21 – Loans

(a) Carrying amounts

The carrying amounts of loans at 31 December 2006 and 2005 were as follows:

	2006 £m	2005 £m
Policy loans	1,217	1,020
Bank loans	170	125
Securitised mortgage loans (see note 22)	6,709	7,476
Non-securitised mortgage loans	15,185	15,224
Other loans	3,164	699
Total	26,445	24,544

Of the above loans, £23,243 million (2005: £23,031 million) is expected to be recovered more than one year after the balance sheet date.

The carrying amounts of the above loans are stated at amortised cost with the exception of £4,941 million (2005: £5,084 million) of securitised mortgage loans and £11,316 million (2005: £10,000 million) of non-securitised mortgage loans which are designated as other than trading and measured at fair value.

The fair value has been calculated by discounting the future cashflows using appropriate current interest rates for each portfolio of mortgages.

The change in fair value of these loans during the year, attributable to a change in credit risk, was £nil (2005: £nil). The cumulative change attributable to changes in credit risk to 31 December 2006 was £nil (2005: £nil).

(b) Collateral

The Group holds collateral in the form of liens or charges over properties and, in the case of policy loans, the underlying policy for the majority of the loan balances above. In the event of a default, the Group is able to sell or repledge the collateral. The Group did not hold any collateral which it was permitted to sell or repledge in the absence of default, at the end of either 2006 or 2005.

22 – Securitised mortgages and related assets

The Group has loans secured by mortgages, subject to non-recourse finance arrangements, in a UK long-term business subsidiary and in three Dutch subsidiaries. Details of the relevant transactions are as follows:

(a) UK

In a long-term business subsidiary (NUER), the beneficial interest in certain portfolios of lifetime mortgages has been transferred to five special purpose securitisation companies, Equity Release Funding (No 1) plc (ERF1), Equity Release Funding (No 2) plc (ERF2), Equity Release Funding (No 3) plc (ERF3), ERF Trustee (No 4) Limited (ERF4T) held on trust for the benefit of Equity Release Funding (No. 4) plc (ERF4), and ERF Trustee (No 5) Limited (ERF5T) held on trust for the benefit of Equity Release Funding (No. 5) plc (ERF5) (together “the ERF companies”), in return for initial consideration and, at later dates, deferred consideration. The deferred consideration represents receipts accrued within the ERF companies after meeting all their obligations to the noteholders, loan providers and other third-parties in the priority of payments. No gain or loss was recognised on the transfers to ERF1, ERF3 and ERF5T, and gains of £5 million and £9 million were recognised on the transfers to ERF2 and ERF4T respectively. The purchases of the mortgages were funded by the issue of fixed rate, floating rate and index-linked notes by the ERF companies.

All the shares in the ERF companies are held by independent companies, whose shares are held on trust. Although NUER does not own, directly or indirectly, any of the share capital of the ERF companies or their parent companies, these have been treated as subsidiaries in the consolidated financial statements. NUER has no right to repurchase the benefit of any of the securitised mortgage loans, other than in certain circumstances where NUER is in breach of warranty or loans are substituted in order to effect a further advance.

NUER has purchased subordinated notes and granted subordinated loans to some of the ERF companies. These have been eliminated on consolidation through offset against the borrowings of the ERF companies in the consolidated balance sheet.

(b) Netherlands and Belgium

In three subsidiaries, Delta Lloyd Levensverzekering NV (DLL), Amstelhuys NV (AMS), and Delta Lloyd Bank NV/SA (DLB), the principal benefits of certain portfolios of mortgage loans have been transferred to a number of special purpose securitisation companies, Arena 2000 – I BV, Arena 2001 – I BV, Arena 2002 – I BV, Arena 2003 – I BV, Arena 2004 – I BV, Arena 2004 – II BV, Arena 2005 – I BV, Arena 2006 – I BV, B-Arena NV/SAand DARTS Finance BV (the securitisation companies), which were funded primarily through the issue of fixed rate, floating rate and index-linked notes. No gains or losses were recognised on these transfers.

