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Delivery continues, but uncertainty reigns

Dissecting the dividend cut: In our view, Avivasdecision to cut thefinal dividend by 44% was fuelled by increased regulatory scrutiny.

Having successfully maintained the dividend at the interim, we find itdifficult to comprehend that management had not expected thedisposal programme to result in a significant reduction in shareholdersequity (hence the uplift to leverage ratios). While a material reductionin the internal leverage was not on managements agenda when therestructuring plans were laid out, we believe that pressure from theFSA has resulted in what is now a formalised 5.8bn loan and a planto repay 0.6bn over the next three years. Given our view thatleverage reduction will continue to take priority over shareholderreturns, 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 sensibleand achievable, utilising a combination of disposal proceeds andretained earnings. However, while this is ongoing, we expect dividendflows to shareholders to remain stifled, with the dividend yield onlyrising marginally out to 2015. At the same time, we see a number ofscenarios which could derail the process, with delivery reliant on abenign macro environment and a relatively accommodating regulator.

Fixing the leverage issue will go beyond 2015: Even assumingperfect delivery out to 2015, there is no guarantee that a 5.2bninternal loan is any more agreeable than the 5.8bn level. The currentplan has received no objections from the FSA, but by the timenegotiations come around again, UK insurance companies will be atthe behest of a new regulator. In our view, further leverage reductionlooks likely, but without any insight from management as to whathappens next, we expect uncertainty to reign.

Deep value, but near-term upside capped by uncertainty:Tradingat 5.7x 2015E earnings, we continue to see deep value within Avivasoperations. However, despite continued and considerablerestructuring progress, we expect near-term uncertainty on leverage tocap upside, putting the investment thesis on hold. Given the scale ofthe internal leverage, we believe that the only quick resolution comesin the form of a rights issue an option roundly dismissed bymanagement. We adjust our SoTP valuation to reflect this uncertainty

overhang, with our revised price target now offering 7% upside.

HoldRating system

Current price

GBp 328

Relative

Price target

GBp 35014/03/2013 London CloseMarket cap GBP 9,556mReuters AV.LBloomberg AV/ LN

Changes made in this noteRating Hold (Buy)Price target GBp 350 (470.00)

Chg 2013e 2014e 2015eold % old % old %

Netincome

1385 -4.5 1690 -6.4 - -

IFRS

EPS

48.44 -3.7 54.15 -0.4 - -

EV EPS 47.83 10.9 53.40 15.7 - -

DPS 26.00 -43.8 26.00 -41.0 - -Source: Berenberg Bank estimates

Share dataShares outstanding (m) 2,946Enterprise value (GBPm) -Daily trading volume 11,114,370

Performance dataHigh 52 weeks (GBp) 388Low 52 weeks (GBp) 255Relative performance to SXXP FTSE 1001 month -14.3 % -11.8 %3 months -15.6 % -20.7 %12 months -18.2 % -21.5 %

Business activities:Life insurance, non-life insurance andasset management.

Non-institutional shareholders:None

15 March 2013

Matthew PrestonAnalyst+44 20 3207 7913matthew.preston@berenberg.com

Trevor MossSpecialist Sales

+44 20 3207 7893revor.moss@berenberg.com

Y/E 31.12., GBPm 2011 2012 2013E 2014E 2015E

Net income 60 -3,050 1,322 1,581 1,732

Operating EPS (p) 53.8 39.1 46.6 53.9 57.5

Embedded value operating EPS (p) 64.0 27.3 53.0 61.8 66.3

Dividend per share (p) 26.0 19.0 14.6 15.3 16.1

Net asset value per share (p) 342 225 256 294 337

Embedded value per share (p) 347 369 396 434 487

Operating ROE (%) 19.2 11.4 20.7 21.1 19.5

Operating ROEV (%) 17.3 7.9 14.4 15.6 15.3

P/E (operating) 6.1 8.4 7.0 6.1 5.7

P/E (embedded value operating) 5.1 12.0 6.2 5.3 5.0

Dividend yield (%) 7.9 5.8 4.4 4.7 4.9

Price / net asset value (%) 96 146 128 112 97

Price / embedded value (%) 95 89 83 76 67

Source: Company data, Berenberg Bank

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Delivery continues, but uncertainty reigns

