Notes to the consolidated financial statements 1-10

1 – First time adoption of International Financial Reporting Standards

(a) The Group has adopted International Financial Reporting Standards (IFRS) for these financial statements for the year ended 31 December 2005. In order to show comparative balances, the year ended 31 December 2004 is also shown under IFRS. The date of transition to IFRS is 1 January 2004.

In general, a company is required to determine its IFRS accounting policies and apply these retrospectively to determine its opening balance sheet under IFRS. However, International Financial Reporting Standard 1, First time adoption of International Financial Reporting Standards, (IFRS 1) allows a number of exemptions to this general principle upon adoption of IFRS. The Group has taken advantage of the following transitional arrangements.

Business combinations

The Group has elected not to apply retrospectively the provisions of IFRS 3, Business Combinations, to business combinations that occurred prior to 1 January 2004. At the date of transition, no adjustment was made between UK GAAP and IFRS for any historical business combination.

Cumulative translation differences

The Group has elected that the cumulative translation differences of foreign operations were deemed to be zero at the transition date to IFRS.

Equity compensation plans

The Group has elected not to apply the provisions of IFRS 2, Share-based Payment, to options and awards granted on or before 7 November 2002 which had not vested by 1 January 2005.

Employee benefits

All cumulative actuarial gains and losses on the Group’s defined benefit pension schemes have been recognised in equity at the transition date.

Comparatives

The Group has not taken advantage of the exemption within IFRS 1 that allows comparative information presented in the first year of adoption of IFRS not to comply with IAS 32, Financial Instruments: Disclosure and Presentation, IAS 39, Financial Instruments: Recognition and Measurement and IFRS 4, Insurance Contracts.

Estimates

Where estimates had previously been made under UK GAAP, consistent estimates (after adjustments to reflect any difference in accounting policies) have been made for the same date on transition to IFRS (ie judgements affecting the Group’s opening balance sheet have not been revisited for the benefit of hindsight).

Held for sale

The requirements of International Financial Reporting Standard 5, Non-current Assets Held for Sale and Discontinued Operations, have been applied prospectively from 1 January 2005.

Transitional provisions

The Group has elected to disclose only five years of data in its loss development tables, as permitted by IFRS 4 in the year of adoption of IFRS. This will be increased in each succeeding additional year, until the full ten years of information is included.

(b) The following tables show the effect of adopting IFRS on the statements that have previously been reported under UK GAAP for the year ending 31 December 2004. They also show the effect of implementing FRS 27, Life Assurance, and of changing the methodology for the Group’s longer term investment return.

(i) Summarised consolidated balance sheet at date of transition to IFRS – 1 January 2004

	UK GAAP as published £m	Adjustments £m	IFRS £m
Assets
Goodwill	1,105	40	1,145
Acquired value of in-force business and intangible assets	488	–	488
Investments in joint ventures and associates	1,912	69	1,981
Property and equipment	320	563	883
Investment property	9,106	618	9,724
Financial investments and loans	129,032	40,518	169,550
Assets held to cover linked liabilities	40,665	(40,665)	–
Reinsurance assets	6,883	328	7,211
Tax assets	215	633	848
Other assets	15,955	(3,610)	12,345
Cash and cash equivalents	2,999	6,524	9,523
Total assets	208,680	5,018	213,698
Equity
Share capital	764	–	764
Capital reserves	3,859	–	3,859
Shares held by employee trusts	(1)	–	(1)
Revaluation and other reserves	–	543	543
Retained earnings	1,932	(877)	1,055
Equity attributable to shareholders of Aviva plc	6,554	(334)	6,220
Minority interests	811	(7)	804
Total equity	7,365	(341)	7,024
Liabilities
Insurance liabilities	175,304	(62,055)	113,249
Liability for investment contracts	–	57,467	57,467
Unallocated divisible surplus	8,443	1,650	10,093
Net asset value attributable to unitholders	–	1,606	1,606
Provisions	336	1,586	1,922
Tax liabilities	1,276	630	1,906
Borrowings (including subordinated debt)	4,722	3,645	8,367
Other liabilities	11,234	830	12,064
Total liabilities	201,315	5,359	206,674
Total equity and liabilities	208,680	5,018	213,698

Analysis of adjustments to the balance sheet at 1 January 2004 as a result of the transition to IFRS

	Investment valuation (note 1) £m	Insurance changes (note 2) £m	Employee benefits (note 3) £m	Goodwill (note 4) £m	Dividend recognition (note 5) £m	Deferred tax (note 6) £m	Borrowings/ cash (note 7) £m	Other items (note 9) £m	Total adjustments £m
Assets
Goodwill				40					40
Acquired value of in-force business and intangible assets									–
Investments in joint ventures and associates	7							62	69
Property and equipment								563	563
Investment property								618	618
Financial investments and loans	1,854						44	38,620	40,518
Assets held to cover linked liabilities								(40,665)	(40,665)
Reinsurance assets		(134)						462	328
Tax assets						617		16	633
Other assets		(36)	(427)				67	(3,214)	(3,610)
Cash and cash equivalents							3,547	2,977	6,524
Total assets	1,861	(170)	(427)	40	–	617	3,658	(561)	5,018
Equity
Share capital									–
Capital reserves									–
Revaluation and other reserves	543								543
Retained earnings	(352)	242	(834)	40	344	(351)	(37)	71	(877)
Equity attributable to shareholders of Aviva plc	191	242	(834)	40	344	(351)	(37)	71	(334)
Minority interests								(7)	(7)
Total equity	191	242	(834)	40	344	(351)	(37)	64	(341)
Liabilities
Insurance liabilities	161	(57,892)	(715)			58		(3,667)	(62, 055)
Liability for investment contracts		57,445						22	57,467
Unallocated divisible surplus	1,509	(79)				(48)		268	1,650
Net asset value attributable to unitholders								1,606	1,606
Provisions			1,475					111	1,586
Tax liabilities		14	(353)			958	(15)	26	630
Borrowings (including subordinated debt)							3,484	161	3,645
Other liabilities		100			(344)		226	848	830
Total liabilities	1,670	(412)	407	–	(344)	968	3,695	(625)	5,359
Total equity and liabilities	1,861	(170)	(427)	40	–	617	3,658	(561)	5,018

Note references are to section (iii)

(ii) Summarised consolidated balance sheet at 31 December 2004

	UK GAAP as published £m	Adjustments £m	IFRS £m
Assets
Goodwill	1,135	49	1,184
Acquired value of in-force business and intangible assets	451	65	516
Investments in joint ventures and associates	2,088	40	2,128
Property and equipment	283	529	812
Investment property	9,407	1,650	11,057
Financial investments and loans	140,763	47,648	188,411
Assets held to cover linked liabilities	51,144	(51,144)	–
Reinsurance assets	7,540	963	8,503
Tax assets	63	845	908
Other assets	16,275	(3,270)	13,005
Cash and cash equivalents	3,121	9,658	12,779
Total assets	232,270	7,033	239,303
Equity
Share Capital	1,760	–	1,760
Capital reserves	3,878	–	3,878
Revaluation and other reserves	–	736	736
Retained earnings	2,682	(973)	1,709
Equity attributable to shareholders of Aviva plc	8,320	(237)	8,083
Minority interests	924	(14)	910
Total equity	9,244	(251)	8,993
Liabilities
Insurance liabilities	195,591	(71,469)	124,122
Liability for investment contracts	–	69,555	69,555
Unallocated divisible surplus	9,218	(1,669)	7,549
Net asset value attributable to unitholders	–	2,247	2,247
Provisions	340	1,785	2,125
Tax liabilities	1,617	848	2,465
Borrowings (including subordinated debt)	4,560	5,530	10,090
Other liabilities	11,700	457	12,157
Total liabilities	223,026	7,284	230,310
Total equity and liabilities	232,270	7,033	239,303

Analysis of adjustments to the balance sheet at 31 December 2004 as a result of the transition to IFRS

	Investment valuation (note 1) £m	Insurance changes (note 2) £m	Employee benefits (note 3) £m	Goodwill (note 4) £m	Dividend recognition (note 5) £m	Deferred tax (note 6) £m	Borrowings/ cash (note 7) £m	FRS (note 8) £m	Other items (note 9) £m	Total £m
Assets
Goodwill				49					–	49
Acquired value of in-force business and intangible assets				65					–	65
Investments in joint ventures and associates	8			15					17	40
Property and equipment									529	529
Investment property									1,650	1,650
Financial investments and loans	2,599						(3,598)		48,647	47,648
Assets held to cover linked liabilities									(51,144)	(51,144)
Reinsurance assets		(108)						417	654	963
Tax assets						845			–	845
Other assets		(19)	(475)					(13)	(2,763)	(3,270)
Cash and cash equivalents							8,792		866	9,658
Total assets	2,607	(127)	(475)	129	–	845	5,194	404	(1,544)	7,033
Equity
Share capital									–	–
Capital reserves									–	–
Revaluation and other reserves	736								–	736
Retained earnings	(452)	166	(909)	129	364	(322)	(26)	–	77	(973)
Equity attributable to shareholders of Aviva plc	284	166	(909)	129	364	(322)	(26)		77	(237)
Minority interests									(14)	(14)
Total equity	284	166	(909)	129	364	(322)	(26)		63	(251)
Liabilities
Insurance liabilities	250	(69,797)	(813)			28		4,226	(5,363)	(71,469)
Liability for investment contracts		69,555								69,555
Unallocated divisible surplus	2,073	(165)				(62)	17	(3,822)	290	(1,669)
Net asset value attributable to unitholders									2,247	2,247
Provisions			1,643						142	1,785
Tax liabilities			(396)			1,201	(4)		47	848
Borrowings (including subordinated debt)							5,207		323	5,530
Other liabilities		114			(364)				707	457
Total liabilities	2,323	(293)	434	–	(364)	1,167	5,220	404	(1,607)	7,284
Total equity and liabilities	2,607	(127)	(475)	129	–	845	5,194	404	(1,544)	7,033

Note references are to section (iii)

(iii) Notes to the analysis of adjustments to the balance sheets as at 1 January and 31 December 2004 as a result of the transition to IFRS

The UK GAAP balance sheet has been presented in a format consistent with IFRS.