All the shares in the securitisation companies are held by independent trustee companies. Although DLL and AMS do not own, directly or indirectly, any of the share capital of the securitisation companies or their parent companies, these companies have been treated as subsidiaries in the consolidated financial statements. DLL, AMS and DLB have no right, nor any obligation, to repurchase the benefit of any of the securitised mortgage loans before the optional call date, other than in certain circumstances where they are in breach of warranty.

Delta Lloyd companies have purchased notes in the securitisation companies, which have been eliminated on consolidation through offset against the borrowings of the securitisation companies in the consolidated balance sheet.

(c) In all of the above transactions, the Company and its subsidiaries are not obliged to support any losses that may be suffered by the noteholders and do not intend to provide such support. Additionally, the notes were issued on the basis that noteholders are only entitled to obtain payment, of both principal and interest, to the extent that the available resources of the respective special purpose securitisation companies, including funds due from customers in respect of the securitised loans, are sufficient and that noteholders have no recourse whatsoever to other companies in the Aviva Group.

23 – Financial investments

(a) Financial investments comprise:

		2006
		At fair value through profit or loss
		Trading £m	Other than trading £m	Available for sale* £m	Total £m
*	The gain related to AFS investments recognised in equity was £347 million (2005: £110 million loss) and the amount recognised in the income statement on disposals was £162 million (2005: £154 million gain). (See notes 5 and 32b).
Debt securities
UK government		–	19,921	–	19,921
Non-UK government		7	19,388	434	19,829
Corporate – UK		19	12,230	80	12,329
Corporate – Non-UK		119	41,858	4,725	46,702
Other		–	6,544	7,716	14,260
		145	99,941	12,955	113,041
Equity securities
Corporate – UK		–	30,580	140	30,720
Corporate – Non-UK		34	24,666	1,342	26,042
		34	55,246	1,482	56,762
Other investments
Unit trusts and other specialised investment vehicles		5	28,860	147	29,012
Derivative financial instruments		1,325	–	–	1,325
Deposits with credit institutions		–	381	–	381
Minority holdings in property management undertakings (see note 17b)		–	542	–	542
Other		6	1,735	49	1,790
		1,336	31,518	196	33,050
Total financial investments		1,515	186,705	14,633	202,853

Of the above total, £115,004 million (2005: £19,509 million) is expected to be recovered more than one year after the balance sheet date.

	2005
	At fair value through profit or loss
	Trading £m	Other than trading £m	Available for sale* £m	Total £m
Debt securities
UK government	–	22,845	–	22,845
Non-UK government	4	22,908	438	23,350
Corporate – UK	–	11,492	58	11,550
Corporate – Non-UK	81	31,345	5,237	36,663
Other	–	8,834	675	9,509
	85	97,424	6,408	103,917
Equity securities
Corporate – UK	–	29,036	13	29,049
Corporate – Non-UK	58	21,610	1,327	22,995
	58	50,646	1,340	52,044
Other investments
Unit trusts	4	24,202	3	24,209
Derivative financial instruments	467	–	–	467
Deposits with credit institutions	–	165	–	165
Minority holdings in property management undertakings (see note 17b)	–	499	–	499
Other	(6)	1,069	24	1,087
	465	25,935	27	26,427
Total financial investments	608	174,005	7,775	182,388

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

	2006
	Cost/ amortised cost £m	Unrealised gains £m	Unrealised losses £m	Fair value £m
Debt securities	111,409	2,402	(770)	113,041
Equity securities	45,045	12,330	(613)	56,762
Other investments
Unit trusts and specialised investment vehicles	26,433	2,642	(63)	29,012
Derivatives financial instruments	–	1,325	–	1,325
Deposits with credit institutions	381	–	–	381
Minority holdings in property management undertakings	542	–	–	542
Other	1,712	86	(8)	1,790
	185,522	18,785	(1,454)	202,853

	2005
	Cost/ amortised cost £m	Unrealised gains £m	Unrealised losses £m	Fair value £m
Debt securities	99,086	5,006	(175)	103,917
Equity securities	42,578	9,562	(96)	52,044
Other investments
Unit trusts and specialised investment vehicles	22,335	1,885	(11)	24,209
Derivative financial instruments	–	467	–	467
Deposits with credit institutions	165	–	–	165
Minority holdings in property management undertakings	499	–	–	499
Other	1,040	49	(2)	1,087
	165,703	16,969	(284)	182,388

(c) Other information on investments
Included within financial investments are shareholdings held on a long-term basis as follows:

	Market value of shareholding
	Long-term business		Non-long-term business		Total		Proportion held
	2006 £m	2005 £m	2006 £m	2005 £m	2006 £m	2005 £m	2006 %	2005 %	Country of incorporation
UniCredit Group	437	383	591	501	1,028	884	2.2%	2.1%	Italy

UniCredit Group is a banking company.

