Interim results for 6 months ended 30 June 2006
Principal 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. The same margins are applied on a consistent basis across the Group to gross risk-free yields to obtain investment return assumptions for ordinary shares and property and to produce risk discount rates. Additional country-specific risk margins are applied to smaller businesses to reflect additional economic, political and business-specific risk, which result in the application of risk margins ranging from 3.7% to 8.7% in our eastern European and Asian business operations. Expense inflation is derived as a fixed margin above a local measure of long-term price inflation. Risk free rates and price inflation have been harmonised across territories within the Euro currency zone, except for expense inflation in Ireland where significant differences remain. Required capital is shown as a multiple of the EU statutory minimum solvency margin.
Investment return assumptions are generally derived by major product class, based on hypothecating the assets at the valuation date. Future assumed reinvestment rates are consistent with implied market returns at 30 June 2006. Rates have been derived using rates from the current yield curve at a duration based on the term of the liabilities, or directly from forward yield curves where considered appropriate. Assumptions about future investment mix are consistent with long-term plans. In most cases, the investment mix is assumed to continue unchanged throughout the projection period. The changes in assumptions between reporting dates reflect the actual movements in risk free yields in the United Kingdom, the Eurozone and other territories. The principal economic assumptions used are as follows:
| United Kingdom | ||||
|---|---|---|---|---|
| 30 June 2006 |
31 Dec 2005 |
30 June 2005 |
31 Dec 2004 |
|
| Risk discount rate | 7.4% | 6.8% | 6.9% | 7.3% |
| Pre-tax investment returns: | ||||
| Base government fixed interest | 4.7% | 4.1% | 4.2% | 4.6% |
| Ordinary shares | 7.7% | 7.1% | 7.2% | 7.6% |
| Property | 6.7% | 6.1% | 6.2% | 6.6% |
| Future expense inflation | 3.3% | 3.2% | 3.1% | 3.3% |
| Tax rate | 30.0% | 30.0% | 30.0% | 30.0% |
| Required Capital (% EU minimum) | 150% / 100% | 150% / 100% | 200% / 100% | 200% / 100% |
| France | ||||
|---|---|---|---|---|
| 30 June 2006 |
31 Dec 2005 |
30 June 2005 |
31 Dec 2004 |
|
| Risk discount rate | 6.8% | 6.0% | 5.9% | 6.4% |
| Pre-tax investment returns: | ||||
| Base government fixed interest | 4.1% | 3.3% | 3.2% | 3.7% |
| Ordinary shares | 7.1% | 6.3% | 6.2% | 6.7% |
| Property | 6.1% | 5.3% | 5.2% | 5.7% |
| Future expense inflation | 2.5% | 2.5% | 2.5% | 2.5% |
| Tax rate | 34.4% | 34.4% | 34.9% | 34.9% |
| Required Capital (% EU minimum) | 115% | 115% | 115% | 115% |
| Ireland | ||||
|---|---|---|---|---|
| 30 June 2006 |
31 Dec 2005 |
30 June 2005 |
31 Dec 2004 |
|
| Risk discount rate | 6.8% | 6.0% | 5.9% | 6.4% |
| Pre-tax investment returns: | ||||
| Base government fixed interest | 4.1% | 3.3% | 3.2% | 3.7% |
| Ordinary shares | 7.1% | 6.3% | 6.2% | 6.7% |
| Property | 6.1% | 5.3% | 5.2% | 5.7% |
| Future expense inflation | 4.0% | 4.0% | 4.0% | 4.0% |
| Tax rate | 12.5% | 12.5% | 12.5% | 12.5% |
| Required Capital (% EU minimum) | 150% | 150% | 150% | 150% |
| Italy | ||||
|---|---|---|---|---|
| 30 June 2006 |
31 Dec 2005 |
30 June 2005 |
31 Dec 2004 |
|
| Risk discount rate | 6.8% | 6.0% | 5.9% | 6.4% |
| Pre-tax investment returns: | ||||
| Base government fixed interest | 4.1% | 3.3% | 3.2% | 3.7% |
| Ordinary shares | 7.1% | 6.3% | 6.2% | 6.7% |
| Property | 6.1% | 5.3% | 5.2% | 5.7% |
| Future expense inflation | 2.5% | 2.5% | 2.5% | 2.5% |
| Tax rate | 38.3% | 38.3% | 38.3% | 38.3% |
| Required Capital (% EU minimum) | 115% | 115% | 115% | 115% |
| Netherlands | ||||
|---|---|---|---|---|
| 30 June 2006 |
31 Dec 2005 |
30 June 2005 |
31 Dec 2004 |
|
| Risk discount rate | 6.8% | 6.0% | 5.9% | 6.4% |
| Pre-tax investment returns: | ||||
| Base government fixed interest | 4.1% | 3.3% | 3.2% | 3.7% |
| Ordinary shares | 7.1% | 6.3% | 6.2% | 6.7% |
| Property | 6.1% | 5.3% | 5.2% | 5.7% |
| Future expense inflation | 2.5% | 2.5% | 2.5% | 2.5% |
| Tax rate | 29.1% | 29.1% | 31.5% | 31.5% |
| Required Capital (% EU minimum) | 150% | 150% | 150% | 150% |
| Poland | ||||
|---|---|---|---|---|
| 30 June 2006 |
31 Dec 2005 |
30 June 2005 |
31 Dec 2004 |
|
| Risk discount rate | 8.8% | 8.6% | 8.7% | 9.7% |
| Pre-tax investment returns: | ||||
| Base government fixed interest | 5.1% | 4.9% | 5.0% | 6.0% |
| Ordinary shares | 8.1% | 7.9% | 8.0% | 9.0% |
| Property | n/a | n/a | n/a | n/a |
| Future expense inflation | 3.5% | 3.3% | 2.4% | 3.4% |
| Tax rate | 19.0% | 19.0% | 19.0% | 19.0% |
| Required Capital (% EU minimum) | 150% | 150% | 150% | 150% |
| Spain | ||||
|---|---|---|---|---|
| 30 June 2006 |
31 Dec 2005 |
30 June 2005 |
31 Dec 2004 |
|
| Risk discount rate | 6.8% | 6.0% | 5.9% | 6.4% |
| Pre-tax investment returns: | ||||
| Base government fixed interest | 4.1% | 3.3% | 3.2% | 3.7% |
| Ordinary shares | 7.1% | 6.3% | 6.2% | 6.7% |
| Property | 6.1% | 5.3% | 5.2% | 5.7% |
| Future expense inflation | 2.5% | 2.5% | 2.5% | 2.5% |
| Tax rate | 35.0% | 35.0% | 35.0% | 35.0% |
| Required Capital (% EU minimum) | 125% / 110% | 125% / 110% | 125% / 110% | 125% / 110% |
For service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company. Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for credit risk. Required capital in the United Kingdom is 150% EU minimum for Norwich Union Annuity Limited and 100% for other companies. Required capital in Spain is 125% EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies.
Other economic assumptions
Required capital relating to with-profit business is assumed to be covered
by the surplus within the with-profit funds and no effect has been attributed
to shareholders.
Bonus rates on participating 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.