The only significant change in heading is that the Fund for Future Appropriations is now renamed the Unallocated Divisible Surplus.

The basis for the material adjustments between UK GAAP and IFRS is as follows:

(1) Investment valuation
The adjustments in respect of investment valuation arise from the following:

	1 January 2004 £m	31 December 2004 £m
Increase in valuation of debt securities	1,718	2,459
Change in valuation of certain mortgages	113	119
Other sundry adjustments	23	21
	1,854	2,599

The principal changes are discussed further below:

a) Debt securities Under UK GAAP, equity securities and unit trusts are carried at current value. Debt and other fixed income securities are carried at current value, with the exception of many non-linked long-term business debt securities and fixed income securities, which are carried at amortised cost.

As a result of applying IAS 39, the Group now carries all investments in debt and equity securities at fair value. The change in valuation of debt securities from amortised cost to fair value increases the valuation of investments by £1,718 million at 1 January 2004 and £2,459 million at 31 December 2004. This change in the valuation of debt securities is largely offset by corresponding movements in the unallocated divisible surplus and technical liabilities. The net impact on shareholders’ funds at 1 January 2004 and 31 December 2004 is to increase them by £191 million and £284 million respectively.

b) Commercial mortgages backing certain annuity business Under IFRS, the Group has chosen to move certain of its commercial mortgage portfolio to an active fair valuation basis in accordance with IAS39, which has increased the value of investments by £113 million at 1 January 2004 and £119 million at 31 December 2004. The annuity liabilities which are backed by these assets have been correspondingly revalued, with the result that there is an insignificant impact on shareholders’ funds at either date.

c) Revaluation reserve Under IFRS, certain investment gains are recorded as a separate component of shareholders’ equity, whereas under UK GAAP they would be included in retained earnings.

Separate revaluation reserves are created for:

• Changes in the fair value of securities classified as available for sale;
• Changes in the value of owner-occupied property;
• Exchange differences arising from the translation of the net investment in foreign subsidiaries, associates and joint ventures and from borrowings designated as hedges of such items; and
• Changes in the fair value of derivatives that are designated and qualify as cash flow hedges.

The amounts included in the above reserves are, where appropriate, net of deferred tax and impairment losses.

The above requirements have resulted in transfers from retained earnings into separate revaluation reserves of £543 million and £736 million at 1 January 2004 and 31 December 2004 respectively.

(2) Insurance changes
The impact on shareholders’ funds of insurance changes is as follows:

	1 January 2004 £m	31 December 2004 £m
Derecognition of claims equalisation provision	364	388
Change in the value of reinsurance treaties	(48)	(34)
Application of an active liability valuation basis in the Netherlands	(7)	(52)
Change in value of non-participating investment contracts and other sundry items	(67)	(136)
	242	166

The principal changes to the Group’s insurance accounting upon transition to IFRS are discussed further below.

a) Product classification IFRS 4, Insurance Contracts, requires all products issued to be classified for accounting purposes as either insurance or investment contracts, depending on whether significant insurance risk exists. In the case of a life contract, insurance risk exists if the amount payable on death differs from the amount payable if the policyholder survives. The Group has deemed insurance risk to be significant if the difference exceeds 5% of the policy value, although the classification would be similar if a 10% test had been used.

Following a detailed review, 61% of life policy reserves on an modified statutory solvency basis (MSSB) at 31 December 2003 (31 December 2004: 59%) have been classified as insurance and 24% (at both dates) have been classified as participating investment contracts (being those investment contracts containing a discretionary participating feature as defined within IFRS 4). Both classes will continue to be accounted for under the Group’s existing accounting policies. The remaining 15% (31 December 2004: 17%) have been classified as non-participating investment contracts and therefore are required to be accounted for under IAS 39 and IAS 18, Revenue. Virtually all our general insurance products are classified as insurance.

This product classification change has led to technical provisions being allocated between insurance and investment contracts. This has resulted in £57,445 million and £69,555 million of liabilities at 1 January 2004 and 31 December 2004 respectively being classified as investment contracts.

b) Equalisation provision An equalisation provision is recorded in the balance sheets of individual general insurance companies in the United Kingdom and in a limited number of other countries, to eliminate or reduce the volatility in incurred claims arising from exceptional levels of claims in certain classes of business. The provision is required by law even though no actual liability exists at the balance sheet date and is included in the UK GAAP consolidated balance sheet. The annual change in the equalisation provision is recorded in the UK GAAP profit and loss account. Under IFRS, no equalisation provision is recorded, as no actual liability exists at the balance sheet date. There are increases of £364 million and £388 million in shareholders’ funds at 1 January 2004 and 31 December 2004 respectively as a result of the removal of this provision.

c) Reinsurance treaties Following a full review of all our reinsurance contracts, a small number of the Group’s long-term reinsurance treaties have been revalued under IFRS, leading to reductions in the value of reinsurance assets of £134 million and £108 million at 1 January 2004 and 31 December 2004 respectively. The majority of these changes relate to participating contracts and so these value changes principally affect the unallocated divisible surplus rather than shareholders’ funds.

d) Application of an active liability valuation basis in the Netherlands The conversion to IFRS has been a particular issue in the Dutch industry where, traditionally, both bond investments and associated insurance liabilities have been held at amortised cost. IAS 39 requires bonds to be held at fair value and hence, to prevent an equity mis-match, the Group has chosen to move to a more active liability valuation basis for its insurance liabilities within the Netherlands. As a result of this change, gross liabilities increased by £41 million and £213 million at 1 January 2004 and 31 December 2004 respectively.

Having applied an active basis for valuing liabilities on a traditional gross and individual savings business, the amounts representing undistributed gains on investments backing these products which were previously booked to the fund for future appropriations under UK GAAP of £34 million at 1 January 2004 and £161 million at 31 December 2004 have been released to equity.

e) Non-participating investment contracts and other sundry items The liability for those contracts classified as non-participating investment contracts is valued in accordance with IAS 39. The majority of the Group’s contracts classified as non-participating investment contracts are unit-linked contracts and have been valued at fair value. For unit-linked contracts, the fair value liability is deemed to equal the current unit fund value, plus positive non-unit reserves if required on a fair value basis. This replaces the reserve held under UK GAAP which equals the unit fund value plus any positive or negative non-unit reserves determined on the local valuation basis, and which differs from that required on a fair value basis.

In addition to the change in liability valuation, the accounting for deferred acquisition costs has been revised in accordance with IAS 18. This restricts the types of acquisition costs that can be deferred, leading to a reduction in deferred acquisition costs as compared to UK GAAP.

The net impact on shareholders’ funds of the above changes and of other sundry items is a reduction of £67 million at 1 January 2004 and of £136 million at 31 December 2004.

In addition to the above, IFRS now requires that any front end fees received on non-participating investment contracts are included within an explicit deferred income reserve within creditors. Under UK GAAP, any deferred acquisition cost asset created would have been net of these fees. This has led to increases in “Other assets” and “Other liabilities” of £100 million and £114 million at 1 January 2004 and 31 December 2004 respectively.

(3) Employee benefits
a) Pensions Under the Group’s UK GAAP pension policy, as set out in Statement of Standard Accounting Practice 24, Accounting for Pension Costs (SSAP 24), the cost of providing pension benefits is expensed using actuarial valuation methods which give a substantially even charge over the expected service lives of employees, and results in either a prepayment or an accrual to the extent that this charge does not equate to the cash contributions made into the schemes. Under IAS 19, Employee Benefits, the projected benefit obligation is matched against the fair value of the underlying assets and other unrecognised actuarial gains and losses in determining the pension expense for the year. Any pension asset or obligation must be recorded in the balance sheet. Aviva has not applied the “corridor approach” to valuing pension deficits.

This change in accounting has resulted in the removal of the Group’s SSAP 24 balances, a net debtor of £251 million after allowing for deferred tax, at 1 January 2004 (31 December 2004: £279 million) and the recognition of a deficit of £583 million (31 December 2004: £630 million), net of deferred tax, valued in accordance with IAS 19. This gives an overall impact on shareholders’ funds of £834 million at 1 January 2004 and £909 million at 31 December 2004.

The Group has assumed that substantially all of the pension deficit will fall to be borne by the shareholders. This is particularly relevant to the UK pension scheme deficit, which forms the majority of the deficit recognised by the Group. Costs, including pension costs, are charged to the UK Life companies and with-profit funds on the basis of a pre-determined Management Services Agreement (MSA). As reported at the time of the conversion to EEV, where similar assumptions have been made in connection with deficit funding, under the MSA, NU Life Services Limited can renegotiate the terms relating to the recharging of the costs to the UK with-profit fund in 2008, subject to regulatory approval. In evaluating the impact on IFRS, Aviva has not sought to pre-empt the outcome of this renegotiation. Any changes to the recharges in respect of the pension deficit will be credited to equity in the period agreement is obtained.

In some countries, the pension schemes have invested in the Group’s long-term business funds. IAS 19 requires the liquidity of the schemes’ assets to be considered and, if these are deemed non-transferable, the presentation of the total obligation to the schemes must include these amounts. Accordingly, insurance liabilities have been reduced by £715 million at 1 January 2004 (£813 million at 31 December 2004) and provisions increased by the same amounts, to reflect this disclosure. There is no impact on equity or income arising from this presentation.