(d) Stocklending

The Group has entered into stocklending arrangements in the UK and overseas during the year in accordance with established market conventions. In the UK, investments are lent to locally-domiciled counterparties and governed by agreements written under English law. Other investments are specifically deposited under local laws in various countries overseas as security to holders of policies issued there.

Included within financial investments are £722 million (2005: £461 million) of debt securities and other fixed income securities which have been sold under stock repurchase arrangements. The obligations arising under these arrangements are included in other financial liabilities (see note 44).

The carrying amounts of financial assets received and pledged as collateral under stocklending arrangements at 31 December 2006 are £21,153 million and £nil respectively (2005: £20,037 million and £nil respectively). In certain markets, the Group or the Group’s appointed stocklending managers obtain legal ownership of the collateral received and can re-pledge as collateral elsewhere or sell outright. The value of collateral re-pledged or sold is £nil (2005: £nil).

24 – Receivables and other financial assets

	2006 £m	2005 £m
Amounts owed by contract holders	1,921	1,873
Amounts owed by intermediaries	1,258	1,543
Deposits with ceding undertakings	1,028	1,050
Amounts due from reinsurers	707	820
Other financial assets	3,184	2,488
Total	8,098	7,774
Less: Amounts classified as held for sale	–	(68)
	8,098	7,706
Expected to be recovered in less than one year	7,668	7,210
Expected to be recovered in more than one year	430	496
	8,098	7,706

Concentrations of credit risk with respect to receivables are limited due to the size and spread of the Group’s trading base. No further credit risk provision is therefore required in excess of the normal provision for doubtful receivables.

25 – Deferred acquisition costs and other assets

(a) The carrying amount comprises:

	Total 2006 £m	Total 2005 £m
Deferred acquisition costs in respect of:
Insurance contracts – Long-term business	848	1,118
Insurance contracts – General insurance and health business	1,422	1,281
Participating investment contracts	364	3
Non-participating investment contracts	566	752
Retail fund management business	22	21
	3,222	3,175
Surpluses in the staff pension schemes (note 42d(v))	56	–
Other assets	198	631
Total	3,476	3,806
Less: Amounts classified as held for sale	–	(40)
	3,476	3,766

Deferred acquisition costs on long-term business are generally recoverable in more than one year whereas such costs on general insurance and health business are generally recoverable within one year after the balance sheet date.

(b) The movements in deferred acquisition costs during the year were:

	2006 £m	2005 £m
Carrying amount at 1 January	3,175	2,709
Acquisition costs deferred during the year	3,248	3,108
Amortisation	(3,224)	(2,704)
Impairment losses	–	(4)
Foreign exchange rate movements	(49)	10
Other movements	72	56
Carrying amount at 31 December	3,222	3,175

Amortisation of deferred acquisition costs includes £271 million (2005:nil) for the effect of adjusting to PS06/14 realistic basis.

(c) Other assets include £2 million (2005: £472 million) that is expected to be recovered more than one year after the balance sheet date.

(d) Prepayments and accrued income include £62 million (2005: £467 million) that is expected to be recovered more than one year after the balance sheet date.

26 – Assets held to cover linked liabilities

Certain unit-linked products have been classified as investment contracts, while some are included within the definition of an insurance contract. The assets backing these unit-linked liabilities are included within the relevant balances in the consolidated balance sheet, while the liabilities are included within insurance and investment contract provisions disclosed in notes 35 and 37.

