity risk; hence, the actual impact may differ substantially from applying spread movements implied by various published credit spread indices to these sensitivities.

Group IGD

The sensitivity of the group's IGD surplus reflects the impact of the hedges we have put in place as part of our long-term strategy to protect the group from extreme market movements. At 30 June 2009 the sensitivity to a 10% fall in global equity markets or a rise of 1% in global interest rates is as follows:

	30 June 2009 £bn	Equities down 10% £bn	Interest  rates up 1% £bn
IGD Group surplus	3.2	(0.1)	(0.5)

We continue to actively manage our exposure to further market volatility, with ongoing hedging strategies in place. Protection against equity market falls has been increased further from year end levels, and a 40% fall in equity markets at 30 June 2009 would reduce IGD by only £0.3 billion. By contrast, we have retained upside exposure and a 40% rise in equity markets would improve IGD by £0.7 billion.

	£bn
Equities down 10%	(0.1)
Equities down 20%	(0.2)
Equities down 30%	(0.3)
Equities down 40%	(0.3)
Equities up 40%	0.7

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Page 31 

Risk management

Equity hedging

Our risk management processes ensure close and ongoing monitoring of all our capital measures. The following table shows the material equity derivatives within the group's shareholder funds at 30 June 2009 that are used as part of a long-term strategy to manage equity risk. It excludes derivatives used for portfolio management purposes:

Derivative	Notional  £bn1	Market fall below    protection level    %2,4	Market fall required    before protection starts    %3,4	Outstanding duration
(a)	2.5	-	19%	< 6 months
(b)	6.1	-	27%	6-11 months
(c)	0.5	-	12%	12 months

1.    The notional represents the notional amount of hedging as at 30 June 2009. 

2.    The 'Market fall below protection level' shows the percentage the market has fallen below the protection level as at 30 June 2009.

3.    The 'Market fall required before protection starts' shows the percentage the market would have to fall from the 30 June 2009 position before the derivative moves into the money.

4.    Derivatives (a), (b) and (c) each represent a collection of derivatives with different strike prices. The strike prices used in the above calculations are the weighted average strikes of the derivatives in each bucket.

Interest rate hedging

Interest rate hedges are used widely to manage asymmetric interest rate exposures across our life insurance businesses as well as an efficient way to manage cash flow and duration matching. The most material examples of uses to hedge guarantees relate to minimum interest rate guarantees in the Netherlands, and also guaranteed annuity exposures in both the UK and Ireland. These hedges are used to protect against interest rate falls and are sufficient in scale to materially reduce the Group's interest rate exposure

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Operational cost base 

The Aviva operating cost base is calculated from reported IFRS expenses as set out in the table below:

	6 months  2009 £m	Restated 6 months  2008 £m
Other expenses (as reported)	2,245	2,234
Less:
Non operating items included above (amortisation and impairments)	(730)	(596)
Add:
Claims handling costs1	340	370
Non commission acquisition costs2	638	614
Operating cost base	2,493	2,622

1.    As reported within Claims and benefits paid of £14,142 million (2008: £14,136 million)

2.    As reported within Fee and commissions expense of £1,909 million (2008: £ 2,276 million)

During H1 2009, the operating cost base decreased 5% to £2,493 million (six months to 30 June 2008: £2,622 million). The table and notes below set out and explain the methodology and inherent assumptions used for the calculation of the like-for-like adjustments and different components which have driven the decrease in the operating cost base. These adjustments account for the impact of foreign exchange, impact of businesses acquired/disposed of during the year and adjustments to eliminate the impact of one-off restructuring and integration spend from the cost base in both years. After adjustments, the operating cost base decreased by 9% to £2,345 million compared with a 30 June 2008 like-for-like cost base of £2,584 million.

Movement in operating costs base

	£m
Total operating cost base 30 June 2008	2,622
Less: restructuring and integration spend for the six months to 30 June 2008	(132)
Impact of acquisitions and disposals1	(92)
Foreign exchange	186
30 June 2008 like-for-like operating cost base	2,584
Inflation2	72
UK Life3	(80)
UK General Insurance3	(118)
Europe3	(75)
Other businesses (including group)3	(38)
30 June 2009 like-for-like operating cost base	2,345
Restructuring and integration spend 30 June 2009	148
Total operating cost base 30 June 2009	2,493

1     Impact of acquisitions & disposals - Represents the disposal of Autowindscreens, BSM and HPI in the UK and healthcare business in the Netherlands.

2     Inflation - Notional level of Inflation that would have impacted the operating cost base during the period. This is calculated using the Consumer Price Index for individual countries, applied to operating expenditure i.e. excluding restructuring & integration costs (but including adjustments for acquisitions & disposals). The overall weighted average is calculated at 2.8%.

3     Regional operating costs reduction - Includes realised savings from cost initiatives (cost savings achieved during H1 2009 as well as cost savings achieved during the second half of 2008 which represent a decrease on the H1 2009 versus H1 2008 position) and productivity and other savings (decrease in the cost base driven by the revenue fall in the business as well as by saving initiatives not attributable to the specific initiatives linked to the cost savings committed externally).