While Avivas management continues to make considerable strides in simplifyingand restructuring the disparate collection of operations it inherited from theprevious regime, the formalisation of the internal leverage agreements has thepotential to be a game-changer for shareholders. Chairman John McFarlane said atthe investor day on 5 July 2012 that the current restructuring would not materiallyreduce internal leverage within the group, with Avivas recent announcementtherefore representing somewhat of a change of tack.

Having pledged to try and maintain the dividend (and having achieved this aim atthe 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 cost-savings 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 easilyforeseeable outcome given the valuation multiples of similar businesses to those onAvivas disposal hit list. At the same time, we assume that management would havehad appropriate visibility as to the level of internal leverage and any pressinginternally driven need to address this.

In our view, unforeseen pressure from the FSA has resulted in a heightened focuson internal leverage. As a result, the internal leverage arrangement has now beenformalised, taking the form of a 5.8bn fully collateralised loan from AvivaInsurance Limited (AIL) to Aviva Group Holdings (AGH). Management(following consultation with the FSA) has committed to reducing this balance by600m (or 10%) over the next three years, seemingly partly funded by a scalingback of the external debt reduction plans and by the dividend cut. Reducinginternal as opposed to external leverage makes sense from the FSAs perspectivecash is repatriated into AIL, a subsidiary which also falls under FSA supervision, asopposed to being returned to the external debt holders.

During the Q&A following Avivas results, new CEO Mark Wilson said that hewas 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 planto 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 in2015 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 toany covenants attached to the new loan agreement and (if present) how they mayaffect existing shareholders.

Despite management plans to improve cash remittances, we have no certainty as towhether this improvement will ultimately flow through to shareholders while theinternal leverage overhang remains. Addressing this issue will take time and relies onrelatively benign macro conditions, with the only short-term option for resolutionbeing a rights issue an option which management has ruled out on numerousoccasions. Trading at just 5.7x 2015E earnings versus the sector on c.9x, wecontinue to see considerable long-term value in Aviva, but believe that the currentuncertainty means the near-term investment thesis remains on hold for now. As aresult, we downgrade our recommendation from Buy to Hold and reduce our pricetarget to 350p.

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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 thatAvivas 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 ona like-for-like basis). The underlying operating profit from the continuingbusinesses (excluding restructuring costs) amounted to 1,776m. This is equivalentto c.44p per share after tax in a year not yet benefiting from flow-through of thecost reductions. With 400m+ of cost savings set to emerge by 2014, this has thepotential 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 from130% at the end of 2011 to a much more robust 172%, approaching the upper endof managements target range (160-175%). A vast number of business units havebeen disposed of in a short timeframe and at reasonable values, including the USwhich many viewed as the albatross around Avivas neck. The plan to offset theloss of earnings through cost savings also appears to be progressing well, with arun rate at FY 2012 of 275m and the target now being for savings in excess of400m.

However, in our view, the dividend yield was a key attraction of the stock andrewarded investors for their patience while a restructuring was executed. Giveninitial investor scepticism on the restructuring, we would not be surprised if the44% dividend cut has dented investor confidence in managements ability to

deliver, especially following previous guidance that it would try to maintain thedividend. However, in our view, this restructuring continues at a pace and shouldnot be chalked up as another failed effort anytime soon.

That said, the additional disclosure provided at the full-year results highlighted thechallenge management has faced with regard to remitting capital up to group (inpart due to the wider eurozone issues) and therefore the increased reliance oninternal leverage. With the FSA now seemingly taking an increased interest inAvivas internal leverage position, this new disclosure has flagged up anothersizeable task in need of management attention.

