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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Aviva Plc | LSE:AV. | London | Ordinary Share | GB00BPQY8M80 | ORD 32 17/19P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 3.60 | 0.77% | 472.00 | 472.10 | 472.30 | 474.50 | 468.60 | 470.00 | 3,223,825 | 16:35:01 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Insurance Carriers, Nec | 41.43B | 1.09B | 0.3962 | 11.92 | 12.93B |
From May 2019 to May 2024
TIDMAV.
RNS Number : 9292Y
Aviva PLC
08 March 2012
Part 5 of 5
Page 153
MCEV Supplement
In this section Page Condensed consolidated income statement 154 Earnings per share 155 Condensed consolidated statement of comprehensive income 156 Condensed consolidated statement of changes in equity 156 Condensed consolidated statement of financial position 157 Reconciliation of shareholders' equity on IFRS and MCEV bases 158 Reconciliation of IFRS total equity to MCEV net worth 158 Group MCEV analysis of earnings 159 E1 - Basis of preparation 160 E2 - Geographical analysis of life MCEV operating earnings 164 E3 - Geographical analysis of fund management operating earnings 170 E4 - Analysis of other operations and regional costs 170 E5 - Exceptional items and integration and restructuring costs 170 E6 - Segmentation of condensed consolidated statement of financial position 171 E7 - Analysis of life and pension earnings 172 E8 - Life MCEV operating earnings 173 E9 - Present value of life new business premiums 174 E10 - Geographical analysis of value of new business 175 E11 - Post tax internal rate of return and payback period on life and pensions new business 176 E12 - Free surplus emergence 177 E13 - Maturity profile of business 177 E14 - Segmental analysis of life and related business embedded value 178 E15 - Risk allowance within present value of in-force (VIF) 179 E16 - Implied discount rates (IDR) 180 E17 - Summary of non-controlling interest in life and related businesses' MCEV results 181 E18 - Principal assumptions 182 E19 - Sensitivity analysis 187
Page 154
Condensed consolidated income statement - MCEV basis
For the year ended 31 December 2011
Hot Features
Premium
Restated
2011 2010
GBPm GBPm
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
Operating profit before tax attributable
to shareholders' profits
United Kingdom 1,193 - 1,193 1,085 - 1,085
Europe 1,617 270 1,887 2,013 83 2,096
North America 241 - 241 289 - 289
Asia Pacific 78 - 78 109 - 109
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
Long-term business 3,129 270 3,399 3,496 83 3,579
General insurance and health 935 1 936 904 146 1,050
Fund management(1) 32 9 41 31 94 125
Other operations and regional costs(2) (204) 7 (197) (171) (24) (195)
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
Regional Operating Profit 3,892 287 4,179 4,260 299 4,559
Corporate centre (138) - (138) (143) - (143)
Group debt costs and other interest (657) (4) (661) (644) (12) (656)
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
Operating profit before tax attributable
to shareholders'
profits (excluding Delta Lloyd as an
associate) 3,097 283 3,380 3,473 287 3,760
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
Share of operating profit (before tax) of
Delta Lloyd as
an associate 157 - 157 - - -
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
Operating profit before tax attributable
to
shareholders' profits 3,254 283 3,537 3,473 287 3,760
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
Adjusted for the following:
Economic variances on long-term business (6,541) (316) (6,857) (450) (71) (521)
Short-term fluctuation in return on
investments
on non-long
term business (266) (60) (326) (199) (44) (243)
Economic assumption changes on general
insurance
and
health business (90) - (90) (61) - (61)
Impairment of goodwill (392) - (392) (23) (1) (24)
Amortisation and impairment of intangibles (266) (5) (271) (173) (14) (187)
Profit on the disposal of subsidiaries and
associates 565 159 724 163 (4) 159
Integration and restructuring costs (212) - (212) (294) (18) (312)
Exceptional items (57) - (57) (303) (125) (428)
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
Non-operating items before tax (excluding
Delta Lloyd
as an associate) (7,259) (222) (7,481) (1,340) (277) (1,617)
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
Share of Delta Lloyd's non-operating items
(before tax) as
an associate 10 - 10 - - -
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
Non-operating items before tax (7,249) (222) (7,471) (1,340) (277) (1,617)
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
Share of Delta Lloyd's tax expense, as an
associate (34) - (34) - - -
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
(Loss)/profit before tax attributable to
shareholders profits (4,029) 61 (3,968) 2,133 10 2,143
----------- ------------ ------- ----------- ------------ ---------
Tax on operating profit (974) (74) (1,048) (1,044) (79) (1,123)
Tax on other activities 2,217 98 2,315 372 82 454
----------- ------------ ------- ----------- ------------ ---------
1,243 24 1,267 (672) 3 (669)
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
(Loss)/profit for the year (2,786) 85 (2,701) 1,461 13 1,474
-------------------------------------------- ----------- ------------ ------- ----------- ------------ ---------
1 Excludes the proportion of the results of Aviva Investors fund management businesses and other fund management operations within the Group that arises from the provision of fund management services to our life businesses. These results are included within the life MCEV operating earnings consistent with the MCEV methodology.
2 Excludes the proportion of the results of subsidiaries providing services to the Life business. These results are included within the life MCEV operating earnings consistent with the MCEV methodology.
Page 155
Earnings per share - MCEV basis
Restated
Earnings per share 2011 2010
---------------------------------------- ---------------------------------- --------------------------------
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
---------------------------------------- ----------- ------------ ------- ----------- ------------ -----
Operating earnings per share on an MCEV
basis
after tax, attributable to ordinary
shareholders
of Aviva plc
Basic (pence per share) 71.3p 3.8p 75.1p 74.5p 2.8p 77.3p
Diluted (pence per share) 70.0p 3.8p 73.8p 73.2p 2.8p 76.0p
---------------------------------------- ----------- ------------ ------- ----------- ------------ -----
Earnings after tax on an MCEV basis,
attributable to
ordinary shareholders of Aviva plc
Basic (pence per share) (67.3p) 4.0p (63.3p) 48.4p 1.0p 49.4p
Diluted (pence per share) (67.3p) 3.9p (63.3p) 47.6p 1.0p 48.6p
---------------------------------------- ----------- ------------ ------- ----------- ------------ -----
The effect of future share awards and options in the loss from continuing operations and total is anti-dilutive, therefore the diluted earnings per share has been maintained at (67.3) pence and (63.3) pence respectively.
Total MCEV operating profit before shareholder tax was GBP3,537 million (2010: GBP3,760 million), a decrease of 6%. Within this total the long-term business operating profit before shareholder tax was GBP3,399 million (2010: GBP3,579 million), a decrease of 5%.
Page 156
Condensed consolidated statement of comprehensive income - MCEV basis
For the year ended 31 December 2011
Restated
2011 2010
GBPm GBPm
------------------------------------------------------- ------- --------
(Loss)/profit for the year from continuing operations (2,786) 1,461
Profit for the year from discontinued operations 85 13
------------------------------------------------------- ------- --------
(Loss)/profit from the period (2,701) 1,474
Other comprehensive income from continuing operations
Fair value losses on AFS securities, owner-occupied
properties and hedging instruments (9) -
Actuarial gains on pension schemes 996 1,078
Actuarial losses on pension schemes transferred to
unallocated divisible surplus and other movements (22) (18)
Share of other comprehensive income of joint ventures
and associates (141) -
Foreign exchange rate movements (461) (57)
Aggregate tax effect - shareholder tax (160) 37
------------------------------------------------------- ------- --------
Other comprehensive income, net of tax from continuing
operations 203 1,040
Other comprehensive income/(expense), net of tax from
discontinued operations 131 (198)
------------------------------------------------------- ------- --------
Other comprehensive income, net of tax 334 842
Total comprehensive (expense)/income for the year from
continuing operations (2,583) 2,501
Total comprehensive income/(expense) for the year from
discontinued operations 216 (185)
------------------------------------------------------- ------- --------
Total comprehensive (expense)/income for the year (2,367) 2,316
Attributable to:
Equity shareholders of Aviva plc (1,419) 2,445
Non-controlling interests (948) (129)
(2,367) 2,316
------------------------------------------------------- ------- --------
Condensed consolidated statement of changes in equity - MCEV basis
For the year ended 31 December 2011
Restated
2011 2010
GBPm GBPm
------------------------------------------------------------------- ------- --------
Balance at 1 January 20,205 18,573
Total comprehensive (expense)/income for the year (2,367) 2,316
Dividends and appropriations (813) (757)
Shares issued in lieu of dividends 307 209
Capital contributions from minority shareholders 68 42
Movements in ordinary shareholder equity following deconsolidation
of Delta Lloyd (316) -
Movements in non-controlling interests following deconsolidation
of Delta Lloyd (1,484) -
Minority share of dividends declared in the year (126) (187)
Recycling of reserves to income statement on disposal of
subsidiary (3) -
Non-controlling interest in acquired subsidiaries - 3
Changes in non-controlling interest in existing subsidiaries (11) (38)
Shares acquired by employee trusts (29) (14)
Reserves credit for equity compensation plans 48 41
Aggregate tax effect - shareholder tax 16 17
Total equity 15,495 20,205
Non-controlling interests (1,476) (3,977)
Balance at 31 December 14,019 16,228
------------------------------------------------------------------- ------- --------
Page 157
Condensed consolidated statement of financial position - MCEV basis
As at 31 December 2011
Restated
2011 2010
GBPm GBPm
--------------------------------------------------- ------- --------
Assets
Goodwill 2,640 3,391
Acquired value of in-force business and intangible
assets 2,021 2,806
Additional value of in-force long-term business(1) 132 2,480
Interests in, and loans to, joint ventures 1,700 1,994
Interests in, and loans to, associates 1,118 643
Property and equipment 510 750
Investment property 11,638 13,064
Loans 28,116 43,074
Financial investments 216,058 253,288
Reinsurance assets 7,112 7,084
Deferred tax assets 238 288
Current tax assets 140 198
Receivables 7,937 8,295
Deferred acquisition costs and other assets 6,444 6,072
Prepayments and accrued income 3,235 3,691
Cash and cash equivalents 23,043 25,455
Assets of operations classified as held for
sale 426 14
--------------------------------------------------- ------- --------
Total assets 312,508 372,587
--------------------------------------------------- ------- --------
Equity
Ordinary share capital 726 705
Capital reserves 4,444 4,465
Other reserves 1,262 2,069
Shares held by employee trusts (43) (32)
Retained earnings 5,954 5,411
Additional retained earnings on an MCEV basis(1) 486 2,420
Equity attributable to ordinary shareholders
of Aviva plc 12,829 15,038
Preference share capital and direct capital
instruments 1,190 1,190
Non-controlling interests(1) 1,476 3,977
Total equity 15,495 20,205
Liabilities
Gross insurance liabilities 150,101 177,700
Gross liabilities for investment contracts 110,644 117,787
Unallocated divisible surplus 650 3,428
Net asset value attributable to unit holders 10,352 9,032
Provisions 992 2,943
Deferred tax liabilities 1,171 1,758
Current tax liabilities 232 314
Borrowings 8,450 14,949
Payables and other financial liabilities 11,230 20,292
Other liabilities 2,828 4,179
Liabilities of operations classified as held
for sale 363 -
Total liabilities 297,013 352,382
Total equity and liabilities 312,508 372,587
--------------------------------------------------- ------- --------
The summarised consolidated statement of financial position presented above is unaltered from the corresponding IFRS summarised consolidated statement of financial position with the exception of the following:
1 Adding the excess of the Life MCEV, including non-controlling interests, over the corresponding Life IFRS net assets represented as the additional value of in-force long-term business; corresponding item within equity represented by the additional retained profit on an MCEV basis; and, corresponding adjustments to non-controlling interests.
Page 158
Reconciliation of shareholders' equity on IFRS and MCEV bases
For the year ended 31 December 2011
2011 IFRS Adjustment MCEV
GBPm GBPm GBPm GBPm
------------------------------------------------------ ------ ---------- ------
Ordinary share capital 726 - 726
Capital reserves 4,444 - 4,444
Other reserves 1,562 (300) 1,262
Shares held by employee trusts (43) - (43)
Retained earnings 5,954 - 5,954
Additional retained earnings on an MCEV basis - 486 486
------------------------------------------------------ ------ ---------- ------
Equity attributable to ordinary shareholders of Aviva
plc 12,643 186 12,829
Preference share capital 200 - 200
Direct capital instruments 990 - 990
Non-controlling interests 1,530 (54) 1,476
Total equity 15,363 132 15,495
------------------------------------------------------ ------ ---------- ------
Restated
2010 IFRS Adjustment MCEV
GBPm GBPm GBPm GBPm
------------------------------------------------------ ------ ---------- --------
Ordinary share capital 705 - 705
Capital reserves 4,465 - 4,465
Other reserves 2,245 (176) 2,069
Shares held by employee trusts (32) - (32)
Retained earnings 5,411 - 5,411
Additional retained earnings on an MCEV basis - 2,420 2,420
Equity attributable to ordinary shareholders of Aviva
plc 12,794 2,244 15,038
Preference share capital 200 - 200
Direct capital instruments 990 - 990
Non-controlling interests 3,741 236 3,977
Total equity 17,725 2,480 20,205
------------------------------------------------------ ------ ---------- --------
Reconciliation of IFRS total equity to MCEV net worth
For the year ended 31 December 2011
Restated
2011 2010
GBPm GBPm
----------------------------------------------------------- ------- --------
Net assets on a statutory IFRS net basis 15,363 17,725
Adjusting for general business and other net assets on a
statutory IFRS net basis 301 1,331
Life and related businesses net assets on a statutory IFRS
net basis 15,664 19,056
Goodwill and other intangibles (2,117) (2,356)
Acquired value of in-force business (960) (1,447)
Adjustment for share of joint ventures and associates (7) (120)
Adjustment for assets to regulatory value net of tax (1,880) (890)
Adjustment for DAC and DIR net of tax (2,622) (2,839)
Adjustment for differences in technical provisions 2,904 1,303
Other accounting and tax differences (507) (505)
MCEV net worth 10,475 12,202
MCEV value of in-force(1) 2,619 6,805
MCEV(2) 13,094 19,007
----------------------------------------------------------- ------- --------
1 Comprises PVFP of GBP5,847 million (31 December 2010: GBP9,952 million), FC of GBP(642) million (31 December 2010: GBP(884) million), CNHR of GBP(1,046) million (31 December 2010: GBP(1,070) million), and TVOG of GBP(1,540) million (31 December 2010: GBP(1,193) million).
2 Comprises embedded value of GBP12,274 million (31 December 2010: GBP15,874 million) and non-controlling interest in long-term business assets of GBP820 million (31 December 2010: GBP3,133 million).
Movements in the reconciling items during the period arise mainly from the deconsolidation of Delta Lloyd on 6(th) May and consequent removal of Delta Lloyd life business from covered business.
The adjustment for assets to regulatory value and differences in technical provisions relates mainly to the US, reflecting differences between the IFRS and local solvency reserving basis. The DAC and DIR adjustment relates mainly to the UK and US.
Page 159
Group MCEV analysis of earnings
Non-covered
but
related
to Total Non-covered Total
Covered life life relating non-covered
business(1) business(2) business(3) to non-life business Total
2011 GBPm GBPm GBPm GBPm GBPm GBPm
GBPm A B A+B C B+C A+B+C
--------------------------------------- ------------ ------------ ------------ ------------ ------------ -------
Opening group MCEV 15,874 2,339 18,213 (1,985) 354 16,228
Operating MCEV earnings 2,193 - 2,193 4 4 2,197
Non-operating MCEV earnings (3,530) (218) (3,748) (189) (407) (3,937)
Total MCEV earnings (1,337) (218) (1,555) (185) (403) (1,740)
Other movements in IFRS net equity - 412 412 270 682 682
Capital and dividend flows (493) - (493) (297) (297) (790)
Foreign exchange variances (251) (30) (281) (80) (110) (361)
Acquired/divested businesses (1,519) 30 (1,489) 1,489 1,519 -
Closing group MCEV 12,274 2,533 14,807 (788) 1,745 14,019
Preference share capital and direct
capital
instruments (1,190)
Equity attributable to ordinary
shareholders
of Aviva plc on an MCEV basis 12,829
--------------------------------------- ------------ ------------ ------------ ------------ ------------ -------
1 Covered business represents the business that the MCEV calculations cover, as detailed in the Basis of preparation note. The embedded value is presented net of non-controlling interests and tax.
2 Non-covered but related to life business represents the adjustments to the MCEV, including goodwill, to calculate the long-term business net assets on an MCEV basis. An analysis of net assets on an MCEV basis gross of non-controlling interests is provided in E6.
3 Net assets for the total life businesses on an MCEV basis presented net of non-controlling interests.
Non-covered
but
related Non-covered
to Total relating Total
Covered life life to non-covered
Restated business(1) business(2) business(3) non-life business Total
2010 GBPm GBPm GBPm GBPm GBPm GBPm
GBPm A B A+B C B+C A+B+C
---------------------------------------- ------------ ------------ ------------ ----------- ------------ -------
Opening group MCEV 15,070 2,055 17,125 (2,831) (776) 14,294
Operating MCEV earnings 2,199 - 2,199 12 12 2,211
Non-operating MCEV earnings (633) (63) (696) (79) (142) (775)
Total MCEV earnings 1,566 (63) 1,503 (67) (130) 1,436
Other movements in IFRS net equity - 525 525 536 1,061 1,061
Capital and dividend flows (1,020) - (1,020) 509 509 (511)
Foreign exchange variances (167) 2 (165) 113 115 (52)
Acquired/divested businesses 425 (180) 245 (245) (425) -
Closing group MCEV 15,874 2,339 18,213 (1,985) 354 16,228
Preference share capital and direct
capital
instruments (1,190)
Equity attributable to ordinary
shareholders
of Aviva plc on an MCEV basis 15,038
---------------------------------------- ------------ ------------ ------------ ----------- ------------ -------
Page 160
E1 - Basis of preparation
The condensed consolidated income statement and condensed consolidated statement of financial position on pages 156 to 157 present the Group's results and financial position for the life and related businesses on the Market Consistent Embedded Value (MCEV) basis and for its non-covered businesses on the International Financial Reporting Standards (IFRS) basis. The MCEV methodology adopted is in accordance with the MCEV Principles published by the CFO Forum in October 2009.