The carrying values of assets backing these unit-linked liabilities are as follows:

	2006 £m	2005 £m
Loans	879	–
Debt securities	15,308	12,959
Equity securities	25,839	21,593
Other investments	26,712	21,704
Reinsurance assets	1,136	1,232
Cash and cash equivalents	3,648	2,675
	73,522	60,163

27 – Ordinary share capital

(a) Details of the Company’s ordinary share capital are as follows:

	2006 £m	2005 £m
The authorised share capital of the Company at 31 December 2006 was: 3,000,000,000 (2005: 3,000,000,000) ordinary shares of 25 pence each	750	750
The allotted, called up and fully paid share capital of the Company at 31 December 2006 was: 2,565,753,431 (2005: 2,395,693,688) ordinary shares of 25 pence each	641	599

	Number of shares	Share capital £m	Share premium £m
At 1 January	2,395,693,688	599	1,167
Shares issued under the Group’s Employee and Executive Share Option Schemes	14,204,808	3	40
Shares issued in connection with acquisitions, net of transaction costs	129,000,000	32	(11)
Shares issued in lieu of dividends	26,854,935	7	(7)
At 31 December	2,565,753,431	641	1,189

Ordinary shares in issue in the Company rank pari passu. All the ordinary shares in issue carry the same right to receive all dividends and other distributions declared, made or paid by the Company.

Shares in lieu of the 2005 final and 2006 interim dividends were issued on 17 May and 17 November 2006 respectively. The issue of shares in lieu of cash dividends is considered a bonus issue under the terms of the Companies Act 1985 and the nominal value of the shares is charged to the share premium account.

28 – Equity compensation plans

(a) Description of the plans

The Group maintains a number of active stock option and award schemes. These are as follows:

(i) Savings-related options

These are options granted under the Inland Revenue-approved Save As You Earn (SAYE) share option schemes in the UK and in Ireland. Options are normally exercisable during the six month period following either the third, fifth or seventh anniversary of the start of the relevant savings contract.

(ii) Executive share options

These are options granted on various dates from 1996 to 2004, under the Aviva Executive Share Option Scheme or predecessor schemes. Options granted between 1997 and 2000 were subject to the satisfaction of conditions relating to either the Company’s return on equity shareholders’ funds (ROE) or its relative total shareholder return (TSR) against a chosen comparator group. In respect of options granted from 2000 the performance condition has been a mixture of both ROE and TSR measures. In all cases, performance is measured over a three year performance period and the options are normally exercisable between the third and tenth anniversary of their grant.

(iii) Deferred bonus plan options

These are options granted in 1999 and 2000 under the CGU Deferred Bonus Plan. Participants who deferred their annual cash bonus in exchange for an award of shares of equal value also received a matching award over an equal number of share options. The exercise of these options is not subject to the attainment of performance conditions. These options are exercisable up to the tenth anniversary of their grant.

(iv) Long-term incentive plan awards

These awards have been made to senior Group executives since 2001 and are described in section (b) below and in the Directors’ remuneration report.

(v) Deferred bonus plan awards

These awards have been made under the Aviva Deferred Bonus Plan, and are described in section (b) below and in the Directors’ remuneration report. The Group has established various employee share trusts to facilitate the delivery of shares under the above schemes. Details of these trusts are given in note 29.

(vi) Annual bonus plan awards

These awards have been made under the Aviva Bonus Plan, and are described in section (b) below and in the Directors’ remuneration report.

(b) Outstanding options and awards

(i) Share options

At 31 December 2006, options to subscribe for ordinary shares of 25 pence each in the Company were outstanding as follows:

Aviva Savings Related Share Option Scheme	Option price p	Number of shares	Normally exercisable	Option price p	Number of shares	Normally exercisable
	750.00	25,725	2006	406.00	1,565,926	2006, 2008 or 2010
	895.20	59,053	2005 or 2007	428.00	1,754,101	2007, 2009 or 2011
	664.00	435,637	2006 or 2008	491.00	4,548,158	2008, 2010 or 2012
	401.00	4,914,256	2005, 2007 or 2009	593.00	3,623,585	2009, 2011 or 2013

Hibernian Savings Related Share Option Scheme (in euros)	Option price c	Number of shares	Normally exercisable	Option price c	Number of shares	Normally exercisable
	1,087.56	10,114	2006	630.12	103,642	2007 or 2009
	662.85	82,057	2005 or 2007	719.00	168,230	2008 or 2010
	586.00	164,017	2006 or 2008	879.00	243,008	2009 or 2011

