Aviva plc

Insurance

Delivery continues, but uncertainty reigns

Dissecting the dividend cut: In our view, Avivas decision to cut the

final dividend by 44% was fuelled by increased regulatory scrutiny. Having successfully maintained the dividend at the interim, we find it difficult to comprehend that management had not expected the disposal programme to result in a significant reduction in shareholders equity (hence the uplift to leverage ratios). While a material reduction in the internal leverage was not on managements agenda when the restructuring plans were laid out, we believe that pressure from the FSA has resulted in what is now a formalised 5.8bn loan and a plan to repay 0.6bn over the next three years. Given our view that leverage reduction will continue to take priority over shareholder returns, we downgrade to Hold and reduce our price target to 350p. Leverage plan achievable, but risks could derail the process: Managements plans to reduce internal leverage by 600m by 2015 and to restore the external leverage ratio to 40% look both sensible and achievable, utilising a combination of disposal proceeds and retained earnings. However, while this is ongoing, we expect dividend flows to shareholders to remain stifled, with the dividend yield only rising marginally out to 2015. At the same time, we see a number of scenarios which could derail the process, with delivery reliant on a benign macro environment and a relatively accommodating regulator. Fixing the leverage issue will go beyond 2015: Even assuming perfect delivery out to 2015, there is no guarantee that a 5.2bn internal loan is any more agreeable than the 5.8bn level. The current plan has received no objections from the FSA, but by the time negotiations come around again, UK insurance companies will be at the behest of a new regulator. In our view, further leverage reduction looks likely, but without any insight from management as to what happens next, we expect uncertainty to reign. Deep value, but near-term upside capped by uncertainty: Trading at 5.7x 2015E earnings, we continue to see deep value within Avivas operations. However, despite continued and considerable restructuring progress, we expect near-term uncertainty on leverage to cap upside, putting the investment thesis on hold. Given the scale of the internal leverage, we believe that the only quick resolution comes in the form of a rights issue an option roundly dismissed by management. We adjust our SoTP valuation to reflect this uncertainty overhang, with our revised price target now offering 7% upside.
Y/E 31.12., GBP m Net income Operating EPS (p) Embedded value operating EPS (p) Dividend per share (p) Net asset value per share (p) Embedded value per share (p) Operating ROE (%) Operating ROEV (%) P/E (operating) P/E (embedded value operating) Dividend yield (%) Price / net asset value (%) Price / embedded value (%) Source: Company data, Berenberg Bank 2011 60 53.8 64.0 26.0 342 347 19.2 17.3 6.1 5.1 7.9 96 95 2012 -3,050 39.1 27.3 19.0 225 369 11.4 7.9 8.4 12.0 5.8 146 89 2013E 1,322 46.6 53.0 14.6 256 396 20.7 14.4 7.0 6.2 4.4 128 83 2014E 1,581 53.9 61.8 15.3 294 434 21.1 15.6 6.1 5.3 4.7 112 76 2015E 1,732 57.5 66.3 16.1 337 487 19.5 15.3 5.7 5.0 4.9 97 67

Hold
Rating system Current price Relative Price target

GBp 328

GBp 350

14/03/2013 London Close Market cap GBP 9,556 m Reuters AV.L Bloomberg AV/ LN Changes made in this note Rating Hold (Buy) Price target GBp 350 (470.00) Chg
2013e old % 1385 -4.5 2014e old % 1690 -6.4 2015e old % -

Net income 48.44 -3.7 54.15 -0.4 IFRS EPS EV EPS 47.83 10.9 53.40 15.7 26.00 -43.8 26.00 -41.0 DPS
Source: Berenberg Bank estimates

Share data

Shares outstanding (m) Enterprise value (GBP m) Daily trading volume

2,946 11,114,370

Performance data
High 52 weeks (GBp) 388 Low 52 weeks (GBp) 255 Relative performance to SXXP FTSE 100 1 month -14.3 % -11.8 % 3 months -15.6 % -20.7 % 12 months -18.2 % -21.5 %

Business activities:
Life insurance, non-life insurance and asset management.

