Regional overviews: UK

Dear Shareholder,

Aviva UK Life has reported record sales and profits for the second year, delivering on “one Aviva, twice the value”. In doing so we are beginning to realise the full potential of our scale position.

In 2007 we’ve focused on improving our customers’ experience, and at the same time created value from our existing business through reducing costs. We’ve made great progress towards reducing the complexity of our life and pensions operations through an innovative agreement with Swiss Re, which is helping us become a much more efficient organisation.

We’ve grown sales and improved brand value through joint advertising with Norwich Union Insurance. We continued to grow our presence in the corporate market, putting Norwich Union products directly into customers’ workplaces; maintained a strong presence in the financial adviser market; and launched a distribution deal with the Post Office, offering innovative products such as our simplified life insurance product. In 2008, we’ve continued to innovate and recently announced the launch of a SIPP-lite product to enhance our pensions product range.

The UK market is challenging as the credit crunch and stockmarket volatility continue to impact the economy. Nevertheless, I am confident that our scale, brand, strong distribution footprint and broad product offering puts us firmly on track to realise our long-term goal of clear UK market leadership.

Mark Hodges
UK Life, Chief executive

Long-term savings

* Excludes investment sales. Investment sales totalled £2,751 million
(2006: £2,455 million) giving overall new business sales of £14,406 million
(2006: £13,601 million).
** Stated before the effect of required capital.

We remain committed to providing a broad product offering to meet the needs of a wide range of customers. During the year, we continued to focus on simpler products, making two direct to consumer protection offerings, an over-50s life cover and our innovative simplified life insurance product, available through our new partnership agreement with the Post Office. Within the financial adviser market, we refreshed our enhanced annuity product, which offers preferential rates to customers who are expected to have a shorter than average life. In anticipation of the decline in appetite for UK commercial property, we extended and diversified our fund offering and focused on improving the performance of our UK equity funds. In the corporate market, we used our unique ability to combine life, general insurance and healthcare products to provide a comprehensive package of products directly into customers’ workplaces, developing a foothold in this growth area.

We have improved our Financial Adviser Service Awards rating for the second year running, receiving a three star rating in the Life & Pension and the Investment Provider categories. We also won the Best Investment Service award from Moneyfacts and were voted the best pension provider by Bankhall, one of the largest financial adviser networks. Independent research shows that over the year the percentage of advisers who rate our service as excellent or good has increased from 52% to 66%. Adviser service complaints are down 33%, to their lowest level for four years.

In 2007, despite the market becoming progressively tougher with rises in interest rates, a slowdown in the housing market and stock market volatility, Norwich Union delivered record sales for the second year in a row. Total sales, including investment sales, were up 6% to £14,406 million (2006: £13,601 million), driven by significant increases in sales of individual annuities, bonds and collective investments. Our bancassurance joint venture with RBSG also delivered a second consecutive year of record results with sales in 2007 double those in 2005.

Our new business contribution rose 10% to £360 million (2006: £327 million), the result of sales growth and an improvement in margin to 3.1% (2006: 2.9%). This was driven by a combination of the savings from our ongoing efficiency review and our commitment to maximising shareholder value through balancing price, volume and mix.

On a post cost of capital basis, our new business contribution was 16% higher at £305 million (2006: £263 million) with a margin of 2.6% (2006: 2.4%).

Life EEV operating return increased strongly by 15% to £864 million (2006: £744 million) benefiting from higher new business profitability and operational improvements in the management of existing business supported by lower costs and improved retention. In 2006 we committed to cutting costs at the same time as improving service. We successfully completed the efficiency review announced in 2006 and have delivered the promised £125 million of annualised savings, £108 million of which contributed to 2007 financial performance. A further £100 million annualised savings are targeted by the end of 2009 which will eliminate our existing business expense overrun. Improved customer retention has been driven through a wide programme of initiatives including the creation of a dedicated advice team, improved customer communications and more active management of distributor commission terms. For similar reasons, our IFRS life operating profit has increased by 15% to £723 million (2006 restated: £629 million).

We continue to review the appropriateness of the operating assumptions that underpin the embedded value of our business. In 2007 we have revised the assumption relating to the rate of improvement of life expectancy, bringing it in line with latest industry studies. This change has adversely impacted profitability by £153 million. We also revised our assumption about the amount of risk capital that we believe we should hold for annuity business to reflect the outcome of our latest risk modelling, which has enhanced our new and existing business profitability by £14 million and £132 million respectively.

During 2007 we have continued to work towards the proposed reattribution of the inherited estate. We are the first company to do so under new rules from the FSA published in 2007, which require negotiation through a policyholder advocate. This is a complex process and has taken longer than anticipated. We have now agreed the eligibility criteria for the reattribution with the policyholder advocate and established the parameters for determining the surplus in the fund and obligations to current investors. Separately to this, we were delighted to announce a special bonus of £2.1 billion for around 1.1 million with-profits policyholders who have invested in CGNU Life and CULAC Life with-profits funds. The distribution of this special bonus clears the way to negotiate a fair price for the balance of the inherited estate, amounting to a further £2.6 billion.

We are confident in our medium- to long-term outlook for market growth at between 5-10%. However, given the uncertainty over the performance of the UK economy, market growth in 2008 may be slightly slower than in 2007. The UK is the fifth largest economy in the world, yet within this market there remain large numbers of people who either do not save or who are underprotected. In 2008, our focus will remain on completing our simplification programme, driving further operational efficiencies and building on service improvements. At the same time we will remain engaged with the Government, FSA, ABI and other stakeholders on the Retail Distribution Review and NPSS in order to influence an outcome that is satisfactory for customers, distributors and the industry as a whole.

Our scale, brand, broad product offering and strong distribution footprint position us well to succeed in an uncertain 2008. Our aim remains to improve profitability and grow our new business sales at least in line with the market, while maintaining or increasing our overall new business margin from current levels.