The directors consider that the MCEV methodology gives useful insight into the drivers of financial performance of the Group's life and related businesses. This basis values future cash flows from assets consistently with market prices, including more explicit allowance for the impact of uncertainty in future investment returns and other risks. Embedded value is also consistent with the way pricing is assessed and the business is managed.
The results for 2011 and 2010 have been audited by our auditors, Ernst & Young LLP. Their report in respect of 2011 can be found on page 360 in the Report and Accounts.
Covered business
The MCEV calculations cover the following lines of business: life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of certain life and related business written in our associated undertakings and joint ventures, as well as the equity release business written in the UK.
Covered business includes the Group's share of our joint ventures including our associated undertakings in India, China, Turkey, Malaysia, Taiwan and South Korea. In addition, the results of group companies providing significant administration, fund management and other services and of Group holding companies have been included to the extent that they relate to covered business. Together these businesses are referred to as 'Life and related businesses'.
Aviva's associate holding of Delta Lloyd is not included within covered business as MCEV is not used to manage Delta Lloyd. For 'Group' MCEV reporting, which includes general insurance and other non-covered business, Delta Lloyd is included on an IFRS basis.
New business premiums
New business premiums include:
n premiums arising from the sale of new contracts during the period;
n non-contractual additional premiums; and
n expected renewals on new contracts and expected future contractual alterations to new contracts.
The Group's definition of new business under MCEV includes contracts that meet the definition of 'non-participating investment' contracts under IFRS.
For products sold to individuals, premiums are considered to represent new business where a new contract has been signed, or where underwriting has been performed. Renewal premiums include contractual renewals, non-contractual variations that are reasonably predictable and recurrent single premiums that are pre-defined and reasonably predictable.
For Group products, new business includes new contracts and increases to aggregate premiums under existing contracts. Renewal premiums are based on the level of premium received during the reporting period and allow for premiums expected to be received beyond the expiry of any guaranteed premium rates.
Life and pensions operating earnings
For life and pensions operating earnings, Aviva uses normalised investment returns. The use of asset risk premia reflects management's long-term expectations of asset returns in excess of the swap yield from investing in different asset classes.
The normalised investment return on equities and property has been calculated by reference to the ten year swap rate in the relevant currency plus an appropriate risk premium. The expected return on bonds has been calculated by reference to the swap rate consistent with the duration of the backing assets in the relevant currency plus an appropriate risk margin (expected return is equivalent to the gross redemption yield less an allowance for defaults).
The expected existing business contribution (in excess of reference rate) is calculated using the implied discount rate (IDR), which itself is based on the normalised investment returns. The methodology applies the IDR to the Value of In Force (VIF) and Required Capital (RC) components of the MCEV and adds to this the total expected return for Free Surplus (FS) to derive the total expected return, in a manner consistent with that previously used under European Embedded Value reporting. This total is presented as the expected existing business contribution (reference rate), expected existing business contribution (in excess of reference rate) and expected return on shareholders' net worth (grossed up for tax for pre-tax presentation), with only the excess contribution being impacted by the change. The change to expected returns has no impact on total return or on the closing balance sheet.
Page 161
E1 - Basis of preparation continued
MCEV methodology
Overview
Under the MCEV methodology, profit is recognised as it is earned over the life of products defined within covered business. The total profit recognised over the lifetime of a policy is the same as under the IFRS basis of reporting, but the timing of recognition is different.
Calculation of the embedded value
The shareholders' interest in the life and related businesses is represented by the embedded value. The embedded value is the total of the net worth of the life and related businesses and the value of in-force covered business. Calculations are performed separately for each business and are based on the cash flows of that business, after allowing for both external and intra-group reinsurance. Where one life business has an interest in another, the net worth of that business excludes the interest in the dependent company.
The embedded value is calculated on an after-tax basis applying current legislation and practice together with future known changes. Where gross results are presented, these have been calculated by grossing up post-tax results at the full rate of corporation tax for each country based on opening period tax rates, apart from the UK, where a 26% tax rate was used for 2011 for grossing up.
Net worth
The net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in the non-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets, and consists of the required capital and free surplus.
Required capital is the market value of assets attributed to the covered business over and above that required to back liabilities for covered business, for which distribution to shareholders is restricted. Required capital is reported net of implicit items permitted on a local regulatory basis to cover minimum solvency margins which are assessed at a local entity level. The level of required capital for each business unit is generally set equal to the higher of:
n The level of capital at which the local regulator is empowered to take action;
n The capital requirement of the business unit under the Group's economic capital requirements; and
n The target capital level of the business unit.
For Aviva US, the required capital is set at 325% of the NAIC Company Action Level in line with management targets and target credit ratings.
This methodology reflects the level of capital considered by the directors to be appropriate to manage the business, and includes any additional shareholder funds not available for distribution, such as the reattributed inherited estate in the UK. The same definition of required capital is used for both existing and new business.
The free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business at the valuation date. The level of required capital across the business units expressed as a percentage of the EU minimum solvency margin (or equivalent) can be found in E14.
Value of in-force covered business (VIF)
The value of in-force covered business consists of the following components:
n present value of future profits;
n time value of financial options and guarantees;
n frictional costs of required capital; and
n cost of residual non-hedgeable risks.
Present value of future profits (PVFP)
The PVFP is the present value of the distributable profits to shareholders arising from the in-force covered business projected on a best estimate basis.
Distributable profits generally arise when they are released following actuarial valuations. These valuations are carried out in accordance with any local statutory requirements designed to ensure and demonstrate solvency in long-term business funds. Future distributable profits will depend on experience in a number of areas such as investment return, discontinuance rates, mortality, administration costs, as well as management and policyholder actions. Releases to shareholders arising in future years from the in-force covered business and associated required capital can be projected using assumptions of future experience.
Future profits are projected using best estimate non-economic assumptions and market consistent economic assumptions. In principle, each cash flow is discounted at a rate that appropriately reflects the riskiness of that cash flow, so higher risk cash flows are discounted at higher rates. In practice, the PVFP is calculated using the 'certainty equivalent' approach, under which the reference rate is used for both the investment return and the discount rate. This approach ensures that asset cash flows are valued consistently with the market prices of assets without options and guarantees. Further information on the risk-free rates is given in note E14.
The PVFP includes the capitalised value of profits and losses arising from subsidiary companies providing administration, investment management and other services to the extent that they relate to covered business. This is referred to as the 'look through' into service company expenses. In addition, expenses arising in holding companies that relate directly to acquiring or maintaining covered business have been allowed for. Where external companies provide services to the life and related businesses, their charges have been allowed for in the underlying projected cost base.
Page 162
E1 - Basis of preparation continued
Time value of financial options and guarantees (TVOG)
The PVFP calculation is based on a single (base) economic scenario; however, a single scenario cannot appropriately allow for the effect of certain product features. If an option or guarantee affects shareholder cash flows in the base scenario, the impact is included in the PVFP and is referred to as the intrinsic value of the option guarantee; however, future investment returns are uncertain and the actual impact on shareholder profits may be higher or lower. The value of in-force business needs to be adjusted for the impact of the range of potential future outcomes. Stochastic modelling techniques can be used to assess the impact of potential future outcomes, and the difference between the intrinsic value and the total stochastic value is referred to as the time value of the option or guarantee.
Stochastic modelling typically involves projecting the future cash flows of the business under thousands of economic scenarios that are representative of the possible future outcomes for market variables such as interest rates and equity returns. Under a market consistent approach, the economic scenarios generated reflect the market's tendency towards risk aversion. Allowance is made, where appropriate, for the effect of management and/or policyholder actions in different economic conditions on future assumptions such as asset mix, bonus rates and surrender rates.
Stochastic models are calibrated to market yield curves and volatility levels at the valuation date. Tests are performed to confirm that the scenarios used produce results that replicate the market price of traded instruments.
Where evidence exists that persistency rates are linked to economic scenarios, dynamic lapse assumptions are set that vary depending on the individual scenarios. This cost is included in the TVOG. Dynamic lapses are modelled for parts of the UK, US and French businesses. Asymmetries in non-economic assumptions that are linked to economic scenarios, but that have insufficient evidence for credible dynamic assumptions, are allowed for within mean best estimate assumptions.
Frictional costs of required capital
The additional costs to a shareholder of holding the assets backing required capital within an insurance company rather than directly in the market are called frictional costs. They are explicitly deducted from the PVFP. The additional costs allowed for are the taxation costs and any additional investment expenses on the assets backing the required capital. The level of required capital has been set out above in the net worth section.
Frictional costs are calculated by projecting forwards the future levels of required capital. Tax on investment return and investment expenses are payable on the assets backing required capital, up until the point that they are released to shareholders.
Cost of residual non-hedgeable risks (CNHR)
The cost of residual non-hedgeable risks (CNHR) covers risks not already allowed for in the time value of options and guarantees or the PVFP. The allowance includes the impact of both non-hedgeable financial and non-financial risks. The most significant risk not included in the PVFP or TVOG is operational risk.
Asymmetric risks allowed for in the TVOG or PVFP are described earlier in the basis of preparation. No allowance has been made within the cost of non-hedgeable risk for symmetrical risks as these are diversifiable by investors.
US capital solutions
Credit has been taken within the US embedded value, and value of new business, for the anticipated reduction in capital requirements based on management's intention to enact transactions which allow recognition of additional assets that can be held against certain reserves, reducing shareholder capital requirements. By the end of 2011 transactions have been enacted for business written from 2006 to 2011.
US new business tax
US new business has been valued on a basis with tax applied at the full corporation rate and consequential movements in the value of the Deferred Tax Asset included as a variance within existing business operating return.
Participating business
Future regular bonuses on participating business are projected in a manner consistent with current bonus rates and expected future market-consistent returns on assets deemed to back the policies.
For with-profit funds in the UK and Ireland, for the purpose of recognising the value of the estate, it is assumed that terminal bonuses are increased to exhaust all of the assets in the fund over the future lifetime of the in-force with-profit policies. However, under stochastic modelling there may be some extreme economic scenarios when the total assets in the Group's with-profit funds are not sufficient to pay all policyholder claims. The average additional shareholder cost arising from this shortfall has been included in the TVOG.
For profit-sharing business in continental Europe, where policy benefits and shareholder value depend on the timing of realising gains, the apportionment of unrealised gains between policyholders and shareholders reflect contractual requirements as well as existing practice. Under certain economic scenarios where additional shareholder injections are required to meet policyholder payments, the average additional cost has been included in the TVOG.
Page 163
E1 - Basis of preparation continued
The embedded value of the US spread-based products anticipates the application of management discretion allowed for contractually within the policies, subject to contractual guarantees. This includes the ability to change the crediting rates and indexed strategies available within the policy. Consideration is taken of the economic environment assumed in future projections and returns in excess of the reference rate are not assumed. Anticipated market and policyholder reaction to management action has been considered.
Consolidation adjustments
The effect of transactions between Group life companies such as loans and reinsurance arrangements have been included in the results split by territory in a consistent manner. No elimination is required on consolidation.
As the MCEV methodology incorporates the impact of profits and losses arising from subsidiary companies providing administration, investment management and other services to the Group's life companies, the equivalent profits and losses have been removed from the relevant segment (non-insurance or fund management) and are instead included within the results of life and related businesses. In addition, the underlying basis of calculation for these profits has changed from the IFRS basis to the MCEV basis.
The capitalised value of the future profits and losses from such service companies are included in the embedded value and value of new business calculations for the relevant business, but the net assets (representing historical profits and other amounts) remain under non-insurance or fund management. In order to reconcile the profits arising in the financial period within each segment with the assets on the opening and closing statement of financial positions, a transfer of IFRS profits from life and related business to the appropriate segment is deemed to occur. An equivalent approach has been adopted for expenses within our holding companies. The assessments of goodwill, intangibles and pension schemes relating to life insurance business utilise the IFRS measurement basis.
Exchange rates
The Group's principal overseas operations during the period were located within the Eurozone and the US.
The results and cash flows of these operations have been translated at the average rates for that period and the assets and liabilities have been translated at the period end rates. Please refer to note A2 on page 44 of the IFRS financial statements.
Restatement
The 2010 opening and closing embedded values have been restated for the US, primarily reflecting modelling corrections to the valuation of certain life contracts and an overstatement of asset income identified in 2011. The resulting impact of the restatement was that the opening 2010 embedded value increased by GBP12 million and the closing 2010 embedded value reduced by GBP257 million, with no impact on operating profit.
Impact of Delta Lloyd disposal
On 6 May 2011, the Group sold 25 million shares in Delta Lloyd N.V. ("Delta Lloyd") (the Group's Dutch long-term insurance, general insurance and fund management subsidiary), reducing our holding to approximately 43% of Delta Lloyd's ordinary share capital.
In line with IFRS, up to the date of partial disposal, Delta Lloyd has been presented as a discontinued operation. Following the partial disposal, when Delta Lloyd became an associate of Aviva, Delta Lloyd has been removed from covered business as it is not managed by either Aviva or Delta Lloyd on an MCEV basis. The impact on MCEV as at 6 May 2011 is a reduction of GBP1,519 million.
Page 164
E2 - Geographical analysis of life MCEV operating earnings
2011
-------- ------- -------- -------- ----------- -------------------
United Aviva North Asia Continuing Discontinued
Kingdom Europe America Pacific operations operations Total
Gross of tax and non-controlling interest GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------------- -------- ------- -------- -------- ----------- ------------ -----
Value of new business 380 369 (131) 71 689 1 690
Earnings from existing business:
-------- ------- -------- -------- ----------- ------------ -----
- expected returns at the reference rate 214 274 62 16 566 19 585
- expected returns in excess of the reference
rate 340 334 515 10 1,199 109 1,308
-------- ------- -------- -------- ----------- ------------ -----
- expected returns 554 608 577 26 1,765 128 1,893
- experience variances 116 41 (98) (13) 46 3 49
- operating assumption changes (11) 178 (115) (11) 41 99 140
Expected return on shareholders' net worth 147 184 64 16 411 41 452
Other operating variances 7 237 (56) (11) 177 (2) 175
--------------------------------------------- -------- ------- -------- -------- ----------- ------------ -----
Operating earnings before tax 1,193 1,617 241 78 3,129 270 3,399
--------------------------------------------- -------- ------- -------- -------- ----------- ------------ -----
2010
-------- ------- -------- -------- ----------- -------------------
United Aviva North Asia Continuing Discontinued
Kingdom Europe America Pacific operations operations Total
Gross of tax and non-controlling interest GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------------- -------- ------- -------- -------- ----------- ------------ -----
Value of new business 354 504 (194) 52 716 (92) 624
Earnings from existing business:
-------- ------- -------- -------- ----------- ------------ -----
- expected returns at the reference rate 169 244 20 20 453 49 502
- expected returns in excess of the reference
rate 425 357 401 25 1,208 181 1,389
-------- ------- -------- -------- ----------- ------------ -----
- expected returns 594 601 421 45 1,661 230 1,891
- experience variances (20) 147 (7) (28) 92 (16) 76
- operating assumption changes (18) 338 (146) 13 187 (320) (133)
Expected return on shareholders' net worth 179 152 82 12 425 124 549
Other operating variances (4) 271 133 15 415 157 572
--------------------------------------------- -------- ------- -------- -------- ----------- ------------ -----
Operating earnings before tax 1,085 2,013 289 109 3,496 83 3,579
--------------------------------------------- -------- ------- -------- -------- ----------- ------------ -----
United Kingdom
MCEV operating earnings were 10% higher at GBP1,193 million (2010: GBP1,085 million) mainly due to increases in the value of new business and experience variances, partly offset by lower expected return.
Value of new business grew 7% to GBP380 million (2010: GBP354 million) due to our focus on value maximisation through active management of our new business mix, robust cost control and pricing discipline.
Total expected return decreased by 9% to GBP701 million (2010: GBP773 million) as a result of a lower opening implied discount rate, albeit on a higher embedded value.
Experience variances of GBP116 million (2010: GBP20 million adverse) primarily reflect benefits from the Part VII transfer of the former RBS JV business, partly offset by GBP30 million adverse project expenditures due to increased level of regulatory change.
Assumption changes were GBP11 million adverse (2010: GBP18 million adverse) reflecting the strengthening of mortality and morbidity rates.
Aviva Europe
MCEV operating earnings decreased 20% to GBP1,617 million (2010: GBP2,013 million) as operating variances and assumption changes were less favourable than in the prior period. Additionally, our lower new business volumes, as a result of our focus on value over volume, have led to a corresponding decline in the value of new business.
Value of new business was 27% lower at GBP369 million (2010: GBP504 million) following lower sales in Spain and management action to reduce sales of profit-sharing products in Italy and, to a lesser extent, in France.
Total expected return increased by 5% to GBP792 million (2010: GBP753 million) due to increased yields on shareholders' net worth.
