Group performance

Profit before tax

The tables below set out our financial and operational performance for the year ended 31 December 2007.

Reconciliation of group operating profit to profit before tax

	12 months 2007 £m	Restated 12 months 2006 £m
Operating profit before tax – IFRS basis	2,228	2,609
Adjusted for the following:
Investment return variances and economic assumption changes on long-term business	15	401
Short-term fluctuation in return on investments backing general insurance and health business	(184)	149
Impairment of goodwill – non long-term business subsidiaries	(10)	(94)
Amortisation and impairment of intangibles	(103)	(64)
Profit on the disposal of subsidiaries and associates	49	222
Integration and restructuring costs	(153)	(246)
Profit before tax – IFRS basis	1,842	2,977
Tax	(337)	(588)
Profit for the financial year	1,505	2,389
Attributable to:
Equity shareholders	1,327	2,215
Minority interests	178	174

 

Reconciliation of group operating profit to profit before tax – EEV basis

	12 months 2007 £m	Restated 12 months 2006 £m
Operating profit before tax – EEV basis	3,286	3,251
Adjusted for the following:
Variation from longer term investment return on long-term business	(450)	319
Effect of economic assumption changes on long-term business	517	671
Short-term fluctuation in return of investments backing general insurance and health business	(184)	149
Impairment of goodwill	(10)	(94)
Amortisation and impairment of intangibles	(89)	(46)
Profit on the disposal of subsidiaries and associates	20	161
Integration and restructuring costs	(153)	(246)
Profit before tax – EEV basis	2,937	4,165
Tax	(803)	(1,286)
Profit for the financial year	2,134	2,879

Profit before tax on an EEV basis was lower at £2,937 million (2006: £4,165 million), reflecting an adverse variance from longer term investment return of £634 million (2006: £468 million favourable) and a positive impact from economic assumption changes of £517 million (2006: £671 million).

The variance in longer term investment return reflects long-term economic assumptions which are set with reference to bond yields.

£153 million of integration and restructuring costs have been included in the results to 31 December 2007 (2006: £246 million). These include £45 million relating to the UK cost and efficiency programme announced back in 2006. This initiative has now been completed at a total cost of £250 million. The costs also include £82 million relating to the new savings targets announced in October 2007; further costs of this programme are expected to be £248 million spread over the next two years. The balance of £26 million relates to the completion of integration activity on Ark Life in Ireland and the former AmerUs business in the United States, which were both acquired in 2006.

On an IFRS basis, the negative short-term fluctuations on the non-life business of £184 million (2006: £149 million favourable) were due to lower market returns compared to our longer term investment return assumptions. The group reduced their exposure to equities through an active sell-off of the equity book in the second half of the year.

The long-term business favourable investment variance (reflecting our new IFRS operating profit definition) of £15 million (2006: £401 million) comprises favourable investment variances in Europe offset by negative effects in the USA and UK. In Europe, the positive variances relate mainly to the realisation of capital gains on securities in the Netherlands and France. In the USA, realised and unrealised losses on investments were driven by the widening of credit spreads on debt securities, while in the UK there was a negative investment variance on surplus assets backing annuity business due to interest rate changes.

Profit on disposal of subsidiaries and associates includes the sale of 50.3% of the Turkish life business as part of the joint venture agreement with Aksigorta A.S. This produced a profit of £74 million on an IFRS basis (£45 million on an EEV basis due to the additional value of long-term in-force business). This was partly offset by losses on a number of small disposals.

Tax

The taxation charge was £803 million (2006: £1,286 million) on an EEV basis and includes a charge of £992 million (£2006: £1,028 million) on operating profit, which is equivalent to an effective rate of 30.2% (2006: 31.6%). On an IFRS basis the effective rate of tax on operating profit was 27.2% (2006: 24.7%).

Dividend

The Board has recommended a 10% increase in the final dividend to 21.10 pence per share (2006: 19.18 pence), payable on 16 May 2008 to shareholders on the register at 28 March 2008. This equates to 10% growth in the total dividend for the year of 33.00 pence (2006: 30.00 pence). Our IFRS operating profits cover this dividend 1.60 times (2006: restated 2.26 times) in line with our dividend cover target of 1.5 - 2.0 times.