Cash remittances on managements to-do list

While Avivas operational capital generation in recent years has broadly trendedpositively, cash remittances to group have not mirrored this. As shown in Figure 1,Avivas cash remittances to group only represented 37% and 48% of operationalcash generation for 2011 and 2012 respectively. In part this was due to pressures inthe eurozoneFrance, Spain, Italy and Ireland remitted nothing in 2011but alsoreflects relatively weak cash extraction from a wider number of business units. As aresult, Aviva increasingly relied on internal leverage from the UK GI business andasset disposals to fund the dividend at group. This was an unsustainable positionand one management is no longer willing to tolerate in the near term.

However, the step up in remittances for 2012 demonstrates that progress is alreadyin 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 beingnet remitters to group.

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

Source: Berenberg Bank, Company data

In addition, management has retrospectively announced a simplification of thecorporate structure which has been in place since 1 January 2013 (as shown inFigures 2 and 3). This has been designed to further streamline the group, with aview to aiding cash remittances and providing greater visibility.

Figure 2:Avivas old structurewas partly as aresult of historical acquisitions

Figure 3: The new structure is much cleaner andshould 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 mutedwith a CAGR of just 1% between 2012 and 2015. However, as a result of theongoing management actions, we expect remittances to grow at a 20% CAGR (seeFigures 4 and 5).

By the time we get to 2015, our forecasts suggest that cash remittances to groupshould amount to 75% of operational cash generation, significantly bolstering thecash available to fund interest and corporate costs, restructuring, internal andexternal leverage repayments, and ultimately dividends.

m unless stated

Cash

generation

Cash

remittance

%

remittance

Cash

generation

Cash

remittance

%

remittance

UK Life 551 200 36% 662 150 23%

UK GI 421 184 44% 341 150 44%

France 320 0 0% 330 202 61%

Canada 162 168 104% 190 136 72%

Poland 102 102 100% 124 70 56%

Spain 85 0 0% 78 68 87%

Singapore 6 33 550% 35 17 49%

Italy (56) 0 0% 75 0 0%

Ireland 34 0 0% 52 0 0%

Other 461 91 20% 72 151 210%

Total 2,086 778 37% 1,959 944 48%

2011 2012

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

Figure 5: ...but expect cash remittances to groupto 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 0.8bnin 2011 to 1.6bn in 2015 (see Figure 6). However, while this uplift to cashremittances is a positive, we expect only a limited amount to filter through toshareholders in the near term, with leverage reduction taking priority overshareholder returns.

Figure 6: Our forecasts show limited near-term shareholder upside, givenmanagements focus on repaying internal and external debt

Source: Berenberg Bank, Company data

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

m unless stated 2011 2012 2013E 2014E 2015E

Cash remittances 0.8 0.9 1.1 1.4 1.6

Debt costs (0.4) (0.4) (0.4) (0.4) (0.4)

Central costs (0.2) (0.3) (0.2) (0.1) (0.1)

Restructuring spend (0.3) (0.3) (0.2) (0.1) (0.1)

Repayment of internal leverage 0.0 0.0 (0.3) (0.2) (0.1)

Issuance / repayment of external debt 0.0 0.3 0.0 0.0 (0.5)

Cash surplus / deficit (pre-dividend) (0.0) 0.2 0.1 0.6 0.5

External dividend (fully costed basis) (0.7) (0.8) (0.4) (0.4) (0.5)

Scrip 0.3 0.1 0.0 0.0 0.0

Cash surplus / deficit (post-dividend) (0.5) (0.5) (0.3) 0.1 0.0

Opening central liquidity 1.5 1.5 1.4 3.1 3.2

Cash surplus / deficit (0.5) (0.5) (0.3) 0.1 0.0

Disposals 0.5 0.4 2.0 0.0 0.0

Closing central liquidity 1.5 1.4 3.1 3.2 3.2

Tangible IFRS equity 10.2 7.0 7.7 8.5 9.5

External debt 6.7 7.0 7.0 7.0 6.5

Internal leverage 4.8 5.8 5.5 5.3 5.2

External debt / total capital 40% 50% 48% 45% 40%

Internal debt / total capital 28% 41% 38% 34% 32%

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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 paydown internal and external debt. As such, management did not seemingly feelconfident in utilising the central liquidity buffer to support the previous 26pdividend in the short term. In addition, we believe that management may havebeen encouraged by the FSA to retain a higher level of central liquidity to providesome comfort over the internal and external leverage levels.