Experience variances were favourable at GBP41 million (2010: GBP147 million) following positive mortality and other experience across the region, partly offset by adverse expenses in France and Ireland and lapse experience in Ireland.
Assumption changes on existing business were favourable at GBP178 million (2010: GBP338 million) primarily reflecting positive impact of changes to mortality and lapse assumptions in France and changes to assumed expense levels and management actions in relation to product charges in Poland, offset by adverse impacts of lapse and expense changes in Ireland, Italy, Spain and Other Europe.
Other operating variances were positive at GBP237 million (2010: GBP271 million). These largely arose in France and relate to modelling refinements of GBP324 million, offset by adverse modelling refinements in Italy of GBP110 million.
Page 165
E2 - Geographical analysis of life MCEV operating earnings continued
North America
MCEV operating earnings decreased 17% to GBP241 million (2010: GBP289 million) as higher expected return and improved value of new business were more than offset by adverse experience, operating assumption changes and other operating variances.
Value of new business of negative GBP131 million (2010: GBP194 million negative) reflects the continuing adverse economic environment with low risk free rates. The year on year improvement results from product actions, together with assumption and modelling changes, that more than offset adverse economic movements.
Total expected return increased by 27% to GBP641 million (2010: GBP503 million) reflecting a higher implied discount rate.
Operating experience and assumption changes on existing business were GBP213 million adverse (2010: GBP153 million adverse) reflecting adverse expense and mortality experience, the strengthening of future expense assumptions and revisions to policyholder behaviour and annuity spread assumptions.
Other operating variances were GBP56 million adverse (2010: GBP133 million favourable), primarily reflecting the marginal impact of new business on the value of deferred tax losses.
Asia Pacific
MCEV operating earnings were 28% lower at GBP78 million (2010: GBP109 million) as the higher value of new business was more than offset by lower expected return and adverse impacts of existing business.
Value of new business was 37% higher at GBP71 million (2010: GBP52 million), reflecting improved scale efficiencies, product mix and volumes.
Total expected return decreased by 26% to GBP42 million (2010: GBP57 million), as a result of lower implied discount rates.
Operating experience variances, other operating variances and assumption changes on existing business were adverse GBP35 million (2010: nil), primarily reflecting adverse lapse experience and assumption strengthening.
Page 166
E2 - Geographical analysis of life MCEV operating earnings continued
Gross of tax and Other Aviva North Asia Continuing Discontinued
non-controlling interests UK France Ireland Italy Poland Spain Europe Europe America Pacific operations operations Total
2011 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------------------------ ----- ------ ------- ----- ------ ----- ------ ------ ------- ------- ---------- ------------ -----
Value of new business 380 142 (4) 75 45 86 25 369 (131) 71 689 1 690
Earnings from existing
business
* expected existing business contribution (reference
rate) 214 113 14 23 72 34 18 274 62 16 566 19 585
* expected existing business contribution (in excess of
reference rate) 340 140 26 72 20 72 4 334 515 10 1,199 109 1,308
Experience variances
- maintenance expense(1) 2 (14) (8) (7) 6 2 2 (19) (46) - (63) (1) (64)
- project and other
related expenses(1) (30) (15) (1) - - (1) (1) (18) (16) (4) (68) 4 (64)
- mortality/morbidity(2) 2 33 2 11 12 (5) 2 55 (28) 7 36 (8) 28
- lapses(3) (11) 9 (12) 2 4 - (5) (2) 5 (14) (22) (1) (23)
- other(4) 153 13 (4) 7 9 - - 25 (13) (2) 163 9 172
------------------------------------------------------------ ----- ------ ------- ----- ------ ----- ------ ------ ------- ------- ---------- ------------ -----
116 26 (23) 13 31 (4) (2) 41 (98) (13) 46 3 49
Operating assumption
changes:
- maintenance expense(5) 63 11 (65) (28) 51 (4) (2) (37) (54) 19 (9) 100 91
- project and other
related expenses(5) (65) (4) - - - - - (4) - - (69) - (69)
- mortality/morbidity(6) (18) 163 - - 22 (16) 6 175 - (6) 151 (1) 150
- lapses(7) (1) 107 (57) (5) 37 (65) (30) (13) (136) (24) (174) - (174)
- other(8) 10 (33) - (28) 117 - 1 57 75 - 142 - 142
(11) 244 (122) (61) 227 (85) (25) 178 (115) (11) 41 99 140
Expected return on
shareholders'
net worth 147 60 30 47 10 32 5 184 64 16 411 41 452
Other operating variances(9) 7 352 (12) (95) 5 2 (15) 237 (56) (11) 177 (2) 175
Earnings before tax
and
non-controlling interests 1,193 1,077 (91) 74 410 137 10 1,617 241 78 3,129 270 3,399
------------------------------------------------------------ ----- ------ ------- ----- ------ ----- ------ ------ ------- ------- ---------- ------------ -----
1 Adverse expense experience occurred across a number of businesses.
2 Mortality experience continues to be better than the assumption set across a number of our businesses, most notably in France. Adverse experience reflects normal volatility in mortality and increased retention limits in the US.
3 Persistency experience continues to be somewhat volatile across our businesses. Asia reflects an accumulation of small adverse experience across businesses.
4 Other experience includes tax benefits from the transfer of former RBS joint venture business into the long-term fund in the UK.
5 Maintenance and project expense assumptions have been revised in many regions with a broadly neutral impact on continuing business and a benefit from restructuring in Delta Lloyd.
6 Mortality assumptions have been updated in France reflecting experience.
7 Persistency assumptions have been updated in a number of businesses reflecting lower expected lapses in France (AFER), increases due to the economic environment in Ireland and Spain, and, in the US, revisions to dynamic policyholder lapse behaviour.
8 Other operating assumption changes in Poland relate to a change to assumed management actions in relation to product charges, and, in the US, revisions to policyholder utilisation of rider benefits offset by revisions to annuity spread assumptions.
9 Other operating variances relate to modelling changes and the release of a modelling provision in France, and modelling refinements in Italy, and, in the US, the marginal impact of new business on the value of deferred tax losses, with cost of capital transactions and model refinements broadly offsetting.
Page 167
E2 - Geographical analysis of life MCEV operating earnings continued
Gross of tax and
non-controlling Other Aviva North Asia Continuing Discontinued
interests UK France Ireland Italy Poland Spain Europe Europe America Pacific operations operations Total
2010 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ----- ------ ------- ----- ------ ----- ------ ------ ------- ------- ---------- ------------ -----
Value of new business 354 175 1 142 40 128 18 504 (194) 52 716 (92) 624
Earnings from existing
business
- expected existing
business
contribution
(reference
rate) 169 98 12 13 74 34 13 244 20 20 453 49 502
- expected existing
business
contribution (in
excess of
reference rate) 425 183 30 34 25 76 9 357 401 25 1,208 181 1,389
Experience variances
- maintenance
expense(1) 12 (25) 6 (11) 5 (1) 5 (21) (16) (2) (27) (21) (48)
- project and other
related expenses(1) (8) (5) (2) - - (2) (5) (14) (18) (3) (43) (4) (47)
-
mortality/morbidity(2) 23 27 3 (4) 13 2 3 44 (7) 9 69 13 82
- lapses(3) (29) 27 (10) 18 (1) (11) (11) 12 (3) (27) (47) 5 (42)
- other(4) (18) 93 (4) 12 14 3 8 126 37 (5) 140 (9) 131
----------------------- ----- ------ ------- ----- ------ ----- ------ ------ ------- ------- ---------- ------------ -----
(20) 117 (7) 15 31 (9) - 147 (7) (28) 92 (16) 76
Operating assumption
changes:
- maintenance
expense(5) 83 31 (3) (11) 140 132 - 289 (88) 8 292 220 512
- project and
otherrelated
expenses(5) (92) - - - - - - - - - (92) (6) (98)
-
mortality/morbidity(6) 2 57 7 1 7 (2) - 70 (64) 17 25 (470) (445)
- lapses(7) (3) (12) (17) 39 13 (49) (7) (33) 6 (12) (42) (52) (94)
- other (8) 4 - (2) 8 - 2 12 - - 4 (12) (8)
(18) 80 (13) 27 168 81 (5) 338 (146) 13 187 (320) (133)
Expected return on
shareholders'
net worth 179 47 20 50 9 18 8 152 82 12 425 124 549
Other operating
variances(8) (4) 271 (6) (15) 30 (9) - 271 133 15 415 157 572
Earnings before tax
and
non-controlling
interests 1,085 971 37 266 377 319 43 2,013 289 109 3,496 83 3,579
----------------------- ----- ------ ------- ----- ------ ----- ------ ------ ------- ------- ---------- ------------ -----
1 Adverse expense experience occurred across a number of businesses.
2 Mortality experience continues to be better than the assumption set across a number of our businesses, most notably in France and the UK Annuity business.
3 Persistency experience remains volatile across most of our businesses, in part reflecting the wider economic circumstances. In France, persistency experience reflects a release of the short-term provision.
4 Other experience includes, in France, the benefit from policyholders switching to unit-linked funds, and, in the USA favourable spread experience.
5 Favourable maintenance expense assumptions reflect the benefit of the shared service centre in Spain, together with the release of margins in Spain, related to bancassurance joint venture governance costs, and Poland. In the UK, the expense assumptions include a reallocation of provisions in the service company, better reflecting the expected future allocation of costs. In the USA, the adverse impact reflects a revised allocation of costs between ongoing and one-off. In Delta Lloyd, favourable expense assumptions relate to planned expense saving following restructuring activities.
6 Delta Lloyd has updated mortality assumptions to reflect recently published tables, which include a significantly increased allowance for mortality improvements. In France and the USA, mortality assumptions have been updated reflecting experience.
7 Persistency assumptions have been updated in a number of businesses.
8 Other operating variances for France relate to modelling changes, particularly relating to the time value of options and guarantees, and the benefit of reducing minimum guarantee rates. In Delta Lloyd, modelling changes include impacts related to commercial mortgages partly offset by changes to group pensions business. In the US, other operating variances related to the benefit of an AXXX capital solution together with modelling refinements on our asset portfolio.
Page 168
E2 - Geographical analysis of life MCEV operating earnings continued
Net of tax and
non-controlling Other Aviva North Asia Continuing Discontinued
interests UK France Ireland Italy Poland Spain Europe Europe America Pacific operations operations Total
2011 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ---- ------ ------- ----- ------ ----- ------ ------ ------- ------- ---------- ------------ -----
Value of new business 281 79 (3) 23 34 28 20 181 (85) 55 432 - 432
Earnings from existing
business
- expected existing
business
contribution
(reference rate) 158 71 9 7 51 13 16 167 40 12 377 7 384
- expected existing
business
contribution (in
excess of
reference rate) 252 84 17 22 15 26 4 168 334 7 761 41 802
Experience variances
- maintenance
expense(1) 2 (9) (6) (4) 4 1 2 (12) (30) - (40) - (40)
- project and other
related expenses(1) (22) (10) - - - (1) (1) (12) (11) (3) (48) 2 (46)
-
mortality/morbidity(2) 1 21 1 4 8 (2) 1 33 (18) 6 22 (4) 18
- lapses(3) (7) 8 (8) - 3 (3) (4) (4) 3 (11) (19) - (19)
- other(4) 113 6 (2) 2 7 - - 13 (9) (2) 115 4 119
87 16 (15) 2 22 (5) (2) 18 (65) (10) 30 2 32
Operating assumption
changes:
- maintenance
expense(5) 47 7 (45) (10) 36 (2) (2) (16) (35) 14 10 43 53
- project and other
related expenses(5) (49) (2) - - - - - (2) - - (51) - (51)
-
mortality/morbidity(6) (14) 101 - - 16 (5) 5 117 - (6) 97 (1) 96
- lapses(7) - 73 (38) (1) 26 (23) (25) 12 (88) (18) (94) - (94)
- other(8) 7 (21) - (8) 84 - 1 56 49 - 112 - 112
(9) 158 (83) (19) 162 (30) (21) 167 (74) (10) 74 42 116
Expected return on
shareholders'
net worth 109 36 20 16 7 13 3 95 42 12 258 17 275
Other operating
variances(9) 6 237 (9) (29) 4 1 (12) 192 (36) (7) 155 (3) 152
Earnings after tax and
non-controlling
interests 884 681 (64) 22 295 46 8 988 156 59 2,087 106 2,193
----------------------- ---- ------ ------- ----- ------ ----- ------ ------ ------- ------- ---------- ------------ -----
1 Adverse expense experience occurred across a number of businesses.
2 Mortality experience continues to be better than the assumption set across a number of our businesses, most notably in France. Adverse experience reflects normal volatility in mortality and increased retention limits in the US.
3 Persistency experience continues to be somewhat volatile across our businesses. Asia reflects an accumulation of small adverse experience across businesses.
4 Other experience includes tax benefits from the transfer of former RBS joint venture business into the long-term fund in the UK.
5 Maintenance and project expense assumptions have been revised in many regions with a broadly neutral impact on continuing business and a benefit from restructuring in Delta Lloyd.
6 Mortality assumptions have been updated in France reflecting experience.
7 Persistency assumptions have been updated in a number of businesses reflecting lower expected lapses in France (AFER), increases due to the economic environment in Ireland and Spain, and, in the US, revisions to dynamic policyholder lapse behaviour.
8 Other operating assumption changes in Poland relate to a change to assumed management actions in relation to product charges, and, in the US, revisions to policyholder utilisation of rider benefits offset by revisions to annuity spread assumptions.
9 Other operating variances relate to modelling changes and the release of a modelling provision in France, and modelling refinements in Italy, and, in the US, the marginal impact of new business on the value of deferred tax losses, with cost of capital transactions and model refinements broadly offsetting.
Page 169
E2 - Geographical analysis of life MCEV operating earnings continued
Net of tax and
non-controlling Other Aviva North Asia Continuing Discontinued
interests UK France Ireland Italy Poland Spain Europe Europe America Pacific operations operations Total
2010 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ---- ------ ------- ----- ------ ----- ------ ------ ------- ------- ---------- ------------ -----
Value of new business 254 100 1 42 29 43 15 230 (126) 41 399 (41) 358
Earnings from existing
business
- expected existing
business
contribution
(reference rate) 122 61 8 4 53 13 11 150 13 14 299 19 318
- expected existing
business
contribution (in
excess
of reference rate) 306 115 19 11 18 27 7 197 261 20 784 68 852
Experience variances
- maintenance
expense(1) 8 (16) 5 (6) 3 (3) 4 (13) (10) (1) (16) (9) (25)
- project and other
related expenses(1) (6) (3) (1) - - (2) (4) (10) (12) (3) (31) (1) (32)
-
mortality/morbidity(2) 17 15 2 (2) 10 - 2 27 (5) 7 46 3 49
- lapses(3) (21) 19 (7) 6 - (6) (9) 3 (2) (22) (42) - (42)
- other(4) (12) 62 (3) 3 10 2 6 80 24 (4) 88 (3) 85
(14) 77 (4) 1 23 (9) (1) 87 (5) (23) 45 (10) 35
Operating assumption
changes:
- maintenance
expense(5) 57 21 (2) (8) 97 83 - 191 (57) 8 199 89 288
- project and other
related expenses (65) - - - - - - - - - (65) (3) (68)
-
mortality/morbidity(6) 1 38 5 1 4 - - 48 (42) 13 20 (198) (178)
- lapses(7) (2) (8) (12) 10 10 (17) (6) (23) 4 (9) (30) (21) (51)
- other (6) 3 - - 6 - 1 10 - - 4 (5) (1)
(15) 54 (9) 3 117 66 (5) 226 (95) 12 128 (138) (10)
Expected return on
shareholders'
net worth 129 27 14 17 6 7 6 77 53 9 268 50 318
Other operating
variances(8) (4) 162 (4) (2) 20 (4) - 172 87 9 264 64 328
Earnings after tax and
non-controlling
interests 778 596 25 76 266 143 33 1,139 188 82 2,187 12 2,199
----------------------- ---- ------ ------- ----- ------ ----- ------ ------ ------- ------- ---------- ------------ -----
1 Adverse expense experience occurred across a number of businesses.
2 Mortality experience continues to be better than the assumption set across a number of our businesses, most notably in France and the UK Annuity business.
3 Persistency experience remains volatile across most of our businesses, in part reflecting the wider economic circumstances. In France, persistency experience reflects a release of the short-term provision.
4 Other experience includes, in France, the benefit from policyholders switching to unit linked funds, and, in the USA favourable spread experience.
5 Favourable maintenance expense assumptions reflect the benefit of the shared service centre in Spain, together with the release of margins in Spain, related to bancassurance joint venture governance costs, and Poland. In the UK, the expense assumptions include a reallocation of provisions in the service company, better reflecting the expected future allocation of costs. In the USA, the adverse impact reflects a revised allocation of costs between ongoing and one-off. In Delta Lloyd, favourable expense assumptions relate to planned expense saving following restructuring activities.
6 Delta Lloyd has updated mortality assumptions to reflect recently published tables, which include a significantly increased allowance for mortality improvements. In France and the USA, mortality assumptions have been updated reflecting experience.
7 Persistency assumptions have been updated in a number of businesses.
8 Other operating variances for France relate to modelling changes, particularly relating to the time value of options and guarantees, and the benefit of reducing minimum guarantee rates. In Delta Lloyd, modelling changes include impacts related to commercial mortgages partly offset by changes to group pensions business. In the US, other operating variances related to the benefit of an AXXX capital solution together with modelling refinements on our asset portfolio.
