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

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2. Analysis of general insurance and health

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.

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.

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

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

Definitions:

Claims ratio

Incurred claims expressed as a percentage of net earned premiums.

Expense ratio

Written expenses excluding commissions expressed as a percentage of net written premiums.

Commission ratio

Written commissions expressed as a percentage of net written premiums.

Combined operating ratio

Aggregate of claims ratio, expense ratio and commission ratio.

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