Non-institutional shareholders:
None

15 March 2013 Matthew Preston

Analyst +44 20 3207 7913
matthew.preston@berenberg.com

Trevor Moss
Specialist Sales +44 20 3207 7893
trevor.moss@berenberg.com

Aviva plc
Insurance

Delivery continues, but uncertainty reigns

While Avivas management continues to make considerable strides in simplifying and restructuring the disparate collection of operations it inherited from the previous regime, the formalisation of the internal leverage agreements has the potential to be a game-changer for shareholders. Chairman John McFarlane said at the investor day on 5 July 2012 that the current restructuring would not materially reduce internal leverage within the group, with Avivas recent announcement therefore representing somewhat of a change of tack. Having pledged to try and maintain the dividend (and having achieved this aim at the interim results), it is interesting to consider what has changed to require a 44% cut. The restructuring plan appears to be at the very least on target, with a costsavings run rate of 275m and the vast majority of disposals executed at reasonable prices. While external leverage has increased as a result of the disposals (from 40% at FY 2011 to 50% at FY 2012), we believe that this was an easily foreseeable outcome given the valuation multiples of similar businesses to those on Avivas disposal hit list. At the same time, we assume that management would have had appropriate visibility as to the level of internal leverage and any pressing internally driven need to address this. In our view, unforeseen pressure from the FSA has resulted in a heightened focus on internal leverage. As a result, the internal leverage arrangement has now been formalised, taking the form of a 5.8bn fully collateralised loan from Aviva Insurance Limited (AIL) to Aviva Group Holdings (AGH). Management (following consultation with the FSA) has committed to reducing this balance by 600m (or 10%) over the next three years, seemingly partly funded by a scaling back of the external debt reduction plans and by the dividend cut. Reducing internal as opposed to external leverage makes sense from the FSAs perspective cash is repatriated into AIL, a subsidiary which also falls under FSA supervision, as opposed to being returned to the external debt holders. During the Q&A following Avivas results, new CEO Mark Wilson said that he was not prepared just to kick the can down the road with regard to the dividend, hence the 44% cut. However, while not kicking the dividend can down the road, Aviva has seemingly done just that with regard to internal leverage. The new plan to reduce internal leverage is a sensible extension of the Aviva restructuring story, but management has provided no clarity as to whether the targeted 5.2bn level in 2015 is an appropriate steady-state or merely a small milestone in a longer-term leverage-reduction plan. In addition, there has been no disclosure with regard to any covenants attached to the new loan agreement and (if present) how they may affect existing shareholders. Despite management plans to improve cash remittances, we have no certainty as to whether this improvement will ultimately flow through to shareholders while the internal leverage overhang remains. Addressing this issue will take time and relies on relatively benign macro conditions, with the only short-term option for resolution being a rights issue an option which management has ruled out on numerous occasions. Trading at just 5.7x 2015E earnings versus the sector on c.9x, we continue to see considerable long-term value in Aviva, but believe that the current uncertainty means the near-term investment thesis remains on hold for now. As a result, we downgrade our recommendation from Buy to Hold and reduce our price target to 350p.

Aviva plc
Insurance

Reasonable results, but overshadowed by the dividend

Despite the dividend cut grabbing all of the headlines at the full-year results, looking beyond this we believe that Avivas operating performance was reasonable. IFRS operating profit for the period was marginally behind both us and consensus (2,016m actual versus us and consensus at 2,104m and 2,060m respectively on a like-for-like basis). The underlying operating profit from the continuing businesses (excluding restructuring costs) amounted to 1,776m. This is equivalent to c.44p per share after tax in a year not yet benefiting from flow-through of the cost reductions. With 400m+ of cost savings set to emerge by 2014, this has the potential to add a further c.10p to operating EPS.

Still ticking the boxes on delivery

In our view, Avivas management continues to deliver when it comes to restructuring the business. The economic capital position has improved from 130% at the end of 2011 to a much more robust 172%, approaching the upper end of managements target range (160-175%). A vast number of business units have been disposed of in a short timeframe and at reasonable values, including the US which many viewed as the albatross around Avivas neck. The plan to offset the loss of earnings through cost savings also appears to be progressing well, with a run rate at FY 2012 of 275m and the target now being for savings in excess of 400m. However, in our view, the dividend yield was a key attraction of the stock and rewarded investors for their patience while a restructuring was executed. Given initial investor scepticism on the restructuring, we would not be surprised if the 44% dividend cut has dented investor confidence in managements ability to deliver, especially following previous guidance that it would try to maintain the dividend. However, in our view, this restructuring continues at a pace and should not be chalked up as another failed effort anytime soon. That said, the additional disclosure provided at the full-year results highlighted the challenge management has faced with regard to remitting capital up to group (in part due to the wider eurozone issues) and therefore the increased reliance on internal leverage. With the FSA now seemingly taking an increased interest in Avivas internal leverage position, this new disclosure has flagged up another sizeable task in need of management attention.

Cash remittances on managements to-do list

While Avivas operational capital generation in recent years has broadly trended positively, cash remittances to group have not mirrored this. As shown in Figure 1, Avivas cash remittances to group only represented 37% and 48% of operational cash generation for 2011 and 2012 respectively. In part this was due to pressures in the eurozone France, Spain, Italy and Ireland remitted nothing in 2011 but also reflects relatively weak cash extraction from a wider number of business units. As a result, Aviva increasingly relied on internal leverage from the UK GI business and asset disposals to fund the dividend at group. This was an unsustainable position and one management is no longer willing to tolerate in the near term. However, the step up in remittances for 2012 demonstrates that progress is already in train when it comes to addressing this issue. Avivas subsidiaries upstreamed 21% more cash in 2012 than 2011, with all of the European operations now being net remitters to group.