Page 170
E3 - Geographical analysis of fund management operating earnings
The summarised consolidated income statement - MCEV basis includes earnings from the Group's fund management operations as analysed below. This excludes the proportion of the results of Aviva Investors fund management businesses and other fund management operations within the Group that arise from the provision of fund management services to our Life businesses. These results are included within the Life MCEV operating earnings.
2011 2010
GBPm GBPm
-------------------------------- ----- -----
United Kingdom 14 28
Europe 12 10
North America - (8)
Asia Pacific (5) -
Aviva Investors 21 30
United Kingdom 11 3
Aviva Europe - -
Asia Pacific - (2)
-------------------------------- ----- -----
Total - continuing operations 32 31
Total - discontinued operations 9 94
-------------------------------- ----- -----
Total 41 125
-------------------------------- ----- -----
E4 - Analysis of other operations and regional costs
Where subsidiaries provide services to our life business, that proportion has been excluded. These results are included within the Life MCEV operating return.
2011 2010
----------------------------- -----------------------------
Regional Other Regional Other
costs operations Total costs operations Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- -------- ----------- ------ -------- ----------- ------
United Kingdom - (61) (61) - (21) (21)
Aviva Europe (57) (38) (95) (55) (43) (98)
North America (15) (3) (18) (26) 6 (20)
Asia Pacific (30) - (30) (32) - (32)
-------------------------------- -------- ----------- ------ -------- ----------- ------
Total - continuing operations (102) (102) (204) (113) (58) (171)
Total - discontinued operations - 7 7 - (24) (24)
-------------------------------- -------- ----------- ------ -------- ----------- ------
Total (102) (95) (197) (113) (82) (195)
-------------------------------- -------- ----------- ------ -------- ----------- ------
E5 - Exceptional items and integration and restructuring costs
Exceptional Items of GBP(57) million (2010: GBP(428) million) were mainly due to a GBP22 million provision for compensation scheme costs for the leveraged property fund in Ireland, as well as a GBP35 million expense for the discounted cost of strengthening latent claims provisions in the UK.
For full year 2010, exceptional items were mainly due to a change in the cost of capital charge for the Cost of Non-Hedgeable Risk, from 2.5% to 3.3% p.a. with total impact of GBP(365) million, the impact of reducing state contributions to Pillar II Pension funds in Poland, following the announcement to change legislation on 1 April 2011 of GBP(280) million, and the recognition by Delta Lloyd of GBP(59) million costs in relation to unit-linked insurance compensation scheme and compensation costs in defined contribution pension schemes, partly offset by a GBP286 million benefit from the closure of the final salary section of the UK staff pension scheme to future accruals.
Integration and restructuring costs incurred in the year amounted to GBP212 million (FY10: GBP312 million). This includes costs associated with preparing the businesses for Solvency II implementation of GBP88 million, expenditure relating to the Quantum Leap project in Europe of GBP51 million, and other restructuring exercises across the Group of GBP91 million partly offset by benefits of regulatory changes of GBP20 million.
Page 171
E6 - Segmentation of condensed consolidated statement of financial position
Restated
2011 2010
--------------------------------- ---------------------------------
Life General Life General
and business and business
related and related and
businesses other Group businesses other Group
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------------- ----------- --------- --------- ----------- --------- ---------
Total assets before acquired value
of in-force long-term business 281,471 30,090 311,561 323,476 45,378 368,854
Acquired additional value of in-force
long-term business 815 - 815 1,253 - 1,253
Total assets included in the IFRS statement
of financial position 282,286 30,090 312,376 324,729 45,378 370,107
Liabilities of the long-term business (266,622) - (266,622) (305,673) - (305,673)
Liabilities of the general insurance
and other businesses - (30,391) (30,391) - (46,709) (46,709)
Net assets on a statutory IFRS basis 15,664 (301) 15,363 19,056 (1,331) 17,725
Additional value of in-force long-term
business(1) 132 - 132 2,480 - 2,480
Net assets on an MCEV basis(2) 15,796 (301) 15,495 21,536 (1,331) 20,205
Equity capital, capital reserves, shares
held by employee trusts and
other reserves 6,389 7,207
IFRS basis retained earnings 5,954 5,411
Additional MCEV basis retained earnings 486 2,420
Equity attributable to ordinary shareholders
of Aviva plc on
an MCEV basis 12,829 15,038
Preference share capital and direct
capital instruments 1,190 1,190
Non-controlling interests 1,476 3,977
MCEV basis total equity 15,495 20,205
--------------------------------------------- ----------- --------- --------- ----------- --------- ---------
1 The analysis between the Group's and non-controlling interests' share of the additional value of in-force long-term business is as follows:
Movement
Restated in
2011 2010 year
GBPm GBPm GBPm
------------------------------------------------ ----- -------- --------
Group's share included in shareholders' funds 486 2,420 (1,934)
Non-controlling interests' share (54) 236 (289)
Movements in AFS securities (300) (176) (125)
Additional value of in-force long-term business 132 2,480 (2,348)
------------------------------------------------ ----- -------- --------
2 Analysis of net assets on an MCEV basis is made up as follows:
Restated
2011 2010
GBPm GBPm
------------------------------------------------------------------ ------ --------
Embedded value 12,274 15,874
Non-controlling interests 820 3,133
13,094 19,007
Goodwill and intangible assets allocated to long-term business(3) 2,117 2,356
Notional allocation of IAS19 pension fund surplus/(deficit)
to long-term business(4) 585 173
Long-term business net assets on an MCEV basis 15,796 21,536
------------------------------------------------------------------ ------ --------
3 Goodwill and intangible assets includes amounts related to associated undertakings and joint ventures.
4 The value of the Aviva Staff Pension Scheme surplus has been notionally allocated between segments, based on current funding and the Life proportion has been included within the long-term business net assets on an MCEV basis. The pension fund surplus notionally allocated to long-term business is net of the agreed funding borne by the UK with-profit funds.
Page 172
E7 - Analysis of life and pension earnings
The following table provides an analysis of the movement in embedded value for covered business. The analysis is shown separately for free surplus, required capital and the value of in-force covered business, and includes amounts transferred between these categories. All figures are shown net of tax and non-controlling interests.
Continuing operations Discontinued operations Total
----------------------------- --------------------------------------- ------------------------------------- -------
Net of tax and Free Required Total Free Required Total Total
non-controlling interests surplus capital(1) VIF MCEV surplus capital(1) VIF MCEV MCEV
2011 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- -------- ----------- ------- ------- -------- ----------- ----- ------- -------
Opening Group MCEV 1,247 7,398 5,733 14,378 356 944 196 1,496 15,874
New business value (905) 559 778 432 (29) 14 15 - 432
Expected existing business
contribution
(reference rate) - - 377 377 - - 7 7 384
Expected existing business
contribution
(in excess of
reference rate) - - 761 761 - - 41 41 802
Transfers from VIF and
required
capital to the free surplus 1,822 (583) (1,239) - 85 (25) (60) - -
Experience variances 45 161 (176) 30 2 - - 2 32
Assumption changes 96 (92) 70 74 - - 42 42 116
Expected return on
shareholders'
net worth 91 167 - 258 5 12 - 17 275
Other operating variances 118 15 22 155 (2) 3 (4) (3) 152
Operating MCEV earnings 1,267 227 593 2,087 61 4 41 106 2,193
Economic variances (704) 452 (3,132) (3,384) 212 (83) (255) (126) (3,510)
Other non-operating
variances(2) (51) (18) 49 (20) - - - - (20)
Total MCEV earnings 512 661 (2,490) (1,317) 273 (79) (214) (20) (1,337)
Capital and dividend
flows(3,4) (398) - (92) (490) (3) - - (3) (493)
Foreign exchange variances (17) (94) (186) (297) 16 28 2 46 (251)
Acquired/divested business - - - - (642) (893) 16 (1,519) (1,519)
Closing MCEV 1,344 7,965 2,965 12,274 - - - - 12,274
----------------------------- -------- ----------- ------- ------- -------- ----------- ----- ------- -------
1 Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.
2 Other non-operating variances are described under Exceptional items in note E5.
3 Included within capital and dividend flows is the transfer to Life and related businesses from other segments consisting of service company profits and losses during the reported period that have emerged from the value of in-force. Since the 'look through' into service companies includes only future profits and losses, these amounts must be eliminated from the closing embedded value.
4 As a result of the January 2012 announced disposal of the Czech, Hungarian, and Romanian businesses, the VIF movement reflects the write-down of this business to the IFRS carrying value.
Divested business is the removal of Delta Lloyd from covered business subsequent to the reduction of our holding to 42%.
Continuing operations Discontinued operations Total
------------------------------- --------------------------------------- ----------------------------------- -------
Restated
Net of tax and Free Required Total Free Required Total Total
non-controlling interests surplus capital(1) VIF MCEV surplus capital(1) VIF MCEV MCEV
2010 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- -------- ----------- ------- ------- -------- ----------- ----- ----- -------
Opening Group MCEV 1,799 6,451 5,232 13,482 368 1,095 125 1,588 15,070
New business value (1,136) 846 689 399 (114) 55 18 (41) 358
Expected existing business
contribution
(reference rate) - - 299 299 - - 19 19 318
Expected existing business
contribution
(in excess of
reference rate) - - 784 784 - - 68 68 852
Transfers from VIF and required
capital to the free surplus 1,594 (509) (1,085) - 217 (78) (139) - -
Experience variances 114 86 (155) 45 (7) (10) 7 (10) 35
Assumption changes 22 18 88 128 (169) (39) 70 (138) (10)
Expected return on
shareholders'
net worth 111 157 - 268 15 35 - 50 318
Other operating variances 55 (2) 211 264 (8) 9 63 64 328
Operating MCEV earnings 760 596 831 2,187 (66) (28) 106 12 2,199
Economic variances (218) 175 (43) (86) 43 (72) (1) (30) (116)
Other non-operating
variances(2) (39) - (429) (468) (20) - (29) (49) (517)
Total MCEV earnings 503 771 359 1,633 (43) (100) 76 (67) 1,566
Capital and dividend flows(3) (1,068) - - (1,068) 48 - - 48 (1,020)
Foreign exchange variances (14) (26) (71) (111) (13) (39) (4) (56) (167)
Acquired/divested business 27 202 213 442 (4) (12) (1) (17) 425
Closing MCEV 1,247 7,398 5,733 14,378 356 944 196 1,496 15,874
------------------------------- -------- ----------- ------- ------- -------- ----------- ----- ----- -------
1 Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.
2 Other non-operating variances relate to increase in CNHR charge from 2.5% to 3.3% p.a., legislation changes to Poland Pensions, costs for Solvency II implementation and other restructuring and unit-linked insurance compensation scheme and compensation costs in Delta Lloyd.
3 Included within capital and dividend flows is the transfer to Life and related businesses from other segments consisting of service company profits and losses during the reported period that have emerged from the value of in-force. Since the "look through" into service companies includes only future profits and losses, these amounts must be eliminated from the closing embedded value.
Page 173
E8 - Life MCEV operating earnings
The table below presents the life and pensions MCEV earnings broken down into constituent parts. The life and pensions MCEV operating earnings comprise: the value of new business written during the year; the earnings from existing business including other operating variances; and the expected investment return on the shareholders' net worth.
These components are calculated using economic assumptions as at the start of the year (in-force business) or start of the quarter (new business) and operating (demographic and expenses) assumptions as at the end of the year.
Restated
2011 2010
GBPm GBPm
--------------------------------------------------------------- ------- ---------
Value of new business 689 716
Earnings from existing business
- expected returns at the reference rate 566 453
- expected returns in excess of the reference rate 1,199 1,208
--------------------------------------------------------------- ------- ---------
- expected returns 1,765 1,661
- experience variances 46 92
- operating assumption changes 41 187
Other operating variance 177 415
Expected return on shareholders' net worth 411 425
Life and Pensions operating earnings before tax 3,129 3,496
Economic variances (6,541) (450)
Other non-operating variances (32) (686)
Life and Pensions earnings before tax (3,444) 2,360
Tax on operating earnings (908) (1,035)
Tax on other activities 2,098 296
--------------------------------------------------------------- ------- ---------
Life and Pensions earnings after tax - continuing operations (2,254) 1,621
Life and Pensions earnings after tax - discontinued operations (33) (83)
--------------------------------------------------------------- ------- ---------
Total Life and Pensions earnings after tax (2,287) 1,538
--------------------------------------------------------------- ------- ---------
There were no separate development costs reported in these years.
Other non-operating variances are described under Exceptional items in note E5.
The table above presents a summarised breakdown of the life and pensions MCEV earnings on a gross of non-controlling interests basis and gross of tax with tax shown separately. The Group favours the gross presentation for consistency with the IFRS results. The table below compares the key items on the different bases as the subsequent analysis is provided predominantly on a net of tax and non-controlling interests basis as preferred by the CFO Forum Principles.
Key indicators
Restated
2011 2010
---------------- ---------------- ---------------- ----------------
Net Gross Net Gross
of of of of
non-controlling non-controlling non-controlling non-controlling
interests interests interests interests
and and and and
tax tax tax tax
GBPm GBPm GBPm GBPm
----------------------------------------------
Value of new business - continuing operations 432 689 399 716
Value of new business - discontinued
operations - 1 (41) (92)
---------------------------------------------- ---------------- ---------------- ---------------- ----------------
Total value of new business 432 690 358 624
---------------------------------------------- ---------------- ---------------- ---------------- ----------------
Life and pensions operating return -
continuing operations 2,087 3,129 2,187 3,496
Life and pensions operating return -
discontinued operations 106 270 12 83
---------------------------------------------- ---------------- ---------------- ---------------- ----------------
Life and pensions operating return 2,193 3,399 2,199 3,579
---------------------------------------------- ---------------- ---------------- ---------------- ----------------
Life and pensions earnings - continuing
operations (1,317) (3,444) 1,633 2,360
Life and pensions earnings - discontinued
operations (20) (46) (67) (113)
---------------------------------------------- ---------------- ---------------- ---------------- ----------------
Life and pensions earnings (1,337) (3,490) 1,566 2,247
---------------------------------------------- ---------------- ---------------- ---------------- ----------------
Page 174
E9 - Present value of life new business premiums
The tables below set out the present value of new business premiums (PVNBP) written by the life and related businesses, gross of tax and non-controlling interests. The PVNBP calculation is equal to total single premium sales received in the period plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale.
The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate the value of new business, so the components of the new business margin are on a consistent basis.
The weighted average capitalisation factor (WACF) is the multiple of the annualised regular premium which gives the present value at point of sale of the regular premiums.
Present
Present value
value of new
Gross of Regular of regular Single business
non-controlling interests premiums premiums premiums premiums
2011 GBPm WACF GBPm GBPm GBPm
----------------------------------------------------- --------- ---- ----------- --------- ---------
United Kingdom 766 4.9 3,776 7,539 11,315
France 81 6.7 540 3,507 4,047
Ireland 53 3.9 205 712 917
Italy 58 5.4 316 2,677 2,993
Poland 50 7.3 367 120 487
Spain 92 5.4 501 1,425 1,926
Other Europe 87 4.8 414 107 521
Aviva Europe 421 5.6 2,343 8,548 10,891
North America 109 10.0 1,088 2,844 3,932
Asia Pacific 295 4.9 1,444 338 1,782
----------------------------------------------------- --------- ---- ----------- --------- ---------
Total life and pensions - continuing operations 1,591 5.4 8,651 19,269 27,920
Total life and pensions - discontinued operations(1) 73 9.1 663 422 1,085
----------------------------------------------------- --------- ---- ----------- --------- ---------
Total life and pensions 1,664 5.6 9,314 19,691 29,005
----------------------------------------------------- --------- ---- ----------- --------- ---------
1 Current period discontinued represent the results of Delta Lloyd up to 6 May 2011 only.
Present
Present value
value of new
Gross of Regular of regular Single business
non-controlling interests premiums premiums premiums premiums
2010 GBPm WACF GBPm GBPm GBPm
-------------------------------------------------- --------- ---- ----------- --------- ---------
United Kingdom 579 5.2 2,997 7,301 10,298
France 89 6.3 565 4,353 4,918
Ireland 65 4.0 263 675 938
Italy 50 5.4 270 4,186 4,456
Poland 51 9.2 468 135 603
Spain 109 5.9 648 1,436 2,084
Other Europe 89 4.6 412 126 538
Aviva Europe 453 5.8 2,626 10,911 13,537
North America 97 10.2 993 3,735 4,728
Asia Pacific 240 4.7 1,132 485 1,617
-------------------------------------------------- --------- ---- ----------- --------- ---------
Total life and pensions - continuing operations 1,369 5.7 7,748 22,432 30,180
Total life and pensions - discontinued operations 172 9.3 1,591 1,587 3,178
-------------------------------------------------- --------- ---- ----------- --------- ---------
Total life and pensions 1,541 6.1 9,339 24,019 33,358
-------------------------------------------------- --------- ---- ----------- --------- ---------
In Poland, the decrease in the WACF reflects the lower proportion of new pension business written following legislative changes making this business less attractive. This business had a high WACF, reflecting the long duration of the business combined with premiums increasing each year.
Page 175
E10 - Geographical analysis of value of new business
The tables below set out the present value of new business premiums (PVNBP) written by the life and related businesses, the value of the new business and the resulting margin, firstly gross and then net of tax and non-controlling interests. The value generated by new business written during the period is the present value of the projected stream of after-tax distributable profit from that business, including expected profit between point of sale and the valuation date. The value of new business has been calculated using economic assumptions at the point of sale which has been implemented with the assumptions being taken as those appropriate to the start of each quarter. For contracts that are re-priced more frequently, weekly or monthly economic assumptions have been used. The operating assumptions are consistent with those used to determine the embedded value. The value of new business is shown after the effect of the frictional costs of holding required capital, and after the effect of the costs of residual non-hedgeable risks on the same basis as for the in-force covered business.