Financial highlights

	12 months 2007 £m	12 months 2006 £m
Worldwide sales*	49,152	41,464
Life and pensions new business contribution before required capital	1,174	892
Life and pensions new business contribution after required capital	912	683
Life and pensions margin before required capital	3.7%	3.5%
Life and pensions margin after required capital	2.9%	2.6%
General insurance business combined operating ratio	100%	94%
Return on equity shareholders’ funds	11.3%	13.1%
Earnings per share
Basic – EEV operating profit after tax basis	76.5p	79.2p
Basic – IFRS total profit after tax basis	49.2p	87.5p

* Based on worldwide long-term savings new business sales, plus general insurance and health business net written premiums.

Worldwide sales

In 2007 we achieved total worldwide sales of £49,152 million (2006: £41,464 million) reflecting strong growth in long-term business sales offset by weaker general insurance and health net written premiums.

Long-term new business sales were up 25% to £38,583 million (2006: £30,762 million), comprising a 22% increase in life and pension sales of £31,600 million (2006: £25,852 million) and 41% growth in investment sales of £6,983 million (2006: £4,910 million).

Total UK sales were up 6% to £14,406 million (2006: £13,601 million), within this, life and pension sales were up 5% at £11,655 million (2006: £11,146 million) supported by significant increases in bonds and annuities. Investment sales of £2,751 million (2006: £2,455 million) were up 12% as we extended and diversified our fund offering and focused on improving the performance of our UK equity funds. Our share of sales from the joint venture with the Royal Bank of Scotland Group was up 36% to £1,587 million (2006: £1,169 million), benefiting from the impact of new products and an increase in the number of sales advisers.

Life and pension sales in Aviva Europe grew 15% to £14,914 million (2006: £12,840 million), reflecting the success of our multi-distribution strategy, broad product offerings and our diversified portfolio. Investment sales were up 74% to £1,572 million (2006: £891 million) driven by strong inflows in the Netherlands and Poland.

Sales in our US life business were up 39% on a pro forma basis to £3,602 million (2006: £884 million), representing growth across all product lines. This was mainly driven by new product launches and supported by the impact of the recent AM Best rating upgrade to A+.

Aviva Asia Pacific continued to achieve a high rate of growth, with total sales 60% higher at £4,089 million (2006: £2,546 million), driven primarily by strong Navigator (wrap administration platform) sales across the region.

Net written premiums from our general insurance and health business were £10,569 million (2006: £10,702 million) reflecting price competition across most regions.

Long-term new business contribution and margin

Our new business contribution before the effect of required capital increased by 30% to £1,174 million (2006: £892 million), generating an improved group margin of 3.7% (2006: 3.5%). The large increase in US sales following the acquisition of AmerUs, in November 2006, has been a key driver in new business contribution growth. Margins have also improved in the UK and Europe reflecting efficiency savings and favourable operating assumption changes.

After the effect of required capital, our new business contribution increased by 33% to £912 million (2006: £683 million) reflecting the factors above and lower cost of capital, mainly in the UK from changes to the annuity business and in the US from implementation of an efficient financing solution to free up capital previously held to support redundant reserves.

Earnings per share

Our IFRS earnings per share for 2007 was 49.2 pence (2006: 87.5 pence). This reflects the reduction in operating profit, mainly due to lower results in the general insurance segment as a result of adverse weather and increased competition, and net adverse short-term fluctuations and economic assumption changes.

Combined operating ratio

The worldwide general insurance combined operating ratio (COR) worsened to 100% (2006: 94%) mainly as a result of adverse weather in the UK and increased competitive pressures in this business segment across most regions. Excluding the impact of weather, our COR would have been 95%, within our meet or beat target of 98%.

The COR in our Dutch operations improved to 85% (2006: 89%) following the favourable development of prior year claims and the retention of premium rates in key areas. In Ireland the COR remained strong but deteriorated to 80% (2006: 77%) reflecting intensifying competition and higher claims costs. In Canada and France, CORs were held at 2006 levels.

