Aviva plc
 Interim report 2004		   Notes to the accounts
 
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1 - Basis of preparation - modified statutory solvency basis

(a) The results for the six months to 30 June 2004 have been prepared on the basis of the accounting policies set out in Aviva plc's 2003 Annual Report and Accounts. The results for the six months to 30 June 2004 and 2003 are unaudited but have been reviewed by the auditor. The interim accounts do not constitute statutory accounts as defined in Section 240 of the Companies Act 1985. The results for the full year 2003 have been taken from the Group's 2003 Annual Report and Accounts. The auditors have reported on the 2003 accounts and their report was unqualified and did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. The Group's 2003 Annual Report and Accounts have been filed with the Registrar of Companies.

(b) The contribution from the Group's share of the alliance with RBSG is incorporated within the modified statutory life profit. Goodwill amortised in the period in respect of the Group's holding in the associated company, RBS Life Investments Limited, is included within "Amortisation of goodwill"

(c) In November 2000, the Accounting Standards Board issued Financial Reporting Standard 17 (FRS17) "Retirement Benefits", the accounting provisions, which are not required to be adopted by the Group until 2005. FRS17 requires certain transitional disclosures to be made in the statutory accounts. The Group has continued to account for pension costs in accordance with SSAP24.

(d) Changes in accounting policy

(i) Additional value of internally-generated in-force business

In November 2003, the Association of British Insurers revised its Statement of Recommended Practice on accounting for insurance business (ABI SORP). One of the amendments is that insurance companies are no longer allowed to recognise the internally-generated additional value of in-force business (AVIF) on their balance sheets, either as an asset or as part of shareholders' funds.

The effect of implementing this change are that shareholders' funds at 30 June 2004 have been reduced by £4,677 million (30 June 2003: reduced by £3,942 million; 31 December 2003:
reduced by £4,611 million) and minority interests have been reduced by £174 million
(30 June 2003: reduced by £101 million; 31 December 2003: reduced by £133 million).

(ii) Presentation changes

In December 2003, the Urgent Issues Task Force issued UITF Abstract 38 which requires shares held in employee share trusts to be deducted from capital in arriving at shareholders' funds rather than being held as assets.

The effects of implementing this change on shareholders' funds at 30 June 2004 is nil (30 June 2003: reduced by £1 million; 31 December 2003: reduced by £1 million).

2 - Exchange rates

The euro rates employed in this announcement are an average rate of €1 = £0.68 (six months to 30 June 2003: €1 = £0.68; full year 2003: €1 = £0.69) and a closing rate of €1 = £0.67 (30 June 2003:
€1 = £0.70; 31 December 2003: €1 = £0.70).


3 - Exceptional costs for termination of operations

In February 2004, the Group announced the closure of its UK national broker subsidiary, Hill House Hammond (HHH) by the end of 2004 together with the sale of its commercial business. The associated pre-tax costs of the closure of HHH are £50 million and these exceptional costs relate to the redundancy costs and closure provisions. The Group expects to complete the branch closures by the end of September 2004.

During 2003, the Group incurred costs on the closure of its general insurance operations in Belgium. These exceptional costs relate to termination activities, including redundancy costs and closure provision.

4 - Disposals
The net profit/(loss) on the disposal of subsidiary undertakings comprises:
       
  6 months 6 months Full year
  2004 2003 2003
  £m £m £m
Other small operations 6 (7) (6)
  6 (7) (6)
No disposal of subsidiary undertakings was sufficiently material to warrant separate disclosure.
In June 2004, our French operations, Aviva France, sold its 31.4% holding in Société Foncière Lyonnaise (SFL) a French listed property company for €427 million (£285 million) and recorded a gain of £27 million. These shares were owned by both our French life and non-life operations. In accordance with local French provisions, the gain on sale in the life company of £22 million has been transferred to a statutory provision forming part of the fund for future appropriations and will be attributed to policyholders and shareholders as bonuses are declared to policyholders within the next eight years.
 