Present
value of
new
business Value of New business
premiums new business margin
-------------- --------------- --------------
Life and pensions 2011 2010 2011 2010 2011 2010
(gross of tax and non-controlling interest) GBPm GBPm GBPm GBPm % %
----------------------------------------------------- ------ ------ ------- ------ ------ ------
United Kingdom 11,315 10,298 380 354 3.4% 3.4%
France 4,047 4,918 142 175 3.5% 3.6%
Ireland 917 938 (4) 1 (0.4)% 0.1%
Italy 2,993 4,456 75 142 2.5% 3.2%
Poland 487 603 45 40 9.2% 6.6%
Spain 1,926 2,084 86 128 4.5% 6.1%
Other Europe 521 538 25 18 4.8% 3.3%
Aviva Europe 10,891 13,537 369 504 3.4% 3.7%
North America 3,932 4,728 (131) (194) (3.3)% (4.1)%
Asia Pacific 1,782 1,617 71 52 4.0% 3.2%
----------------------------------------------------- ------ ------ ------- ------ ------ ------
Total life and pensions - continued operations 27,920 30,180 689 716 2.5% 2.4%
Total life and pensions - discontinued operations(1) 1,085 3,178 1 (92) 0.1% (2.9)%
----------------------------------------------------- ------ ------ ------- ------ ------ ------
Total life and pensions 29,005 33,358 690 624 2.4% 1.9%
----------------------------------------------------- ------ ------ ------- ------ ------ ------
Present
value of
new
business Value of New business
premiums new business margin
-------------- --------------- --------------
Life and pensions 2011 2010 2011 2010 2011 2010
(net of tax and non-controlling interest) GBPm GBPm GBPm GBPm % %
----------------------------------------------------- ------ ------ ------ ------- ------ ------
United Kingdom 11,315 10,298 281 254 2.5% 2.5%
France 3,376 4,340 79 100 2.3% 2.3%
Ireland 688 704 (3) 1 (0.4)% 0.1%
Italy 1,336 1,965 23 42 1.7% 2.1%
Poland 440 531 34 29 7.7% 5.5%
Spain 1,054 1,136 28 43 2.7% 3.8%
Other Europe 521 538 20 15 3.8% 2.8%
Aviva Europe 7,415 9,214 181 230 2.4% 2.5%
North America 3,932 4,728 (85) (126) (2.2)% (2.7)%
Asia Pacific 1,756 1,598 55 41 3.1% 2.6%
----------------------------------------------------- ------ ------ ------ ------- ------ ------
Total life and pensions - continued operations 24,418 25,838 432 399 1.8% 1.5%
----------------------------------------------------- ------ ------ ------ ------- ------ ------
Total life and pensions - discontinued operations(1) 599 1,721 - (41) - (2.4)%
----------------------------------------------------- ------ ------ ------ ------- ------ ------
Total life and pensions 25,017 27,559 432 358 1.7% 1.3%
----------------------------------------------------- ------ ------ ------ ------- ------ ------
1 Current period discontinued operations represent the results of Delta Lloyd up to 6 May 2011 only.
Page 176
E11 - Post-tax internal rate of return and payback period on life and pensions new business
The new business written requires up-front capital investment due to high set-up costs and capital requirements. The internal rate of return (IRR) is a measure of the shareholder return expected on this capital investment. It is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the lifetime of the business written, including allowance for the time value of options and guarantees, is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is the initial capital required to pay acquisition costs and set up statutory reserves in excess of premiums received (initial capital), plus required capital at the same level as for the calculation of the value of new business.
The payback period shows how quickly shareholders can expect the total capital to be repaid. The payback period has been calculated based on undiscounted cash flows and allows for the initial and required capital.
The projected investment returns in both the IRR and payback period calculations assume that equities, properties and bonds earn a return in excess of risk-free consistent with the long-term rate of return assumed in operating earnings.
The IRR on life and pensions new business for the Group (excluding Delta Lloyd) was 14.4% (2010: 13.3%).
Internal
rate Total Payback
Gross of of Initial Required invested period
non-controlling interests return capital capital capital years
31 December 2011 % GBPm GBPm GBPm
------------------------------ -------- -------- -------- --------- --------
United Kingdom 15% 155 187 342 7
France 11% 45 127 172 8
Ireland 6% 27 22 49 12
Italy 12% 24 117 141 6
Poland 24% 25 9 34 4
Spain 23% 25 70 95 4
Other Europe 16% 40 13 53 6
Aviva Europe 14% 186 358 544 7
North America 14% 27 301 328 5
Asia Pacific(1) 13% 56 31 87 12
------------------------------ -------- -------- -------- --------- --------
Total - excluding Delta Lloyd 14.4% 424 877 1,301 7
Total - Delta Lloyd(2) 10% 26 27 53 10
------------------------------ -------- -------- -------- --------- --------
Total 14.3% 450 904 1,354 7
------------------------------ -------- -------- -------- --------- --------
Internal Total
Gross of rate Initial Required invested Payback
non-controlling interests of return capital capital capital period
31 December 2010 % GBPm GBPm GBPm years
------------------------------ ---------- -------- -------- --------- --------
United Kingdom 15% 98 198 296 7
France 9% 34 202 236 9
Ireland 5% 34 17 51 11
Italy 11% 32 183 215 6
Poland 25% 16 9 25 4
Spain 22% 25 80 105 4
Other Europe 14% 41 16 57 6
Aviva Europe 13% 182 507 689 7
North America 14% 65 366 431 4
Asia Pacific 11% 62 34 96 13
------------------------------ ---------- -------- -------- --------- --------
Total - excluding Delta Lloyd 13.3% 407 1,105 1,512 7
Total - Delta Lloyd 6% 106 112 218 16
------------------------------ ---------- -------- -------- --------- --------
Total 12.5% 513 1,217 1,730 8
------------------------------ ---------- -------- -------- --------- --------
1 The Asia Pacific region IRR and payback period excluding Taiwan, which is held for sale, are 14% and 8 years respectively. (2010: 11% and 8 years).
2 Current period represents the results of Delta Lloyd up to 6 May 2011 only.
Page 177
E12 - Free surplus emergence
Total
Existing business New business business
------------------------------------------------------- ------------------------------ -----------
Impact
of
experience
variances Reduction
Transfer and Release Total in free Total
from assumption of required existing Impact surplus new Total
Net of tax and VIF Return changes capital business on from business free
non-controlling to net on net on net to free surplus net required surplus surplus
interests worth worth worth surplus generation worth capital generation generation
2011 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- -------- ------- ---------- ----------- ----------- ------ --------- ----------- -----------
United Kingdom 364 109 247 (86) 634 (101) 10 (91) 543
Aviva Europe 539 95 (37) 225 822 (152) (233) (385) 437
North America 270 42 119 203 634 (42) (305) (347) 287
Asia Pacific 66 12 14 (10) 82 (51) (31) (82) -
---------------- -------- ------- ---------- ----------- ----------- ------ --------- ----------- -----------
Total -
continuing
operations 1,239 258 343 332 2,172 (346) (559) (905) 1,267
Total -
discontinued
operations 60 17 3 10 90 (15) (14) (29) 61
---------------- -------- ------- ---------- ----------- ----------- ------ --------- ----------- -----------
Total 1,299 275 346 342 2,262 (361) (573) (934) 1,328
---------------- -------- ------- ---------- ----------- ----------- ------ --------- ----------- -----------
Total
Existing business New business business
------------------------------------------------------- ------------------------------ -----------
Impact
of
experience
variances
and Reduction
Transfer assumption Release Total in free Total
from Return changes of required existing Impact surplus new Total
Net of tax and VIF on on capital business on from business free
non-controlling to net net net to free surplus net required surplus surplus
interests worth worth worth surplus generation worth capital generation generation
2010 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- -------- ------ ----------- ----------- ----------- ------ --------- ----------- -----------
United Kingdom 345 129 208 (183) 499 (43) (95) (138) 361
Aviva Europe 478 77 146 126 827 (149) (342) (491) 336
North America 210 53 (56) 292 499 (41) (375) (416) 83
Asia Pacific 52 9 (5) 15 71 (57) (34) (91) (20)
---------------- -------- ------ ----------- ----------- ----------- ------ --------- ----------- -----------
Total -
continuing
operations 1,085 268 293 250 1,896 (290) (846) (1,136) 760
Total -
discontinued
operations 139 50 (224) 83 48 (59) (55) (114) (66)
---------------- -------- ------ ----------- ----------- ----------- ------ --------- ----------- -----------
Total 1,224 318 69 333 1,944 (349) (901) (1,250) 694
---------------- -------- ------ ----------- ----------- ----------- ------ --------- ----------- -----------
E13 - Maturity profile of business
(a) Total in-force business
To show the profile of the VIF emergence, the value of VIF in the statements of financial position has been split into five-year tranches depending on the date when the profit is expected to emerge.
Net of non-controlling interest 2011 GBPm 0-5 6-10 11-15 16-20 20+ Total -------------------------------- --- ----- ----- ----- ----- ------- United Kingdom 189 729 585 258 571 2,332 Aviva Europe 306 468 379 222 320 1,695 North America 60 (624) (335) (144) (319) (1,362) Asia Pacific 188 126 47 14 (75) 300 -------------------------------- --- ----- ----- ----- ----- ------- Total 743 699 676 350 497 2,965 -------------------------------- --- ----- ----- ----- ----- ------- Restated Net of non-controlling interest 2010 GBPm 0-5 6-10 11-15 16-20 20+ Total --------------------------------- ----- ----- ----- ----- ---- ----- United Kingdom 153 766 538 287 553 2,297 Aviva Europe 1,361 801 481 294 351 3,288 North America (117) (47) 8 (4) (17) (177) Asia Pacific 181 92 34 15 3 325 --------------------------------- ----- ----- ----- ----- ---- ----- Total - excluding Delta Lloyd 1,578 1,612 1,061 592 890 5,733 Total - Delta Lloyd 234 50 26 (80) (34) 196 --------------------------------- ----- ----- ----- ----- ---- ----- Total 1,812 1,662 1,087 512 856 5,929 --------------------------------- ----- ----- ----- ----- ---- -----
Page 178
E13- Maturity profile of business continued
(b) New business
To show the profile of the VIF emergence, the value of new business has been split into five-year tranches depending on the date when the profit is expected to emerge.
Net of non-controlling interests 2011 GBPm 0-5 6-10 11-15 16-20 20+ Total ----------------------------------- --- ---- ----- ----- ---- ----- United Kingdom 93 58 34 25 173 383 Aviva Europe 161 75 41 22 34 333 North America 43 (94) 28 7 (27) (43) Asia Pacific 51 29 14 8 3 105 ----------------------------------- --- ---- ----- ----- ---- ----- Total - continuing operations 348 68 117 62 183 778 Total - discontinued operations(1) (8) 11 10 (1) 3 15 ----------------------------------- --- ---- ----- ----- ---- ----- Total 340 79 127 61 186 793 ----------------------------------- --- ---- ----- ----- ---- ----- Net of non-controlling interests 2010 GBPm 0-5 6-10 11-15 16-20 20+ Total ----------------------------------- ---- ---- ----- ----- --- ----- United Kingdom 78 42 22 13 143 298 Aviva Europe 178 87 53 24 36 378 North America (26) (85) 10 22 (6) (85) Asia Pacific 57 22 11 5 3 98 ----------------------------------- ---- ---- ----- ----- --- ----- Total - continuing operations 287 66 96 64 176 689 Total - discontinued operations(1) (1) 9 9 5 (4) 18 ----------------------------------- ---- ---- ----- ----- --- ----- Total 286 75 105 69 172 707 ----------------------------------- ---- ---- ----- ----- --- -----
1 Current period discontinued operations represent the results of Delta Lloyd up to 6 May 2011 only.
E14- Segmental analysis of life and related business embedded value
Net of Free Required Total non-controlling interests surplus capital(1) VIF MCEV 2011 GBPm GBPm GBPm GBPm --------------------------- -------- ----------- ------- ------ United Kingdom 1,054 2,868 2,332 6,254 France(2) (145) 2,048 800 2,703 Ireland 60 343 400 803 Italy(3) 8 499 (658) (151) Poland 131 102 929 1,162 Spain 118 227 105 450 Other Europe 31 33 119 183 Aviva Europe 203 3,252 1,695 5,150 North America(2,4) (11) 1,575 (1,362) 202 Asia Pacific 98 270 300 668 Total 1,344 7,965 2,965 12,274 --------------------------- -------- ----------- ------- ------
1 Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.
2 France and Aviva USA have a positive surplus on a statutory basis.
3 Negative MCEV in Italy results from widening of spreads on sovereign debt over the year
4 Aviva USA's holding company debt amounting to GBP736 million at 31 December 2011 has been included within non-covered business.
Restated Free Required Total Net of non-controlling interests surplus capital(1) VIF MCEV 2010 GBPm GBPm GBPm GBPm ---------------------------------- -------- ----------- ----- ------ United Kingdom 1,139 2,934 2,297 6,370 France(2) (243) 1,737 1,446 2,940 Ireland 47 336 444 827 Italy 202 313 82 597 Poland 129 114 876 1,119 Spain 81 266 207 554 Other Europe 43 45 233 321 Aviva Europe 259 2,811 3,288 6,358 North America(2,3) (286) 1,437 (177) 974 Asia Pacific 135 216 325 676 ---------------------------------- -------- ----------- ----- ------ Total - excluding Delta Lloyd 1,247 7,398 5,733 14,378 Total - Delta Lloyd 356 944 196 1,496 ---------------------------------- -------- ----------- ----- ------ Total 1,603 8,342 5,929 15,874 ---------------------------------- -------- ----------- ----- ------
1 Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.
2 France and Aviva USA have a positive surplus on a statutory basis.
3 Aviva USA's holding company debt amounting to GBP765 million at 31 December 2010 has been included within non-covered business.
Page 179
E14- Segmental analysis of life and related business embedded value continued
The required capital across our life businesses varies between 100% and 325% of EU minimum or equivalent. The weighted average level of required capital for our life business, excluding Delta Lloyd, expressed as a percentage of the EU minimum (or equivalent) solvency margin has increased to 135% (2010: 130%). These levels of required capital are used in the calculation of the Group's embedded value to evaluate the cost of locked in capital. At 31 December 2011 the aggregate regulatory requirements based on the EU minimum test amounted to GBP5.9 billion (2010: GBP6.0 billion). At this date, the actual net worth held in our long-term business, excluding Delta Lloyd, was GBP9.3 billion (2010: GBP8.6 billion) which represents 158% (2010: 144%) of these minimum requirements.
E15 - Risk allowance within present value of in-force (VIF)
Within the VIF in the tables, there are additional allowances for risks not included within the basic present value of future profits calculation.
Time
value
of financial
options
Net of Frictional Non-hedgeable and
non-controlling interests PVFP costs risks guarantees VIF
2011 GBPm GBPm GBPm GBPm GBPm
--------------------------- ----- ---------- ------------- ------------- -------
United Kingdom 2,990 (241) (390) (27) 2,332
France 1,721 (147) (182) (592) 800
Ireland 439 (14) (22) (3) 400
Italy (550) (3) (20) (85) (658)
Poland 1,088 (11) (145) (3) 929
Spain 176 (12) (45) (14) 105
Other Europe 130 (2) (7) (2) 119
Aviva Europe 3,004 (189) (421) (699) 1,695
North America (513) (160) (67) (622) (1,362)
Asia Pacific 455 (26) (67) (62) 300
Total 5,936 (616) (945) (1,410) 2,965
--------------------------- ----- ---------- ------------- ------------- -------
The Time Value of Options and Guarantees (excluding Delta Lloyd) has increased by GBP621 million to GBP1,410 million, reflecting adverse impacts from economic movements over the year; in particular, significant increases in swaption volatility and decreases in risk-free rates.
The allowance for Non-hedgeable risks (excluding Delta Lloyd) increased by GBP124 million to GBP945 million, primarily due to lower reference rates. The charge for CNHR remains unchanged at 3.3%.
Time
value
of financial
Restated options
Net of Frictional Non-hedgeable and
non-controlling interests PVFP costs risks guarantees VIF
2010 GBPm GBPm GBPm GBPm GBPm
------------------------------ ----- ---------- ------------- ------------- -----
United Kingdom 2,938 (291) (322) (28) 2,297
France 2,051 (123) (170) (312) 1,446
Ireland 476 (9) (23) - 444
Italy 156 (19) (11) (44) 82
Poland 1,013 (14) (118) (5) 876
Spain 281 (18) (41) (15) 207
Other Europe 247 (3) (9) (2) 233
Aviva Europe 4,224 (186) (372) (378) 3,288
North America 379 (136) (69) (351) (177)
Asia Pacific 441 (26) (58) (32) 325
------------------------------ ----- ---------- ------------- ------------- -----
Total - excluding Delta Lloyd 7,982 (639) (821) (789) 5,733
Total - Delta Lloyd 580 (107) (85) (192) 196
------------------------------ ----- ---------- ------------- ------------- -----
Total 8,562 (746) (906) (981) 5,929
------------------------------ ----- ---------- ------------- ------------- -----
Page 180
E16 - Implied discount rates (IDR)
In the valuation of a block of business, the IDR is the rate of discount such that a traditional embedded value calculation for the covered business equates to the MCEV.