There are a number of adjustments impacting the Group’s “Provisions” line. However, the most significant adjustment relates to the recognition of the pension obligations as shown in the table below:

	1 January 2004 £m	31 December 2004 £m
Provisions as stated under UK GAAP	336	340
Less: SSAP 24 pension obligation	(78)	(63)
Deficit in the staff pension schemes	838	893
Other obligations to staff pension schemes – insurance policies issued by Group companies	715	813
Total IAS 19 obligations to staff pension schemes	1,553	1,706
Adjustments to other provisions arising under IFRS	111	142
Provisions as stated under IFRS	1,922	2,125

b) Equity compensation plans Under UK GAAP, the costs of awards to employees under equity compensation plans, other than the Save As You Earn plans, are recognised immediately if they are not conditional on performance criteria. If the award is conditional upon future performance criteria, the cost is recognised over the period to which the employee’s service relates. The minimum cost for the award is the difference between the fair value of the shares at the date of grant less any contribution required from employee or exercise price. The cost is based on a reasonable expectation of the extent that the performance criteria will be met. Any subsequent changes in that expectation are reflected in the income statement as necessary.

Under IFRS 2, Share-based Payment, compensation costs for equity compensation plans that were granted after 7 November 2002, but had not yet vested at 1 January 2005, are determined based on the fair value of the share-based compensation at grant date, which is recognised in the income statement over the period of the expected life of the share-based instrument.

This change in accounting has not resulted in any material changes to the balance sheets at 1 January 2004 or 31 December 2004.

(4) Goodwill and intangibles
Under UK GAAP, goodwill arising before 1 January 1998 was eliminated against shareholders’ funds and was not subsequently reinstated. Goodwill previously written off to shareholders’ funds is taken back through the profit and loss account when calculating the profit or loss in the event of any subsequent disposal of the underlying investment. Under UK GAAP for acquisitions subsequent to 1997, goodwill arising on acquisition is carried on the balance sheet and amortised in the consolidated profit and loss account on a straight-line basis over its useful economic life, not exceeding 20 years.

Under IAS 36, Impairment of Assets, goodwill is no longer amortised but is tested for impairment at least annually. Any goodwill previously amortised prior to the date of transition (1 January 2004) or, for goodwill arising before 1 January 1998, eliminated against shareholders’ funds has not been reinstated. Amortisation charged in 2004 under UK GAAP is not charged to profit under IFRS to the extent that it does not relate to an impairment, and hence shareholders’ funds increase upon conversion to IFRS. In addition, negative goodwill of £40 million at 1 January 2004 and £37 million at 31 December 2004, previously recognised under UK GAAP, is included directly in retained earnings.

IFRS 3, Business combinations, requires that intangible assets such as customer lists, which can be separately identified and valued, must be recognised separately in the balance sheet. The Group has applied IFRS 3 to acquisitions since 1 January 2004, which has resulted in £65 million of goodwill being reclassified as intangibles upon conversion to IFRS.

(5) Dividend recognition
Under UK GAAP, dividends are accrued in the period to which they relate, regardless of when they are declared and approved.
Under IAS 10, Events after the Balance Sheet Date, shareholders’ dividends are accrued only when declared and appropriately approved. This has increased shareholders’ funds by £344 million at 1 January 2004 and £364 million at 31 December 2004.

(6) Deferred tax
Under UK GAAP, provision is made for deferred tax assets and liabilities, using the liability method, arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in a tax computation. No provision is made for tax that might arise on undistributed earnings of subsidiaries unless a binding arrangement for distribution exists. Deferred tax is recognised as a liability or asset if the transactions or events that give the entity an obligation to pay more tax in future or a right to pay less tax in future have occurred by the balance sheet date. The Group policy is to discount its deferred tax balances.

Under IAS 12, Income tax, deferred tax is provided under the liability method for all relevant temporary differences, being the difference between the carrying amount of an asset or liability in the balance sheet and its value for tax purposes. IAS 12 does not require all temporary differences to be provided for. In particular, the Group does not provide for deferred tax on undistributed earnings of subsidiaries where the Group is able to control the timing of the distribution and the temporary difference created is not expected to reverse in the foreseeable future. Deferred tax assets are recognised for unused tax losses and other deductible temporary differences to the extent that it is probable that future taxable profit will be utilised against the unused tax losses and credits. Discounting is prohibited under IAS 12.

The changes to deferred tax arise from the removal of discounting, changes to the valuation of the Group’s assets and liabilities under IFRS and presentational changes to disclosure of tax assets and liabilities. The main net increases in deferred tax that reduce shareholders’ funds are:

	1 January 2004 £m	31 December 2004 £m
Reversal of discounting (the total discounting applied to UK GAAP deferred tax liabilities at 1 January 2004 was £151 million (31 December 2004: £277 million), of which £110 million (31 December 2004: £215 million) relates to non-life and shareholders’ interests)	110	215
Deferred tax impact of the removal of the equalisation provision	108	117
Deferred tax impact of other changes to technical provisions, valuation of investments and other sundry adjustments	133	(10)
Net decrease to shareholders’ funds	351	322

(7) Borrowings and cash
IFRS requires a number of presentational changes to borrowings and cash. The most significant change is that the linked presentation can no longer be adopted for the Group’s borrowing securitised on certain of its mortgage portfolios. This increases borrowings and investments by £3,143 million at 1 January 2004 and £5,110 million at 31 December 2004. The equity impact of £37 million at 1 January 2004 and £26 million at 31 December 2004 relates to the application of the fair value option to the mortgages of the UK equity release business, the loan notes which are securitised upon them and backing derivatives, which more appropriately reflects the commercial substance of this business. This has increased borrowings by £90 million at 1 January 2004 and £97 million at 31 December 2004. Additionally, £3,307 million of the Group’s investments at 1 January 2004 (31 December 2004: £8,792 million) meet the definition of cash equivalents and so have been reclassified to this heading in the consolidated balance sheets.

(8) FRS 27 Life Assurance
In December 2004, the UK’s Accounting Standards Board (ASB) issued Financial Reporting Standard 27, Life Assurance (FRS 27). In accordance with the Memorandum of Understanding (MoU) signed by the Group along with other major insurance companies, the Association of British Insurers (ABI) and the ASB, the Group has adopted FRS 27 in its 2004 IFRS balance sheet. FRS 27 requires insurance companies to measure their liabilities on with-profit business, on a “realistic basis” (ie the FSA’s definition of a “realistic” valuation). The use of the “realistic” basis to measure liabilities for with-profit business does not impact reported profits, as an offsetting adjustment is made to the unallocated divisible surplus.

(9) Other items
The other changes that arise as a result of the transition to IFRS are principally reclassifications and presentational changes. The total effect of the other changes to shareholders’ funds is £71 million at 1 January 2004 and £77 million at 31 December 2004.

(i) Assets held to cover linked liabilities of £40,665 million at 1 January 2004 and £51,144 million at 31 December 2004 are no longer disclosed in a single line but have been reported in the various asset classifications. Of this amount, assets of £3,343 million at 1 January 2004 and £4,965 million at 31 December 2004 have been netted off technical liabilities, reducing the gross assets and investment contract liabilities of the Group. There is no impact on profit or shareholders’ funds as a result of this change.

(ii) The assets and liabilities of the banking business are no longer disclosed entirely in “other debtors” and “other creditors” but have been reported in the appropriate balance sheet classifications.

(iii) Owner-occupied properties have been reclassified from “investment property” to property and equipment. We continue to hold these properties at fair value.

(iv) Mutual funds have been consolidated where these vehicles meet the definition of a subsidiary. This has resulted in an increase in gross assets of £1,606 million at 1 January 2004 and £2,247 million at 31 December 2004, representing the part of the funds owned by third parties. This third party interest is recorded in the line “net assets attributable to unitholders” within liabilities. The consolidation of mutual funds has no impact on shareholders’ funds or profit after tax.

(iv) Summarised consolidated pro forma operating profit statement for the year ended 31 December 2004

	UK GAAP £m	IFRS   changes £m	Restated for IFRS changes £m	LTIR (note 6) £m	Restated for IFRS and LITR changes £m
Note references are to section (v). 1. Represents the application of deposit accounting for those contracts classified as non-participating investment contracts. 2. Calculated as operating profit net of tax, minorities and preference dividend over interim and final ordinary dividends declared in respect of the financial year.
Net premiums written (excluding associates)
Life premiums	19,899	(6,357)1	13,542	–	13,542
General insurance and health	9,809	–	9,809	–	9,809
	29,708	(6,357)	23,351	–	23,351
Operating profit
Long-term business	1,185	(69)	1,116	–	1,116
Fund management	43	(3)	40	–	40
General insurance and health business	1,384	(28)	1,356	(97)	1,259
Non-insurance operations	(108)	(13)	(121)	–	(121)
Corporate costs	(178)	(10)	(188)	–	(188)
Unallocated interest charges	(465)	–	(465)	–	(465)
Unallocated income	–	28	28	–	28
Operating profit before tax attributable to shareholders’ profits	1,861	(95)	1,766	(97)	1,669
Amortisation/impairment of goodwill	(120)	79	(41)	–	(41)
Amortisation of acquired additional value of in-force long-term business and intangibles	(126)	34	(92)	–	(92)
Financial Services Compensation Scheme and other levies	(49)	–	(49)	–	(49)
Short-term fluctuation in return on investments	131	(67)	64	97	161
Change in the equalisation provision	(23)	23	–	–	–
Net loss on the disposal of subsidiaries and associates	(136)	170	34	–	34
Exceptional costs for termination of operations	(50)	10	(40)	–	(40)
Profit before tax attributable to shareholders’ profits	1,488	154	1,642	–	1,642
Tax attributable to shareholders’ profits	(355)	84	(271)	–	(271)
Profit for the year	1,133	238	1,371	–	1,371
Attributable to:
Equity shareholders of Aviva plc	1,057	218	1,275	–	1,275
Minority interests	76	20	96	–	96
Earnings per share based on operating profit after tax attributable to ordinary shareholders	57.2p		56.9p		53.9p
Earnings per share based on profit after tax attributable to ordinary shareholders	45.8p		55.5p		55.5p
Dividend cover2	2.25 times		2.23 times		2.11 times

Analysis of IFRS adjustments to the pro forma operating profit statement for the year ended 31 December 2004 as a result of the transition to IFRS

