Slide1: Operating in a low interest rate environment Philip Scott, Group Executive Director, Aviva Federation of Indian Chambers of Commerce and Industry, New Delhi Monday, 18th October 2004


Disclaimer: Disclaimer This presentation may contain certain “forward-looking statements” with respect to certain of Aviva’s plans and its current goals and expectations relating to its future financial conditions, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Aviva’s control including among other things, UK domestic and global economic business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdiction in which Aviva and its affiliates operate. As a result, Aviva’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in Aviva’s forward-looking statements. Aviva undertakes no obligation to update the forward-looking statements contained in this presentation or any other forward-looking statements we may make.


Agenda: Interest rate and its impact Interest rate and Inflation Status of India Low interest rate regime Operating in a low interest rate regime Agenda


Interest rate and its impact: Interest rate Rate of yield on savings for depositors Capital cost for borrowers and investors Impact of interest rate On depositors On borrowers and investors Impact of interest rate on Economy Impact of interest rate on Insurance business Interest rate and its impact


Interest rate and Inflation: Interest rate and Inflation Interest Rate Inflation Low High High Long Term Growth Best for depositors Counter forces, No impact Market favors borrowers; poor returns on savings


Interest rate : India: Interest rate : India Source: Centre for Monitoring Indian Economy (CMIE) PLR=Prime Lending Rate


Interest rate and Inflation : India: Interest rate and Inflation : India Source: RBI website


Status of India: Status of India Interest Rate Inflation Low High High


Operating in a low interest rate environment: Be aware of consumer expectations Offer broad fund choice Innovation in product design Equity linked products Innovation in product distribution Bancassurance Capital and cash management Margin management Operating in a low interest rate environment


Be aware of consumer expectations: Evidence in France (low inflation country) is that demand for “lower” return / low risk products remains robust Expect period of consumer adjustment in countries (e.g. UK) where equity-linked content was higher Industry needs to manage expectations through pro-active communications Be aware of consumer expectations Consumer expectations will align to investment market returns


Slide11: Equity linked products would do well in the long term compared to the other asset classes Long term return on assets Source: RBI website BSE India website


Offer broad fund choice: Offer broad fund choice Norwich Union Life (UK)


Innovation in product design: Use guarantees provided by investment banks Price guarantee into policy Innovation in product design


Product range: Broad product range enables insurers to flex marketing spend towards demand Product range NU Life Sales 2002 APE


Slide15: Indian Equity Market - not overvalued Equity markets have given low returns over the last 12 years despite the economy growing Sensex GDP Sensex : 1287 GDP: Rs 2108 bn Sensex : 4285 GDP: Rs 5589 bn Sensex : 5583 GDP: INR 27500 billion


Slide16: Indian Equity Market - not overvalued


Launch products with higher equity exposure: Yield on Equities is comparable to Yield on bonds Launch products with higher equity exposure


Innovation in product distribution: Aviva bancassurance: Accounted for 25% of Aviva’s Global new business in 2003 Sales +16% in 2003 vs. 2002 Bancassurance accounts for over 85% of new business sales in Spain and Italy Bancassurance accounts for 70% of Aviva India’s business Aviva has bancassurance distribution arrangements with ABN AMRO, American Express, Canara Bank, Lakshmi Vilas Bank and Punjab & Sind Bank Innovation in product distribution Bancassurers have excellent access to deposits


Capital and cash management: Capital and cash management techniques Capital and cash management Reduce payback periods Securitisation Reinsurance capital “Cashless financing” from emerging surpluses


Capital and cash management: Bringing the cash flow horizon closer Capital and cash management Illustration of protection policy cash flow Policy Year APE (%)


Capital and cash management: RBC will optimise risk management and capital allocation Capital and cash management


Capital and cash management: UK: guaranteed annuity options were responsible for the issues at Equitable Life Hedge or fund historic guarantees Aviva in UK fully funded Orphan estate struck after allowance for guarantees Orphan estate £4.3bn at 31/12/02 (additional > £ 4bn already provided) Capital and cash management Guarantees on in-force books


Margin management: Focus capital towards higher margin products Reduce expenses Grow “e” activity Aviva will size cost to revenues where necessary, drawing on its cost reduction experience through M&A Margin management


Margin management: Shake-out of weaker, inefficient operators Increased market shares for strongest Margin management Conditions are a catalyst to re-structuring UK life & pensions market shares 41% 22% 37% 48% 24% 28% Rest 6-10 Top 5 APE £bn


Margin management: Competitive advantage through capital strength, brand, market leading product range Margin management Aviva’s UK life market share more than doubled Aviva’s UK life market share % 5.2% 11.4% APE £bn


Operating in a low interest rate environment: Modelling techniques will optimise capital allocation and risk management Equities will become more attractive! High volume / low cost survivors Competitive positions of strongest insurers significantly enhanced Operating in a low interest rate environment ^ Thriv


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