Preliminary results - 12 months ended 31 December 2006 01 March 2007
Supplementary analyses
(a) Analysis of service companies and fund management businesses within embedded value
The EEV methodology incorporates the impact of profits and losses arising from subsidiary undertakings providing administration, investment management and other services where these arise in relation to covered business. The principal subsidiaries of the Aviva group providing such services include NU Life Services Limited (UK), Morley Fund Management (UK) and Aviva Gestion d'Actifs (France). The following table provides an analysis of the elements within the life and other related business embedded value:
| 2006 | 2005 | |||
|---|---|---|---|---|
| Fund Management £m | Non-Insurance £m | Total £m | Total £m | |
| United Kingdom | 154 | (182) | (28) | (102) |
| France | 65 | 6 | 71 | 47 |
| Netherlands | 55 | (48) | 7 | – |
| Other Europe and Rest of the World | 32 | (2) | 30 | 27 |
| 306 | (226) | 80 | (28) | |
The “look-through” value attributable to fund management is based on the level of after-tax profits expected to be earned in the future over the outstanding term of the covered business in respect of services provided to the Group’s life operations. The EEV basis income statement excludes the actual statutory basis profits arising from the provision of fund management services to the Group’s life businesses. The EEV income statement records the experience profit or loss compared to the assumed profitability, the return on the in-force value arising from the unwind at the relevant risk discount rate and the effect on the in-force value of changes to economic assumptions.
NU Life Services Limited (NULS) is the main provider of administration services to the UK Life business. NULS incurs substantially all of the UK Life businesses operating expenditure, comprising acquisition, maintenance and project costs. Costs are recharged to the UK Life companies (the product companies) on the basis of a pre-determined Management Services Agreement (MSA) which will be reviewed in 2008.
The EEV principles “look-through” the contractual terms of the MSA to the underlying expenses of NULS. Accordingly the actual maintenance expenses and a “normal” annual level of project expense allowances have been applied to the product companies. Under EEV, any further one-off project expenditure is reported as experience losses when incurred.
The increases in fund management have arisen from changes in the assumed future profitability of these operations. In the Netherlands the non-insurance element reflects the “look-through” to expenses that were previously recharged to the covered business.
(b) Pension schemes
(i) Pension scheme deficits in consolidated balance sheet
On the consolidated balance sheet, the amount described as Provisions includes the pension scheme deficits and comprises:
| 2006 £m | 2005 £m | |
|---|---|---|
| Deficits in the staff pension schemes | 1,029 | 1,471 |
| Other obligations to staff pension schemes – Insurance policies issued by Group companies | 1,086 | 875 |
| Total IAS 19 obligations to staff pension schemes | 2,115 | 2,346 |
| Restructuring provisions | 234 | 36 |
| Other provisions | 501 | 493 |
| Provisions | 2,850 | 2,875 |
(ii) Movements in the pension schemes’ deficits comprise:
| 2006 £m | 2005 £m | |
|---|---|---|
| Deficits in the schemes at 1 January | (1,471) | (893) |
| Employer contributions | 554 | 383 |
| Charge to net operating expenses (see (iii) below) | (160) | (130) |
| Credit to investment income | 77 | 32 |
| Actuarial gains/(losses) | 3 | (547) |
| Acquisitions | (1) | (313) |
| Buy-outs and other transfers | 18 | - |
| Exchange rate movements in foreign plans | 7 | (3) |
| Deficits in the schemes at 31 December | (973) | (1,471) |
The current year surplus in the Irish scheme of £56 million is included in Other assets whilst the deficits in the other schemes of £1,029 million are included in provisions.
The change in the net pension deficit during 2006 is mainly attributable to additional contribution into the schemes and an increase in the market value of their assets, partially offset by changes in assumptions underlying the present value of the schemes’ liabilities. In the UK, the value of the liabilities has increased due to a strengthening to the post-retirement mortality assumptions and higher assumed inflation, partially offset by an increase in the corporate bond yields used for the valuation discount rate. The increase in scheme assets is primarily due to an improvement in equity values since the previous year end, partially offset by a reduction in bond values, together with deficit contribution payments made by the employing companies.
Employer contributions included deficit funding payments amounting to £229 million (2005: £211 million).