	Investment valuation (note 1) £m	Insurance changes (note 2) £m	Employee benefits (note 3) £m	Goodwill (note 4) £m	Policyholder tax (note 5) £m	Other items	Total   adjustments £m
Operating profit
Long-term business	111	(77)	(27)		(93)	17	(69)
Fund management			(3)				(3)
General insurance and health business		5	(33)				(28)
Non-insurance operations			(3)			(10)	(13)
Corporate costs			(10)				(10)
Unallocated interest charges							–
Unallocated income			28				28
Operating profit before tax attributable to shareholders	111	(72)	(48)	–	(93)	7	(95)
Amortisation/impairment of goodwill				79			79
Amortisation of AVIF and intangibles					37	(3)	34
Financial Services Compensation Scheme and other levies							–
Short-term investment fluctuation	(67)						(67)
Change in equalisation provision		23					23
Net loss on the disposal of subsidiaries and associates				169		1	170
Exceptional costs for termination of operations						10	10
Profit before tax attributable to shareholders’ profits	44	(49)	(48)	248	(56)	15	154
Tax attributable to shareholders’ profits	–	(7)	15	–	56	20	84
Profit for the year	44	(56)	(33)	248	–	35	238

Note references are to section (v)

(v) Notes to the Analysis of adjustments to the pro forma operating profit statement for the year ended 31 December 2004 as a result of the transition to IFRS

(1) Investment valuation
The main investment valuation change upon conversion to IFRS is that assets, which are not classified as being held to maturity, are required to be held at fair value. Under UK GAAP, certain of the Group’s bonds were held at amortised cost. This change in valuation of debt securities resulted in a £2,459 million increase in the valuation of securities at 31 December 2004. Most of this change was offset by corresponding movements in the unallocated divisible surplus and technical liabilities. However, there was a residual uplift which resulted in a positive increase in the Group’s shareholders’ funds, and the year-on-year movement in respect of those investments classified as “at fair value through profit and loss account” is reported as an increased profit in the 2004 income statement.

In addition, changes to investment accounting have resulted in £67 million of investment gains being reclassified from short-term fluctuations to the life operating profit.

(2) Insurance changes
Insurance changes consist of:

• The removal of the claims equalisation provision, improving profit before tax by £23 million but with no impact on operating profit;
• The revaluation of liabilities and deferred acquisition costs on those contracts classified as non-participating investment contracts, reducing operating profit by £91 million;
• The revaluation of certain life reinsurance treaties, increasing operating profit by £14 million;
• Other sundry changes to our general insurance business reserves, increasing operating profit in 2004 by £5 million.

Of these changes, the most significant impact occurs on our UK Life business, where profit falls by £90 million as a result of the adoption of IAS 39. On the basis of 2004 gross written premiums, 44% of our total life business within the UK is classified as non-participating investment contracts and includes unit-linked bonds and unit-linked pension contracts. IAS 39 reduces the level of deferred acquisition costs that can be recognised, as well as requiring the removal from technical provisions of positive or negative non-unit reserves determined on the local valuation basis held over and above the unit fund value. The effect of these changes is that the profits on a non-participating investment contract will arise later in the contract term under IFRS than under UK GAAP.

The overall impact on annual profits arising from this accounting change is dependent upon levels of new business, product mixes, the ageing profile of the existing in-force business and reserving policies. Additional new business strain under IFRS would be expected to be mitigated by the emergence of higher IFRS basis profits of the in-force book of business. Until mid-2003, unit-linked bond business sold by Norwich Union in the UK contained a guaranteed minimum death benefit, and hence contained significant insurance risk, and accordingly, as permitted by IFRS Phase 1, the UK GAAP basis profit profile has been retained. After mid-2003, this benefit was removed and business written since this time has been classified as non-participating investment business. The existing in-force business is therefore small and profits are insufficient to offset the new business strain. A significant conversion effect on profit therefore arises.

This reduction in profit is no more than a timing adjustment. Aviva’s main value measure remains European embedded value and the profit arising on this basis is unaffected by this technical accounting change.

(3) Employee benefits
The overall impact of adopting IAS 19, Employee benefits, and IFRS 2, Share based compensation, has been to increase costs by £48 million in 2004. This partly reflects the fact that IAS 19 has used a more current actuarial valuation to measure the ongoing pension service cost. The charge under UK GAAP was based on the SSAP 24 valuation which, as disclosed in the 2004 Annual Report and Accounts, was last updated for financial reporting purposes in April 2002.

(4) Goodwill
Goodwill is no longer amortised under IFRS but is subject to annual impairment review. Impairment charges of £41 million were incurred in 2004, relating to sundry small overseas businesses, which had been fully reflected within the UK GAAP amortisation charge of £120 million. No additional impairment arose as a result of the transition to IFRS.

A further £169 million credit arises to profit before tax, as goodwill previously charged directly to reserves was deducted from profit upon disposal of subsidiaries under UK GAAP. Under IFRS no such deduction is required. This change has no impact on operating profit or shareholders’ funds.

(5) Policyholder tax
Operating profit before tax has fallen relative to the UK GAAP result by £93 million as a result of a change in the allocation of the tax charged to the life funds between policyholders and shareholders. This presentational change has no impact on operating profit after tax or the tax suffered by the life funds but merely represents how the tax charge is presented in the financial statements. The increase in tax costs charged to operating profit arises principally in the UK, but has been partly offset by a change in allocation in the Netherlands, where all tax is now deemed to be shareholder tax.

It is a feature of the UK tax regime that the tax attributable to life business operations is a single charge in respect of policyholder income and shareholder profits. Under UK GAAP, the difficulty of allocating this charge between policyholders and shareholders is generally acknowledged and hence, under UK GAAP, the total tax charge is deducted from life operating profit in the long-term technical account, the net result of which is then grossed up at the effective shareholder tax rate. Traditionally, Aviva has grossed up at 30% which represents its view of the long-term effective rate. We remain of the view that this will be the rate suffered by shareholders over the longer term.

Under IFRS, all taxation must be reported within the taxation line. The profit before this total tax would present a misleading picture of the Group’s profit as (i) much of the policyholder tax is in the with-profits funds where the unallocated divisible surplus is adjusted on a net of tax basis; (ii) the cost of policyholder tax is priced into the relevant products; and (iii) the level of tax will vary on an annual basis in line with the investment return on assets backing the long-term funds.

The UK industry has therefore agreed that it is appropriate to adopt an income statement presentation which depicts profit before tax attributable to the shareholders. This requires an allocation of the total tax charge between policyholders and shareholders, with the policyholder charge being offset against operating profit. There is no universal view on how this allocation should be performed. Aviva has taken the view that the IFRS conceptual framework does not permit companies to use notional allocation or gross-up methods. Instead, the allocation to policyholder tax should reflect the actual tax payable at policyholder rates, including deferred tax. Aviva has therefore developed a conceptual methodology to achieve this consistently year-on-year.

In 2004, the level of tax attributed to the shareholders was reduced by the following arrangement. The £1.5 billion of capital injected into the life funds on the demutualisation of Norwich Union in 1997 had the effect that future distributions up to that amount by Norwich Union Life and Pensions are treated as already having suffered some shareholder tax. In 2004, a substantial proportion of the company’s shareholders’ surplus was sheltered by this arrangement and this has the impact of lowering the actual tax paid at shareholder rates. This is a genuine benefit to shareholders and resulted in higher profit after tax. This tax benefit has a finite capacity and will at some point be exhausted, such that over the long-term there will be an increase in shareholder tax rates back towards 30%. The use of this capacity is dependent on the level of distributions made by Norwich Union Life & Pensions.

The impact of this is that operating profit before tax falls relative to the UK GAAP result, as the actual shareholder rate suffered in the UK in 2004 was lower than 30%.

It should be noted that, from an EEV perspective, an asset representing this tax benefit is already established and so 30% remains as an appropriate shareholder tax rate for this business.

(6) Longer-term investment return
The Group has chosen to revisit its longer-term investment return (LTIR) methodology from 2005 as part of a discretionary change not required by IFRS. In order to provide suitable trend analysis, the 2004 comparatives are presented in accordance with this new methodology. The key changes are as follows:

• For properties and equity, we have applied lower start of year long-term rates of investment return consistent with those adopted for reporting life operating returns under EEV principles. This would have reduced operating profit in 2004 by £25 million;
• For fixed income securities, we have included the amortisation of the premium or discount arising upon acquisition of a bond within our LTIR calculation. This would have reduced operating profit before tax by £72 million in 2004;
• The LTIR is only being applied to general insurance and health business.

These changes have no effect on profit before tax.

(vi) Reconciliation of the cash flows reported under UK GAAP to cash flows reported under IFRS

Under UK GAAP, as amended by the ABI SORP for insurance companies, the consolidated statement of cash flows presents only the cash flows of general insurance business and shareholders’ funds. Cash flows of the long-term business, other than amounts transferred to shareholders, are not included in this statement. IAS 7, Cash Flow Statements, requires the cash flow statement to include cash flows from all activities of the Group, including the reconciliation of cash flows from operating activities to profit or loss reported in the income statement. Other differences arise between the UK cash flow statements and IFRS, mainly due to reclassification of items under IFRS.

For the year ended 31 December 2004, the only material differences between the cash flow statements prepared under the two bases were the inclusion of cash flows from the Group’s long-term businesses and from newly-consolidated securitisation vehicles and investment vehicles, together with changes arising from the different definitions of cash and cash equivalents under these bases.

2 – Exchange rates

The Group’s principal overseas operations are located within the Eurozone. The results and cash flows of these operations have been translated into sterling at an average rate for the year of 1 euro = £0.68 (2004: 1 euro = £0.68) and their assets and liabilities have been translated at the year-end rate of 1 euro = £0.69 (2004: 1 euro = £0.71).

Total foreign currency movements during 2005 resulted in a loss recognised in the income statement of £203 million (2004: £31 million gain).