Aviva plc
Insurance

Figure 1: Cash remittances to group are trending in the right direction

m unless stated Cash UK Life UK GI France Canada Poland Spain Singapore Italy Ireland Other Total generation 551 421 320 162 102 85 6 (56) 34 461 2,086 2011 Cash remittance 200 184 0 168 102 0 33 0 0 91 778 % remittance 36% 44% 0% 104% 100% 0% 550% 0% 0% 20% 37% Cash generation 662 341 330 190 124 78 35 75 52 72 1,959 2012 Cash remittance 150 150 202 136 70 68 17 0 0 151 944 % remittance 23% 44% 61% 72% 56% 87% 49% 0% 0% 210% 48%

Source: Berenberg Bank, Company data

In addition, management has retrospectively announced a simplification of the corporate structure which has been in place since 1 January 2013 (as shown in Figures 2 and 3). This has been designed to further streamline the group, with a view to aiding cash remittances and providing greater visibility. Figure 2: Avivas old structure was partly as a result of historical acquisitions Figure 3: The new structure is much cleaner and should aid internal dividend flows

Source: Berenberg Bank, Company data

Source: Berenberg Bank, Company data

We expect the growth in operational cash generation to remain relatively muted with a CAGR of just 1% between 2012 and 2015. However, as a result of the ongoing management actions, we expect remittances to grow at a 20% CAGR (see Figures 4 and 5). By the time we get to 2015, our forecasts suggest that cash remittances to group should amount to 75% of operational cash generation, significantly bolstering the cash available to fund interest and corporate costs, restructuring, internal and external leverage repayments, and ultimately dividends.

Aviva plc
Insurance

Figure 4: We expect cash generation to grow at a 1% CAGR between 2012 and 2015

Figure 5: ...but expect cash remittances to group to grow at 20%

Source: Berenberg Bank, Company data

Source: Berenberg Bank, Company data

Near-term remittances needed to address the leverage issue

Our forecasts suggest that cash remittances are broadly set to double from 0.8bn in 2011 to 1.6bn in 2015 (see Figure 6). However, while this uplift to cash remittances is a positive, we expect only a limited amount to filter through to shareholders in the near term, with leverage reduction taking priority over shareholder returns. Figure 6: Our forecasts show limited near-term shareholder upside, given managements focus on repaying internal and external debt
m unless stated Cash remittances Debt costs Central costs Restructuring spend Repayment of internal leverage Issuance / repayment of external debt Cash surplus / deficit (pre-dividend) External dividend (fully costed basis) Scrip Cash surplus / deficit (post-dividend) Opening central liquidity Cash surplus / deficit Disposals Closing central liquidity Tangible IFRS equity External debt Internal leverage External debt / total capital Internal debt / total capital 2011 0.8 (0.4) (0.2) (0.3) 0.0 0.0 (0.0) (0.7) 0.3 (0.5) 1.5 (0.5) 0.5 1.5 10.2 6.7 4.8 40% 28% 2012 0.9 (0.4) (0.3) (0.3) 0.0 0.3 0.2 (0.8) 0.1 (0.5) 1.5 (0.5) 0.4 1.4 7.0 7.0 5.8 50% 41% 2013E 1.1 (0.4) (0.2) (0.2) (0.3) 0.0 0.1 (0.4) 0.0 (0.3) 1.4 (0.3) 2.0 3.1 7.7 7.0 5.5 48% 38% 2014E 1.4 (0.4) (0.1) (0.1) (0.2) 0.0 0.6 (0.4) 0.0 0.1 3.1 0.1 0.0 3.2 8.5 7.0 5.3 45% 34% 2015E 1.6 (0.4) (0.1) (0.1) (0.1) (0.5) 0.5 (0.5) 0.0 0.0 3.2 0.0 0.0 3.2 9.5 6.5 5.2 40% 32%

Source: Berenberg Bank, Company data NB: Historical cash and central liquidity movements include Berenberg estimates as not all data are disclosed.

Aviva plc
Insurance

While we estimate that Aviva will receive 2.0bn in disposal proceeds during 2013, significantly boosting central liquidity balances, management has indicated that these proceeds will need to be retained for known and unknown risks and to pay down internal and external debt. As such, management did not seemingly feel confident in utilising the central liquidity buffer to support the previous 26p dividend in the short term. In addition, we believe that management may have been encouraged by the FSA to retain a higher level of central liquidity to provide some comfort over the internal and external leverage levels. We expect Aviva to have a net cash generation surplus at group level (post dividends) from 2014, consistent with the messages from management. However, given the schedule of internal and external leverage reduction, we expect the central liquidity balance to remain broadly flat with any surplus cash being used to fund the repayments. Based on our forecasts, we expect external leverage to fall from 50% at the end of 2012 to 40% by the end of 2015, as a result of retiring 500m of debt and retained earnings. This is in line with managements guidance and with the leverage reported at the end of 2011, but still represents a higher leverage ratio versus peers. Internal leverage is expected to fall by 600m to 5.2bn, funded predominantly by the 44% dividend cut.

