Achieved Profit Basis Notes
Analysis of life achieved operating profit
Life achieved operating profit is calculated on an after-tax basis and then grossed up at the full rate of corporation tax for UK business and at appropriate rates of tax for other countries.
| 6 months 2004 £m |
6 months 2003 £m |
Full year 2003 £m |
||
|---|---|---|---|---|
| United Kingdom | 356 | 339 | 659 | |
| Europe (excluding UK) | ||||
| France | 114 | 90 | 220 | |
| Ireland | 18 | 31 | 65 | |
| Italy | 34 | 33 | 70 | |
| Netherlands (including Belgium and Luxembourg) | 129 | 69 | 189 | |
| Poland | 33 | 40 | 104 | |
| Spain | 78 | 71 | 158 | |
| Other | 7 | 2 | 9 | |
| International | 31 | 30 | 81 | |
| Total life achieved operating profit before tax* | 800 | 705 | 1,555 | |
| * Life achieved operating profit includes minority interests in the six months to 30 June 2004 of £79 million (six months to 30 June 2003: £65 million; full year 2003: £154 million). This comprises minority interests in France of £5 million (six months to 30 June 2003: £4 million; full year 2003: £6 million), Italy £18 million (six months to 30 June 2003: £17 million; full year 2003: £37 million), Netherlands £13 million (six months to 30 June 2003: £3 million; full year 2003: £14 million), Poland £5 million (six months to 30 June 2003: £6 million; full year 2003: £20 million), Spain £37 million (six months to 30 June 2003: £35 million; full year 2003: £76 million) and Other Europe £1 million (six months to 30 June 2003: nil; full year 2003: £1 million). | ||||
Embedded value of life business
| 6 months 2004 £m |
6 months 2003 £m |
Full year 2003 £m |
||
|---|---|---|---|---|
| Embedded value at the beginning of the period | 12,155 | 10,148 | 10,148 | |
| Total life achieved profit after tax | 548 | 492 | 1,585 | |
| Exchange rate movements | (317) | 307 | 342 | |
| Embedded value of businesses acquired* | - | 64 | 64 | |
| Amounts injected into life operations | 13 | 88 | 221 | |
| Amounts released from life operations | (458) | (38) | (205) | |
| Embedded value at the end of the period** | 11,941 | 11,061 | 12,155 | |
| * Embedded value of businesses acquired
in 2003 represents the embedded value of Delta Lloyd
ABN AMRO Verzekeringen Holding BV, the insurance company
acquired as part of the bancassurance agreement entered
into with ABN AMRO NV in the Netherlands, of £64
million. ** Embedded value at the end of the period includes minority interests in 2004 of £575 million (30 June 2003: £504 million; 31 December 2003: £559 million). This comprises minority interests in France of £52 million (30 June 2003: £49 million; 31 December 2003: £46 million), Italy £223 million (30 June 2003: £204 million; 31 December 2003: £230 million), Netherlands £53 million (30 June 2003: £37 million; 31 December 2003: £43 million), Poland £56 million (30 June 2003: £50 million; 31 December 2003: £63 million), Spain £187 million (30 June 2003: £161 million; 31 December 2003: £174 million) and Other Europe £4 million (30 June 2003: £3 million; 31 December 2003: £3 million). |
||||
Segmental analysis of embedded value of life business
| Net worth at 30 June* |
Value of in-force at 30 June** |
Embedded value at 30 June |
||||
|---|---|---|---|---|---|---|
| 2004 £m |
2003 £m |
2004 £m |
2003 £m |
2004 £m |
2003 £m |
|
| United Kingdom | 1,769 | 1,913 | 3,744 | 3,443 | 5,513 | 5,356 |
| Europe (excluding UK) | ||||||
| France | 1,049 | 961 | 451 | 408 | 1,500 | 1,369 |
| Ireland | 262 | 247 | 274 | 284 | 536 | 531 |
| Italy | 319 | 291 | 109 | 102 | 428 | 393 |
| Netherlands (including Belgium and Luxembourg) | 1,222 | 967 | 1,131 | 1,021 | 2,353 | 1,988 |
| Poland | 121 | 120 | 226 | 216 | 347 | 336 |
| Spain | 194 | 182 | 284 | 226 | 478 | 408 |
| Other | 137 | 138 | 67 | 47 | 204 | 185 |
| International | 453 | 369 | 129 | 126 | 582 | 495 |
| 5,526 | 5,188 | 6,415 | 5,873 | 11,941 | 11,061 | |
| * The shareholders’ net worth