3 – Subsidiaries

(a) Acquisitions

(i) RAC plc

On 4 May 2005, the Group acquired 100% of the share capital of RAC plc. The results of RAC plc’s operations have been included in the consolidated financial statements of the Group with effect from 4 May 2005, and contributed £15 million to the consolidated profit before tax.

	£m
Purchase cost
Cash paid	566
Fair value of 88 million shares issued, based on their published price at date of exchange (average of £6.03 per share)	530
Costs attributable	17
Total	1,113

The issue of new shares in the Company in exchange for shares in RAC plc has attracted merger relief under section 131 of the Companies Act 1985. Of the £530 million above, £22 million has been credited to share capital (see note 27(b)) and £508 million has been credited to the merger reserve, increasing that reserve from £2,763 million to £3,271 million.

The assets and liabilities at the date of acquisition were:

	Book value £m	Revaluation of Intangibles £m	Pension scheme   valuation £m	Fair value and    accounting policy £m	Fair   value £m
Assets
Intangible assets	59	333	–	–	392
Tax assets	58	–	–	(58)	–
Other assets	608	–	–	38	646
Total assets	725	333	–	(20)	1,038
Liabilities
Provisions
Pension deficit	(257)	–	(56)	–	(313)
Other	(8)	–	–	(14)	(22)
Tax liabilities	–	(118)	17	83	(18)
Other liabilities	(708)	–	–	(3)	(711)
Total liabilities	(973)	(118)	(39)	66	(1,064)
Net assets acquired	(248)	215	(39)	46	(26)
Goodwill (including £118 million arising from the creation of the deferred tax liability on intangibles)					1,139
Intangible assets					392
Total goodwill and intangible assets					1,531
Less: deferred tax liability					(118)
Total value of goodwill and intangible assets net of associated tax included on balance sheet					1,413

Separable intangible assets have been identified and valued by an independent third party at £392 million, using estimated post-tax cash flows and post-tax discount rates. The Group has assessed the useful economic lives of these intangibles, considering relevant factors such as usage of the asset, typical product life cycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position, and the period of control over the assets. In the case of the RAC and BSM brands, it has been determined that the existing lives of the assets, their competitive position in and the stability of their respective markets indicate that the brands have indefinite useful lives, and thus no amortisation has been charged in the period since acquisition. Of the total £392 million, £260 million has been assessed as having an indefinite life, with the remaining £132 million, mainly contractual customer relationships, being amortised over nine to 22 years.

A deferred tax liability of £118 million has been provided against these intangible assets, resulting in an increase in residual goodwill by this amount. Although this liability has been recognised in accordance with IAS 12, and a proportion will be amortised to the income statement as the related intangible asset is amortised, this liability is only payable if the intangible asset is sold separately and this is not expected to happen.

The pension scheme valuation adjustment and associated deferred taxation represents the effect of aligning the assumptions of the RAC plc schemes to those of Aviva. The fair value of the RAC pension deficit at the date of acquisition amounted to £313 million (£219 million after deferred tax).

The residual goodwill of £1,139 million essentially represents synergies, both in increased revenues and in reduced costs, expected to arise in RAC plc and our UK general insurance business as a result of the acquisition.

£109 million of integration costs for the restructuring of the combined Norwich Union Insurance and RAC businesses has been included in the results to 31 December 2005.

(ii) Gresham Insurance Company Limited

On 31 March 2005, the Group acquired 100% of the share capital of Gresham Insurance Company Limited. The cash consideration including purchase costs was £75 million. The fair value of the net assets acquired, including intangibles of £14 million, was £75 million, giving rise to no goodwill on acquisition.

(iii) Solus Automotive Limited

On 11 May 2005, the Group acquired 100% of the share capital of Solus Automotive Limited. The cash consideration including purchase costs was £20 million, including £12 million of cash and £8 million of deferred consideration. The fair value of the net assets acquired was nil, giving rise to £20 million of goodwill on acquisition.

(iv) Unaudited pro forma combined revenues and profit

Shown below are unaudited pro forma figures for combined revenues and profit as though the acquisition date for all business combinations effected during the year had been 1 January 2005, after giving effect to purchase accounting adjustments and the elimination of intercompany transactions. The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at 1 January 2005, nor is it necessarily indicative of future results.

	2005 £m
Revenues (premiums and fee income)	27,842
Profit before tax attributable to shareholders	2,578

Of the above pre-tax profit, £21 million has arisen since acquisition.

(v) Non-adjusting post-balance sheet events:

Irish bancassurance agreement
On 22 November 2005, the Group announced a new bancassurance agreement in Ireland between its wholly-owned subsidiary Hibernian Group plc (“Hibernian”) and Allied Irish Banks plc (“AIB”). This will create a leading force in the Irish life and pensions market and bring further opportunities for growth in this market. The transaction completed on 27 January 2006, following the receipt of regulatory and European Commission approval.

Under the terms of the agreement, Hibernian Life Holdings Limited (HLH), the parent company of Hibernian Life & Pensions Limited, has acquired all the shares of Ark Life Assurance Company Limited (Ark Life) from AIB in exchange for a 24.99% stake in the enlarged HLH and a balancing cash payment of €195.4 million which also reflects the management of Ark Life funds by Hibernian Investment Managers Limited, part of the Group’s fund management business. A further deferred cash payment of up to €10 million is payable, subject to the fulfilment of certain performance criteria.

AIB calculate embedded value on a different basis to that used by the Group and, in particular, do not use EEV principles. In view of the very recent timing of completion, it is currently impractical to comply with the requirements of paragraph 67 of IFRS 3, Business Combinations, and to state with any certainty the fair values of the assets and liabilities acquired, and therefore to estimate the goodwill arising on this acquisition and the unrealised gain on disposal of the Group’s 24.99% interest in HLH.

The gain on disposal of this interest in HLH will be calculated in accordance with SIC 13, Jointly Controlled Entities – Non-Monetary Contributions by Venturers, and will be recognised in 2006.

Acquisition in Sri Lanka
On 1 February 2006, the Group acquired a 51% interest in Eagle Insurance Limited (Eagle), the third largest insurer in Sri Lanka, by buying a majority shareholding in Eagle’s immediate holding company, NDB Finance Lanka (Pvt) Limited, for cash of £15 million. At the same time, Eagle has entered into a bancassurance agreement with National Development Bank Limited (NDB), Sri Lanka’s biggest development bank and Eagle’s other major shareholder. In view of the very recent timing of completion, it is currently impractical to comply with the requirements of paragraph 67 of IFRS 3, Business Combinations, and to state with any certainty the fair values of the assets and liabilities acquired, and therefore to estimate the goodwill arising on this acquisition.

(b) Disposals of subsidiaries and associates
The profit on disposal was determined as follows:

	2005 £m	2004 £m
Proceeds from sale	421	327
Net assets sold	(245)	(293)
Transaction costs	(23)	–
Profit on disposal before tax	153	34
Tax on profit on disposal	(43)	–
Profit on disposal after tax	110	34

The profit/(loss) on the disposal of subsidiaries and associates comprises:

	2005 £m	2004 £m
General insurance businesses
United Kingdom	10	28
France	–	6
Asia (see below)	122	–
Other small operations	(22)	–
	110	34

(i) Sale of Asian general insurance businesses

During 2005, the Group completed the disposal of its Asian general insurance businesses to Mitsui Sumitomo Insurance (MSI) for a total of US$450 million in cash. Under the terms of the agreement, MSI acquired all of Aviva’s general insurance businesses in Asia. These comprised the general insurance business of Aviva Limited and the general insurance assets of Aviva Asia Pte Limited in Singapore; Aviva Insurance Berhad in Malaysia (including its branch in Brunei); Aviva Insurance (Thai) Company Limited in Thailand; PT Aviva Insurance in Indonesia; Dah Sing General Insurance Co Limited in Hong Kong; and Aviva’s branch operations in Hong Kong, the Philippines, Marianas, Macau and Taiwan. The transaction was achieved through share purchase of Aviva’s interests in joint venture operations, business purchase and asset purchase in Singapore, and transfer of Aviva’s general insurance branch operations in Hong Kong, the Philippines, Marianas, Macau and Taiwan.

The transaction completed in two phases. Phase I completed on 28 February 2005 and included all businesses above except for Malaysia, Indonesia, Macau, Marianas, Taiwan, Dah Sing and the Philippines. Phase II completed in December 2005, when the last of these businesses was sold, with the exception of Taiwan which completed in February 2006. Due to its immateriality, this last disposal has been treated as a 2005 transaction.

The total sale proceeds were fixed by reference to the net assets of the businesses as at 31 December 2003 and were not adjusted to reflect the results in the period from 1 January 2004 to completion. The Group therefore hedged its exposure to the sale proceeds of US$450 million through the purchase of foreign currency forward contracts. The Group did not bear any continuing operating risk from 31 December 2003.

The results of the Asian general insurance business have been consolidated with those of the Group’s ongoing operations until the completion of each transaction. Although the Group retained no economic interest in the operations of this business beyond 31 December 2003, the post-tax operating profits have been incorporated in the Group’s consolidated income statement from 1 January 2004 to the date of completion. This has been offset by a corresponding change to the final profit on sale. The total pre-tax profit on sale was £165 million (£122 million after tax) and is summarised below:

	2005 £m
Net assets as at 31 December 2003	60
Post-tax operating profit to disposal	14
Dividends paid	(5)
Foreign exchange rate movement on net assets	4
Net assets at disposal	73
Proceeds	256
Less: Net assets	(73)
Transaction costs	(18)
Pre-tax profit on sale	165
Tax attributable to profit on sale	(43)
Post-tax profit on sale	122

The net assets at disposal of £73 million, comprised financial investments (£220 million) and other assets (£95 million), less insurance liabilities (£207 million) and other liabilities (£35 million).