Limited dividend prospects while leverage take priority

In recent years, Avivas dividend has been part funded from central liquidity, which in turn has been bolstered by disposals such as the 0.5bn from the disposal of the RAC in 2011, and the 0.4bn from the part sell down of Delta Lloyd in 2012. However, as a result of managements need to retain the central liquidity and to reduce leverage, we see limited prospects for dividend growth. We assume a dividend of 14.6p per annum for 2013, with 5% growth per annum in 2014 and 2015. As a result, the repayment of 500m of external debt coupled with the retained earnings is sufficient for the external leverage ratio to be reduced to 40% by 2015. We note that management could opt to increase the dividend by a slightly larger amount in both 2014 and 2015 while still achieving a 40% external leverage ratio. However, based on our forecasts, such an action would likely require management to dip into the central liquidity pot again the very scenario management has sought to avoid by cutting the dividend to 44%.

Aviva plc
Insurance

Figure 7: We see limited scope for dividend growth without depleting central liquidity we assume 5% dividend growth in 2014 and 2015

Source: Berenberg Bank estimates

Adverse macro developments could derail the plan

While our forecasts suggest that Avivas management should be able to deliver an external leverage ratio of 40% by 2015 and reduce internal leverage by 600m, there are a number of market risks which could derail this plan. Firstly, in the event of a significant worsening in the macro-economic climate, we would expect overseas regulators to require Aviva to retain higher capital balances in the subsidiaries, reducing (or potentially stopping) cash remittances to group from those affected. This significant reduction in cash remittances could therefore oblige management to utilise a higher proportion of the central liquidity to meet the leverage reduction targets. At this point, there is the possibility that even the rebased dividend could come under pressure, but clearly this would be a wider sector issue and not just something affecting Aviva. Secondly, risks to the IFRS equity from negative investment variances could hinder the reduction in the external leverage ratio, requiring debt repayments above the 500m currently assumed by 2015 to allow the 40% target to be met. Finally, significant insurance events (such as extreme weather or a sizeable step-up in bodily injury claims and/or periodic payment orders) could pressure cash remittances. Should these events occur within the UK GI business, we believe the internal leverage agreement would come under greater regulatory scrutiny. Conversely, positive macro movements or claims developments would be supportive of managements plans, with an ongoing improvement in the eurozone having the potential to lessen capital retention within certain subsidiaries. Such events could free managements hand, resulting in an improved dividend trajectory.

No insight into the current covenant arrangements

While management has said that the FSA is supportive of the current internal leverage reduction plan, it has provided no details as to events which would change this view or what covenants (if any) are attached to the 5.8bn loan. We understand from management that the loan is collateralised by the fair value of the AGH subsidiaries, while the FSA has provided a letter of no objection to the internal leverage plans. However, we note that this seems to leave scope for the

Aviva plc
Insurance

regulator to change its view. As a result, we believe the following questions remain outstanding. 1. Are there any covenants which either limit dividend payments or give AIL control of any cash flows up to AGH over and above those slated for repayment over the next three years? 2. Are there any covenants which limit operational flexibility? For example, is there a minimum level of fair value/market value of assets which must remain within AGH to provide sufficient collateral for the loan? Would management be able to dispose of significant AGH subsidiaries if suitable offers were forthcoming? 3. Are there any circumstances under which AIL would be able to call the loan (a significant macro downturn or a ramping up of large losses within the UK GI business perhaps)? If so, how would this be financed?

UK regulatory oversight seemingly more stringent

In our view, the direction of travel in the UK regulatory environment remains resolutely towards a heavier-touch regime. While we believe this has been a key driver of Avivas decision to reduce leverage, there are other examples across the market which support our view that this is the beginning of a trend. Prudential for example, in collaboration with the FSA, is now utilising a more cautious methodology when it comes to assessing its IGD position with regard to its US business (resulting in a step down in its IGD surplus). A similar measure could have also been applied to Avivas US business had it not been disposed of, which in our view would have likely negatively affected Avivas IGD surplus. While we note that UK insurers have weathered the financial crisis relatively well, the failure of banks to perform in the same way has resulted in a relatively blunt approach from regulators when it comes to scrutiny for all financial services companies. We believe the need to retain increasing amounts of capital and to continue to de-risk financial services business models is a trend which will remain prominent in the near-to-medium term at the very least.

Even assuming execution, what happens beyond 2015?

In our view, the plan to reduce internal leverage to 5.2bn and external leverage to 40% is realistic, although we would note that there is limited margin for error. However, management has provided no clarity to date as to what happens next. The reduction in external leverage to 40% is a significant step in the right direction, but would still leave Avivas leverage ratio above that of peers; Aviva has calculated the industry average to be c.37%. There is seemingly no imminent need to scale back external leverage further, as manifested by i) managements lessening of the near-term repayment plans (originally 700m of external debt was slated for retiring versus the 500m now planned); and ii) the narrowing of Avivas credit spreads since the announcement of the restructuring plan. However, in our view, 40% remains high versus peers in the longer term. Reducing the ratio to the 37% average of peers would require either a further c.0.9bn of debt to be repaid or a further 1.3bn of earnings to be retained or, more likely, a combination of the two. The internal leverage represents more of a conundrum, given that it is difficult to benchmark versus peers, especially given the unknown regulatory element. While management has provided no further detail on what happens to the external

Aviva plc
Insurance

leverage after it reaches 5.2bn, given that this would only represent a c.10% fall from current levels, we believe that ongoing reduction will be necessary.