comprises 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. ** The value of in-force includes the effect of holding shareholders’ capital to support the minimum statutory solvency margin requirements and allowing for projected future releases. This impact reduces the value of in-force by £920 million (30 June 2003: £840 million). The minimum statutory solvency margin requirements supported by shareholders’ capital of £3,200 million (30 June 2003: £3,000 million) is included within the net worth. |
||||||
Minority interest in life achieved profit
| 6 months 2004 |
6 months 2003 |
Full year 2003 |
|||
|---|---|---|---|---|---|
| Shareholders’ interest £m |
Minority interest £m |
Group £m |
Group £m |
Group £m |
|
| New business contribution before effect of solvency margin | 270 | 54 | 324 | 297 | 621 |
| Effect of solvency margin | (64) | (14) | (78) | (86) | (149) |
| New business contribution including effect of solvency margin | 206 | 40 | 246 | 211 | 472 |
| Life achieved operating profit before tax and exceptional items | 721 | 79 | 800 | 705 | 1,555 |
| Total life achieved profit before tax | 707 | 84 | 791 | 696 | 2,249 |
| Attributed tax | (213) | (30) | (243) | (204) | (664) |
| Total life achieved profit after tax | 494 | 54 | 548 | 492 | 1,585 |
| Closing life embedded value | 11,366 | 575 | 11,941 | 11,061 | 12,155 |
Methodology
(a) Life achieved profit
The achieved profit method of financial reporting is designed
to recognise the present value of profits to be earned over
the life of an insurance policy. The total profit recognised
over the lifetime of a policy is the same as under the modified
statutory basis of reporting, but the timing of recognition
is different.
Distributable profits from long-term businesses arise when they are released to shareholders following actuarial valuations. These are carried out in accordance with 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 and administration costs. Using realistic assumptions of future experience, we can project releases to shareholders arising in future years from the business in-force and associated minimum statutory solvency margin.
The life achieved profit reflects current performance by measuring the movement, from the beginning to the end of the period, in the present value of projected releases to shareholders from the business in-force and associated minimum statutory solvency margin, together with the movement in the net assets of the long-term operations, adjusted for any amounts released from or invested in life operations.
The present value of the projected releases to shareholders is calculated by discounting back to the current time using a risk discount rate. The risk discount rate is a combination of a discount rate to reflect the time value of money and a risk margin to make prudent allowance for the risk that experience in future years may differ from the assumptions referred to above.
Achieved profit reporting takes account of the cost of maintaining local provisions. In addition, a significant allowance for the expected cost of guarantees is implicitly allowed for in the risk margin inherent in the risk discount rate consistent with the principles of the achieved profit guidance.
The calculations are carried out on an after-tax basis and the profits are then grossed up for tax at the full rate of corporation tax for the United Kingdom and at an appropriate rate for each of the other countries.
(b) Embedded value
The shareholders' interest in the long-term business operations
is represented by the embedded value. The embedded value
is the total of the net assets of the long-term operations
and the present value at risk discount rates (which incorporate
a risk margin) of the projected releases to shareholders
arising from the business in-force, less a deduction for
the effect of holding the minimum statutory solvency margin.
This effect of solvency margin is the difference between
the nominal value of the solvency margin and the present
value at risk discount rates of the projected release of
the solvency margin and investment earnings on the assets
deemed to back the solvency margin.