(ii) Other

In July 2005, the Group completed the sale of the business and certain operational assets and liabilities of Hyundai Cars (UK), which was acquired as part of the RAC group, to Hyundai Motor UK Limited for a total of £70 million. This sale did not give rise to any gain or loss.

In December 2005, the Group sold its commercial fleet business in Lex Transfleet Limited to Fraikin Limited for a total of £69 million, of which £10 million is deferred consideration. The Group acquired 50% of Lex Transfleet Limited with the RAC group, and this company became a wholly-owned subsidiary after the Group acquired the remaining 50% of its share capital in November 2005. The sale resulted in a gain of £5 million.

No other disposal is considered material for further disclosure.

(c) Operations classified as held for sale
The assets and liabilities of operations classified as held for sale as at 31 December 2005 were as follows:

	2005 £m	2004 £m
Intangible assets	9	–
Investments and property and equipment	320	–
Receivables and other financial assets	68	–
Deferred acquisition costs and other assets	40	–
Cash and cash equivalents	25	–
Total assets	462	–
Payables and financial liabilities	(96)
Other liabilities	(49)	–
Total liabilities	(145)	–
Net assets	317	–

In October 2005, the Group announced its decision to sell its 50% stake in Lex Vehicle Leasing (Holdings) Limited (LVL), a joint venture with HBOS, as a result of HBOS exercising an option under the JV shareholders agreement. LVL provides vehicle leasing, supply, management, maintenance and incident support for companies who outsource the day-to-day operations of their fleets, and was acquired as a part of the Group’s acquisition of RAC. Completion of the sale of the investment in LVL is expected in the second quarter of 2006 and so the relevant assets and liabilities have been classified as Held for Sale in the consolidated balance sheet.

At year end, the Group held for sale certain divisions of Manufacturer Support Services (MSS), part of the RAC group. The decision to sell is part of the Group’s wider strategy to integrate RAC and exit non-core operations. The divisions being sold primarily comprise Lex Transfleet Limited, Multipart Holdings Limited and Lex Commercials Limited, both wholly-owned subsidiaries, and Hyundai Car Finance Limited, an associate in which the Group holds 49.99%. Lex Transfleet is a provider of complex fleet solutions, Multipart Holdings provides logistics and aftermarket services to the automotive sector and Lex Commercials is a leading UK commercial vehicles dealership group, while Hyundai Car Finance Limited provides vehicle instalment finance and leasing. The disposal groups have also been treated as Held for Sale and are expected to be sold by the second quarter of 2006.

(d) Exceptional costs for termination of operations
In February 2004, the Group announced the closure of its UK national broker subsidiary, Hill House Hammond (HHH) together with the sale of its commercial business. The associated pre-tax costs of the closure of HHH were £40 million and relate to termination activities, including redundancy costs and closure provisions.

(e) Other information
Principal subsidiaries at 31 December 2005 are listed in the Aviva Group of companies section.

One of the Group’s wholly-owned subsidiaries, Delta Lloyd NV, is subject to the provisions of Dutch corporate law and particularly the Dutch “structure company” regime. Under this regime, Delta Lloyd operates under a Supervisory Board which has a duty to have regard to the interests of a wide variety of stakeholders. The Supervisory Board includes two Aviva Group representatives and is responsible for advising and supervising Delta Lloyd’s Executive Board. The shareholder is one of the most important stakeholders to whom the Supervisory Board has a duty.

4 – Segmental information

(a) Primary reporting format – business segments
(i) Reporting segments
The principal activity of the Group is financial services, which is managed using the following reportable segments: long-term business, fund management, general insurance and health.

Long-term business
Our long-term business comprises life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of the other life and related business written in our associates and joint ventures, as well as the equity release business written in the United Kingdom.

Fund management activities
Our fund management business invests policyholders’ and shareholders’ funds, provides investment management services for institutional pension fund mandates and manages a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. Clients include Aviva Group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors.

General insurance and health
Our general insurance and health business provides insurance cover to individuals and to small and medium-sized businesses, for risks associated mainly with motor vehicles, property and liability, such as employers’ liability and professional indemnity liability, and medical expenses.

Other
Other activities not related to the core business segments or which are not reportable segments due to their immateriality, such as the RAC non-insurance operations, our banking businesses and service companies, are included as “Other”, in the following tables. Head office expenses, such as Group treasury and finance functions are also reported as “Other”, together with eliminations and other reconciling items. Certain financing costs and taxes are not allocated among the segments.

The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms and market conditions.

Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet but excluding items such as tax and borrowings.

(ii) Segmental results – business segments

For the year ended 31 December 2005	Long-term   business £m	Fund   management £m	General   insurance and health £m	Other £m	Total £m
Gross written premiums	15,282	–	11,017	–	26,299
Premiums ceded to reinsurers	(611)	–	(706)	–	(1,317)
Net written premiums	14,671	–	10,311	–	24,982
Change in unearned premium reserve	–	–	(123)	–	(123)
Net earned premiums	14,671	–	10,188	–	24,859
Fee and commission income	598	264	214	771	1,847
	15,269	264	10,402	771	26,706
Net investment income	21,985	11	1,603	123	23,722
Inter-segment revenue	–	112	–	–	112
Other income	(10)	–	41	122	153
Segment income	37,244	387	12,046	1,016	50,693
Claims and benefits paid, net of recoveries from reinsurers	(13,482)	–	(6,224)	–	(19,706)
Change in insurance liabilities, net of reinsurance	(10,004)	–	(372)	–	(10,376)
Change in investment contract provisions	(7,814)	–	–	–	(7,814)
Change in unallocated divisible surplus	(1,474)	–	–	–	(1,474)
Fee and commission expense	(1,481)	(55)	(2,752)	(38)	(4,326)
Other operating expenses
Depreciation	(11)	(6)	(17)	(78)	(112)
Amortisation of acquired value of in force business	(45)	–	–	–	(45)
Amortisation of intangible assets	(18)	–	(5)	(16)	(39)
Net impairment of acquired value of in force business	(28)	–	–	–	(28)
Net impairment of intangible assets	(6)	–	–	–	(6)
Impairment of goodwill	(14)	–	–	(29)	(43)
Other net impairment losses recognised in the income statement	(37)	–	–	–	(37)
Inter-segment expenses	(103)	–	(9)	–	(112)
Other expenses	(999)	(233)	(615)	(1,027)	(2,874)
Finance costs	(203)	–	(58)	(100)	(361)
Segment expenses	(35,719)	(294)	(10,052)	(1,288)	(47,353)
Segment result before share of profit/(loss) of joint ventures and associates	1,525	93	1,994	(272)	3,340
Share of profit/(loss) of joint ventures and associates	340	(1)	1	18	358
Segment result before tax	1,865	92	1,995	(254)	3,698
Unallocated costs
Finance costs on central borrowings (see below)					(248)
Tax attributable to policyholders’ returns					(922)
Tax attributable to shareholders’ profits					(630)
Profit for the year					1,898

Finance costs on central borrowing comprise interest payable on borrowings by holding companies within the Group which is not allocated to operating companies.

Impairment losses, and reversal of such losses, recognised directly in equity were £nil and £124 million respectively in long-term business.

Pro forma reconciliation to operating profit before tax attributable to shareholders' profits

For the year ended 31 December 2005	Long-term business £m	Fund   management £m	General   insurance and health £m	Other £m	Total £m
Segment result before tax	1,865	92	1,995	(254)	3,698
Finance costs on central borrowings				(248)	(248)
Adjusted for the following items
Impairment of goodwill	14	–	–	29	43
Amortisation and impairment of acquired value of in-force business	73	–	–	–	73
Amortisation and impairment of intangibles	24	–	5	16	45
Short-term fluctuation in return on investments backing general insurance and health business	–	–	(517)	–	(517)
(Profit)/loss on the disposal of subsidiaries and associates	10	–	(41)	(122)	(153)
Integration costs	–	–	77	32	109
Unallocated interest	–	(1)	25	(24)	–
Corporate costs reallocation	1	1	7	(9)	–
	1,987	92	1,551	(580)	3,050
Less:
Tax attributable to policyholders’ returns	(922)	–	–	–	(922)
Operating profit before tax attributable to shareholders’ profits	1,065	92	1,551	(580)	2,128

For the year ended 31 December 2004	Long-term business £m	Fund   management £m	General   insurance and health £m	Other £m	Total £m
Gross written premiums	14,216	–	10,562	–	24,778
Premiums ceded to reinsurers	(683)	–	(744)	–	(1,427)
Net written premiums	13,533	–	9,818	–	23,351
Change in unearned premium reserve	–	–	(176)	–	(176)
Net earned premiums	13,533	–	9,642	–	23,175
Fee and commission income	534	203	197	334	1,268
	14,067	203	9,839	334	24,443
Net investment income	14,503	8	1,176	46	15,733
Inter-segment revenue	–	114	–	–	114
Other income	–	–	13	21	34
Segment income	28,570	325	11,028	401	40,324
Claims and benefits paid, net of recoveries from reinsurers	(12,015)	–	(5,784)	–	(17,799)
Change in insurance liabilities, net of reinsurance	(5,393)	–	(711)	–	(6,104)
Change in investment contract provisions	(5,635)	–	–	–	(5,635)
Change in unallocated divisible surplus	(1,330)	–	–	–	(1,330)
Fee and commission expense	(1,865)	(70)	(2,482)	(54)	(4,471)
Other operating expenses
Depreciation	(14)	(4)	(19)	(60)	(97)
Amortisation of acquired value of in force business	(72)	–	–	–	(72)
Amortisation of intangible assets	–	–	–	–	–
Net impairment of acquired value of in force business	(13)	–	–	–	(13)
Amortisation of other intangible assets	(7)	–	–	–	(7)
Impairment of goodwill on subsidiaries	(18)	–	(2)	(21)	(41)
Net impairment of property and equipment	(1)			(24)	(25)
Net impairment of other financial assets	(3)	–	–	–	(3)
Other reversal of impairment losses recognised in the income statement
Inter-segment expenses	(105)	–	(9)	–	(114)
Other expenses	(788)	(218)	(610)	(692)	(2,308)
Finance costs	(161)	–	(43)	(72)	(276)
Segment expenses	(27,420)	(292)	(9,660)	(923)	(38,295)
Segment result before share of profit/(loss) of joint ventures and associates	1,150	33	1,368	(522)	2,029
Share of profit/(loss) of joint ventures and associates	235	(6)	–	13	242
Segment result before tax	1,385	27	1,368	(509)	2,271
Unallocated costs
Finance costs on central borrowings (see below)					(246)
Tax attributable to policyholders’ returns					(383)
Tax attributable to shareholders’ profits					(271)
Profit/(loss) for the year					1,371

Finance costs on central borrowings comprise interest payable on borrowings by holding companies within the Group which is not allocated to operating companies.