Change in regulator adds to the uncertainty

As a result of the Financial Services Act 2012, all UK-based insurers including Aviva will be regulated by a new entity from 1 April 2013. The current FSA regime is to be replaced by three new regulators the Prudential Regulation Authority (PRA); the Financial Conduct Authority (FCA); and the Financial Policy Committee with the PRA set to be the key regulatory body for the insurance companies. The Financial Services Act 2012 will also result in the new regulatory regime having additional powers versus those vested in the FSA. As a result, these powers result in the potential for a more rigorous and intrusive regulatory regime than the one currently in existence. The question is, what does this mean for Aviva in 2015? While the existing leverage reduction plan has seemingly been met with approval and support from the FSA, the change in regulator adds uncertainty on how the external leverage will be viewed in three years time.

Ultimate fix may require a rights issue

Despite our view that managements plan as far out as 2015 makes sense and is achievable, there are numerous obstacles which need to be avoided and hurdles to be jumped for execution to be successful. While some of these are within managements control, the reliance on a benign macro environment and an accommodating regulatory regime means that the need to resort to a rights issue cannot be disregarded. While having been explicitly ruled out by management on a number of occasions, such an action arguably represents the cleanest and quickest way to fix the leverage issue. Management would then have the ability to pay a well supported and rapidly growing dividend, while also having the operational flexibility to invest in the pockets of growth which remain within Avivas portfolio of businesses. Even assuming Aviva manages perfect execution through to 2015, the lack of clarity as to whether this is a steady-state means that the leverage overhang does not go away at that point either. Assuming the business is fully restored by then, at 5.2bn the internal leverage remains sizeable and, at 40%, external debt high. However, it is not unthinkable that shareholders could be willing to support a rights issue if it was needed to finally unlock the latent value within the business, removing what we consider to be a de facto dividend cap and driving a sizeable rerating of the stock. While we do not assume the need to resort to such an action within our base case, we believe shareholder upside (and stock valuation) remains capped while lack of clarity on leverage persists. Given this predicament, it is interesting to consider what shape a rights issue would take were management to consider such a route. Based on the planned reductions in both internal and external leverage (and the potential for further future reductions beyond 2015), we believe c.3bn would be sufficient. This would instantaneously reduce the external leverage to 40%, while enabling more cash to be diverted towards cutting the internal leverage balance.

A myriad of longer-term valuation outcomes

Trading on just 5.7x our 2015 earnings forecasts versus the sector on c.9x, todays share price suggests that there is considerable deep value within Aviva. While we

Aviva plc
Insurance

believe that the leverage overhang is responsible for much of the discount to peers, assuming this is removed it is not difficult to arrive at a 500p+ valuation for Aviva based on our 2015 forecasts and relatively conservative peer-based multiples (Figure 8). While this includes giving the current management team credit for delivery on its targets, we believe progress on the restructuring so far suggests that this may not be overly optimistic. Figure 8: Our 2015 forecasts imply a 5 valuation, assuming no overhang
2015E (GBp unless stated) EPS Assumed DPS at 45% payout ratio IFRS shareholders' equity (ex.goodwill) RoE MCEV shareholders' equity (ex.goodwill) RoEV Blended implied valuation 2015E 57.5 25.9 337 20% 487 15% 507 Assumed multiple 9x 5.0% 1.5x 1.0x Implied value (p) 517 517 506 487

Source: Berenberg Bank estimates

Even assuming the need to resort to a rights issue to further stabilise the business, we believe that the shares could offer value (given our assumptions that a 3bn, or c.100p, capital raise would be sufficient to remove the uncertainty). However, for this to apply, investors must believe in delivery and be willing to support a rights issue if necessary. In a sector which remains driven by dividends, as shown by the disparate performance of the UK and European insurance companies that have reported so far, it is perhaps not unsurprising that Avivas share price is where it is.

Uncertainty clouds near-term valuation downgrading to Hold

We remain convinced that deep value exists within the Aviva business. Managements focus on a cash-plus-growth strategy is sensible given Avivas mature operational footprint, and sees the company treading a similar path to the one Legal & General embarked upon a number of years ago. However, given the lack of visibility as to the net recipient of this cash strategy out to 2015 and beyond, we see better near-term opportunities elsewhere. While we make limited changes to our earnings numbers, we adjust our valuation methodology to include an uncertainty discount which is intended to reflect the leverage overhang. This discount is modelled on the reduced returns on embedded value Aviva would generate following a 3bn rights issue. While we accept this is a relatively unscientific adjustment, as discussed earlier this is the quantum of rights issue we believe would address a large number of the remaining questions on leverage. As a result, we cut our price target to 350p.