5 - Geographical analysis of life and pensions and investment sales - new business and total income  
               
  New business sales        
  New single premiums   New regular premiums   Premium income (after reinsurance) and investment sales
  6 months 6 months   6 months 6 months   6 months 6 months Full year
  2004 2003   2004 2003   2004 2003 2003
  £m £m   £m £m   £m £m £m
Life and pensions sales                  
                   
United Kingdom                  
- group* 2,668 2,618   265 251   4,030 4,828 8,688
- associates 73 82   8 10   125 141 254
  2,741 2,700   273 261   4,155 4,969 8,942
Europe (excluding UK)                  
France 1,183 966   27 23   1,345 1,141 2,300
Ireland 85 86   35 30   219 217 442
Italy 694 804   20 37   794 913 1,662
Netherlands (including Belgium and Luxembourg) 542 431   65 59   1,123 970 1,722
Poland                  
- Life 20 10   7 8   126 132 263
- Pensions 13 4   8 11   217 212 440
Spain 875 778   42 61   965 834 1,641
Other 167 100   41 34   316 258 616
International 225 476   51 52   357 602 1,007
Total life and pension sales (including share of associates) 6,545 6,355   569 576   9,617 10,248 19,035
                   
Investment sales                  
United Kingdom 437 313   14 6   451 319 680
Netherlands 120 115   - -   120 115 204
Poland 48 30   1 1   49 31 110
Other Europe 91 21   - -   91 21 49
International 64 34   - -   64 34 98
                   
Total investment sales 760 513   15 7   775 520 1,141
                   
Total long-term savings (including share of associates) 7,305 6,868   584 583   10,392 10,768 20,176
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.
*Included within the prior year premium income (after reinsurance) and investment sales are transfers of institutional business into Morley Pooled Pensions (six months to 30 June 2003: £1,247 million; full year 2003: £1,247 million) which, since they are institutional in nature, are excluded from new business sales.
 
6 - Geographical analysis of modified statutory life operating profit
       
  6 months 6 months Full year
  2004 2003 2003
  £m £m £m
United Kingdom      
With-profit 54 64 145
Non-profit 235 229 449
       
Europe (excluding UK)      
France 84 80 179
Ireland 12 18 41
Italy 19 14 30
Netherlands (including Belgium and Luxembourg) 54 29 107
Poland 38 41 103
Spain 28 24 50
Other 3 (7) (4)
       
International 21 23 38
       
Total modified statutory life operating profit 548 515 1,138
 
7 - Geographical analysis of health premiums after reinsurance and operating result
(a) Premiums after reinsurance:
  6 months 6 months Full year
  2004 2003 2003
  £m £m £m
United Kingdom 145 136 270
France 78 71 134
Netherlands 459 439 662
       
  682 646 1,066
 
(b) Operating result:
    Operating profit     Underwriting result
  6 months 6 months Full year   6 months 6 months Full year
  2004 2003 2003   2004 2003 2003
  £m £m £m   £m £m £m
United Kingdom 3 4 13   1 2 9
France 2 3 9   (3) (2) (2)
Netherlands 28 20 39   4 (9) (20)
             
  33 27 61   2 (9) (13)
             
 
8 - Geographical analysis of general insurance premiums after reinsurance and operating result
(a) General insurance premiums after reinsurance:
  6 months 6 months Full year
  2004 2003 2003
  £m £m £m
United Kingdom 2,674 2,496 5,135
       
Europe (excluding UK)      
France 304 305 515
Ireland 292 319 611
Netherlands 341 295 563
Other 124 116 226
       
International      
Canada 601 565 1,208
Other 118 182 266
       
  4,454 4,278 8,524
 
(b) Operating result:
    Operating profit*     Underwriting result*
  6 months 6 months Full year   6 months 6 months Full year
  2004 2003 2003   2004 2003 2003
  £m £m £m   £m £m £m
United Kingdom 408 313 676   67 10 50
               
Europe (excluding UK)              
France 13 15 35   (6) (7) (9)
Ireland 68 43 91   36 14 26
Netherlands 23 12 35   (1) (3) (5)
Other 18 16 32   (2) (4) (6)
               
International              
Canada 59 (33) 12   4 (85) (98)
Other 24 21 30   7 4 (12)
               
  613 387 911   105 (71) (54)
*The general insurance operating profit and underwriting result are stated before the change in the equalisation provision of £11 million (six months to 30 June 2003: £28 million; full year to 31 December 2003: £49 million) and the Financial Services Compensation Scheme levy of £25 million (six months to 30 June 2003: nil; full year to 31 December 2003: nil).
 