Impairment losses, and reversal of such losses, recognised directly in equity were £nil and £138 million respectively in long-term business.

Pro forma reconciliation to operating profit before tax attributable to shareholders' profits

For the year ended 31 December 2004	Long-term business £m	Fund   management £m	General   insurance and health £m	Other £m	Total £m
Segment result before tax	1,385	27	1,368	(509)	2,271
Finance costs on central borrowings	–	–	–	(246)	(246)
Adjusted for the following items
Impairment of goodwill	18	–	2	21	41
Amortisation and impairment of acquired value of in-force business	85	–	–	–	85
Amortisation and impairment of intangibles	7	–	–	–	7
Financial Services Compensation Scheme and other levies	–	9	40	–	49
Short-term fluctuation in return on investments backing general insurance and health business	–	–	(161)	–	(161)
Profit on the disposal of subsidiaries and associates	–	–	(12)	(22)	(34)
Exceptional costs for termination of operations	–	–	–	40	40
Corporate costs reallocation	4	4	22	(30)	–
	1,499	40	1,259	(746)	2,052
Less:
Tax attributable to policyholders’ returns	(383)	–	–	–	(383)
Operating profit before tax attributable to shareholders’ profits	1,116	40	1,259	(746)	1,669

(iii) Segmental balance sheet – business segments

As at 31 December 2005	Long-term business £m	Fund   management £m	General   insurance and health £m	Other £m	Total £m
Goodwill	631	–	398	1,245	2,274
Acquired value of in-force business and intangible assets	424	–	265	114	803
Investments in joint ventures and associates	2,815	46	39	114	3,014
Property and equipment	367	4	126	388	885
Investment property	12,895	–	338	42	13,275
Loans	18,240	–	3,661	2,643	24,544
Financial investments	166,211	22	12,496	3,659	182,388
Other assets	23,185	436	9,425	2,113	35,159
Segment assets	224,768	508	26,748	10,318	262,342
Unallocated assets – tax assets					1,105
Total assets					263,447
Insurance liabilities	114,176	–	18,426	–	132,602
Liability for investment contracts	77,309	–	–	–	77,309
Unallocated divisible surplus	8,978	–	–	–	8,978
Net asset value attributable to unitholders	3,137	–	–	–	3,137
External borrowings	4,060	–	2,565	578	7,203
Other liabilities, including inter-segment liabilities	6,149	278	(224)	9,622	15,825
Segment liabilities	213,809	278	20,767	10,200	245,054
Unallocated liabilities
Central borrowings (see below)					3,810
Tax liabilities					3,491
Total liabilities					252,355
Total equity					11,092
Total equity and liabilities					263,447
Capital expenditure
Intangible assets	44	–	6	2	52
Property and equipment	26	3	11	166	206
	70	3	17	168	258

Central borrowings are borrowings by holding companies within the Group which are not allocated to operating companies.

As at 31 December 2004	Long-term business £m	Fund   management £m	General   insurance and health £m	Other £m	Total £m
Goodwill	595	–	308	281	1,184
Acquired value of in-force business and intangible assets	451	–	19	46	516
Investments in joint ventures and associates	1,995	40	13	80	2,128
Property and equipment	404	7	133	268	812
Investment property	10,639	–	362	56	11,057
Loans	17,090	–	2,635	2,330	22,055
Financial investments
Debt securities	86,897	2	9,255	2,565	98,719
Equity securities	44,269	1	2,449	572	47,291
Other investments	20,067	6	224	49	20,346
Other assets	23,455	311	9,786	735	34,287
Segment assets	205,862	367	25,184	6,982	238,395
Unallocated assets – tax assets					908
Total assets					239,303
Insurance liabilities	106,329	–	17,793	–	124,122
Liability for investment contracts	69,555	–	–	–	69,555
Unallocated divisible surplus	7,549	–	–	–	7,549
Net asset value attributable to unitholders	2,247	–	–	–	2,247
External borrowings	4,082	–	1,439	270	5,791
Other liabilities, including inter-segment liabilities	6,250	191	474	7,367	14,282
Segment liabilities	196,012	191	19,706	7,637	223,546
Unallocated liabilities
Central borrowings (see below)					4,299
Tax liabilities					2,465
Total liabilities					230,310
Total equity					8,993
Total equity and liabilities					239,303
Capital expenditure
Intangible assets	–	–	5	–	5
Property and equipment	27	3	12	173	215
	27	3	17	173	220

Central borrowings are borrowings by holding companies within the Group which are not allocated to operating companies.

(b) Secondary reporting format – geographical segments

(i) Reporting segments

Although the Group’s business segments are managed on a worldwide basis, they operate in five main geographical areas. These are United Kingdom, France, Netherlands (including Belgium and Luxembourg), Other Europe and International.

Revenue by destination does not differ materially from revenue by geographical origin, as most risks are located in the countries where the contracts were written.

(ii) Segmental results and balance sheets – geographical segments

Year ended 31 December 2005	United Kingdom £m	France £m	Netherlands £m	Other Europe £m	International £m	Total £m
Gross written premiums	11,510	4,250	3,878	4,316	2,345	26,299
Premiums ceded to reinsurers	(914)	35	(22)	(306)	(110)	(1,317)
Internal reinsurance revenue	(10)	(6)	(4)	(1)	21	–
Net written premiums	10,586	4,279	3,852	4,009	2,256	24,982
Fee and commission income	1,002	200	192	239	214	1,847
Segment revenue	11,588	4,479	4,044	4,248	2,470	26,829
Segment result before tax	2,057	304	348	461	553	3,723
Segment assets	136,235	46,682	38,871	29,868	11,791	263,447
Segment liabilities:
External borrowings	(2,128)	(10)	(5,013)	(52)	–	(7,203)
Other liabilities, including inter-segment liabilities	(126,759)	(44,274)	(30,714)	(26,387)	(9,717)	(237,851)
	(128,887)	(44,284)	(35,727)	(26,439)	(9,717)	(245,054)
Segment net assets	7,348	2,398	3,144	3,429	2,074	18,393
Unallocated liabilities						(7,301)
Total net assets						(11,092)
Capital expenditure	167	5	31	32	23	258

 

Year ended 31 December 2004	United Kingdom £m	France £m	Netherlands £m	Other Europe £m	International £m	Total £m
Gross written premiums	11,449	3,625	3,231	4,274	2,199	24,778
Premiums ceded to reinsurers	(945)	(57)	(86)	(188)	(151)	(1,427)
Internal reinsurance revenue	(21)	(6)	(4)	11	20	–
Net written premiums	10,483	3,562	3,141	4,097	2,068	23,351
Fee and commission income	620	193	187	164	104	1,268
Segment revenue	11,103	3,755	3,328	4,261	2,172	24,619
Segment result before tax	718	245	335	431	296	2,025
Segment assets	124,127	44,216	30,539	30,089	10,332	239,303
Segment liabilities:
External borrowings	(1,737)	(21)	(4,007)	(21)	(5)	(5,791)
Other liabilities, including inter-segment liabilities	(116,850)	(41,866)	(23,911)	(26,832)	(8,296)	(217,755)
	(118,587)	(41,887)	(27,918)	(26,853)	(8,301)	(223,546)
Segment net assets	5,540	2,329	2,621	3,236	2,031	15,757
Unallocated liabilities						(6,764)
Total net assets						8,993
Capital expenditure	110	1	88	17	4	220

 

(iii) Life and pensions and investment sales – new business and total income

For the purpose of recording life and pensions new business premiums, the Group’s policy is to include life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of the other life and related business written in our associates and joint ventures, as well as the equity release business written in the UK. This includes both insurance and investment contracts as defined under IFRS 4, Insurance Contracts, and is consistent with the definition of covered business used for our supplementary embedded value reporting.

An analysis of new long-term business sales is provided below. In this table, single premiums are those relating to products issued by the Group which provide for the payment of one premium only. Regular premiums are those where there is a contractual obligation to pay on an ongoing basis. Life and pensions total income represents all net written premiums in the year for insurance contracts and investment contracts, excluding non-participating investment contracts which are required to be accounted for under IAS 39, Financial Instruments: Recognition and Measurement, and IAS 18, Revenue.

		New single premiums			New regular premiums			Total income
		2005 £m	2004 £m		2005 £m	2004 £m		2005 £m	2004 £m
Life and pensions:
United Kingdom	– Group companies	6,573	6,297		485	499		4,676	4,768
	– associates and joint ventures	–	205		–	17		–	319
		6,573	6,502		485	516		4,676	5,087
France		3,077	2,454		76	62		3,553	2,892
Netherlands		1,245	1,131		146	148		2,582	1,859
Other Europe
Ireland		372	203		63	66		182	195
Italy		1,940	1,529		58	45		1,357	1,084
Poland		120	60		30	31		312	267
Spain		1,395	1,566		100	91		1,248	1,206
Other		406	336		80	90		152	565
International		798	660		113	105		870	706
Total life and pensions (including share of associates and joint ventures)		15,926	14,441		1,151	1,154		14,932	13,861
Retail sales of mutual fund type products:
United Kingdom		1,139	840		21	19		1,160	859
Netherlands		563	196		–	–		563	196
Other Europe
Poland		49	75		4	2		53	77
Other		410	254		–	–		410	254
International		213	243		–	–		213	243
Total investment sales		2,374	1,608		25	21		2,399	1,629
Total long term savings (including share of associates and joint ventures)		18,300	16,049		1,176	1,175		17,331	15,490

Included within new business sales is £5,071 million single premiums and £357 million regular premiums (2004: £4,338 million and £410 million respectively) in respect of contracts that meet the definition of “non-participating investment” contracts under IFRS 4, Insurance Contracts. Under IFRS, the premiums on these contracts are not included in the Group income statement under earned premiums, but are included on the balance sheet as a deposit.