10

Aviva plc
Insurance

Figure 9: We adjust our valuation to reflect the uncertainty we see for equity holders
Aviva Sum-of-the-parts EURm Life Non-life Other EV plus debt Debt EV Life agency costs Adjusted EV Uncertainty adjustment 2013e fair value 2013e 2014e EVE 2014e return 15,068 1,589 10.5% 5,897 769 13.0% (3,954) (66) 1.7% 17,011 2,292 13.5% (5,339) (471) 11,672 1,821 Comment SoTP Per share (GBp) 11% sust ROEV, 1.0x EV 14,442 490 10x 2013e PER, 1.3x NAV 7,689 261 10x PER corp costs, 12x PER asset mgmt (1,267) (43) 20,864 708 Face value (5,339) (181) 15,525 527 Life agency costs @10% (1,444) (49) Sum-of-the-parts 14,081 478 (3,644) (124) 10,437 354

Source: Berenberg Bank estimates

Figure 10: Aviva IFRS income statement (2009-15E)

IFRS P&L (GBPm) Long term business operating profit Fund management General Insurance and Health Other operations and regional costs Corporate centre Group debt costs and other interest DeltaLloyd - discontinued Operation Share of Delta Lloyd as associate Operating profit before tax Economic variances and assumpt chgs (Life) Short term fluctuations (non-life) Economic assumption changes (non-life) Impairment of goodwill Amortisation and impairment of intangibles Profit on disposals Integration and restructuring costs Exceptional items Profit before tax Tax on operating profit Tax on other activities Net Profit Operating profit Tax on operating profit Minorities Preference dividend DCI coupons Operating profit for shareholders Operating EPS Net income EPS Interim dividend Final dividend Total Dividend per share 2009 1,887 133 960 -214 -108 -636 277 0 2,022 -75 95 57 -62 -144 153 -286 45 1,805 -547 57 1,315 2,022 -547 -193 -17 -44 1,221 45.1 37.8 9.0 15.0 24.0 2010 1,988 201 1,050 -177 -143 -644 330 0 2,605 791 -243 -61 -24 -216 159 -243 -273 2,495 -625 77 1,947 2,661 -625 -332 -17 -42 1,864 65.8 61.3 9.5 16.0 25.5 2011 2,123 99 935 -207 -138 -657 191 157 2,503 -1,616 -326 -90 -392 -176 533 -268 -57 87 -650 623 60 2,273 -625 -150 -17 -43 1,531 53.8 9.1 10.0 16.0 26.0 2012 2,031 106 893 -208 -136 -671 0 112 2,127 -278 7 -21 -842 -257 -2,523 -468 0 -2,671 -543 164 -3,050 1,888 -493 -184 -17 -55 1,139 39.1 -113.1 10.0 9.0 19.0 2013E 1,840 90 970 -150 -93 -589 0 0 2,068 0 0 0 0 -128 0 -150 0 1,790 -507 39 1,322 2,068 -507 -115 -17 -55 1,374 46.6 42.9 5.6 9.0 14.6 2014E 1,941 97 1,028 -75 -73 -570 0 0 2,348 0 0 0 0 -128 0 -100 0 2,120 -564 25 1,581 2,348 -564 -124 -17 -55 1,589 53.9 51.4 5.9 9.5 15.3 2015E 2,035 101 1,053 -75 -73 -560 0 0 2,481 0 0 0 0 -128 0 -50 0 2,303 -583 13 1,732 2,481 -583 -133 -17 -55 1,693 57.5 56.2 6.2 9.9 16.1

Source: Berenberg Bank estimates, Company data

11

Aviva plc
Insurance

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+44 (0) 20 3207 7888 +44 (0) 20 3207 7931

+44 (0) 20 3207 7916 +44 (0) 20 3207 7918 +44 (0) 20 3207 7837 +44 (0) 20 3207 7934 +44 (0) 20 3207 7856 +44 (0) 20 3207 7915

+44 (0) 20 3207 7869 +44 (0) 20 3207 7876 +44 (0) 20 3465 2637 +44 (0) 20 3465 2747 +44 (0) 20 3207 7874 +44 (0) 20 3207 7877

+44 (0) 20 3207 7851 +44 (0) 20 3207 7834 +44 (0) 20 3465 2638 +44 (0) 20 3207 7852 +44 (0) 20 3465 2673

HOUSEHOLD & PERSONAL CARE Seth Peterson +44 (0) 20 3207 7891 Andrew Steele +44 (0) 20 3207 7926 INSURANCE Tom Carstairs Peter Eliot Kai Mueller Matthew Preston Sami Taipalus MEDIA Robert Berg Emma Coulby Laura Janssens Sarah Simon

+44 (0) 20 3207 7862 +44 (0) 20 3207 7824 +44 (0) 20 3207 7858 +44 (0) 20 3465 2639 +44 (0) 20 3207 7857 +44 (0) 20 3207 7859