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Analysis of assets 

Total assets - Shareholder/policyholder exposure to risk

		Policyholder assets  £m	Participating fund assets £m	Shareholder assets £m	Total assets analysed £m	Less assets of operations classified as held for sale £m	Balance  sheet  total £m
Assets
Goodwill and acquired value of in-force business and intangible assets		-	-	6,631	6,631	(1)	6,630
Interests in joint ventures and associates		8	569	1,916	2,493	(33)	2,460
Property and equipment		-	74	841	915	(110)	805
Investment property		3,413	6,517	2,288	12,218	-	12,218
Loans		1,621	8,760	29,353	39,734	(16)	39,718
Financial investments
Debt securities		18,533	79,802	48,511	146,846	(878)	145,968
Equity securities		23,481	7,701	5,322	36,504	(379)	36,125
Other investments		20,843	6,661	2,179	29,683	(748)	28,935
Reinsurance assets		1,524	1,046	4,446	7,016	(11)	7,005
Deferred tax assets		-	-	2,533	2,533	(31)	2,502
Current tax assets		-	-	444	444	-	444
Receivables and other financial assets		660	2,471	7,658	10,789	(24)	10,765
Deferred acquisition costs and other assets		198	781	5,283	6,262	(18)	6,244
Prepayments and accrued income		130	1,371	2,183	3,684	(10)	3,674
Cash and cash equivalents		4,076	11,927	9,737	25,740	(192)	25,548
Assets of operations classified as held for sale		-	-	-	-	2,451	2,451
Total		74,487	127,680	129,325	331,492	-	331,492
Total %		22.5%	38.5%	39.0%
FY 2008		79,893	134,665	140,004	354,562	-	354,562
FY 2008 %		22.5%	38.0%	39.5%

The quality of our asset base continues to be strong and shows no material deterioration since the end of 2008 in either its credit quality or the proportion of assets which are valued based on either quoted prices in an active market or using models with significant observable market parameters.

82% of assets (including 100% of financial investments) are measured at fair value of which the principle asset classes are loans, debt securities, equity securities and other financial investments. Of total debt securities, 94.8% are investment grade with 1.6% below investment grade and 3.6% not rated.

The group has very limited exposure to RMBS (Sub prime, Alt A), ABS, Wrapped Credit, CDOs and CLOs; these investments represent less than 1.0% of total balance sheet assets.

As at 30 June 2009, shareholder exposure to total loans and financial investments represented £85,365 million. The fall when compared to 31 December 2008 is predominantly driven by the movement in the Euro and the US dollar.

We report all of our financial investments, including our £147 billion debt securities portfolio, at market value. The unrealised losses of the debt securities portfolio on our balance sheet equate to 6% as at 30 June 2009, a significant reduction over the period (31 December 2008: 8%). Actual defaults in the period were minimal at £15 million (31 December 2008: £140 million). The total loss over the last 18 months represents just 0.2% of our total corporate debt portfolio. In addition, we have made impairment charges of £50 million (31 December 2008: £260 million).

Our UK Life commercial mortgage portfolio remains strong with no defaults recorded in the period. The portfolio is well diversified by sector and location with over 20% of the portfolio related to healthcare businesses which are effectively government backed. Interest service cover remains strong and unchanged at 1.3 times and over 96% of mortgages are neither past due nor impaired.

The provision we made of £550 million for short term default provisions in the UK for corporate bonds and commercial mortgages remain unutilised. Together with our long-term default assumptions, this equates to a provision of £1.1 billion for the life of the corporate bond and commercial mortgage portfolio and creates a strong buffer against potential future losses.

We have made further provisions of £42 million (31 December 2008: £26 million) on the UK General Insurance mortgage portfolio, bringing the total to £68m, of which £16m (31 December 2008: £nil) is against specific mortgage loans.

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Page 34 

Analysis of assets  continued 

Total assets - Shareholder/policyholder exposure to risk continued

Within the disclosure, the group's total assets have been segmented based on where the market and credit risks are held, according to the following guidelines.

Policyholder assets

We write unit-linked business in a number of long-term business operations. In unit-linked business, the policyholder bears the investment risk on the assets in the unit-linked funds, as the policy benefits are directly linked to the value of the assets in the funds. These assets are managed according to the investment mandates of the funds which are consistent with the expectations of the policyholders. By definition, there is a precise match between the investment assets and the policyholder liabilities, and so the market risk and credit risk lie with policyholders. The shareholders' exposure on this business is limited to the extent that income arising from asset management charges is based on the value of assets in the funds.

Participating fund assets

Some insurance and investment contracts in our long-term businesses contain a discretionary participating feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts. The market risk and credit risk in relation to assets held within Participating Funds (including ''with-profit'' funds) are shared between policyholders and shareholders in differing proportions. In general, the risks and rewards of participating funds rest primarily with the policyholders.

The assets within participating funds cover liabilities for participating insurance contracts and participating investment contracts in addition to other liabilities within the participating funds.

Shareholder assets

Assets held within long-term businesses that are not backing unit-linked liabilities or participating funds, directly expose the shareholders to market and credit risks. Likewise, assets held within general insurance and health, fund management and non-insurance businesses also expose our shareholders to market and credit risks. We have established comprehensive risk management policies to monitor and mitigate these risks.

Total assets - Valuation bases/fair value hierarchy

Valuation bases

The valuation of the group's assets can be categorised into the following major categories:

(i)    Fair value - Fair value is the amount for which an asset can be exchanged between knowledgeable, willing parties in an arm's length transaction;

(ii)    Cost/Amortised cost - The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition less principal repayments, plus or minus the cumulative amortisation (using the effective interest method) of any difference between the initial amount and the maturity amount, and less any reduction for impairment or uncollectibility. The cost/amortised cost of a non-financial asset is the amount at which the asset is initially recognised less any cumulative amortisation/depreciation (if applicable), and less any reduction for impairment;

(iii)    Equity accounted and tax assets - Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the group's share of that entity's post-acquisition changes to shareholders' funds, is included as an asset in the consolidated statement of financial position. The group's share of their post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. Distributions received from the investee reduce the group's carrying amount of the investment; and 

(iv)    Within the group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with Equity accounted within the analysis of the group's assets in the table below.