The cash flows projected are the expected future cash flows including expected investment cash flows from equities, bonds and properties earning a risk premium in excess of risk free, statutory reserves and required capital. The risk premiums used are consistent with those used in the expected existing business contribution within operating earnings. As the risk premiums are positive, a discount rate higher than risk-free is required to give a value equal to the market-consistent embedded value.
Average derived risk discount rates are shown below for the embedded value.
Restated
2011 2010
% %
----------------- ----- --------
United Kingdom 9.3% 8.4%
France 7.9% 6.7%
Ireland 4.1% 4.4%
Italy(1) n/a 7.3%
Poland 6.5% 7.3%
Spain 15.0% 9.6%
Other Europe 6.7% 8.0%
Aviva Europe n/a 6.9%
North America(1) n/a 34.2%
Asia Pacific 5.2% 5.9%
----------------- ----- --------
Total n/a 9.8%
----------------- ----- --------
1. Where there is significant difference in projected real world and risk neutral profits and the value of the in force business plus required capital is negative or close to zero, the IDR is not well defined and consequently IDR is not meaningful.
Page 181
E17- Summary of non-controlling interest in life and related businesses' MCEV results
Aviva Asia Delta Shareholder
France Ireland Italy Poland Spain Europe Pacific Lloyd Total interest Group
2011 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ------ ------- ----- ------ ----- ------- -------- ------ ----- ----------- -------
Value of new business
after tax 15 (1) 27 4 32 77 1 - 78 432 510
Life MCEV operating
(loss)/earnings after
tax 25 (10) 28 37 49 129 3 94 226 2,193 2,419
Life MCEV
(loss)/earnings
after tax (16) (29) (928) 41 (8) (940) 3 (13) (950) (1,337) (2,287)
Closing covered
businesses'
embedded value 214 266 (244) 158 405 799 21 - 820 12,274 13,094
----------------------- ------ ------- ----- ------ ----- ------- -------- ------ ----- ----------- -------
Aviva Asia Delta Shareholder
Restated France Ireland Italy Poland Spain Europe Pacific Lloyd Total interest Group
2010 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ------ ------- ----- ------ ----- ------- -------- ------ ----- ----------- ------
Value of new business
after tax 15 (1) 54 4 47 119 - (26) 93 358 451
Life MCEV operating
earnings after tax 41 6 104 40 81 272 3 49 324 2,199 2,523
Life MCEV
(loss)/earnings
after tax 47 (11) (26) 2 (29) (17) 6 (17) (28) 1,566 1,538
Closing covered
businesses'
embedded value 250 268 630 153 489 1,790 19 1,324 3,133 15,874 19,007
------------------------ ------ ------- ----- ------ ----- ------- -------- ------ ----- ----------- ------
There are no non-controlling interests in the UK or North America.
Page 182
E18 - Principal assumptions
(a) Economic assumptions - Deterministic calculations
Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting period.
In setting the risk-free rate we have, wherever possible, used the mid-price swap yield curve for an AA-rated bank. The curve is extrapolated if necessary to get rates suitable to the liabilities. For markets in which there is no reliable swap yield curve the relevant government bond yields are used. For certain business, swap rates are adjusted for a 'liquidity premium' in deriving the risk-free rates, and these adjustments are shown below the reference rate table.
Required capital is shown as a multiple of the EU statutory minimum solvency margin or equivalent.
The principal economic assumptions used are as follows:
Reference rate (spot, swap rates) and expense inflation
United Kingdom
------------------
2011 2010 2009
------------------ ----- ----- ----
Reference rate
1 year 1.2% 1.0% 1.2%
5 years 1.6% 2.7% 3.5%
10 years 2.3% 3.7% 4.3%
15 years 2.8% 4.1% 4.6%
20 years 3.0% 4.2% 4.6%
Expense inflation 2.8% 3.3% 3.3%
------------------ ----- ----- ----
Delta Lloyd
-----------------
2011 2010 2009
------------------ ----- ---- ----
Reference rate
1 year n/a 1.3% 1.3%
5 years n/a 2.6% 2.9%
10 years n/a 3.4% 3.7%
15 years n/a 3.8% 4.1%
20 years n/a 3.8% 4.2%
Expense inflation n/a 2.0% 2.4%
------------------ ----- ---- ----
Eurozone
(excluding Delta
Lloyd)
---------------------
2011 2010 2009
------------------ ------ ------ -----
Reference rate
1 year 1.4% 1.3% 1.3%
5 years 1.7% 2.5% 2.8%
10 years 2.4% 3.4% 3.7%
15 years 2.8% 3.8% 4.1%
20 years 2.8% 3.8% 4.2%
Expense inflation 1.9% 2.1% 2.5%
------------------ ------ ------ -----
Page 183
E18 - Principal assumptions continued
Poland
----------------
2011 2010 2009
------------------ ---- ---- ----
Reference rate
1 year 4.9% 4.4% 4.5%
5 years 4.8% 5.5% 5.8%
10 years 5.0% 5.7% 5.8%
15 years 4.7% 5.4% 5.7%
20 years 4.3% 5.1% 5.5%
Expense inflation 2.9% 3.0% 3.0%
------------------ ---- ---- ----
United States
-----------------
2011 2010 2009
------------------ ----- ---- ----
Reference rate
1 year 0.7% 0.4% 0.7%
5 years 1.2% 2.2% 3.1%
10 years 2.1% 3.5% 4.2%
15 years 2.5% 4.0% 4.6%
20 years 2.6% 4.2% 4.8%
Expense inflation 2.0% 3.0% 3.0%
------------------ ----- ---- ----
For service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company.
The following adjustments are made to the swap rate for immediate annuity type contracts and for all contracts for Aviva USA. The risk-free rate is taken as the swap yield curve for the currency of the liability, adjusted as follows:
Embedded
New business value
---------------------------------------------------------------------- ------------
4Q 2011 3Q 2011 Q2 2011 Q1 2011 4Q 2010 3Q 2010 2Q 2010 1Q 2010 2011 2010
-------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- ----- -----
UK Immediate annuities 1.27% 1.20% 1.00% 1.14% 1.09% 0.87% 0.75% 0.80% 1.30% 1.09%
UK bulk purchase annuities 1.36% 1.38% 0.65% 0.72% 0.72% 0.69% 0.70% 0.75% 1.30% 1.09%
France n/a n/a n/a n/a n/a n/a n/a n/a 1.18% 0.36%
Spain 0.96% 0.33% 0.31% 0.36% 0.15% 0.12% 0.20% 0.15% 0.88% 0.36%
Delta Lloyd n/a n/a 0.31% 0.36% 0.38% 0.39% 0.34% 0.43% n/a 0.36%
US immediate annuities 1.28% 0.59% 0.57% 0.66% 0.76% 0.85% 0.65% 0.65% 1.33% 0.66%
US deferred annuities and all
other contracts 1.09% 0.51% 0.49% 0.56% 0.64% 0.70% 0.55% 0.55% 1.13% 0.56%
-------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- ----- -----
For Delta Lloyd, the adjustment shown is applied to immediate annuity type contracts. For participating contracts, 75% of this value is used and for all other contracts, 50% of this value is used. This methodology is consistent with QIS 5 Solvency II requirements.
The approach to estimating the market level of liquidity premium in corporate bond assets is consistent with the formula structure proposed by CFO/CRO Forum working party.
The formula is:
UK/Europe: 50% of (iBoxx Corporate bond spread - 40bp)
USA: 60% of (iBoxx Corporate bond spread - 40bp)
Adjustments are made where liabilities are not fully backed by assets earning a liquidity premium and for contracts that are exposed to some lapse risk. There has been no change to the types of contracts to which a liquidity premium is applied.
Risk premium - used for operating profit, Implied Discount Rates (IDR), Internal Rates of Return (IRR) and payback period
For life and pensions operating earnings, Aviva uses normalised investment returns. The normalised investment returns are expressed as a swap rate based on the typical duration of the assets held plus an asset risk premium. More detail is given in note E1 - Basis of preparation.
The use of asset risk premia only impacts operating earnings as expected returns reflect management's long-term expectations of asset returns in excess of the reference rate from investing in different asset classes. This assumption does not impact the embedded value or value of new business as asset risk premia are not recognised until earned. The asset risk premia set out in the table below are added to the ten year swap rate to calculate expected returns.
Page 184
E18- Principal assumptions continued
All territories
-------------------
2011 2010 2009
---------------------- ----- ----- -----
Equity risk premium 3.5% 3.5% 3.5%
Property risk premium 2.0% 2.0% 2.0%
---------------------- ----- ----- -----
Future returns on fixed interest investments are calculated from prospective yields less an adjustment for credit risk.
Required capital and tax
Tax Required capital
rates(5) (% EU minimum or equivalent)
----- ----- --------- --------------------------------
2011 2010 2009 2011 2010
------------------ ----- ----- --------- -------------- ----------------
United Kingdom(1) 25.0% 27.0% 28.0% 100%/200% 100%/110%/200%
France 34.4% 34.4% 34.4% 107.5% 107.5%
Ireland(2) 12.5% 12.5% 12.5% 174%/180% 175%/250%
Italy(3) 34.3% 32.4% 32.4% 195% 111%/165%
Poland 19.0% 19.0% 19.0% 125.5% 125.5%
Spain(4) 30.0% 30.0% 30.0% 122%-130%/156% 130% - 134%/175%
Delta Lloyd n/a 25.0% 25.5% n/a 120%
United States 35.0% 35.0% 0.0% 325% 325%
------------------ ----- ----- --------- -------------- ----------------
1 The required capital in the United Kingdom under MCEV is 100% for unit-linked and other non-participating business and annuity business with 200% for BPA business. In addition, the reattribution of the inherited estate has led to additional capital being locked in to support the with-profit business, and this has been included within required capital.
2 Required capital in Ireland under MCEV is 174% for bancassurance and 180% for retail business.
3 This is the aggregate required capital level in Italy. The required capital as a percentage of EU minimum has increased due to the current economic environment.
4 Required capital in Spain is 156% of the EU minimum for Aviva Vida y Pensiones and 122% - 130% for bancassurance companies.
5 Current tax legislation and rates have been assumed to continue unaltered except where changes in future tax rates have been substantively enacted as at the valuation date.
A reduction in the UK corporation tax rate from 28% to 26% was substantively enacted in March 2011 and is effective from 1 April 2011. A further reduction from 26% to 25% was substantively enacted in July 2011 and will be effective from 1 April 2012. The effect of the 25% rate has been reflected in the Group's MCEV net assets as at 31 December 2011. In addition, the Government announced its intention to further reduce the UK corporation tax rate to 24% from 1 April 2013 and to 23% from 1 April 2014. The benefit to the Group's MCEV net assets from the further 2% reduction in the rate from 25% to 23% is estimated at approximately GBP100 million in total.
Considerable changes to the regime for taxing UK life insurance companies will be made with effect from 1 January 2013. Draft legislation on this was included in the draft 2012 Finance Bill published on 6 December 2011, and consultation on the changes and the draft legislation has continued since then. Based on the draft legislation published in December 2011 and the continued consultation, it is not expected that these changes will have a material impact on the Group's MCEV net assets.
Other economic assumptions
Required capital relating to with-profit business is generally assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders. Where the fund is insufficient and additional shareholder support is required, this is included within required capital, including the RIEESA in the UK. Bonus rates on participating business have been set at levels consistent with the economic assumptions. The distribution of profit between policyholders and shareholders within the with-profit funds assumes that the shareholder interest in conventional with-profit business in the UK and Ireland continues at the current rate of one-ninth of the cost of bonus.
(b) Economic assumptions - Stochastic calculations
The calculation of time value of options and guarantees allows for expected management and policyholder actions in response to varying future investment conditions. The management actions modelled include changes to asset mix, bonus rates and rates of interest and other guarantees granted to policyholders. Modelled policyholder actions are described under 'Other assumptions'.
Page 85
E18 - Principal assumptions continued
Model - Europe (excluding Delta Lloyd) and Asia Pacific
Swap rates are generated by a model, the LIBOR Market Model (LMM),that projects a full swap curve at monthly intervals. Forward rates are assumed to have a log-normal distribution which guarantees non-negative interest rates. The model is calibrated to at-the-money swaptions of a variety of terms and tenors. Swaption volatilities are taken from SuperDerivatives. Tests have been performed to ensure that sufficient scenarios have been used that the result converges to the stochastic value of the business being valued.
The total annual return on equities is calculated as the return on one-year swaps plus an excess return. This excess return is generally modelled using a log-normal model where volatility varies by time horizon. This allows the model to capture the term structure of implied volatilities. The model is calibrated to at-the-money options of a variety of terms. Option volatilities are taken from Markit.
The model also generates property total returns and real yield curves, although these are not significant asset classes for Aviva outside the UK. In the absence of liquid market data, the volatilities of these asset classes are based on historic data.
Assumptions for correlations between asset classes have been set based on historic data.
Model - North America and United Kingdom
Swap rates are generated by a model, the LIBOR Market Model Plus (LMM+), which projects a full swap curve at monthly intervals. Previously the LMM model was used in the UK to generate scenarios. Forward rates are assumed to have a distribution that lies between the log-normal and normal distributions. Although this no longer guarantees non-negative interest rates, it maintains interest rates within a more plausible range than the standard Libor Market Model, and gives a better fit to certain swaption volatility surfaces. The model is calibrated to volatilities for swaptions for ten year swaps for a range of option terms and strike rates. Swaption volatilities are taken from SuperDerivatives. Tests have been performed to ensure that sufficient scenarios have been used that the result converges to the stochastic value of the business being valued.
The total annual return on equities is calculated as the return on one-year swaps plus an excess return. For the US, this excess return is modelled using a log-normal model where volatility varies by time horizon. This allows the model to capture the term structure of implied volatilities. The model is calibrated to at-the-money options of a variety of terms. For the UK, a two-dimensional model is used to capture the term structure of implied volatilities and the projected in the money position. Option volatilities are taken from Markit.
Assumptions for correlations between asset classes have been set based on historic data.
Model - Delta Lloyd
The interest rate model used is a short rate G2++ model. The model is calibrated to the QIS5 yield curve and the swaption implied volatilities. Swaption implied volatilities are taken from Bloomberg. The equity model is a Heston model.
Assumptions for correlations between asset classes have been set based on historic data.
Asset classes
The significant asset classes for UK participating business are equities, property and long-term fixed rate bonds. The most significant assumptions are the distribution of future long-term interest rates (nominal and real) and swaption implied volatilities.
For many businesses, including US, France and Delta Lloyd, the most important assets are fixed rate bonds of various durations.
Summary statistics
Swaption implied volatilities
The implied volatility is that determined by Black-Scholes formula to reproduce the market price of the option. The following table sets out the swaption implied volatilities.
2011 Swap length 2010 Swap length
------------------------------------ --------------------------------------
20
Option length 10 years 15 years years 25 years 10 years 15 years 20 years 25 years
-------------- -------- -------- ------ -------- -------- -------- -------- --------
UK sterling
10 years 18.0% 16.8% 16.1% 15.6% 15.3% 14.8% 14.3% 13.6%
15 years 16.2% 15.4% 14.8% 14.1% 14.1% 13.6% 13.1% 12.3%
20 years 15.3% 14.5% 13.8% 13.1% 13.1% 12.5% 12.0% 11.2%
25 years 15.4% 14.3% 13.5% 12.8% 12.3% 11.7% 11.2% 10.4%
Euro
10 years 27.3% 28.1% 28.7% 28.4% 21.2% 20.9% 20.6% 20.3%
15 years 31.6% 30.9% 29.3% 28.1% 20.7% 20.1% 19.5% 18.8%
20 years 38.2% 32.6% 29.2% 27.7% 19.2% 18.5% 17.8% 16.9%
25 years 35.0% 29.1% 26.3% 25.2% 17.8% 16.9% 16.1% 15.2%
US dollar
10 years 30.4% 29.3% 28.4% 28.3% 24.0% 23.6% 22.9% 22.2%
15 years 30.1% 28.1% 27.4% 27.7% 23.9% 23.1% 22.2% 21.1%
20 years 27.5% 26.5% 26.9% 27.6% 23.0% 21.9% 20.6% 19.4%
25 years 28.0% 27.9% 29.5% 30.4% 21.7% 20.4% 19.1% 17.8%
Delta Lloyd
10 years n/a n/a n/a n/a 17.8% 18.1% 18.8% 19.8%
15 years n/a n/a n/a n/a 20.5% 21.0% 21.4% 21.7%
20 years n/a n/a n/a n/a 25.2% 25.3% 24.3% 23.4%
25 years n/a n/a n/a n/a 28.5% 26.4% 24.0% 22.5%
-------------- -------- -------- ------ -------- -------- -------- -------- --------
Page 186
E18 - Principal assumptions continued
Equity implied volatilities
The implied volatility is that determined by the Black-Scholes formula to reproduce the market price of the option. The following table sets out the model equity implied volatilities.
2011 2010
----- ------ ----- ------- ----- ----- ----- ------ ----- ------- ----- -------------
Delta
Option length UK France Italy Ireland Spain US UK France Italy Ireland Spain US Lloyd
-------------- ----- ------ ----- ------- ----- ----- ----- ------ ----- ------- ----- ----- ------
5 years 25.8% 27.5% 31.9% 27.5% 30.4% 28.9% 24.5% 29.0% 27.5% 27.7% 32.4% 28.8% 27.2%
10 years 27.2% 27.9% 31.5% 27.9% 30.1% 31.0% 25.5% 28.4% 27.0% 27.6% 31.2% 29.1% 27.0%
15 years 27.1% 29.4% 33.0% 29.4% 31.6% 31.2% 26.4% 29.1% 26.1% 28.4% 30.2% 29.7% 26.3%
-------------- ----- ------ ----- ------- ----- ----- ----- ------ ----- ------- ----- ----- ------
Property implied volatilities
Best estimate levels of volatility have been used in the absence of meaningful option prices from which implied levels of volatility can be derived.