We expect Aviva to have a net cash generation surplus at group level (postdividends) from 2014, consistent with the messages from management. However,given the schedule of internal and external leverage reduction, we expect thecentral liquidity balance to remain broadly flat with any surplus cash being used tofund the repayments.

Based on our forecasts, we expect external leverage to fall from 50% at the end of2012 to 40% by the end of 2015, as a result of retiring 500m of debt and retainedearnings. This is in line with managements guidance and with the leveragereported 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 bythe 44% dividend cut.

Limited dividend prospects while leverage take priority

In recent years, Avivas dividend has been part funded from central liquidity, whichin turn has been bolstered by disposals such as the 0.5bn from the disposal ofthe 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 adividend of 14.6p per annum for 2013, with 5% growth per annum in 2014 and2015. As a result, the repayment of 500m of external debt coupled with theretained 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 largeramount in both 2014 and 2015 while still achieving a 40% external leverage ratio.However, based on our forecasts, such an action would likely require managementto dip into the central liquidity pot again the very scenario management hassought to avoid by cutting the dividend to 44%.

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Figure 7: We see limited scope for dividend growth without depletingcentral liquiditywe assume 5% dividend growth in 2014 and 2015

Source: Berenberg Bank estimates

Adverse macro developments could derail the plan

While our forecasts suggest thatAvivas management should be able to deliver anexternal 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, wewould expect overseas regulators to require Aviva to retain higher capital balancesin the subsidiaries, reducing (or potentially stopping) cash remittances to group

from those affected. This significant reduction in cash remittances could thereforeoblige management to utilise a higher proportion of the central liquidity to meetthe leverage reduction targets. At this point, there is the possibility that even therebased dividend could come under pressure, but clearly this would be a widersector issue and not just something affecting Aviva.

Secondly, risks to the IFRS equity from negative investment variances could hinderthe reduction in the external leverage ratio, requiring debt repayments above the500m currently assumed by 2015 to allow the 40% target to be met.

Finally, significant insurance events (such as extreme weather or a sizeable step-upin bodily injury claims and/or periodic payment orders) could pressure cashremittances. 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 besupportive of managements plans, with an ongoing improvement in the eurozonehaving the potential to lessen capital retention within certain subsidiaries. Suchevents 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 internalleverage reduction plan, it has provided no details as to events which would changethis view or what covenants (if any) are attached to the 5.8bn loan. Weunderstand 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 theinternal leverage plans. However, we note that this seems to leave scope for the

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regulator to change its view. As a result, we believe the following questions remainoutstanding.

1. Are there any covenants which either limit dividend payments or give AILcontrol of any cash flows up to AGH over and above those slated forrepayment over the next three years?

2. Are there any covenants which limit operational flexibility? For example, isthere a minimum level of fair value/market value of assets which must remainwithin AGH to provide sufficient collateral for the loan? Would managementbe able to dispose of significant AGH subsidiaries if suitable offers wereforthcoming?

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 UKGI 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 remainsresolutely towards a heavier-touch regime. While we believe this has been a keydriver of Avivas decision to reduce leverage, there are other examples across themarket which support our view that this is the beginning of a trend. Prudential forexample, in collaboration with the FSA, is now utilising a more cautiousmethodology when it comes to assessing its IGD position with regard to its USbusiness (resulting in a step down in its IGD surplus). A similar measure couldhave also been applied to Avivas US business had it not been disposed of, whichin our view would have likely negatively affectedAvivas 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 bluntapproach from regulators when it comes to scrutiny for all financial servicescompanies. We believe the need to retain increasing amounts of capital and tocontinue to de-risk financial services business models is a trend which will remainprominent 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 to40% 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 calculatedthe industry average to be c.37%. There is seemingly no imminent need to scaleback external leverage further, as manifested by i) managements lessening of thenear-term repayment plans (originally 700m of external debt was slated forretiring versus the 500m now planned); and ii) the narrowing of Avivas creditspreads 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 afurther 1.3bn of earnings to be retained or, more likely, a combination of thetwo.