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Analysis of assets  continued 

Total assets - Valuation bases/fair value hierarchy continued

		Fair value  £m	Amortised  cost £m	Equity accounted/ tax assets £m	Total £m
Assets
Goodwill and acquired value of in-force business and intangible assets		-	6,631	-	6,631
Interests in joint ventures and associates		-	-	2,493	2,493
Property and equipment		446	469	-	915
Investment property		12,218	-	-	12,218
Loans		19,556	20,178	-	39,734
Financial investments
Debt securities		146,846	-	-	146,846
Equity securities		36,504	-	-	36,504
Other investments		29,683	-	-	29,683
Reinsurance assets		-	7,016	-	7,016
Deferred tax assets		-	-	2,533	2,533
Current tax assets		-	-	444	444
Receivables and other financial assets		-	10,789	-	10,789
Deferred acquisition costs and other assets		-	6,262	-	6,262
Prepayments and accrued income		-	3,684	-	3,684
Cash and cash equivalents		25,740	-	-	25,740
Total		270,993	55,029	5,470	331,492
Total %		81.7%	16.6%	1.7%
FY 2008		291,252	57,063	6,247	354,562
FY 2008 %		82.1%	16.1%	1.8%

Assets have been valued with 82% of assets (including 100% of financial investments) measured at fair value.

With such a significant portion of the group's total assets carried at fair value, the impact of market risks and credit risks of these assets has been fully reflected within the group's reported 30 June 2009 financial position. Furthermore, all other assets have been tested for impairment and, in the case of financial assets (which includes loans, receivables and cash) carried at amortised cost, this has included a specific analysis of the recoverability of the assets by reference to the credit risk of the counterparty. The carrying values of assets on the different valuation bases are analysed in the tables below between Policyholder, Participating fund and Shareholder assets respectively.

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Analysis of assets  continued 

Total assets - Valuation bases/fair value hierarchy continued

	Fair value  £m	Amortised  cost £m	Equity accounted/ tax assets £m	Total £m
Assets - Policyholder assets
Goodwill and acquired value of in-force business and intangible assets	-	-	-	-
Interests in joint ventures and associates	-	-	8	8
Property and equipment	-	-	-	-
Investment property	3,413	-	-	3,413
Loans	150	1,471	-	1,621
Financial investments
Debt securities	18,533	-	-	18,533
Equity securities	23,481	-	-	23,481
Other investments	20,843	-	-	20,843
Reinsurance assets	-	1,524	-	1,524
Deferred tax assets	-	-	-	-
Current tax assets	-	-	-	-
Receivables and other financial assets	-	660	-	660
Deferred acquisition costs and other assets	-	198	-	198
Prepayments and accrued income	-	130	-	130
Cash and cash equivalents	4,076	-	-	4,076
Total	70,496	3,983	8	74,487
Total %	94.6%	5.4%	0.0%
FY 2008	75,391	4,308	194	79,893
FY 2008 %	94.4%	5.4%	0.2%

	Fair value £m	Amortised cost £m	Equity accounted/ tax assets £m	Total £m
Assets - Participating fund assets
Goodwill and acquired value of in-force business and intangible assets	-	-	-	-
Interests in joint ventures and associates	-	-	569	569
Property and equipment	52	22	-	74
Investment property	6,517	-	-	6,517
Loans	1,073	7,687	-	8,760
Financial investments
Debt securities	79,802	-	-	79,802
Equity securities	7,701	-	-	7,701
Other investments	6,661	-	-	6,661
Reinsurance assets	-	1,046	-	1,046
Deferred tax assets	-	-	-	-
Current tax assets	-	-	-	-
Receivables and other financial assets	-	2,471	-	2,471
Deferred acquisition costs and other assets	-	781	-	781
Prepayments and accrued income	-	1,371	-	1,371
Cash and cash equivalents	11,927	-	-	11,927
Total	113,733	13,378	569	127,680
Total %	89.1%	10.5%	0.4%
FY 2008	120,945	12,770	950	134,665
FY 2008 %	89.8%	9.5%	0.7%

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	Fair value £m	Amortised cost £m	Equity accounted/ tax assets £m	Total £m
Assets - Shareholder assets
Goodwill and acquired value of in-force business and intangible assets	-	6,631	-	6,631
Interests in joint ventures and associates	-	-	1,916	1,916
Property and equipment	394	447	-	841
Investment property	2,288	-	-	2,288
Loans	18,333	11,020	-	29,353
Financial investments
Debt securities	48,511	-	-	48,511
Equity securities	5,322	-	-	5,322
Other investments	2,179	-	-	2,179
Reinsurance assets	-	4,446	-	4,446
Deferred tax assets	-	-	2,533	2,533
Current tax assets	-	-	444	444
Receivables and other financial assets	-	7,658	-	7,658
Deferred acquisition costs and other assets	-	5,283	-	5,283
Prepayments and accrued income	-	2,183	-	2,183
Cash and cash equivalents	9,737	-	-	9,737
Total	86,764	37,668	4,893	129,325
Total %	67.1%	29.1%	3.8%
FY 2008	94,916	39,985	5,103	140,004
FY 2008 %	67.8%	28.6%	3.6%

Fair value hierarchy

To provide further information on the valuation techniques used to measure assets carried at fair value, this disclosure categorises the measurement basis for assets carried at fair value into a ''fair value hierarchy'' as follows:

Quoted market prices in active markets - (''Level 1'')

Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets. An active market is a market in which transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. 