5 – Details of income

	Note		2005 £m	2004 £m
Gross written premiums
Long-term:
Insurance contracts			9,916	10,038
Participating investment contracts			5,366	4,178
General insurance and health			11,017	10,562
	4a		26,299	24,778
Less: premiums ceded to reinsurers	4a		(1,317)	(1,427)
Gross change in provision for unearned premiums	35e		(216)	(232)
Reinsurers’ share of change in provision for unearned premiums	36c		93	56
Net change in provision for unearned premiums			(123)	(176)
Net premiums earned			24,859	23,175
Fee and commission income
Fee income from investment contract business			288	349
Fund management fee income			274	176
Other fee income			921	211
Reinsurance commissions receivable			274	512
Other commission income			99	28
Net change in deferred revenue			(9)	(8)
			1,847	1,268
Total revenue			26,706	24,443
Net investment income
Interest and similar income			6,396	6,052
Dividend income			1,778	1,494
Other income from investments designated as trading
Realised gains and losses			(78)	(250)
Unrealised gains and losses			42	190
			(36)	(60)
Other income from investments designated as other than trading
Realised gains and losses			4,502	1,873
Unrealised gains and losses			8,771	4,007
			13,273	5,880
Realised gains and losses on AFS investments			154	322
Net income from investment properties
Rent			747	728
Expenses relating to these properties			(19)	(8)
Gains on disposal			41	89
Fair value gains on investment properties			1,571	1,154
Gains on loans			38	34
Foreign exchange gains and losses on investments other than trading			(207)	43
Other investment (expense)/income			(14)	5
Net investment income			23,722	15,733
Share of profit after tax of joint ventures	17		326	234
Share of profit after tax of associates	18		32	8
Share of profit after tax of joint ventures and associates			358	242
Profit on the disposal of subsidiaries and associates	3b		153	34
Total income			50,939	40,452

6 – Details of expenses

	Note		2005 £m	2004 £m
Claims and benefits paid
Claims and benefits paid to policyholders on long-term business
Insurance contracts			10,325	9,276
Participating investment contracts			2,465	3,114
Non-participating investment contracts			1,188	62
Claims and benefits paid to policyholders on general insurance and health business			6,523	6,131
			20,501	18,583
Less: Claim recoveries from reinsurers
Insurance contracts			(697)	(595)
Participating investment contracts			(50)	(89)
Non-participating investment contracts			(48)	(100)
Claims and benefits paid, net of recoveries from reinsurers			19,706	17,799
Change in insurance liabilities
Change in insurance liabilities			9,673	6,434
Less: Change in reinsurance asset for insurance provisions			703	(330)
Change in insurance liabilities, net of reinsurance			10,376	6,104
Change in investment contract provisions
Investment income allocated to investment contracts			3,633	2,192
Other changes in provisions
Participating investment contracts			3,530	2,847
Non-participating investment contracts			69	596
Less: Change in reinsurance asset for investment contract provisions			582	–
			7,814	5,635
Change in unallocated divisible surplus			1,474	1,330
Fee and commission expense
Acquisition costs
Commission expenses for insurance and participating investment contracts			2,700	2,443
Change in deferred acquisition costs for insurance and participating investment contracts			(208)	340
Deferrable costs for non-participating investment contracts			165	134
Other acquisition costs			1,245	1,213
Changes in deferred acquisition costs for non-participating investment contracts			(258)	(92)
Reinsurance commissions and other fee and commission expense			682	433
			4,326	4,471

 

	Note		2005 £m	2004 £m
Other operating expenses
Staff costs and other employee-related expenditure	9		1,640	1,815
Global finance transformation programme			28	85
Other corporate costs			108	49
Depreciation	19		112	97
Impairment losses on property and equipment	19		–	25
Impairment of goodwill on subsidiaries	15		43	41
Amortisation of acquired value of in-force business	16 & 18		44	72
Amortisation of intangible assets	16		39	7
Impairment of acquired value of in-force business	16		29	13
Impairment of intangible assets	16		6	–
Integration costs			109	–
			2,158	2,204
Net impairments on loans	21		4	1
Net impairments on financial investments			5	1
Net impairments on receivables and other financial assets			10	1
Net impairments on non-financial assets			38	–
			57	3
Other net foreign exchange (gains)/losses			(4)	12
Other expenses			973	347
			3,184	2,566
Finance costs
Interest expense on:
Subordinated debt			169	169
Debenture loans			41	37
Amounts owed to credit institutions			37	10
Commercial paper			24	34
Securitised mortgage loan notes			183	174
Banking customer deposits			79	71
			533	495
Other similar charges			76	27
			609	522
Total expenses			47,489	38,427

7 – Analysis of investment return

(a) The total investment return reflected in profit before tax comprises:

	2005 £m	2004 £m
Share of result after tax of joint ventures	326	234
Share of result after tax of associates	32	8
Net rental income from investment properties	728	720
Interest, dividend and similar income	8,174	7,546
Foreign exchange gains and losses on investments designated as at fair value through profit or loss	(207)	43
Realised investment gains on financial investments, loans, investment property and owner occupied property	4,657	2,068
Net impairment losses on investments designated as available for sale and on loans	(57)	(3)
Other investment (expenses)/income	(14)	5
Finance costs
Allocated costs	(361)	(276)
Unallocated interest charges:
Subordinated debt	(169)	(169)
Other borrowings	(79)	(77)
	(248)	(246)
Investment return before unrealised gains	13,030	10,099
Unrealised investment gains on financial investments and loans designated as at fair value through profit or loss	10,384	5,351
Total investment return included in profit before tax	23,414	15,450

In addition to the investment return recognised above, £110 million of investment losses (2004: £64 million) has been recognised directly in equity as detailed in the statement of recognised income and expense.

(b) Effective interest rates

The table below summarises the average effective interest rate by major currency for monetary financial instruments:

	2005				2004
	Sterling %	Euro %	Can $ %		Sterling %	Euro %	Can $ %
Monetary assets
Loans	5.9	4.6	4.5		6.4	4.6	4.1
Debt securities	4.9	4.3	4.6		5.1	4.5	4.7
Other investments	–	4.0	–		4.5	4.3	–
Monetary liabilities
Borrowings	6.3	5.4	–		6.2	4.8	–

The investment liabilities in relation to long-term business valued at amortised cost represent only 0.4% of the total liabilities relating to long-term business. On grounds of materiality, their effective interest rate has not been calculated.

8 – Longer term investment return

(a) The longer-term investment return, net of expenses, attributable to the general insurance and health business result was £1,046 million (2004: £988 million).

(b) The longer-term investment return and short-term fluctuation are as follows:

	General insurance and health business
	2005 £m	2004 £m
Net investment income (note 4a)	1,603	1,176
Less: Internal charges reflected in other headings	(40)	(27)
	1,563	1,149
Longer term investment return	1,046	988
Short-term fluctuation in investment return	517	161
	1,563	1,149

(c) The longer term investment return is calculated separately for each principal general insurance and health 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 year.

(d) The principal assumptions underlying the calculation of the longer term investment return are:

	Longer term rates of return Equities			Longer term rates of return Properties
	2005 %	2004 %		2005 %	2004 %
United Kingdom	7.6%	7.8%		6.6%	6.8%
France	6.7%	7.3%		5.7%	6.3%
Netherlands	6.7%	7.3%		5.7%	6.3%
Ireland	6.7%	7.3%		5.7%	6.3%
Canada	7.4%	7.7%		6.4%	6.7%

For 2006, the Group intends to apply the same economic assumptions for equities and properties as are used under EEV principles to calculate the longer-term investment return for its general insurance and health business.

The above rates are consistent with the economic assumptions for equities and properties used under EEV principles.

(e) The table below compares the actual return on investments attributable to the general insurance and health business, after deducting investment management expenses and charges, with the aggregate longer term return over a two year period. This table will be built up over time to give aggregate and comparative figures over a five-year period.

	2004 – 2005 £m
Actual return attributable to shareholders	2,712
Longer term return credited to operating results	(2,034)
Surplus of actual returns over longer term returns	678

(f) The table below shows the sensitivity of the Group’s general insurance and health operating profit before tax to changes in the longer term rates of return:

Movement in investment return for	By	Change in	2005 £m	2004 £m
Equities	1% higher/lower	Group operating profit	29	25
Properties	1% higher/lower	Group operating profit	4	3

9 – Employee information

The average number of persons employed by the Group during the year was:

	2005 Number	2004   Number
United Kingdom	33,827	32,588
France	4,351	4,399
Netherlands	6,338	6,671
Other Europe	5,667	6,359
International	4,608	5,855
	54,791	55,872

Total staff costs were:

	2005 £m	2004   £m
Wages and salaries	1,677	1,645
Social security costs	210	208
Post-retirement obligations
Defined benefit schemes (note 42b)	158	158
Defined contribution schemes (note 42b)	47	47
Profit sharing and incentive plans	116	61
Equity compensation plans (notes 28d & 32)	22	21
Termination benefits	10	14
	2,240	2,154

These costs are charged within:

	2005 £m	2004 £m
Acquisition costs	600	339
Other operating expenses	1,640	1,815
	2,240	2,154

10 – Directors

Information concerning individual directors’ emoluments, interests and transactions is given in the Directors’ Remuneration Report.