For the UK, model property implied volatility is 15% for 31 December 2011 (31 December 2010: 15%).
Demographic assumptions
Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva's recent operating experience with
a view to giving a best estimate of future experience. We have anticipated future changes in experience where that is appropriate,
e.g. we have allowed for improvements in future policyholder longevity.
We have set the assumptions based on a best estimate of shareholder outcomes. In particular, where the policyholder behaviour varies with economic experience, we have set assumptions which are dynamic, i.e. vary depending on the economic assumptions.
For example, surrender and option take up rate assumptions that vary according to the investment scenario under consideration have been used in the calculation of the time value of options and guarantees, based on our assessment of likely policyholder behaviour in different investment scenarios.
Additionally, where demographic experience is not driven by economic scenarios but is asymmetric on a stand-alone basis, the best estimate assumption considers the weighted-average expected experience, not simply the median or most likely outcome.
Notwithstanding the notification on 15 December 2011 that the bancassurance distribution agreement with Allied Irish Bank was not being renewed, the Aviva Ireland demographic assumptions have been set assuming the business remains open to new business and does not incur diseconomies of scale or other operating impacts.
Expense assumptions
Management expenses and operating expenses of holding companies attributed to life and related businesses have been included in the MCEV calculations and split between expenses relating to the acquisition of new business, the maintenance of business in-force and project expenses. Future expense assumptions include an allowance for maintenance expenses and a proportion of recurring project expenses. Certain expenses of an exceptional nature, when they occur, are identified separately and are generally charged as incurred. No future productivity gains have been anticipated.
Where subsidiary companies provide administration, investment management or other services to our life businesses, the value of profits or losses arising from these services have been included in the embedded value and value of new business.
Non-hedgeable risk
For the balance sheet and operating profit, a charge of 3.3% has been applied to the group-diversified capital required on
a 1-in-200 one-year basis over the remaining lifetime of in-force business.The charge is set so as to give an aggregate allowance that is in excess of the expected operational risk costs arising from the in-force covered business over its remaining lifetime.
The capital levels used are projected to be sufficient to cover non-hedgeable risks at the 99.5% confidence level one-year after the valuation date. The capital is equal to the capital from the ICA results for those risks considered. The capital has been projected as running off over the remaining life of the in-force portfolio in line with the drivers of the capital requirement.
In addition to the operational risk allowance, financial non-hedgeable risks and other product level asymmetries have been allowed for. These allowances are not material as significant financial non-hedgeable risks and product level asymmetries are either modelled explicitly and included in the TVOG or are included in the PVFP through the use of appropriate best estimate assumptions.
Page 187
E18 - Principal assumptions continued
(c) Other assumptions
Valuation of debt
Borrowings in the MCEV consolidated statement of financial position are valued on an IFRS basis, consistent with the primary financial statements. At 31 December 2011 the market value of the Group's external debt, subordinated debt, preference shares including General Accident plc preference shares of GBP250 million (classified as non-controlling interests) and direct capital instrument was GBP5,782 million (31 December 2010: GBP7,279 million).
2011 2010
GBPm GBPm
-------------------------------------------------------------------------------------------------- ------- -------
Borrowings per summarised consolidated statement of financial position - MCEV basis 8,450 14,949
Less: Securitised mortgage funding (1,306) (6,332)
-------------------------------------------------------------------------------------------------- ------- -------
Borrowings excluding non-recourse funding - MCEV basis 7,144 8,617
Less: Operational financing by businesses (1,889) (2,551)
-------------------------------------------------------------------------------------------------- ------- -------
External debt and subordinated debt - MCEV basis 5,255 6,066
Add: Preference shares (including General Accident plc) and direct capital instrument 1,440 1,440
-------------------------------------------------------------------------------------------------- ------- -------
External debt, subordinated debt, preference shares and direct capital instrument - MCEV basis 6,695 7,506
Effect of marking these instruments to market (913) (227)
Market value of external debt, subordinated debt, preference shares and direct capital instrument 5,782 7,279
-------------------------------------------------------------------------------------------------- ------- -------
Other
It has been assumed that there will be no changes to the methods and bases used to calculate the statutory technical provisions and current surrender values, except where driven by varying future investment conditions under stochastic economic scenarios.
E19 - Sensitivity analysis
(a) Economic assumptions
The following tables show the sensitivity of the embedded value and the value of new business to:
n 10 basis point increase in the liquidity premium adjustment, where applicable;
n one percentage point increase and decrease in the risk-free rate, including all consequential changes (including assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);
n 10% increase and decrease in market values of equity and property assets;
n 25% increase in equity and swaption volatilities;
n 50 basis point increase and decrease in credit spreads with no change to liquidity premium; and
n decrease in the level of required capital to 100% EU minimum (or equivalent).
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns. Some of the sensitivity scenarios may have consequential effects on valuation bases, where the basis for certain blocks of business is actively updated to reflect current economic circumstances. Consequential valuation impacts on the sensitivities are allowed for where an active valuation basis is used. Where businesses have a target asset mix, the portfolio is re-balanced after a significant market movement otherwise no re-balancing is assumed.
For new business, the sensitivities reflect the impact of a change immediately after inception of the policy.
In general, the magnitude of the sensitivities will reflect the size of the embedded values, though this will vary as the sensitivities have different impacts on the different components of the embedded value. In addition, other factors can have a material impact, such as the nature of the options and guarantees, as well as the types of investments held.
The credit spread sensitivities assume that the change relates to credit risk and not liquidity risk; in practice, credit spread movements may be partially offset due to changes in liquidity risk.
Sensitivities will also vary according to the current economic assumptions, mainly due to the impact of changes to both the intrinsic cost and time value of options and guarantees. Options and guarantees are the main reason for the asymmetry of the sensitivities where the guarantee impacts to different extents under the different scenarios.
Page 188
E19 - Sensitivity analysis continued
Embedded value
Interest
rates
--------------------
10bp
increase Swaption
in adjustment implied
As reported to volatilities
2011 on page risk-free 1% 1% 25%
Embedded value 178 rates increase decrease increase
(net of tax and non-controlling interest) GBPm GBPm GBPm GBPm GBPm
----------------------------------------------- ----------- -------------- --------- --------- -------------
United Kingdom 6,254 205 (195) 140 (5)
France 2,703 5 (55) (30) (165)
Ireland 803 - (10) 15 -
Italy (151) - 45 (145) -
Poland 1,162 - (65) 70 -
Spain 450 10 (10) 5 -
Other Europe 183 - (5) 10 -
Aviva Europe 5,150 15 (100) (75) (165)
North America 202 270 185 (455) (185)
Asia Pacific 668 - 130 (185) (10)
----------------------------------------------- ----------- -------------- --------- --------- -------------
Total 12,274 490 20 (575) (365)
----------------------------------------------- ----------- -------------- --------- --------- -------------
Equity/Property
--------------------------------
Market Values Credit Spread
-------------------- --------------------
EU
2011 As reported Volatility minimum
Embedded value on page 10% 10% 25% 50bps 50bps capital
(net of tax and non-controlling 178 increase decrease increase increase decrease or equivalent
interest) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- ----------- --------- --------- ---------- --------- --------- --------------
United Kingdom 6,254 235 (320) (225) (955) 1,015 5
France 2,703 175 (185) (170) (60) 215 10
Ireland 803 15 (15) - - - 5
Italy (151) 40 (40) - (15) 15 -
Poland 1,162 10 (10) - - - 5
Spain 450 10 (10) (5) (65) 50 5
Other Europe 183 - - - - - -
Aviva Europe 5,150 250 (260) (175) (140) 280 25
North America 202 30 (35) - (990) 985 110
Asia Pacific 668 20 (20) (15) (20) 20 35
--------------------------------- ----------- --------- --------- ---------- --------- --------- --------------
Total 12,274 535 (635) (415) (2,105) 2,300 175
--------------------------------- ----------- --------- --------- ---------- --------- --------- --------------
In line with the CFO Forum Press release on 9 December 2011, a sensitivity to include an allowance for the current sovereign debt market conditions has been performed. The calculated sensitivity uses the ECB AAA and other curve in place of the reference rate for liabilities in Italy and Spain and results in an increase of GBP0.6 billion to the embedded value of GBP12.3 billion.
Page 189
E19- Sensitivity analysis continued
New business
Interest
rates
------------------------
10bp Swaption
increase implied
As reported in adjustment volatilities
2011 on page to risk-free 25%
Value of new business 168 rates 1% increase 1% decrease increase
(net of tax and non-controlling interest) GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ----------- -------------- ----------- ----------- -------------
United Kingdom 281 33 (18) 27 -
France 79 - 7 (8) (10)
Ireland (3) - 1 (1) -
Italy 23 - 15 (25) -
Poland 34 - (3) 3 -
Spain 28 1 (1) (1) -
Other Europe 20 - (1) 2 -
Aviva Europe 181 1 18 (30) (10)
North America (85) 12 55 (102) (18)
Asia Pacific 55 - 18 (20) -
------------------------------------------- ----------- -------------- ----------- ----------- -------------
Total 432 46 73 (125) (28)
------------------------------------------- ----------- -------------- ----------- ----------- -------------
Equity/Property
Market Values Credit Spread
-------------------- --------------------
EU
2011 As reported Volatility minimum
Value of new business on page 10% 10% 25% 50bps 50bps capital
(net of tax and non-controlling 168 increase decrease increase increase decrease or equivalent
interest) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- ----------- --------- --------- ---------- --------- --------- --------------
United Kingdom 281 - - - (137) 148 2
France 79 3 (2) (4) - 3 1
Ireland (3) - - - - - -
Italy 23 - - - - - 2
Poland 34 - - - - - -
Spain 28 - - - (8) 6 -
Other Europe 20 - - - - - -
Aviva Europe 181 3 (2) (4) (8) 9 3
North America (85) - - - (56) 54 15
Asia Pacific 55 - - - - - 6
Total 432 3 (2) (4) (201) 211 26
--------------------------------- ----------- --------- --------- ---------- --------- --------- --------------
Page 190
E19 - Sensitivity analysis continued
(b) Non-economic assumptions
The following tables below show the sensitivity of the embedded value and the value of new business to the following changes in non-economic assumptions:
n 10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of GBP10 pa would represent an expense assumption of GBP9 pa). Where there is a 'look through' into service company expenses the fee charged by the service company is unchanged while the underlying expense decreases;
n 10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% pa would represent a lapse rate of 4.5% pa); and
n 5% decrease in both mortality and morbidity rates disclosed separately for life assurance and annuity business.
No future management actions are modelled in reaction to the changing non-economic assumptions. In each sensitivity calculation all other assumptions remain unchanged. No changes to valuation bases have been included.
Embedded value
5% decrease 5% decrease
in mortality/ in mortality/
10% 10% morbidity morbidity
As reported decrease decrease rates rates
2011 on page in maintenance in lapse - life -annuity
Embedded value 178 expenses rates assurance business
(net of tax and non-controlling interest) GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ----------- --------------- --------- -------------- --------------
United Kingdom 6,254 180 30 65 (375)
France 2,703 45 45 35 (5)
Ireland 803 20 10 5 (5)
Italy (151) 15 (35) 5 -
Poland 1,162 20 50 15 -
Spain 450 5 40 15 (5)
Other Europe 183 10 20 5 -
Aviva Europe 5,150 115 130 80 (15)
North America 202 70 (120) 35 (15)
Asia Pacific 668 30 5 20 -
Total 12,274 395 45 200 (405)
------------------------------------------- ----------- --------------- --------- -------------- --------------
New business
5% decrease 5% decrease
in mortality/ in mortality/
10% 10% morbidity morbidity
As reported decrease decrease rates rates
2011 on page in maintenance in lapse - life -annuity
Value of new business 168 expenses rates assurance business
(net of tax and non-controlling interest) GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ----------- --------------- --------- -------------- --------------
United Kingdom 281 18 11 11 (34)
France 79 2 4 1 -
Ireland (3) 1 1 - -
Italy 23 1 1 1 -
Poland 34 1 5 2 -
Spain 28 1 6 2 -
Other Europe 20 1 6 1 -
Aviva Europe 181 7 23 7 -
North America (85) 9 (20) 6 -
Asia Pacific 55 6 3 1 -
Total 432 40 17 25 (34)
------------------------------------------- ----------- --------------- --------- -------------- --------------
Page 191
Glossary
Product definitions
Annuities
A type of policy that pays out regular amounts of benefit, either immediately and for the remainder of a person's lifetime, or deferred to commence from a future date. Immediate annuities may be purchased for an individual and his or her dependants or on a bulk purchase basis for groups of people. Deferred annuities are accumulation contracts, which may be used to provide benefits in retirement, and may be guaranteed, unit-linked or index-linked.
Bonds and savings
These are accumulation products with single or regular premiums and unit-linked or guaranteed investment returns. Our product ranges include single premium investment bonds, regular premium savings plans and mortgage endowment products.
Critical illness cover
Critical illness cover pays out a lump sum if the insured person is diagnosed with a serious illness that meets the plan definition. The cover is often provided in conjunction with other benefits under a protection contract.
Deferred annuities
An annuity (or pension) due to be paid from a future date or when the policyholder reaches a specified age. A deferred annuity may be funded by a policyholder by payment of a series of regular contributions or by a capital sum (the latter often provided from a pension fund).
Group pensions
A pension plan that covers a group of people, which is typically purchased by a company and offered to their employees.
Guaranteed annuities
A policy that pays out a fixed regular amount of benefit for a defined period.
Income drawdown
The policyholder can transfer money from any pension fund to an income drawdown plan from which they receive an income. The remainder of the pension fund continues to be invested, giving it the potential for growth.
Index linked annuities
An index linked annuity is a type of deferred annuity whose credited interest is linked to an equity index. It guarantees a minimum interest rate and protects against a loss of principal.
Investment sales
Comprise retail sales of mutual fund-type products such as unit trusts, individual savings accounts (ISAs) and open ended investment companies (OEICs).
ISAs
Individual savings accounts - Tax-efficient plans for investing in stocks and shares, cash deposits or life insurance investment funds, subject to certain limits. Introduced in the UK in 1999.
Monolines
Financial companies specialising in a single line of products such as credit cards, mortgages or home equity loans.
Mortgage endowment
An insurance contract combining savings and protection elements which is designed to repay the principal of a loan or mortgage.
Mortgage life insurance
A protection contract designed to pay off the outstanding amount of a mortgage or loan in the event of death of the insured.
Non profits
Long-term savings and insurance products sold in the UK other than "With profits" (see definition below) products.
OEIC
An Open Ended Investment Company is a collective investment fund structured as a limited company in which investors can buy and sell shares.
Pensions
A means of providing income in retirement for an individual and possibly his/her dependants. Our pensions products include personal and group pensions, stakeholder pensions and income drawdown.
Personal pensions
A pension plan tailored to the individual policyholder, which includes the options to stop, start or change their payments.
Protection
An insurance contract that protects the policyholder or his/her dependants against financial loss on death or ill-health. Our product ranges include term assurance, mortgage life insurance, flexible whole life and critical illness cover.
Regular premium
A series of payments are made by the policyholder, typically monthly or annually, for part of or all of the duration of the contract.
SICAVs
Societe d'investissement a capital variable (variable capital investment company). This is an open-ended investment fund, structured as a legally independent joint stock company, whose units are issued in the form of shares.
Page 192
Product definitions cont.
Single premium
A single lump sum is paid by the policyholder at commencement of the contract.
Stakeholder pensions
Low cost and flexible pension plans available in the UK, governed by specific regulations.
Takaful
Insurance products that observe the rules and regulations of Islamic law.
Term assurance
A simple form of life insurance, offering cover over a fixed number of years during which a lump sum will be paid out if the life insured dies.
Unit trusts
A form of open ended collective investment constituted under a trust deed, in which investors can buy and sell units.
Unit-linked annuities
A unit-linked annuity is a type of deferred annuity which is invested in units of investment funds, whose value depends directly on the market value of assets in those funds.
Whole life
Whole life insurance is a protection policy that remains in force for the insured's whole life. Traditional whole life contracts have fixed premium payments that typically cannot be missed without lapsing the policy. Flexible whole life contracts allow the policyholder to vary the premium and/or amount of life cover, within certain limits.
With-profits
A type of long-term savings and insurance product sold in the UK under with profits policies premiums are paid into a separate fund. Policyholders receive a return on their policies through bonuses, which "smooth" the investment return from the assets which premiums are invested in. Bonuses are declared on an annual and terminal basis. Shareholders have a participating interest in the with-profit funds and any declared bonuses. Generally, policyholder and shareholder participation in with-profit funds in the UK is split 90:10.
Wrap investments
An account in which a broker or fund manager executes investment decisions on behalf of a client in exchange for a single quarterly or annual fee, usually based on the total assets in the account rather than the number of transactions.
General terms
Available for sale (AFS)
Securities that have been acquired neither for short-term sale nor to be held to maturity. These are shown at fair value on the statement of financial position and changes in value are taken straight to equity instead of the income statement.
Association of British Insurers (ABI)
Association of British Insurers - A major trade association for UK insurance companies, established in July 1985.