Examples are listed equities in active markets, listed debt securities in active markets and quoted unit trusts in active markets. 

Valued using models with significant observable market parameters - (''Level 2'')

Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly. If the asset has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset. Level 2 inputs include the following:

• Quoted prices for similar (i.e. not identical) assets in active markets;

• Quoted prices for identical or similar assets in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly;

• Inputs other than quoted prices that are observable for the asset (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates); and

• Inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market-corroborated inputs).

Examples are securities measured using discounted cash flow models based on market observable swap yields, investment property measured using market observable information and listed debt or equity securities in a market that is inactive. 

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Valued using models with significant unobservable market parameters - (''Level 3'')

Inputs to Level 3 fair values are unobservable inputs for the asset. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such, unobservable inputs reflect the business unit's own assumptions about the inputs that market participants would use in pricing the asset. 

Examples are certain private equity investments and private placements. 

1.1. Loans

The value of the group's loan portfolio at 30 June 2009 stood at £39,734 million compared to £42,237 million at year end 2008, representing a total decrease of £2,503 million. Policyholder and participating fund assets experienced only slight movements, and the primary source of this decline was from shareholder assets, due to the dominance of mortgage loans in the portfolio, which decreased by £2,383 million to £29,353 million. Within shareholder assets, the mortgage loan portfolio decreased from a year end 2008 position of £27,046 million to a half year 2009 position of £25,147 million.

The key drivers for these reductions were a combination of increased risks due to falling property values, increasing gilt yields and exchange rate movements for the USD and EUR currencies. However, most of these reductions are offset through corresponding reductions in the liability valuations, thereby resulting in minimal impact on the net balance sheet or income.

The group loan portfolio is principally made up of:

• Policy loans which are generally collateralised by a lien or charge over the underlying policy

• Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions. These loans are fully collateralised by other securities; 

• Mortgage loans collateralised by property assets; and

• Other loans which include loans and advances to customers of our banking business and brokers and intermediaries

Loans with fixed maturities, including policy loans, mortgage loans (at amortised cost) and loans and advances to banks, are recognised when cash is advanced to borrowers. These loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method. 

For certain mortgage loans, the group has taken advantage of the revised fair value option under IAS 39 to present the mortgages, associated borrowings, other liabilities and derivative financial instruments at fair value, since they are managed together on a fair value basis. Due to the illiquid nature of these assets, where fair value accounting is applied, it is done so on a Level 2 basis. 

Shareholder assets

	UK £m	Delta Lloyd £m	North  America £m	Europe (excl. DL) £m	Asia £m	Total £m
Policy loans	-	270	209	12	12	503
Loans and advances to banks	846	275	-	-	-	1,121
Mortgages	14,059	9,675	1,399	1	13	25,147
Other loans	33	2,460	82	3	4	2,582
Total	14,938	12,680	1,690	16	29	29,353

Mortgage loans

Of the group's total loan portfolio (including Policyholder, Participating Fund and Shareholder assets), 71% is invested in mortgage loans. Market developments over the past 2 years have led to an increased focus on this asset class. The group's mortgage loan portfolio spans several business units, primarily UK, Delta Lloyd and USA, and across various sectors, including residential loans, commercial loans and government supported healthcare loans.

Aviva shareholders are exposed predominantly to mortgage loans. These exposures are complex with several levels of protection for the shareholder. This section focuses on explaining the residual shareholder risk within these exposures.

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Mortgage loans - Shareholder assets

	UK £m	Delta Lloyd £m	North  America £m	Europe (excl. DL) £m	Asia £m	Total £m
Total securitised mortgage loans	1,756	5,381	-	-	-	7,137
Non-securitised mortgage loans - residential	-	4,274	-	1	-	4,275
Non-securitised mortgage loans - equity release	1,243	-	-	-	-	1,243
Non-securitised mortgage loans - commercial	8,445	20	1,399	-	13	9,877
Non-securitised mortgage loans - healthcare	2,615	-	-	-	-	2,615
Total non-securitised mortgage loans	12,303	4,294	1,399	1	13	18,010
Total mortgage loans	14,059	9,675	1,399	1	13	25,147

Securitised mortgage loans comprise 28% of total Shareholder mortgage loan assets. They are secured through non-recourse borrowings in our UK Life and Dutch businesses, and comprise primarily of residential assets, including equity release in the UK.

Shareholder exposure to non-securitised mortgage loans is predominantly to commercial, rather than residential mortgages. These are typically held to back annuity liabilities. Historical data has shown the portfolio to be of very high quality, with minimal realised losses incurred on the large UK portfolio in the last 15 years. With the economic climate deteriorating significantly over the last year, the level of specific bad debt provision has risen modestly and is expected to continue to rise, although general provisions have already been established to cover these. 

In addition to commercial mortgages of £9,877 million (predominantly held in the UK and US), Aviva also holds £2,615 million of mortgage loans made to UK healthcare related businesses, which receive significant support from the National Health Service ('NHS').

Of a total of £25,147 million of shareholder asset gross mortgage loan exposure (including securitised), a combined 99.9% is based within the UK, Delta Lloyd and USA business units. The analysis following therefore focuses on these three business units only.

Securitised mortgage loans (UK, Delta Lloyd, Shareholder assets only)

Of a total of £7,137 million of securitised residential mortgages, approximately £1 billion of securities are still held by Aviva. The remaining securities have been sold to third parties, and therefore present no credit risk to Aviva. 