The internal leverage represents more of a conundrum, given that it is difficult tobenchmark versus peers, especially given the unknown regulatory element. Whilemanagement has provided no further detail on what happens to the external

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leverage after it reaches 5.2bn, given that this would only represent a c.10% fallfrom 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 includingAviva will be regulated by a new entity from 1 April 2013. The current FSA regimeis to be replaced by three new regulators the Prudential Regulation Authority(PRA); the Financial Conduct Authority (FCA); and the Financial PolicyCommittee with the PRA set to be the key regulatory body for the insurancecompanies. The Financial Services Act 2012 will also result in the new regulatoryregime having additional powers versus those vested in the FSA. As a result, thesepowers result in the potential for a more rigorous and intrusive regulatory regimethan the one currently in existence.The question is, what does this mean for Aviva in 2015? While the existingleverage reduction plan has seemingly been met with approval and support fromthe FSA, the change in regulator adds uncertainty on how the external leverage willbe viewed in three yearstime.

Ultimate fix may require a rights issue

Despite our view that managements plan as far out as 2015 makes sense and isachievable, there are numerous obstacles which need to be avoided and hurdles tobe jumped for execution to be successful. While some of these are withinmanagements control, the reliance on a benign macro environment and anaccommodating regulatory regime means that the need to resort to a rights issuecannot be disregarded. While having been explicitly ruled out by management on a

number of occasions, such an action arguably represents the cleanest and quickestway to fix the leverage issue. Management would then have the ability to pay a wellsupported and rapidly growing dividend, while also having the operationalflexibility to invest in the pockets of growth which remain within Avivas portfolioof businesses.

Even assuming Aviva manages perfect execution through to 2015, the lack ofclarity as to whether this is a steady-state means that the leverage overhang doesnot go away at that point either. Assuming the business is fully restored by then, at5.2bn the internal leverage remains sizeable and, at 40%, external debt high.However, it is not unthinkable that shareholders could be willing to support arights 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 re-rating 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 ofclarity on leverage persists. Given this predicament, it is interesting to considerwhat 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 thepotential for further future reductions beyond 2015), we believe c.3bn would besufficient. This would instantaneously reduce the external leverage to 40%, whileenabling 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, todaysshare price suggests that there is considerable deep value within Aviva. While we

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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 fordelivery on its targets, we believe progress on the restructuring so far suggests thatthis may not be overly optimistic.

Figure 8: Our 2015 forecasts imply a 5 valuation, assuming no overhang

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, orc.100p, capital raise would be sufficient to remove the uncertainty). However, forthis to apply, investors must believe in delivery and be willing to support a rightsissue if necessary. In a sector which remains driven by dividends, as shown by thedisparate performance of the UK and European insurance companies that havereported so far, it is perhaps not unsurprising that Avivas share price is where it is.

Uncertainty clouds near-term valuationdowngrading to Hold

We remain convinced that deep value exists within the Aviva business.Managements focus on a cash-plus-growth strategy is sensible given Avivasmature operational footprint, and sees the company treading a similar path to theone Legal & General embarked upon a number of years ago. However, given thelack of visibility as to the net recipient of this cash strategy out to 2015 andbeyond, we see better near-term opportunities elsewhere.

While we make limited changes to our earnings numbers, we adjust our valuationmethodology to include an uncertainty discount which is intended to reflect theleverage 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 arelatively unscientific adjustment, as discussed earlier this is the quantum of rightsissue we believe would address a large number of the remaining questions onleverage. As a result, we cut our price target to 350p.