(iii) The pension expense for these schemes comprises:
| 2006 £m | 2005 £m | |
|---|---|---|
| Current service cost | 196 | 158 |
| Past service cost/(credit) | 3 | (7) |
| Gain on curtailments* | (39) | (21) |
| Charge to net operating expenses | 160 | 130 |
| Expected return on scheme assets | (490) | (439) |
| Interest charge on scheme liabilities | 453 | 407 |
| Credit to investment income | (37) | (32) |
| Total charge to income | 123 | 98 |
| Expected return on scheme assets | 530 | 439 |
| Actual return on these assets | (800) | (1,270) |
| Actuarial gains on scheme assets | (270) | (831) |
| Less: gains accounted for elsewhere | 19 | – |
| Experience (gains)/losses arising on scheme liabilities | (63) | 86 |
| Changes in assumptions underlying the present value of the scheme liabilities | 430 | 1,292 |
| Loss on acquisitions | 1 | – |
| Actuarial losses on the pension schemes | 117 | 547 |
| Less: Recoveries from unallocated divisible surplus and other movements | (3) | – |
| Actuarial losses recognised in the statement of recognised income and expense | 114 | 547 |
The cumulative amount of actuarial gains and losses on the pension scheme recognised in the statement of recognised income and expenses since 1 January 2004 (the date of transition to IFRS) is a loss of £809 million at 31 December 2006 (2005: loss of £692 million).
(c) Long-term savings new business
| Present value of new business premiums1 | Annual premium equivalent | ||||
|---|---|---|---|---|---|
| 2006 £m | 2005 £m | 2006 £m | 2005 £m | ||
| Life and pensions | |||||
| France | 3,552 | 3,530 | 391 | 384 | |
| Ireland | 1,273 | 665 | 190 | 100 | |
| Italy | 2,768 | 2,294 | 323 | 252 | |
| Netherlands (including Belgium, Germany and Luxembourg) | 2,346 | 2,739 | 270 | 323 | |
| Poland | 534 | 320 | 72 | 47 | |
| Spain | 2,059 | 2,013 | 248 | 240 | |
| Other Europe | 308 | 240 | 63 | 51 | |
| Continental Europe | 12,840 | 11,801 | 1,557 | 1,397 | |
| Asia | 685 | 397 | 107 | 66 | |
| Australia | 297 | 337 | 58 | 63 | |
| United States | 884 | 526 | 97 | 64 | |
| Rest of the World | 1,866 | 1,260 | 262 | 193 | |
| International | 14,706 | 13,061 | 1,819 | 1,590 | |
| United Kingdom | 11,146 | 9,185 | 1,439 | 1,155 | |
| Total (before the effect of required capital) | 25,852 | 22,246 | 3,258 | 2,745 | |
| Investment sales | |||||
| Netherlands | 285 | 563 | 29 | 56 | |
| Poland | 131 | 53 | 17 | 9 | |
| Other Europe | 475 | 410 | 47 | 41 | |
| Continental Europe | 891 | 1,026 | 93 | 106 | |
| Rest of the World (including Navigator sales) | 1,564 | 1,151 | 156 | 115 | |
| International | 2,455 | 2,177 | 249 | 221 | |
| United Kingdom | 2,455 | 1,160 | 285 | 135 | |
| Total investment sales | 4,910 | 3,337 | 534 | 356 | |
| Total long-term savings (including share of associates and joint ventures) | 30,762 | 25,583 | 3,792 | 3,101 | |
Germany has been reclassified from Other Europe to the Netherlands, Lithuania has been reclassified from Other Europe to Poland and Norwich Union's Dublin-based offshore life and savings business has been reclassified from Other Europe to the United Kingdom.
Sales from the Navigator funds administration business, previously excluded from investment sales figures, are now included in the figures above. This change has increased the total investment sales for year ended 31 December 2006 by £1,371 million (2005: £938 million).
- Investment sales are calculated as new single premiums plus annualised value of new regular premiums.
(d) Assets under management
| Life and related business 2006 £m | General business and other 2006 £m | Group 2006 £m | Group 2005 £m | |
|---|---|---|---|---|
| Total IFRS assets included in the balance sheet | 254,761 | 37,961 | 292,722 | 263,447 |
| Additional value of in-force long-term business | 6,794 | – | 6,794 | 6,454 |
| Total EEV assets included in the balance sheet | 261,555 | 37,961 | 299,516 | 269,901 |
| Third party funds under management: | ||||
| Unit trusts, Oeics, Peps and Isas | 20,574 | 16,188 | ||
| Segregated funds | 43,672 | 35,427 | ||
| Total assets under management | 363,762 | 321,516 |
Third party funds under management now include funds administered under the Navigator platform. This change has increased the total assets under management at 31 December 2006 by £6,058 million (2005: £4,606 million).