For with-profit funds in the United Kingdom 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 free assets over the future lifetime of the in-force with-profit policies.
Principal economic assumptions
Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at each period end. Margins are applied on a consistent basis to risk-free yields to obtain investment return assumptions for ordinary shares and property and risk discount rates. The change in assumptions in 2004 reflects the actual movements in risk free yields in each territory.
The principal economic assumptions used are as follows:
| United Kingdom | France | |||||||
|---|---|---|---|---|---|---|---|---|
| 30 June 2004 |
31 Dec- ember 2003 |
30 June 2003 |
31 Dec- ember 2002 |
30 June 2004 |
31 Dec- ember 2003 |
30 June 2003 |
31 Dec- ember 2002 |
|
| Risk discount rate | 7.7% | 7.5% | 7.3% | 7.3% | 8.1% | 8.1% | 7.8% | 8.1% |
| Pre-tax investment returns: | ||||||||
| Base government fixed interest | 5.1% | 4.8% | 4.5% | 4.5% | 4.3% | 4.3% | 3.9% | 4.3% |
| Ordinary shares | 7.6% | 7.3% | 7.0% | 7.0% | 6.3% | 6.3% | 5.9% | 6.3% |
| Property | 6.6% | 6.3% | 6.0% | 6.0% | 5.8% | 5.8% | 5.4% | 5.8% |
| Future expense inflation | 4.2% | 4.1% | 3.6% | 3.6% | 2.5% | 2.5% | 2.5% | 2.5% |
| Tax rate | 30.0% | 30.0% | 30.0% | 30.0% | 35.4% | 35.4% | 35.4% | 35.4% |
| Ireland | Italy | |||||||
|---|---|---|---|---|---|---|---|---|
| 30 June 2004 |
31 Dec- ember 2003 |
30 June 2003 |
31 Dec- ember 2002 |
30 June 2004 |
31 Dec- ember 2003 |
30 June 2003 |
31 Dec- ember 2002 |
|
| Risk discount rate | 8.6% | 8.6% | 8.3% | 8.7% | 7.4% | 7.4% | 7.0% | 7.3% |
| Pre-tax investment returns: | ||||||||
| Base government fixed interest | 4.5% | 4.5% | 4.1% | 4.6% | 4.4% | 4.4% | 3.9% | 4.4% |
| Ordinary shares | 7.5% | 7.5% | 7.1% | 7.6% | 7.4% | 7.4% | 6.9% | 7.4% |
| Property | 6.0% | 6.0% | 5.6% | 6.1% | 5.9% | 5.9% | 5.4% | 5.9% |
| Future expense inflation | 4.0% | 4.0% | 4.0% | 4.0% | 3.3% | 3.3% | 3.3% | 3.3% |
| Tax rate | 12.5% | 12.5% | 12.5% | 12.5% | 38.3% | 38.3% | 39.3% | 39.8% |
| Netherlands | Poland* | |||||||
|---|---|---|---|---|---|---|---|---|
| 30 June 2004 |
31 Dec- ember 2003 |
30 June 2003 |
31 Dec- ember 2002 |
30 June 2004 |
31 Dec- ember 2003 |
30 June 2003 |
31 Dec- ember 2002 |
|
| Risk discount rate | 7.5% | 7.4% | 7.1% | 7.4% | 14.8% | 13.5% | 15.4% | 15.4% |
| Pre-tax investment returns: | ||||||||
| Base government fixed interest | 4.4% | 4.2% | 3.9% | 4.2% | 7.5% | 6.0% | 8.0% | 8.0% |
| Ordinary shares | 7.4% | 7.2% | 6.8% | 7.2% | 7.5% | 6.0% | 8.0% | 8.0% |
| Property | 5.9% | 5.7% | 5.3% | 5.7% | n/a | n/a | n/a | n/a |
| Future expense inflation | 2.5% | 2.5% | 2.5% | 2.5% | 4.9% | 3.4% | 5.4% | 5.4% |
| Tax rate | 25.0% | 25.0% | 25.0% | 25.0% | 19.0% | 19.0% | 27.0% | 27.0% |
| Spain | ||||
|---|---|---|---|---|
| 30 June 2004 |
31 December 2003 |
30 June 2003 |
31 December 2002 |
|
| Risk discount rate | 7.7% | 7.7% | 7.4% | 7.7% |
| Pre-tax investment returns: | ||||
| Base government fixed interest | 4.6% | 4.6% | 4.2% | 4.6% |
| Ordinary shares | 7.6% | 7.6% | 7.2% | 7.6% |
| Property | 6.1% | 6.1% | 5.7% | 6.1% |
| Future expense inflation | 3.0% | 3.0% | 3.0% | 3.0% |
| Tax rate | 35.0% | 35.0% | 35.0% | 35.0% |
| * The economic assumptions shown above are those in the calculations for the life business. The economic assumptions for the pension business are identical with the exception of the risk discount rate which is 14.0% (30 June 2003: 13.8%; full year 2003: 12.7%; full year 2002: 13.8%). | ||||
Other assumptions
- Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have been announced.
- Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva’s recent operating experience.
- The management expenses of Aviva attributable to long-term business operations have been split between expenses relating to the acquisition of new business and to the maintenance of business in-force. Certain expenses of an exceptional nature have been identified separately and the discounted value of projected exceptional costs has been deducted from the value of in-force business. A realistic estimate of future fund management expenses that will be charged to long-term businesses by Group companies not included in the long-term business covered by the achieved profit method has been included within the value of in-force business.
- 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.
- The value of in-force business allows for future premiums under recurring single premium business where collection of future single premiums is expected and where the receipt of further single premiums is not regarded as new business at the point of receipt. It does not allow for future premiums under non-contractual increments, or for future Department of Work and Pensions (DWP) rebate premiums, and the value arising therefrom is included in the value of new business when the premiums are received.
- The value of the in-force business has been determined after allowing for the effect of holding solvency margins equal to the minimum EU solvency requirement (or equivalent for non-EU operations). Solvency margins relating to with-profit business are assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders.
- Bonus rates on with-profit business have been set at levels consistent with the economic assumptions and Aviva’s medium-term bonus plans. 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 United Kingdom and Ireland continues at the current rate of one-ninth of the cost of bonus.
Alternative assumptions
Economic assumptions
The table below shows the sensitivity to a one percentage
point increase in the assumed investment returns for equity
and property investments and in the discount rate for new
business contribution for the half year and embedded value.
| New business contribution* | Embedded value** | |||
|---|---|---|---|---|
| Equity/property returns £m |
Discount rates £m |
Equity/property returns £m |
Discount rates £m |
|
| United Kingdom | 8 | (21) | 150 | (275) |
| Europe (excluding UK) | ||||
| France | 2 | (4) | 40 | (80) |
| Ireland | 1 | (2) | 10 | (15) |
| Italy | - | (1) | 10 | (10) |
| Netherlands (including Belgium and Luxembourg) | 6 | (7) | 200 | (150) |
| Poland | - | - | 10 | (15) |
| Spain | - | (5) | 5 | (20) |
| Other | - | (1) | 5 | (5) |
| International | - | (3) | - | (20) |
| 17 | (44) | 430 | (590) | |
| * Calculated before effect of solvency margin, tax and minority interest. ** Calculated after effect of solvency margin and tax but before minority interest. |
||||
The impact of an increase of one percentage point in the
discount rate is calculated with all other assumptions remaining
unchanged.
Non-economic assumptions
Sensitivity calculations have been performed to identify
the non-economic assumptions to which new business contribution
and the value of in-force business within embedded value
are particularly sensitive. The calculations have been based
on similar percentage movements in each assumption from
the base assumption used to calculate the published new
business contribution and value of in-force business. Based
on this, the Group’s new business contribution and
value of in-force are most sensitive to changes in future
maintenance expenses.