+44 (0) 20 3207 7937 +44 (0) 20 3207 7932 +44 (0) 20 3207 7930 +44 (0) 20 3207 7890

+44 (0) 20 3207 7823 +44 (0) 20 3207 7880 +44 (0) 20 3207 7800 +44 (0) 20 3207 7913 +44 (0) 20 3207 7866

+44 (0) 20 3207 7870 +44 (0) 20 3465 2665

+44 (0) 20 3465 2737 +44 (0) 20 3207 7860 +44 (0) 20 3207 7928

+44 (0) 20 3207 7899 +44 (0) 20 3207 7925

+44 (0) 20 3207 7900 +44 (0) 20 3207 7821 +44 (0) 20 3465 2639 +44 (0) 20 3207 7830

+44 (0) 20 3207 7861 +44 (0) 20 3207 7937 +44 (0) 20 3207 7818 +44 (0) 20 3207 7887

Sales
Specialist Sales CONSUMER Rupert Trotter INSURANCE Trevor Moss LONDON Miel Bakker John von Berenberg-Consbruch Ronald Bernette Matt Chawner Toby Flaux Sean Heath David Hogg Ben Hutton James Matthews David Mortlock Peter Nichols George Smibert Max von Doetinchem Paul Walker E-mail: firstname.lastname@berenberg.com; Internet www.berenberg.de +44 (0) 20 3207 7815 HEALTHCARE Frazer Hall TECHNOLOGY Jean Beaubois HAMBURG Susette Mantzel Marco Weiss PARIS Christophe Choquart Dalila Farigoule Clmence La Clavire-Peyraud Olivier Thibert ZURICH Stephan Hofer Carsten Kinder Gianni Lavigna Benjamin Stillfried CRM LONDON Greg Swallow Laura Cooper CORPORATE ACCESS LONDON Patricia Nehring +44 (0) 20 3207 7875 UTILITIES Benita Barretto INDUSTRIALS Chris Armstrong Kaj Alftan Sales Trading HAMBURG Paul Dontenwill Christian Endras Gregor Labahn Chris McKeand Fin Schaffer Lars Schwartau Marvin Schweden Tim Storm Philipp Wiechmann LONDON Stewart Cook Simon Messman Stephen O'Donohoe PARIS Sylvain Granjoux EVENTS LONDON Natalie Meech Charlotte Kilby Hannah Whitehead +44 (0) 20 3207 7829

+44 (0) 20 3207 7893

+44 (0) 20 3207 7835

+44 (0) 20 3207 7809 +44 (0) 20 3207 7879

+44 (0) 20 3207 7808 +44 (0) 20 3207 7805 +44 (0) 20 3207 7828 +44 (0) 20 3207 7847 +44 (0) 20 3465 2745 +44 (0) 20 3465 2742 +44 (0) 20 3465 2628 +44 (0) 20 3207 7804 +44 (0) 20 3207 7807 +44 (0) 20 3207 7850 +44 (0) 20 3207 7810 +44 (0) 20 3207 7911 +44 (0) 20 3207 7826 +44 (0) 20 3465 2632

+49 (0) 40 350 60 694 +49 (0) 40 350 60 719

+33 (0) 1 5844 9508 +33 (0) 1 5844 9510 +33 (0) 1 5844 9521 +33 (0) 1 5844 9512

+41 (0) 44 283 2029 +41 (0) 44 283 2024 +41 (0) 44 283 2038 +41 (0) 44 283 2033

+49 (0) 40 350 60 563 +49 (0) 40 350 60 359 +49 (0) 40 350 60 571 +49 (0) 40 350 60 798 +49 (0) 40 350 60 596 +49 (0) 40 350 60 450 +49 (0) 40 350 60 576 +49 (0) 40 350 60 415 +49 (0) 40 350 60 346

+44 (0) 20 3465 2752 +44 (0) 20 3465 2754 +44 (0) 20 3465 2753

FRANKFURT Michael Brauburger Nina Buechs Andr Grosskurth Boris Koegel Joachim Kopp

+49 (0) 69 91 30 90 741 +49 (0) 69 91 30 90 735 +49 (0) 69 91 30 90 734 +49 (0) 69 91 30 90 740 +49 (0) 69 91 30 90 742

+44 (0) 20 3207 7833 +44 (0) 20 3207 7806

+33 (0) 1 5844 9509

+44 (0) 20 3207 7811

+44 (0) 20 3207 7831 +44 (0) 20 3207 7832 +44 (0) 20 3207 7922

US Sales
BERENBERG CAPITAL MARKETS LLC Member FINRA & SIPC Andrew Holder Colin Andrade Cathal Carroll Burr Clark Julie Doherty +1 (617) 292 8222 +1 (617) 292 8230 +1 (646) 445 7206 +1 (617) 292 8282 +1 (617) 292 8228

E-mail: firstname.lastname@berenberg-us.com Kelleigh Faldi Kieran O'Sullivan Emily Mouret Jonathan Saxon +1 (617) 292 8288 +1 (617) 292 8292 +1 (646) 445 7204 +1 (646) 445 7202

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Aviva plc
Insurance

Please note that the use of this research report is subject to the conditions and restrictions set forth in the General investment-related disclosures and the Legal disclaimer at the end of this document. For analyst certification and remarks regarding foreign investors and country-specific disclosures, please refer to the respective paragraph at the end of this document.

Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG)
Company Aviva plc (1) (2) (3) (4) (5) (6) Disclosures no disclosures

Berenberg Bank or its affiliate(s) was Lead Manager or Co-Lead Manager over the previous 12 months of a public offering of this company. Berenberg Bank acts as Designated Sponsor for this company. Over the previous 12 months, Berenberg Bank and/or its affiliate(s) has effected an agreement with this company for investment banking services or received compensation or a promise to pay from this company for investment banking services. Berenberg Bank and/or its affiliate(s) holds 5% or more of the share capital of this company. Berenberg Bank holds a trading position in shares of this company. Berenberg Bank and/or its affiliate(s) holds a net short position of 1% or more of the share capital of this company, calculated by methods required by German law as of the last trading day of the past month.

Historical price target and rating changes for Aviva plc in the last 12 months (full coverage) Date 26 April 12 31 July 12 23 January 13 15 March 13 Price target - GBp 575.00 480.00 470.00 350.00 Rating Hold Buy Buy Hold Initiation of coverage 19 July 10

Berenberg distribution of ratings and in proportion to investment banking services Buy Sell Hold 44.96 % 17.54 % 37.50 % 65.52 % 6.90 % 27.59 %

Valuation basis/rating key

The recommendations for companies analysed by Berenberg Banks equity research department are either made on an absolute basis (absolute rating system) or relative to the sector (relative rating system), which is clearly stated in the financial analysis. For both absolute and relative rating system, the three-step rating key Buy, Hold and Sell is applied. For a detailed explanation of our rating system, please refer to our website at http://www.berenberg.de/research.html?&L=1 NB: During periods of high market, sector or stock volatility, or in special situations, the rating system criteria as described on our website may be breached temporarily.

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Aviva plc
Insurance

Competent supervisory authority

Bundesanstalt fr Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory Authority), Graurheindorfer Strae 108, 53117 Bonn and Lurgiallee 12, 60439 Frankfurt am Main

General investment-related disclosures

Joh. Berenberg, Gossler & Co. KG (Berenberg Bank) has made every effort to carefully research all information contained in this financial analysis. The information on which the financial analysis is based has been obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised press as well as the company which is the subject of this financial analysis. Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is necessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in the research note. Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this document. The companies analysed by Berenberg Bank are divided into two groups: those under full coverage (regular updates provided); and those under screening coverage (updates provided as and when required at irregular intervals). The functional job title of the person/s responsible for the recommendations contained in this report is Equity Research Analyst unless otherwise stated on the cover. The following internet link provides further remarks on our financial analyses: http://www.berenberg.de/research.html?&L=1&no_cache=1

Legal disclaimer
This document has been prepared by Berenberg Bank. This document does not claim completeness regarding all the information on the stocks, stock markets or developments referred to in it. On no account should the document be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgements. The document has been produced for information purposes for institutional clients or market professionals. Private customers, into whose possession this document comes, should discuss possible investment decisions with their customer service officer as differing views and opinions may exist with regard to the stocks referred to in this document. This document is not a solicitation or an offer to buy or sell the mentioned stock. The document may include certain descriptions, statements, estimates, and conclusions underlining potential market and company development. These reflect assumptions, which may turn out to be incorrect. Berenberg Bank and/or its employees accept no liability whatsoever for any direct or consequential loss or damages of any kind arising out of the use of this document or any part of its content. Berenberg Bank and/or its employees may hold, buy or sell positions in any securities mentioned in this document, derivatives thereon or related financial products. Berenberg Bank and/or its employees may underwrite issues for any securities mentioned in this document, derivatives thereon or related financial products or seek to perform capital market or underwriting services.

Analyst certification

I, Matthew Preston, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by Berenberg Bank or its affiliates.

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Aviva plc
Insurance

Remarks regarding foreign investors

The preparation of this document is subject to regulation by German law. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

United Kingdom

This document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.

United States of America

This document has been prepared exclusively by Berenberg Bank. Although Berenberg Capital Markets LLC, an affiliate of Berenberg Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital Markets LLC. In addition, this document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets LLC (+1 617.292.8200), if you require additional information.

Third-party research disclosures Company

Aviva plc (1) (2) (3) (4) (5)

Disclosures
no disclosures

Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject company by the end of the prior month.* Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public offering for the subject company.* Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report. Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months, or expects to receive such compensation in the next 3 months.* There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the analyst knows or has reason to know at the time of publication of this research report.

* For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG) section above.

Copyright

Berenberg Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without Berenberg Banks prior written consent. June 2012 Berenberg Bank

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