9 - Corporate costs
       
  6 months 6 months Full year
  2004 2003 2003
  £m £m £m
Global finance transformation programme (45) (12) (60)
Central costs and sharesave schemes (49) (44) (100)
       
  (94) (56) (160)
 
10 - Tax

The tax charge in the profit and loss account comprises:
(a) Tax on profit on ordinary activities:
  6 months 6 months Full year
  2004 2003 2003
  £m £m £m
Current tax      
UK corporation tax      
- current year 22 1 (55)
- prior year (11) (9) 17
       
Overseas tax      
- current year (44) (18) (1)
- prior year 2 3 3
       
Tax attributable to balance on technical account (160) (147) (315)
       
  (191) (170) (351)
       
Deferred tax      
Origination and reversal of timing differences 47 (6) (19)
Changes in tax rates or law (6) - (11)
(Decrease)/increase in discount (1) (6) 14
Prior year adjustments - (29) -
       
  40 (41) (16)
Total tax charged in the profit and loss account (151) (211) (367)
       
(b) Tax charge analysed between:      
  6 months 6 months Full year
  2004 2003 2003
  £m £m £m
Tax charge on operating profit before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items (255) (194) (403)
Tax credit/(charge) on (loss)/profit on other ordinary activities 104 (17) 36
       
  (151) (211) (367)
       
(c) Factors affecting current tax charge for the year:      
  6 months 6 months Full year
  2004 2003 2003
  £m £m £m
Profit on ordinary activities before tax 414 742 1,390
       
Current tax charge at standard UK corporation tax rate of 30% (2003: 30%) (124) (223) (417)
Adjustment to tax charge in respect of prior years (8) (6) 20
Non-assessable dividends 23 6 5
Non-taxable profit/(loss) on the sale of investments 8 (1) (10)
Non-taxable amortisation of goodwill (9) (7) (5)
Other disallowable expenses (35) (16) (33)
Utilisation/non-utilisation of tax losses 30 - (10)
Different local basis of tax on overseas profits (29) 48 53
Deferred tax charge arising from movement in unrealised gains and losses - 4 20
Other deferred tax movements (41) 2 10
Deferred tax assets not recognised - 9 38
Other items (6) 14 (22)
       
Current tax charge for the year (191) (170) (351)
 
11 - Dividends

(a) The preference dividends in the profit and loss account comprise:
  6 months 6 months Full year
  2004 2003 2003
  £m £m £m
Preference dividends 9 9 17
The preference dividends are in respect of the cumulative irredeemable preference shares of £1 each in issue.
       
(b) The ordinary dividends in the profit and loss account comprise:
  6 months 6 months Full year
  2004 2003 2003
  £m £m £m
Ordinary dividends      
Interim 9.36 pence (2003: 9.0 pence) 211 203 203
Final (2003: 15.15 pence) - - 342
       
Total ordinary dividends 211 203 545
Irish shareholders who are due to be paid a dividend denominated in euros will receive a payment at the exchange rate prevailing on 3 August 2004.
 
12 - Earnings per share

  
(a) Basic earnings per share:  
    6 months 2004   6 months 2003   Full year 2003
  Before tax Net of tax,
minorities and preference
dividend 		Per share   Net of tax, minorities and preference
dividend		 Per share   Net of tax, minorities and preference dividend Per share
  £m £m p   £m p   £m p
Operating profit* 878 571 25.4   404 17.9   991 44.0
Adjusted for the following items:                  
- Amortisation of goodwill (49) (49) (2.2)   (52) (2.3)   (103) (4.6)
- Amortisation of acquired additional value of in-force long-term business (49) (36) (1.6)   (30) (1.3)   (98) (4.4)
- Financial Services Compensation Scheme levy (25) (18) (0.8)   - -   - -
- Exceptional costs for termination of operations (50) (42) (1.9)   (16) (0.7)   (16) (0.7)
- Short-term fluctuation in investment return (286) (209) (9.3)   207 9.1   198 8.9
- Change in the equalisation provision (11) (8) (0.4)   (20) (0.9)   (34) (1.5)
- Net profit/(loss) on disposal of subsidiary undertakings 6 6 0.3   (1) -   (6) (0.3)
                   