Securitised residential mortgages held are predominantly issued through vehicles in the Delta Lloyd and in the UK. 

Non-securitised mortgage loans (Shareholder assets only)

UK commercial

Gross Exposures by Loan to Value and Arrears (£m)

	Loan to value
	>120%	115%-120%	110%-115%	105%-110%	100%-105%	95%- 100%	90%- 95%	80%- 90%	70%- 80%	<70%	Total
Neither past due nor impaired	1,138	507	699	1,607	743	946	1,049	599	492	333	8,113
0-3 months	291	-	-	-	-	13	-	-	-	-	304
3-6 months	-	3	-	-	-	20	-	-	-	-	23
6-12 months	-	-	-	-	-	5	-	-	-	-	5
> 12 months	-	-	-	-	-	-	-	-	-	-	-
Total	1,429	510	699	1,607	743	984	1,049	599	492	333	8,445

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Of the £8,445 million of UK Commercial loans, £7,845 million are held by Aviva UK Life to back annuity liabilities, and stated above on a fair value basis. The remaining £600 million of loans are held by Aviva UK General Insurance and stated on an amortised cost basis. The loan exposures for the UK Life business are calculated on a discounted cash flow basis, and include a risk adjustment through the use of Credit Risk Adjusted Value ('CRAV') methods. For the UK General Insurance business, mortgages are held at amortised cost, and subject to impairment review, using a fair value methodology calibrated to the UK Life approach, adjusted for specific portfolio characteristics.

The UK portfolio is well diversified in terms of property type, location and tenants as well as the spread of loans written over time. The UK portfolio has had an excellent track record with minimal defaults in the last 15 years, although the recent economic climate is expected to result in some losses. The risks in commercial mortgages are addressed through several layers of protection. The mortgages risk profile is primarily driven by the ability of the underlying tenant rental income to cover loan interest and amortisation (where applicable). Should any single tenant default on their rental payment, rental from other tenants backing the same loan often ensures the loan interest cover does not fall below 1.0x. Loan interest cover ('LIC') is defined as the annual net rental income (including rental deposits and less ground rent) divided by the annual loan interest service. The average LIC is 1.3x. Where there are multiple loans to a single borrower further protection may be achieved through cross-charging and loans to a single borrower may be pooled so that any single loan is also supported by payments on the other pool loans. Additionally, there may be support provided by the borrower of the loan itself and further loss mitigation from the general floating charges held over other assets within the borrower companies.

If the LIC cover falls below 1.0x and the borrower defaults then Aviva still retains the option of selling the security or restructuring the loans and benefiting from the protection of the collateral. A combination of these benefits and the high recovery levels afforded by property collateral (compared to corporate debt or other uncollateralised credit exposures) results in the economic exposure being significantly lower than the gross exposure reported above.

All loans in arrears have been assessed for impairment and specific provisions. Of the £332 million exposure in arrears, the interest amount in arrears is only £5.8 million. In addition to £29 million of specific provisions relating to defaults made in 2008, Aviva UK Life have provisioned for a further £3 million and Aviva UK General Insurance have made specific provisions of £16 million for defaults for the six month period to 30 June 2009. These are in addition to the general provisions made for longer term expectations of losses.

Of the £4,988 million of loans with LTV above 100%, the amount of exposure uncovered by the underlying security is £805 million. The combined impact of increasing risk, as property values continue to fall, and rising long-term gilt yields have led to a reduction in risk adjusted loan values since year end 2008. This has resulted in LTVs increasing only modestly as the effect of falling property values has been offset by falling loan values. However, loan interest cover has remained stable due to low levels of material tenant defaults.

UK Healthcare

Of the total non-securitised mortgage loans of £12,303 million, £2,615 million relate to healthcare businesses and are secured against General Practitioner premises or other health related premises leased to NHS trusts or Primary Care Trusts. For all such loans, Government support is provided through reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not Government guaranteed, the nature of these businesses and premises provides considerable comfort of an ongoing business model and low risk of default.

On a market value basis, we estimate the average LTV of these mortgages to be 111%, although as explained above, we do not consider this to be a key risk driver. Income support from the National Health Service and stability of the sector provide sustained income stability. Aviva therefore considers these loans to be low risk and uncorrelated with the strength of the UK or global economy.

UK Residential

The UK Non-securitised residential mortgage portfolio has a total current value of £1,243 million. These mortgages are all in the form of equity release, whereby homeowners that usually own a fully paid up property will mortgage it to release cash equity. Due to the low relative levels of equity released in each property, they all currently have LTV of below 80%, and the average LTV across the portfolio is approximately 30-35%. We therefore consider these mortgages to be low risk.

Delta Lloyd Commercial

Delta Lloyd currently holds a total of £430 million of commercial mortgages. However, of these, shareholders are exposed to only £19 million. The remaining assets are held in the Policyholder and Participating Funds of Delta Lloyd's German subsidiaries.