2015E

(GBp unless stated) 2015E

Assumed

multiple

Implied

value (p)

EPS 57.5 9x 517

Assumed DPS at 45% payout ratio 25.9 5.0% 517

IFRS shareholders' equity (ex.goodwill) 337 1.5x 506

RoE 20%

MCEV shareholders' equity (ex.goodwill) 487 1.0x 487RoEV 15%

Blended implied valuation 507

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Figure 9: We adjust our valuation to reflect the uncertainty we see for equity holders

Source: Berenberg Bank estimates

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

Source: Berenberg Bank estimates, Company data

Aviva Sum-of-the-parts

EURm 2013e 2014e EVE 2014e return Comment SoTP Per share (GBp)Life 15,068 1,589 10.5% 11% sust ROEV, 1.0x EV 14,442 490

Non-life 5,897 769 13.0% 10x 2013e PER, 1.3x NAV 7,689 261

Other (3,954) (66) 1.7% 10x PER corp costs, 12x PER asset mgmt (1,267) (43)

EV plus debt 17,011 2,292 13.5% 20,864 708

Debt (5,339) (471) Face value (5,339) (181)

EV 11,672 1,821 15,525 527

Life agency costs Life agency costs @10% (1,444) (49)

Adjusted EV Sum-of-the-parts 14,081 478

Uncertainty adjustment (3,644) (124)

2013e fair value 10,437 354

IFRS P&L (GBPm) 2009 2010 2011 2012 2013E 2014E 2015E

Long term business operating profit 1,887 1,988 2,123 2,031 1,840 1,941 2,035

Fund management 133 201 99 106 90 97 101

General Insurance and Health 960 1,050 935 893 970 1,028 1,053

Other operations and regional costs -214 -177 -207 -208 -150 -75 -75

Corporate centre -108 -143 -138 -136 -93 -73 -73

Group debt costs and other interest -636 -644 -657 -671 -589 -570 -560

DeltaLloyd - discontinued Operation 277 330 191 0 0 0 0

Share of Delta Lloyd as associate 0 0 157 112 0 0 0

Operating profit before tax 2,022 2,605 2,503 2,127 2,068 2,348 2,481

Economic variances and assumpt chgs (Life) -75 791 -1,616 -278 0 0 0

Short term fluctuations (non-life) 95 -243 -326 7 0 0 0

Economic assumption changes (non-life) 57 -61 -90 -21 0 0 0Impairment of goodwill -62 -24 -392 -842 0 0 0

Amortisation and impairment of intangibles -144 -216 -176 -257 -128 -128 -128

Profit on disposals 153 159 533 -2,523 0 0 0

Integration and restructuring costs -286 -243 -268 -468 -150 -100 -50

Exceptional items 45 -273 -57 0 0 0 0

Profit before tax 1,805 2,495 87 -2,671 1,790 2,120 2,303

Tax on operating profit -547 -625 -650 -543 -507 -564 -583

Tax on other activities 57 77 623 164 39 25 13

Net Profit 1,315 1,947 60 -3,050 1,322 1,581 1,732

Operating profit 2,022 2,661 2,273 1,888 2,068 2,348 2,481

Tax on operating profit -547 -625 -625 -493 -507 -564 -583

Minorities -193 -332 -150 -184 -115 -124 -133

Preference dividend -17 -17 -17 -17 -17 -17 -17

DCI coupons -44 -42 -43 -55 -55 -55 -55

Operating profit for shareholders 1,221 1,864 1,531 1,139 1,374 1,589 1,693

Operating EPS 45.1 65.8 53.8 39.1 46.6 53.9 57.5

Net income EPS 37.8 61.3 9.1 -113.1 42.9 51.4 56.2

Interim dividend 9.0 9.5 10.0 10.0 5.6 5.9 6.2

Final dividend 15.0 16.0 16.0 9.0 9.0 9.5 9.9

Total Dividend per share 24.0 25.5 26.0 19.0 14.6 15.3 16.1

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Please note that the use of this research report is subject to the conditions and restrictions set forth in theGeneral investment-related disclosuresand the Legal disclaimerat the end of this document.