Acquired value of in force (AVIF)
An estimate of future profits that will emerge over the remaining term of all existing life and pensions policies for which premiums are being paid or have been paid at the statement of financial position date.
Bancassurance
An arrangement whereby banks and building societies sell insurance and investment products to their customers on behalf of other financial providers.
UK Corporate Governance Code
The UK Corporate Governance Code sets out guidance in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice. The Financial Services Authority (FSA) requires companies with a UK Premium listing to disclose, in relation to the UK Corporate Governance Code, how they have applied its principles and whether they have complied with its provisions throughout the accounting year. Where the provisions have not been complied with, companies must provide an explanation for this.
Deferred acquisition costs (DAC)
The costs directly attributable to the acquisition of new business for insurance and investment contracts may be deferred to the extent that they are expected to be recoverable out of future margins in revenue on these contracts.
Fair value
The price that a reasonable buyer would be willing to pay and a reasonable seller would be willing to accept for a product on the open market.
FSA
The UK's Financial Services Authority - Main regulatory body appointed by the government to oversee the financial services industry in the UK. Since December 2001 it has been the single statutory regulator responsible for the savings, insurance and investment business.
Page 193
General terms cont.
Funds under management
Represents all assets actively managed or administered by or on behalf of the Group including those funds managed by third parties.
Funds under management by Aviva
Represents all assets actively managed or administered by the fund management operations of the Group.
General insurance
Also known as non-life or property and casualty insurance. Property insurance covers loss or damage through fire, theft, flood, storms and other specified risks. Casualty insurance primarily covers losses arising from accidents that cause injury to other people or damage the property of others.
Gross written premiums
The total earnings or revenue generated by sales of insurance products, before any reinsurance is taken into account. Not all premiums written will necessarily be treated as income in the current financial year, because some of them could relate to insurance cover for a subsequent period.
'Hard' insurance market
A term used to describe the state of the general insurance market. A "hard" insurance market is characterised by high levels of underwriting profits and the ability of insurers to charge high premium rates. Hard insurance markets generally occur when capital is scarce and are the opposite of "soft" insurance markets.
Independent Financial Advisers (IFAs)
A person or organisation authorised to give advice on financial matters and to sell the products of all financial service providers. In the UK they are legally obliged to offer the product that best suits their clients' needs. Outside the UK IFAs may be referred to by other names.
IFRS
International Financial Reporting Standards. These are accounting regulations designed to ensure comparable statement of financial position preparation and disclosure, and are the standards that all publicly listed companies in the European Union are required to use.
Operating profit
From continuing operations on an IFRS basis, stated before tax attributable to shareholders' profits, impairment of goodwill and exceptional items.
Inherited estate
In the UK, the assets of the long-term with-profit funds less the realistic reserves for non-profit policies written within the with-profit funds, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs and guarantees.
Long-term and savings business
Collective term for life insurance, pensions, savings, investments and related business.
Market Consistent Embedded Value
Aviva's Market Consistent Embedded Value (MCEV) methodology which is in accordance with the MCEV Principles published by the CFO Forum in June 2008 as amended in October 2009.
Net written premiums
Total gross written premiums for the given period, minus premiums paid over or 'ceded' to reinsurers.
Net asset value per ordinary share
Net asset value divided by the number of ordinary shares in issue. Net asset value is based on equity shareholders' funds.
Present value of new business (PVNBP)
Present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business under Market Consistent Embedded Value (MCEV) principles published by the CFO Forum.
'Soft' insurance market
A term used to describe the state of the general insurance market. A "soft" insurance market is characterised by low levels of profitability and market competition driving premium rates lower. Soft insurance markets generally occur when there is excess capital and are the opposite of "hard" insurance markets.
Turnbull Guidance on Internal Control
The Turnbull Guidance sets out best practice on internal controls for UK listed companies, and provides additional guidance in applying certain sections of the UK Corporate Governance.
Page 194
Market Consistent Embedded Value (MCEV) terms
Asymmetric risk
Risks that will cause shareholder profits to vary where the variation above and below the average are not equal in distribution.
CFO Forum
The CFO Forum (www.cfoforum.nl) is a high-level group formed by the chief financial officers of major European listed and non-listed insurance companies. Its aim is to discuss issues relating to proposed new accounting regulations for their businesses and how they can create greater transparency for investors.
The forum was created in 2002, the Market Consistent Embedded Value Principles were launched in June 2008. The principles are a further development of the European Embedded Value Principles first launched in May 2004.
Cost of non-hedgeable risks
This is the cost of undertaking those risks for which a deep and liquid market in which to hedge that risk does not exist. This can include both financial risks and non-financial risks such as mortality, persistency and expense.
Covered business
The contracts to which the MCEV methodology has been applied.
EU solvency
The excess of assets over liabilities and the worldwide minimum solvency margins, excluding goodwill and the additional value of in-force long-term business, and excluding the surplus held in the Group's life funds. The Group solvency calculation is determined according to the UK Financial Services Authority application of EU Insurance Groups Directive rules.
Financial options and guarantees
Features of the covered business conferring potentially valuable guarantees underlying, or options to change, the level or nature of policyholder benefits and exercisable at the discretion of the policyholder, whose potential value is impacted by the behaviour of financial variables.
Free surplus
The amount of any capital and surplus allocated to, but not required to support, the in-force covered business.
Frictional costs
The additional taxation and investment costs incurred by shareholders through investing the Required Capital in the Company rather than directly.
Group MCEV
A measure of the total consolidated value of the Group with covered life business included on an MCEV basis and non-covered business (including pension schemes and goodwill) included on an IFRS basis.
Gross risk-free yields
Gross of tax yields on risk-free fixed interest investments, generally swap rates under MCEV.
Implicit items
Amounts allowed by local regulators to be deducted from capital amounts when determining the EU required minimum margin.
Life business
Subsidiaries selling life and pensions contracts that are classified as covered business under MCEV.
Life MCEV
The MCEV balance sheet value of covered business as at the reporting date. Excludes non-covered business including pension schemes and goodwill.
Life MCEV operating earnings
Operating earnings on the MCEV basis relating to the lines of business included in the embedded value calculations. From continuing operations and is stated before tax, impairment of goodwill and exceptional items.
Life MCEV earnings
Total earnings on the MCEV basis relating to the lines of business included in the embedded value calculations. From continuing operations.
Look-through basis
Inclusion of the capitalised value of profits and losses arising from subsidiary companies providing administration, investment management and other services to the extent that they relate to covered business.
Long-term savings
Includes life and pension sales calculated under MCEV and retail investment sales.
Market consistent
A measurement approach where economic assumptions are such that projected asset cash flows are valued consistently with current market prices for traded assets.
Net worth
The market value of the shareholders' funds and the shareholders' interest in the surplus held in the non-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets, and consists of the required capital and free surplus.
Page 195
Market Consistent Embedded Value (MCEV) terms cont.
New business margin
New business margins are calculated as the value of new business divided by the present value of new business premiums (PVNBP), and expressed as a percentage.
Present value of new business premiums (PVNBP)
The present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business.
Required capital
The amount of assets, over and above the value placed on liabilities in respect of covered business, whose distribution to shareholders is restricted.
Risk-free rate (reference rate in CFO Forum terminology)
The risk-free rate is taken as swaps except for all contracts that contain features similar to immediate annuities and are backed by appropriate assets, including paid up group deferred annuities and all other contracts in the Netherlands, and deferred annuities and all other contracts in the US. The adjusted risk-free rate is taken as swaps plus the additional return available for products and where backing asset portfolios can be held to maturity.
Service companies
Companies providing administration or fund management services to the covered business.
Solvency cover
The excess of the regulatory value of total assets over total liabilities, divided by the regulatory value of the required minimum solvency margin.
Spread business
Contracts where a significant source of shareholder profits is the taking of credit spread risk that is not passed on to policyholders. The most significant spread business in Aviva are immediate annuities and US deferred annuities and life business.
Statutory basis
The valuation basis and approach used for reporting financial statements to local regulators.
Stochastic techniques
Techniques that incorporate the potential future variability in assumptions.
Symmetric risks
Risks that will cause shareholder profits to vary where the variation above and below the average are equal and opposite. Financial theory says that investors do not require compensation for non-market risks that are symmetrical as the risks can be diversified away by investors.
Time value and intrinsic value
A financial option or guarantee has two elements of value, the time value and intrinsic value. The intrinsic value is the discounted value of the option or guarantee at expiry, assuming that future economic conditions follow best estimate assumptions. The time value is the additional value arising from uncertainty about future economic conditions.
Value of new business
Is calculated using economic assumptions set at the start of each quarter and the same operating assumptions as those used to determine the embedded values at the end of the reporting period and is stated after the effect of any frictional costs. Unless otherwise stated, it is also quoted net of tax and minority interests.
Page 196
Shareholder services
Shareholder profile as at 31 December 2011
Number of Number of
By category of shareholder shareholders % shares %
---------------------------------------------- ------------- ----- ------------- -----
Individual 578,603 96.88 270,555,684 9.11
Banks and nominee companies 15,563 2.61 2,662,548,530 89.63
Pension fund managers and insurance companies 241 0.04 2,357,297 0.08
Other corporate bodies 2,838 0.47 35,041,075 1.18
---------------------------------------------- ------------- ----- ------------- -----
Total 597,245 100 2,970,502,586 100
---------------------------------------------- ------------- ----- ------------- -----
Number of Number of
By size of shareholding shareholders % shares %
----------------------------------- ------------- ----- ------------- -----
1-1,000 540,772 90.54 150,357,346 5.06
1,001-5,000 50,250 8.41 95,608,617 3.22
5,001-10,000 3,389 0.57 23,580,910 0.79
10,001-250,000 2,209 0.37 95,497,159 3.22
250,001-500,000 167 0.03 58,280,304 1.96
500,001 and above 457 0.08 2,539,341,882 85.49
American Depositary Receipts (ADRs) 1 0.00 7,836,368(+) 0.26
Total 597,245 100 2,970,502,586 100
----------------------------------- ------------- ----- ------------- -----
+The number of registered ordinary shares represented by ADRs. Please note that each Aviva ADR represents two (2) ordinary Aviva shares.
2012 financial calendar
Annual General Meeting 3 May 2012 Announcement of first quarter Interim Management Statement 17 May 2012 Announcement of unaudited half-year results 9 August 2012 Announcement of third quarter Interim Management Statement 8 November 2012 ----------------------------------------------------------- ----------------
2011 final dividend dates - ordinary shares
Ex-dividend date 21 March 2012
Record date 23 March 2012
Scrip dividend price setting period 21, 22, 23, 26, 27
Scrip dividend price announcement date March 2012
Last date for receipt of Scrip elections 28 March 2012
Dividend payment date * 18 April 2012
17 May 2012
----------------------------------------- -------------------
* Please note that the ADR local payment date will be approximately five business days after the proposed dividend date for ordinary shares.
Annual General Meeting (AGM)
n The 2012 Aviva AGM will be held at The Barbican Centre, Silk Street, London EC2Y 8DS, on Thursday, 3 May 2012 at 11am.
n Details of all the resolutions to be considered at the AGM are given in the Notice of AGM, which will be available on the Company's website at www.aviva.com/agm.
n Shareholders can vote:
- By attending the meeting in person;
- Electronically at www.aviva.com/agm; or
- By completing and returning the relevant voting card(s) by post.
n The voting results for the 2012 AGM, including proxy votes and votes withheld, will be accessible on the Company's website at www.aviva.com/agm shortly after the meeting.
n If you are unable to attend the AGM but would like to ask the Board of directors a question regarding the business of the meeting, please submit your question via our website at www.aviva.com/agm or send an email to avivashareholders@aviva.com. We will endeavour to provide a formal response to all questions submitted by shareholders.
Do you receive duplicate documents?
A number of shareholders still receive duplicate documentation and split dividend payments as a result of having more than one account on the Aviva Register of Members. If you think you fall into this group and would like to combine your accounts, please contact the Company's Registrar, Computershare, on the telephone number listed overleaf.
Dividends
n Dividends on Aviva ordinary shares are normally paid in May and November; please see the table above for the key dates in respect of the 2011 final dividend.
n Dividends paid on Aviva preference shares are normally paid in March, June, September and December; please visit www.aviva.com/preferenceshares for the latest dividend payment dates.
n Holders of ordinary and preference shares will receive any dividends payable in Sterling and holders of ADRs will receive any dividends payable in US dollars.
Direct credit of dividend payments:
If you would like to have your cash dividends paid directly into your bank or building society account, please visit www.aviva.com/dividendmandate for more information or contact Computershare on the telephone number listed overleaf.
Aviva Scrip Dividend Scheme:
If you would like to receive your dividends on ordinary shares in the form of new shares instead of cash, you can choose to join the Aviva Scrip Dividend Scheme. Please contact Computershare on the telephone number listed overleaf to acquire a personalised application form and a copy of the terms and conditions or, alternatively, you may visit www.aviva.com/ecomms for more information on how to make this election online.
Page 197
Online Shareholder Services Centre - www.aviva.com/shareholderservices
The online shareholder services centre has been designed to provide useful information for holders of Aviva ordinary shares, preference shares and ADRs, and includes features to allow shareholders to manage their Aviva shareholdings easily and efficiently.
Within the online centre you will be able to find a shareholders' guide, current and historic ordinary share and ADR prices, share dealing information, news, updates and, when available, presentations from Aviva's senior management. You will also be able to download an electronic copy of recent Company reports.
The Shareholders' Guide contains answers to a range of frequently asked questions on holding ordinary shares, preference shares and ADRs in Aviva.
Manage your holdings online
You can view and manage your shareholding online by visiting www.aviva.com/ecomms. To log in you will require your 11 digit Shareholder Reference Number (SRN), which you will find on your proxy or voting card, latest dividend stationery, or any share certificate issued since 4 July 2011.
Shareholders can elect to receive electronic communications by registering their email address online, or by contacting Computershare directly. Making this election will save on printing and distribution costs and has environmental benefits.
Aviva Share Price Information
n For ordinary shares and ADRs, please visit www.aviva.com/shareprice
n For preference shares, please visit www.londonstockexchange.com
ShareGift
If you have a small number of shares which you consider uneconomical to sell, you may wish to consider donating them to ShareGift (Registered Charity: 1052686), a charity that specialises in accepting such unwanted small shareholdings. Donated shares are aggregated and sold, with the proceeds being used to support a wide range of UK registered charities.
You can find out more about ShareGift by visiting www.sharegift.org or by calling them on +44 (0)207 930 3737. If you would like to donate your shares to ShareGift, please contact Computershare.
Be on your guard - beware of fraudsters!
Shareholders are advised to be very wary of any unsolicited telephone calls or correspondence offering to buy shares at a discount or offering free financial advice or company reports. If you receive any unsolicited calls or advice:
n Make sure you get the correct name of the person and organisation;
n Check that they are properly authorised by the Financial Services Authority (FSA) by visiting www.fsa.gov.uk/register/; and
n If the calls persist, hang up.
For more information please visit the warning to shareholders page at: www.aviva.com/shareholderservices.
Contact details
Ordinary and preference shares - Computershare
Shareholders will be aware that Aviva changed its Registrar from Equiniti Limited to Computershare Investor Services PLC in July 2011.
For any queries regarding your shareholding, or to advise of changes to your personal details, please contact Computershare:
In writing: Computershare Investor Services PLC
The Pavilions, Bridgewater Road, Bristol BS99 6ZZ
By telephone: 0871 495 0105 (Lines are open from 8.30am to 5pm (UK time), Monday to Friday)
+44 117 378 8361 (if you are calling outside the UK).
By email: avivaSHARES@computershare.co.uk
American Depositary Receipts (ADRs) - Citibank
Aviva has a sponsored ADR facility administered by Citibank, NA. Any queries regarding Aviva ADRs can be directed to Citibank:
In writing: Citibank Shareholder Services
PO Box 43077, Providence, Rhode Island 02940-5000 USA
By telephone: +1 877 248 4237 (free phone for callers within the US) +1 781 575 4555 (for callers outside the US non-free phone)
By email: citibank@shareholders-online.com
Fax enquiries: +1 201 324 3284
Please visit www.citi.com/dr for further information about Aviva's ADR programme.
Group Company Secretary
Shareholders may contact the Group Company Secretary as follows:
In writing: Kirstine Cooper, Group Company Secretary
St Helen's, 1 Undershaft, London EC3P 3DQ
By telephone: + 44 (0) 20 7283 2000
By email: aviva.shareholders@aviva.com
Form 20-F
Aviva is a foreign private issuer in the United States of America and is subject to certain reporting requirements of the Securities Exchange Commission (SEC). Aviva files its Form 20-F with the SEC, copies of which can be found at www.aviva.com/reports.
Page 198
Useful links for shareholders
Aviva shareholder services centre
www.aviva.com/shareholderservices
ADR holders
www.aviva.com/adr
Aviva preference shareholders
www.aviva.com/preferenceshares
Dividend information for ordinary shares
www.aviva.com/dividends
Register for electronic communications
www.aviva.com/ecomms
Annual General Meeting information and Electronic Voting
www.aviva.com/agm
Aviva share price
www.aviva.com/shareprice
Completed proxy instructions must be submitted to the Company's Registrar, Computershare, as soon as possible, but in any event to arrive by no later than:
n 11am on Tuesday, 1 May 2012 for ordinary shareholders.
n 11am on Monday, 30 April 2012 for members of the Aviva Share Account and participants in the Aviva All Employee Share Ownership Plan.
End of part 5 of 5
This information is provided by RNS
The company news service from the London Stock Exchange
END
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