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Delta Lloyd residential

	Loan to value
	>120% £m	115%-120% £m	110%-115% £m	105%-110% £m	100%-105% £m	95%-100% £m	90%- 95% £m	80%- 90% £m	70%- 80% £m	<70% £m	Total £m
Exposures by mortgage type
Government guaranteed residential	370	63	48	33	28	93	23	34	31	68	791
Non-Government guaranteed residential	560	148	135	121	404	370	372	374	407	592	3,483
Total	930	211	183	154	432	463	395	408	438	660	4,274
Exposures by interest payment arrears
0-3 months	30	5	10	10	1	10	22	1	2	4	95
3-6 months	2	-	1	2	4	4	1	2	6	-	22
6-12 months	-	-	-	-	-	-	-	-	-	-	-
> 12 months	-	-	-	-	2	2	2	1	2	2	11
Total	32	5	11	12	7	16	25	4	10	6	128

The total exposure to non-securitised residential loans in the Netherlands is £4,274 million. However, of these, £791 million are Government guaranteed, and so present minimal risk to Aviva shareholders. Of the £4,274 million of residential loans, £3,645 million are measured on a fair value basis, and the remaining on amortised cost basis. 

The Government guarantees were introduced in the Netherlands to encourage homeownership, and apply to home mortgages of up to €350,000 (this threshold was raised, from €265,000 at 31 December 2008, due to the impact of the financial crisis). The guarantees are implemented through the National Mortgage Guarantee Scheme, and ensure that, should the homeowner be forced to sell, and cannot make the repayment on the mortgage, then the residual will be provided for by the Homeownership Guarantee Fund, which in turn is funded by the Government and municipalities through agreements for interest free loans.

In addition to government guarantees, the Dutch residential mortgage market also benefits from the ability for borrowers to deduct mortgage interest payments for tax purpose, thereby helping to reduce arrears or default. 

The total amount of loans for which interest payments are past due is £128 million (down from £282 at 31 December 2008). However, the actual amount of missed payments is £6.8 million. Delta Lloyd has currently not made any additional provisions for these loans as it does not consider the amount of potential loss to be significant.

U.S. commercial

Gross exposures by loan to value and arrears

	Loan to value
	>120% £m	115%-120% £m	110%-115% £m	105%-110% £m	100%-105% £m	95%-100% £m	90%- 95% £m	80%- 90% £m	70%- 80% £m	<70% £m	Total £m
30 June 2009	9	2	2	6	8	38	46	243	304	741	1,399

Aviva USA currently holds £1,399 million of commercial mortgages under Shareholder Assets. Of these, 53% (31 December 2008: 55%) still have LTV of below 70%, and 92% (31 December 2008: 94%) have LTVs of below 90%. However, the mortgage portfolio does currently have a total of £27 million (2% of portfolio) in principal balances where the LTV exceeds 100%. Although declining property prices have had a negative impact, the mortgages continue to perform well, reflective of:

• low underwriting LTVs (shall not exceed 80% at the time of issuance), and consequently a portfolio with an average LTV of 61% at 31 December 2008, and 65% at 30 June 2009;

• A highly diversified portfolio across USA, with strong volumes in many states with more stable economies and related real estate values, such as Washington, Texas and Minnesota; and

• Strong LIC ratios, with 96% of the loans having and LIC above 1.4x, and less than 1% with LIC below 1.0x

As at 30 June 2009, only £1 million of loans was in arrears. Aviva USA holds mortgage loans at an amortised cost value, and conducts a regular impairment review process. As at 30 June 2009, there were no provisions applied to the Aviva USA's commercial mortgage portfolio.

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1.2. Financial investments

Financial investments are an integral element of an insurance business. 

Aviva holds large quantities of high quality bonds, primarily to match our liability to make guaranteed payments to policyholders. Some credit risk is taken, partly to boost returns to policyholders and partly to optimise the risk/return profile for shareholders. The risks are consistent with the products we offer and the related investment mandates, and are in line with our risk appetite.

The group also holds significant quantities of equities. Many of these are held in participating funds or unit linked funds, where they form an integral part of the investment expectations of policyholders and follow well-defined investment mandates. Some equities are also held in shareholder funds and the staff pension schemes, where the holdings are designed to maximise long-term returns with an acceptable level of risk. The vast majority of equity investments are valued at quoted market prices. 

The group's credit risk policy restricts the exposure to individual counterparties across all types of risk. 

The fair values of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Securities, for which fair values cannot be measured reliably, are recognised at cost less impairment. 

Where it is determined that the market in which a price is quoted has become inactive, the quoted price is assessed against either independent valuations or internally modelled valuations which take into account other market observable information. Where the quoted price differs sufficiently from these reassessed prices, the fair value recognised on the balance sheet is based on this adjusted valuation. However, if these reassessed prices confirm that the quoted price remains appropriate, then the fair value recognised on the balance sheet continues to be the quoted price.

The group classifies its investments as either financial assets at fair value through profit or loss (FV) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. In general, the FV category is used as, in most cases, the group's investment or risk management strategy is to manage its financial investments on a fair value basis. The AFS category is used where the relevant long-term business liability (including shareholders funds) is passively managed. 

Investments classified as FV and AFS are subsequently carried at fair value. Changes in the fair value of FV investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS, except for impairment losses, are recorded in a separate investment valuation reserve in equity. Where investments classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve and into the income statement. 

To test for impairment, the group reviews the carrying value of its investments on a regular basis. If the carrying value of an investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. 

For listed investments classified as AFS, the group performs an objective review of the current financial position and prospects of the issuer on a regular basis, to identify whether any impairment provision is required. For unlisted investments classified as AFS, the group considers the current financial position of the issuer and the future prospects in identifying the requirement for an impairment provision. For both listed and unlisted AFS securities identified as being impaired, the cumulative unrealised net loss previously recognised within the AFS reserve is transferred to realised losses for the year. 