RAC Savings Related Share Option Scheme	Option price p	Number of shares	Normally exercisable	Option price p	Number of shares	Normally exercisable
	291.27	20,252	2004 or 2006	354.94	606,313	2007 or 2009
	312.27	377,770	2006 or 2008

Aviva Executive Share Option Scheme	Option price p	Number of shares	Normally exercisable	Option price p	Number of shares	Normally exercisable
	677.50	6,587	2000 to 2007	822.00	48,629	2003 to 2010
	725.50	2,345	2000 to 2007	972.33	14,459	2003 to 2010
	857.50	19,987	2000 to 2007	960.00	55,763	2003 to 2010
	1073.31	8,385	2001 to 2008	1035.00	710,408	2004 to 2011
	1119.00	35,193	2001 to 2008	499.00	14,272	2005 to 2012
	853.00	223,724	2001 to 2008	516.00	1,172,983	2005 to 2012
	965.00	7,425	2002 to 2009	512.00	1,600,043	2006 to 2013
	870.83	44,742	2002 to 2009	526.00	3,732,102	2007 to 2014
	919.00	454,892	2002 to 2009

General Accident Executive Share Option Scheme	Option price p	Number of shares	Normally exercisable
	766.42	71,913	2000 to 2007

Aviva Executive Share Option Scheme (Delta Lloyd)	Option price p	Number of shares	Normally exercisable	Option price p	Number of shares	Normally exercisable
	739.00	246,142	2002 to 2007	380.00	327,961	2003 to 2008

RAC Executive Share Option Scheme	Option price p	Number of shares	Normally exercisable
	347.49	4,136	2005 to 2009

CGU plc Deferred Bonus Plan	Option price p	Number of shares	Normally exercisable	Option price p	Number of shares	Normally exercisable
	899.50	15,462	2002 to 2009	875.00	29,316	2003 to 2010
	966.50	1,986	2002 to 2009

The following table summarises information about options outstanding at 31 December 2006:

Range of exercise prices	Outstanding options Number	Weighted average remaining contractual life Years	Weighted average exercise price p
£1.75 – £4.89	9,927,374	2	399.71
£4.90 – £8.04	15,900,844	5	538.45
£8.05 – £11.19	1,708,401	4	959.35

The comparative figures as at 31 December 2005 were:

Range of exercise prices	Outstanding options Number	Weighted average remaining contractual life Years	Weighted average exercise price p
£1.75 – £4.89	15,587,971	2	389.20
£4.90 – £8.04	18,090,563	5	532.73
£8.05 – £11.19	2,305,625	4	950.85

(ii) Share awards

At 31 December 2006, awards issued under the Company’s executive incentive plans over ordinary shares of 25 pence each in the Company were outstanding as follows:

Aviva Long-Term Incentive Plan	Number of shares	Vesting period
	2,630,279	2004 to 2006

Aviva Long-Term Incentive Plan 2005	Number of shares	Vesting period	Number of shares	Vesting period
	3,683,739	2005 to 2007	3,232,004	2006 to 2008

Aviva Deferred Bonus Plan	Number of shares	Vesting date	Number of shares	Vesting date
	3,135,710	26 March 2007	3,049,330	24 March 2008

Aviva Annual Bonus Plan	Number of shares	Vesting date
	3,226,201	31 March 2009

The vesting of awards under the Aviva Long-Term Incentive Plan is subject to the attainment of performance conditions as described in the Directors’ remuneration report. Shares which do not vest, lapse.

(iii) Shares to satisfy awards and options

Prior to March 2003, it was the practice to satisfy awards and options granted under the executive incentive plans through shares purchased in the market and held by employee share trusts which were established for the purpose of satisfying awards under the various executive incentive plans and funded by the Company. Since March 2003, no shares have been purchased by the trusts, it being the Company’s current practice to satisfy the awards granted after that date by the issue of new shares at the time of vesting. At 31 December 2006, 682,202 shares were held by the employee share trusts with an aggregate nominal value of £170,550 and market value of £6 million. The trustees have waived their right to dividends on the shares held in the trusts. Further details are given in note 29.

(c) Movements in the year

A summary of the status of the option plans as at 31 December 2006 and 2005, and changes during the years ended on those dates, is shown below.