Profit attributable to equity shareholders 414 215 9.5   492 21.8   932 41.4
*All operating profit is from continuing operations.  
Earnings per share has been calculated based on the operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax, attributable to equity shareholders, as well as on the profit attributable to equity shareholders. The directors believe the former earnings per share figure provides a better indication of operating performance. The calculation of basic earnings per share uses a weighted average of 2,252 million (six months to 30 June 2003: 2,252 million; full year 2003: 2,251 million) ordinary shares in issue, after deducting shares owned by the employee share trusts as required by FRS14 "Earnings per share".  
                   
The actual number of shares in issue at 30 June 2004 was 2,262 million (30 June 2003: 2,257 million; 31 December 2003: 2,257 million).
 
(b) Diluted earnings per share:      
  6 months 2004   6 months 2003   Full year 2003
  Total Weighted average
number of shares		 Per share   Total Weighted average
number of shares		 Per share   Total Weighted average
number of shares		 Per share
  £m m p   £m m p   £m m p
Profit attributable to equity shareholders 215 2,252 9.5   492 2,252 21.8   932 2,251 41.4
Dilutive effect of share awards and options - 18 -   - 8 -   - 8 (0.1)
                       
Diluted earnings per share 215 2,270 9.5   492 2,260 21.8   932 2,259 41.3
 
13 - Longer-term investment return

The longer-term investment return is calculated separately for each principal general insurance business and certain long-term business operations. 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.
         
The principal assumptions underlying the calculation of the longer-term investment return are:
  Longer-term rates of return
  Equities   Properties
  2004 2003   2004 2003
  % %   % %
United Kingdom 8.1 8.1   6.6 6.6
France 7.5 7.5   6.5 6.5
Ireland 8.7 8.7   6.7 6.7
Netherlands 8.4 8.4   6.5 6.5
Canada 9.3 9.3   7.3 7.3
 

The table below shows the sensitivity in the changes in the longer-term rates of return on the annual operating profit:
Movement in investment return By Change in By
Equities 1% higher/lower Group operating profit before tax £31m
Properties 1% higher/lower Group operating profit before tax £8m
 
14 - Group capital structure

The Group maintains an efficient structure from a combination of equity shareholders' funds, preference capital, subordinated debt and borrowings, consistent with the Group's risk profile and the regulatory and market requirements of its business. The achieved profit basis provides a more accurate reflection of the performance of the Group's life operations year on year than results under the modified statutory basis. Accordingly, the Group's capital structure is analysed on an embedded value basis.

The Group's capital, from all funding sources, has been allocated such that the capital employed by trading operations is greater than the capital provided by its shareholders and its subordinated debt holders. As a result, the Group is able to enhance the returns earned on its equity capital.

Capital employed by segment
  30 June 31 Dec
  2004 2003
  £m £m
Long-term savings 12,152 12,373
General insurance and health 4,505 4,481
Other business 581 725
Corporate 3,176 2,934
     
Total capital employed 20,414 20,513
     
Financed by    
Internal debt 3,902 3,841
External debt 1,758 1,749
Subordinated debt 2,751 2,814
Shareholders' funds and minority interests 12,003 12,109
     
  20,414 20,513
 
Deployment of equity shareholders' funds
          30 June 2004   31 Dec 2003
  Equities Fixed income securities Other investments Other net assets Total   Total
  £m £m £m £m £m   £m
Assets              
Long-term savings 586 3,813 799 1,434 6,632   6,923
General insurance, health, corporate and other business 2,799 3,281 1,130 - 7,210   7,035
  3,385 7,094 1,929 1,434 13,842   13,958
Goodwill         1,263   1,323
Additional value of in-force long-term business         5,309   5,232
Assets backing total capital employed in continuing operations         20,414   20,513
External debt         (1,758)   (1,749)
Internal debt         (3,902)   (3,841)
Subordinated debt         (2,751)   (2,814)
          12,003   12,109
               
Minority interests         (949)   (944)
Preference capital         (200)   (200)
Equity shareholders' funds         10,854   10,965

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