Cost, unrealised gains and fair value

The following is a summary of the cost/amortised cost, gross unrealised gains and losses and fair value of financial investments:    

				30 June 2009
	Cost/  amortised  cost £m	Unrealised  gains £m	Impairment and unrealised  losses  £m	Fair  value  £m
Debt securities	151,528	4,051	(8,733)	146,846
Equity securities	44,092	2,319	(9,907)	36,504
Other investments	29,274	2,092	(1,683)	29,683
	224,894	8,462	(20,323)	213,033

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			31 December 2008
	Cost/  amortised  cost £m	Unrealised gains £m	Impairment and Unrealised losses  £m	Fair value Restated  £m
Debt securities	156,097	7,634	(13,140)	150,591
Equity securities	54,518	2,685	(13,792)	43,411
Other investments	34,692	4,243	(2,819)	36,116
	245,307	14,562	(29,751)	230,118

1.2.1. Debt instruments

	Fair value hierarchy
	Level 1  £m	Level 2 £m	Level 3 £m	Total £m
Debt securities - Shareholder assets
UK Government	1,224	-	-	1,224
Non-UK Government	10,391	2,312	121	824
Corporate bonds - Public utilities	1,204	1,144	50	2,398
Corporate convertible bonds	10	273	-	283
Other corporate bonds	7,841	15,667	372	23,880
Other	2,470	5,044	388	7,902
Total	23,140	24,440	931	48,511
Total %	47.7%	50.4%	1.9%
FY 2008	26,134	24,469	834	51,437
FY 2008 %	50.8%	47.6%	1.6%

Only 3.3% of shareholder exposure to financial investments (2.1% of shareholder assets recorded at fair value) is fair valued using models with significant unobservable market parameters. Where estimates are used these are based on a combination of independent third party evidence and internally developed models, calibrated to market observable data where possible. Whilst such valuations are sensitive to estimates it is believed that changing one or more of the assumptions for reasonably possible alternative assumptions would not change the fair value significantly.

The majority of the debt instruments held by our North American businesses are valued by independent pricing firms in accordance with usual market practice in that region. 

48% of shareholder exposure to debt securities is based on quoted prices in an active market. The continuing trend of reduced liquidity due to the ongoing uncertainty in the international financial markets contributes to the relatively high proportion of debt securities that is based on quoted prices in markets that are not active or where the prices are less current.

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					Ratings
	AAA £m	AA £m	A £m	BBB £m	Less than BBB £m	Non-rated £m	Total £m
Debt securities - Shareholder assets
Government
UK Government	1,212	-	-	-	-	-	1,212
UK local authorities	3	9	-	-	-	-	12
Non-UK Government	7,399	2,409	2,310	47	58	601	12,824
	8,614	2,418	2,310	47	58	601	14,048
Corporate
Public utilities	105	132	1,308	755	59	39	2,398
Convertibles and bonds with warrants	-	21	110	124	27	1	283
Other corporate bonds	1,938	3,200	9,603	6,265	1,091	1,783	23,880
	2,043	3,353	11,021	7,144	1,177	1,823	26,561
Certificates of deposits	191	4	-	1	-	11	207
Structured
RMBS non-agency sub-prime	2	-	1	2	1	-	6
RMBS non-agency ALT A	129	4	-	-	12	-	145
RMBS non-agency prime	279	12	24	28	1	277	621
RMBS agency	2,458	-	-	-	-	-	2,458
	2,868	16	25	30	14	277	3,230
CMBS	1,368	59	30	36	14	-	1,507
ABS	856	121	164	86	5	271	1,503
CDO (including CLO)	77	10	68	8	18	50	231
ABCP	175	-	-	-	-	-	175
ABFRN	1	-	-	1	-	-	2
	2,477	190	262	131	37	321	3,418
Wrapped credit	141	51	95	79	-	6	372
Other	75	7	305	42	5	241	675
Total	16,409	6,039	14,018	7,474	1,291	3,280	48,511
Total %	33.8%	12.4%	28.9%	15.4%	2.7%	6.8%
FY 2008	19,021	7,414	13,608	6,536	1,185	3,673	51,437
FY 2008 %	37.0%	14.4%	26.5%	12.7%	2.3%	7.1%

The overall quality of the book is strong and has been maintained, despite the continuing downgrade activity by the major rating agencies during the first half of 2009, by taking opportunities to move into higher quality assets. Nearly 30% of shareholder exposure to debt security holdings is in government bonds. A further 55% of holdings are in corporate bonds with an average rating of A. 

The majority of the Residential Mortgage-Backed Securities (RMBS) are US investments and over 75% of the shareholder exposure is backed by one of the US Government Sponsored Entities (GSEs) including Fannie Mae and Freddie Mac which, under the conservatorship arrangements implemented in September 2008, are now backed by the full faith and credit of the US Government. The majority of the remaining US RMBS is backed by fixed rate loans originated in 2005 or before. 

The Group has extremely limited exposure to 'Sub-prime' debt securities and also limited exposure to CDOs and CLOs. Investments in structured assets, excluding agency RMBS which is backed by GSEs, represent less than 10% of debt securities to which the shareholder has exposure. 

The vast majority of the corporate bonds that are not rated represent private placements. The private placements are US investments which are not rated by the major rating agencies but which are rated an average equivalent of between A and BBB by the Securities Valuation Office of the National Association of Insurance Commissioners (NAIC), a US national regulatory agency. 

Excluding the private placements that are rated by the NAIC, the exposure that is not rated by a major rating agency reduces to less than 4% of debt securities to which the shareholder has exposure.