For analyst certification and remarks regarding foreign investors and country-specific disclosures, pleaserefer to the respective paragraph at the end of this document.

Disclosures in respect of section 34b of the German Securities Trading Act(WertpapierhandelsgesetzWpHG)

Company Disclosures

Aviva plc no disclosures

(1) Berenberg Bank or its affiliate(s) was Lead Manager or Co-Lead Manager over the previous 12 months of apublic offering of this company.

(2) Berenberg Bank acts as Designated Sponsor for this company.(3) 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 companyfor investment banking services.

(4) Berenberg Bank and/or its affiliate(s) holds 5% or more of the share capital of this company.(5) Berenberg Bank holds a trading position in shares of this company.(6) 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 Price target - GBp Rating Initiation of coverage26 April 12 575.00 Hold 19 July 1031 July 12 480.00 Buy23 January 13 470.00 Buy15 March 13 350.00 Hold

Berenberg distribution of ratings and in proportion to investment banking services

Buy 44.96 % 65.52 %Sell 17.54 % 6.90 %Hold 37.50 % 27.59 %

Valuation basis/rating key

The recommendations for companies analysed by Berenberg Banks equity research department are either made on anabsolute basis (absolute rating system) or relative to the sector (relative rating system), which is clearly stated inthe financial analysis. For both absolute and relative rating system, the three-step rating key Buy, Hold and Sellis 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 asdescribed on our website may be breached temporarily.

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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 disclosuresJoh. Berenberg, Gossler & Co. KG (Berenberg Bank) has made every effort to carefully research all informationcontained in this financial analysis. The information on which the financial analysis is based has been obtained fromsources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevantspecialised 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 isnecessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in theresearch note.

Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on thisdocument. The companies analysed by Berenberg Bank are divided into two groups: those under full coverage(regular updates provided); and those under screening coverage (updatesprovided as and when required at irregularintervals).

The functional job title of the person/s responsible for the recommendations contained in this report is EquityResearch 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 disclaimerThis 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 forhimself/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 withtheir customer service officer as differing views and opinions may exist with regard to the stocks referred to in thisdocument.

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 marketand company development. These reflect assumptions, which may turn out to be incorrect. Berenberg Bank and/or itsemployees accept no liability whatsoever for any direct or consequential loss or damages of any kind arising out of theuse 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 anysecurities mentioned in this document, derivatives thereon or related financial products or seek to perform capitalmarket or underwriting services.

Analyst certificationI, Matthew Preston, hereby certify that all of the views expressed in this report accurately reflect my personal viewsabout 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 thespecific recommendations or views expressed in this research report, nor is it tied to any specific investmentbanking transaction performed by Berenberg Bank or its affiliates.

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Remarks regarding foreign investorsThe 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 informthemselves about, and observe, any such restrictions.

United KingdomThis 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 AmericaThis document has been prepared exclusively by Berenberg Bank. Although Berenberg Capital Markets LLC, anaffiliate of Berenberg Bank and registered US broker-dealer, distributes this document to certain customers, BerenbergCapital Markets LLC does not provide input into its contents, nor does this document constitute research ofBerenberg Capital Markets LLC. In addition, this document is meant exclusively for institutional investors and marketprofessionals, but not for private customers. It is not for distribution to or the use of private investors or privatecustomers.

This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital MarketsLLC (+1 617.292.8200), if you require additional information.

Third-party research disclosures

Company Disclosures

Aviva plc no disclosures

(1) Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subjectcompany by the end of the prior month.*

(2) Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public

offering for the subject company.*(3) Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report.(4) 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.*(5) 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 ofsection 34b of the German Securities Trading Act (WertpapierhandelsgesetzWpHG) section above.

CopyrightBerenberg 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 writtenconsent.

June 2012 Berenberg Bank