	2006			2005
	Number of options	Weighted average exercise price p		Number of options	Weighted average exercise price p
Outstanding at 1 January	35,984,159	497.34		39,617,478	516.75
Granted during the year	3,912,011	593.00		7,956,344	434.64
Forfeited during the year	–	–		(890)	719
Exercised during the year	(5,665,668)	394.93		(5,918,840)	419.69
Expired during the year	(6,693,883)	569.15		(5,669,933)	581.58
Outstanding at 31 December	27,536,619	514.54		35,984,159	497.34
Exercisable at 31 December	12,757,480	516.30		8,238,435	600.59

(d) Expense charged to income statement

The total expense recognised for the year arising from equity compensation plans was as follows:

	2006 £m	2005 £m
Equity-settled expense	48	22
Cash-settled expense	–	–
	48	22

(e) Fair value of options and awards granted after 7 November 2002

The weighted average fair value of options and awards granted during the year, estimated by using the Black-Scholes option-pricing model, was £2.35 and £6.70 (2005: £1.88 and £4.50) respectively.

(i) Share options

The fair value of the options was estimated on the date of grant, based on the following weighted average assumptions:

Weighted average assumption	2006	2005
Share price	781p	618p
Exercise price	593p	491p
Expected volatility	26%	35%
Expected life	3.82 years	3.81 years
Expected dividend yield	3.70%	4.10%
Risk-free interest rate	4.80%	4.20%

The expected volatility used was based on the historical volatility of the share price over a period equivalent to the expected life of the options prior to its date of grant.

The risk-free interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the expected life of the options.

No options granted after 7 November 2002 were exercised during the year (2005: nil).

(ii) Share awards

The fair value of the awards was estimated on the date of grant, based on the following weighted average assumptions:

Weighted average assumption		2006	2005
*	For awards with market-based performance conditions.
Share price		814p	632p
Expected volatility*		23%	41%
Expected volatility of comparator companies’ share price*		22%	44%
Correlation between Aviva and competitors’ share price*		50%	64%
Expected life		3.0 years	3.0 years
Expected dividend yield		3.60%	4.00%
Risk-free interest rate*		4.50%	4.70%

The expected volatility used was based on the historical volatility of the share price over a period equivalent to the expected life of the options prior to its date of grant.

The risk-free interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the expected life of the options.

29 – Shares held by employee trusts

Movements in the carrying value of shares held by employee trusts comprise:

	2006			2005
	Number	£m		Number	£m
Cost debited to shareholders’ funds
At 1 January	1,823,788	–		5,894,264	–
Distributed in year	(1,141,586)	–		(4,070,476)	–
Balance at 31 December	682,202	–		1,823,788	–

These shares are owned by employee share trusts in the Company and a subsidiary undertaking to satisfy awards under the Group’s Long Term Incentive Plan and Deferred Bonus Plans. The shares were purchased in the market and are carried at cost less amounts charged to the income statement in prior years. Further details of the shares held can be found in note 28b. Details of the features of the plans can be found in the Directors’ remuneration report.

30 – Preference share capital

The preference share capital of the Company at 31 December 2006 was:

	2006 £m	2005 £m
Authorised
200,000,000 cumulative irredeemable preference shares of £1 each	200	200
500,000,000 Sterling preference shares of £1 each	500	500
500,000,000 Sterling new preference shares of £1 each	500	–
	1,200	700

	2006 €m	2005 €m
700,000,000 Euro preference shares of €1 each	700	700

	2006 £m	2005 £m
Issued and paid up
100,000,000 8 3/8% cumulative irredeemable preference shares of £1 each	100	100
100,000,000 8 3/4% cumulative irredeemable preference shares of £1 each	100	100
	200	200

At the Annual General Meeting on 10 May 2006, the Company’s authorised preference share capital was increased to £1,200 million and €700 million by the creation of 500 million sterling new preference shares of £1 each.

The new preference shares, if issued and allotted, would rank, as to payment of a dividend and capital, ahead of the Company’s ordinary share capital but behind the cumulative irredeemable preference shares currently in issue. The issued preference shares are non-voting except where their dividends are in arrears, on a winding up or where their rights are altered. On a winding up, they carry a preferential right of return of capital ahead of the ordinary shares.