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Total assets - Valuation bases/fair value hierarchy continued

1.2.2 Equity securities

Fair value measurement

	Fair value hierarchy
	Level 1  £m	Level 2 £m	Level 3 £m	Total £m
Equity securities - Shareholder assets
Public utilities	86	-	-	86
Banks, trusts and insurance companies	405	135	637	1,177
Industrial miscellaneous and all other	2,022	1,621	223	3,866
Non-redeemable preferred shares	103	86	4	193
Total	2,616	1,842	864	5,322
Total %	49.2%	34.6%	16.2%
FY 2008	2,700	2,131	923	5,754
FY 2008 %	46.9%	37.1%	16.0%

Almost 50% of shareholder exposure to equity securities is based on quoted prices in an active market. Similar to the fixed income markets, continuing reduced liquidity in equity markets during the first half of 2009 means that there continues to be a proportion of equities that is based on quoted prices in markets that are not active or where the prices are less current, although this position is improving slightly. Also subject to Level 2 valuation are unlisted securities. 

Shareholder investments include a strategic holding in Unicredito and other Italian banks of £979 million (£791 million net of minority interest share).

1.2.3. Other investments

Fair value measurement

	Fair value hierarchy
	Level 1  £m	Level 2 £m	Level 3 £m	Total £m
Other investments - Shareholder assets
Unit trusts and other investment vehicles	500	56	4	560
Derivative financial instruments	41	999	25	1,065
Deposits and credit institutions	29	395	-	424
Minority holdings in property management undertakings	-	51	-	51
Other	12	63	4	79
Total	582	1,564	33	2,179
Total %	26.7%	71.8%	1.5%
FY 2008	626	2,491	29	3,146
FY 2008 %	19.9%	79.2%	0.9%

The majority of other investments is fair valued with reference to quoted prices in an active market or using market observable information. The unit trusts and other investment vehicles invest in a variety of assets with the majority of the value being invested in Property and Equity securities with a smaller portion being invested in Debt Securities.

Pension fund assets

In addition to the assets recognised directly on the group's balance sheet outlined in the disclosures above, the group is also exposed to the ''Plan assets'' that are shown net of the present value of scheme liabilities within the IAS 19 net pension deficit. The net pension deficit is recognised within provisions on the group's statement of financial position. 

Plan assets include investments in group-managed funds of £139 million in the UK scheme, and insurance policies of £157 million and £1,217 million in the UK and Dutch schemes respectively. Where the investment and insurance policies are in segregated funds with specific asset allocations, they are included in the appropriate lines in the table below, otherwise they appear in 'Other'. The Dutch insurance policies are considered non-transferable under the terms of IAS 19 and so have been excluded as assets of the relevant scheme in this table.

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Analysis of assets  continued 

Total assets - Valuation bases/fair value hierarchy continued

The total IAS 19 assets (i.e. excluding the non-transferable insurance policies) of the schemes are analysed as follows:

	United Kingdom £m	Delta Lloyd £m	Canada £m	Ireland £m	Total £m
Equities	2,288	-	70	47	2,405
Bonds	3,948	-	96	149	4,193
Property	346	-	-	20	366
Other	415	6	10	166	597
Total fair value of assets	6,997	6	176	382	7,561

Risk management and asset allocation strategy

The long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes. To meet these objectives, each scheme's assets are invested in a diversified portfolio, consisting primarily of equity and debt securities. These reflect the current long-term asset allocation ranges chosen, having regard to the structure of liabilities within the schemes.

Main UK scheme

Both the group and the trustees regularly review the asset/liability management of the main UK scheme. It is fully understood that, whilst the current asset mix is designed to produce appropriate long-term returns, this introduces a material risk of volatility in the scheme's surplus or deficit of assets compared with its liabilities. The principal asset risks to which the scheme is exposed are:

• Equity market risk - the effect of equity market falls on the value of plan assets;

• Inflation risk - the effect of inflation rising faster than expected on the value of the plan liabilities; and

• Interest rate risk - falling interest rates leading to an increase in liabilities significantly exceeding the increase in the value of assets.

The trustees have taken measures to partially mitigate inflation and interest rate risks, including entering into inflation and interest rate  swaps.

There is also an exposure to currency risk where assets are not denominated in the same currency as the liabilities. The majority of this exposure has been removed by the use of hedging instruments. 

During 2008, there was a reduction in the proportion of assets invested in equities, thereby mitigating the equity risk

Other schemes

The other schemes are considerably less material but their risks are managed in a similar way to those in the main UK scheme.

Available funds

To ensure access to liquidity as and when needed, the group maintains over £2 billion of undrawn committed central borrowing facilities with various highly rated banks. £1 billion of this is allocated to support the credit rating of Aviva plc's £2 billion commercial paper programme. The expiry profile of the undrawn committed central borrowing facilities is as follows: 

	£m
Expiring in one year	815
Expiring beyond one year	1,285
	2,100

Guarantees

As a normal part of their operating activities, various group companies have given guarantees and options, including investment return guarantees, in respect of certain long-term insurance and fund management products.

For the UK Life with-profit business, provisions in respect of these guarantees and options are calculated on a market consistent basis, in which stochastic models are used to evaluate the level of risk (and additional cost) under a number of economic scenarios, which allow for the impact of volatility in both interest rates and equity prices. For UK Life non-profit business, provisions do not materially differ from those determined on a market consistent basis.

In all other Businesses, provisions for guarantees and options are calculated on a local basis with sensitivity analysis undertaken where appropriate to assess the impact on provisioning levels of a movement in interest rates and equity levels (typically a 1% increase in interest rates and 10% decline in equity markets).

End of part 2 of 5

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END

 

 

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