The reserves in the group are set conservatively with the aim to protect against adverse future claims experience and development. Our business is predominantly short tail in nature and loss development experience is generally stable. As a result of the prudence applied in setting the reserves, there are releases of £832 million (net of reinsurance) in 2007 which reflect releases across most of our businesses from the 2006 accident year and prior. We continue to apply our reserving policy consistently and our reserves remain at very strong levels. Of the total released this year, we would expect around £440 million to repeat, with the balance being exceptional releases.

Return on equity shareholders’ funds

Our post-tax operating return on equity shareholders’ funds was 11.3% (2006: 13.1%). The reduction against 2006 reflects higher opening shareholders’ funds, which have increased by £2.6 billion. The return is below our target of 12.5% due to the impact of the adverse weather in the UK which has suppressed the return on our general insurance operations.

Balance sheet and cash flow

Summarised group consolidated balance sheet
As at 31 December 2007

	IFRS basis		EEV basis
	2007 £m	Restated 2006 £m	2007 £m	Restated 2006 £m
Assets
Goodwill	3,082	2,910	3,082	2,910
Acquired value of in-force business and intangible assets	3,197	2,728	3,197	2,728
Additional value of in-force long-term business	–	–	7,982	6,794
Investment properties, properties and equipment	16,019	16,027	16,019	16,027
Interests in and loans to joint ventures and associates	3,782	3,690	3,782	3,690
Financial investments	215,368	204,278	215,368	204,278
Other assets	62,498	52,101	62,498	52,101
Cash and cash equivalents	15,774	13,117	15,774	13,117
Total assets	319,720	294,851	327,702	301,645
Equity
Capital and reserves	12,849	11,176	12,559	10,714
Additional retained profit on an EEV basis	–	–	7,694	6,817
Equity attributable to shareholders of Aviva plc	12,849	11,176	20,253	17,531
Preference shares and direct capital instrument	1,190	1,190	1,190	1,190
Minority interests	2,553	1,698	3,131	2,137
Total equity	16,592	14,064	24,574	20,858
Liabilities
Gross liability for insurance and investment contracts	251,284	232,588	251,284	232,588
Unallocated divisible surplus	6,785	9,465	6,785	9,465
Net asset value attributable to unitholders	3,980	3,810	3,980	3,810
Borrowings	12,657	12,137	12,657	12,137
Other liabilities	28,422	22,787	28,422	22,787
Total liabilities	303,128	280,787	303,128	280,787
Total equity and liabilities	319,720	294,851	327,702	301,645

During 2007, the equity attributable to our ordinary shareholders on an IFRS basis increased by 15% to £12,849 million (2006: £11,176 million) primarily reflecting the growth in retained earnings. On an EEV basis, the equity attributable to our ordinary shareholders was £20,253 million (2006: £17,531 million).

At 31 December 2007, our total assets on an IFRS basis were £320 billion (restated 2006: £295 billion). Under EEV principles, our total assets are £328 million higher (restated 2006: £302 million), the difference relates to the recognition as an asset under EEV of internally generated additional value of in-force (AVIF) long-term business. The growth in assets was substantially driven by an increase in financial investment of £11 billion following strong new business sales and effective management of the active equity portfolio minimising the exposure to the downturn in the equity markets.

Increase in other assets of £10 billion to £62,498 million (restated 2006: £52,101 million) was primarily driven by an increase in loans of £7 billion resulting from the restatement of stock lending collateral.

Summary consolidated cash flow statement – IFRS basis

	Long- term business operations £m	Non long- term business operations £m	Total Full year 2007 £m	Restated Total Full year 2006 £m
Net cash from operating activities	2,792	1,240	4,032	1,879
Net cash from investing activities	(407)	(228)	(635)	(1,574)
Net cash flow from financing activities	(536)	(638)	(1,174)	659
Net increase in cash and cash equivalents	1,849	374	2,223	964
Cash and cash equivalents at 1 January	9,388	3,033	12,421	11,623
Effect of exchange rates	464	141	605	(166)
Cash and cash equivalents at 31 December	11,701	3,548	15,249	12,421

Cash flows from operating activities were £4,032 million (2006: £1,879 million). Investing activities generated a cash outflow of £635 million (2006: £1,574 million).

Financing activities generated a cash outflow of £1,174 million (2006: £659 million inflow) primarily driven by interest paid on borrowings.