5. Analysis of movement in life and related businesses embedded value
The following tables provide an analysis of the movement in embedded value for the life and related businesses for 2007 and 2006. The analysis is shown separately for net worth and the value of in-force covered business, and includes amounts transferred between these categories. The transfer to life and related businesses from other segments consists of service company profits and losses during the reported year 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. All figures are shown net of tax.
| 2007 | |||
|---|---|---|---|
| Net worth £m |
Value of in-force £m |
Total £m |
|
| Embedded value at the beginning of the year | |||
| – Free surplus | 3,569 | ||
| – Required capital1 | 5,314 | ||
| Total | 8,883 | 9,215 | 18,098 |
| New business contribution (after the effect of required capital) | (649) | 1,285 | 636 |
| Expected return on existing business – return on VIF | - | 892 | 892 |
| Expected return on existing business – transfer to net worth | 1,216 | (1,216) | - |
| Experience variances and operating assumption changes | 342 | (270) | 72 |
| Expected return on shareholders’ net worth | 334 | - | 334 |
| Investment return variances and economic assumption changes | 539 | (473) | 66 |
| Life EEV return after tax | 1,782 | 218 | 2,000 |
| Exchange rate movements | 572 | 402 | 974 |
| Embedded value of business acquired | 84 | 26 | 110 |
| Net amounts released from life and related businesses | (795) | - | (795) |
| Transfer from life and related businesses to other segments | (68) | - | (68) |
| Embedded value at the end of the year | |||
| – Free surplus | 4,127 | ||
| – Required capital1 | 6,331 | ||
| Total | 10,458 | 9,861 | 20,319 |
- Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.
The embedded value of business acquired in the twelve months to 31 December 2007 of £110 million represents the embedded value of Hamilton Life Assurance Company Limited, Area Life International Assurance Limited and Erasmus Groep BV, Caja de Ahorros De Murcia, Aviva SA Emeklilik ve Hayat A.S CIMB Aviva Takaful Berhad, CIMB Aviva Assurance Berhad and First Aviva Life Assurance Co., Ltd.
Required capital has increased in the period by £1,017 million. The movement comprises an increase of £810 million in relation to new business written, a reduction of £372 million regarding in-force business, an increase of £197 million due to a reduction in implicit items, £46 million additional in-force required capital relating to the acquisitions during the period and a £336 million increase due to foreign exchange rate movements. The decrease in the in-force business required capital includes the impact of the higher solvency margin required for certain unit linked business, following clarification by the French regulator to the industry and the reduction in the level of required capital for UK annuities.
| 2006 | |||
|---|---|---|---|
| Net worth £m |
Value of in-force £m |
Total £m |
|
| Embedded value at the beginning of the year | |||
| – Free surplus | 2,772 | ||
| – Required capital1 | 4,448 | ||
| Total | 7,220 | 7,893 | 15,113 |
| New business contribution (after the effect of required capital) | (602) | 1,071 | 469 |
| Expected return on existing business – return on VIF | - | 710 | 710 |
| Expected return on existing business – transfer to net worth | 1,023 | (1,023) | - |
| Experience variances and operating assumption changes | 400 | (415) | (15) |
| Expected return on shareholders’ net worth | 239 | - | 239 |
| Investment return variances and economic assumption changes | 355 | 340 | 695 |
| Life EEV return after tax | 1,415 | 683 | 2,098 |
| Exchange rate movements | (189) | (120) | (309) |
| Embedded value of business acquired | 675 | 759 | 1,434 |
| Net amounts released from life and related businesses | (253) | - | (253) |
| Transfer to life and related businesses from other segments | 113 | - | 113 |
| UK pension fund deficit borne by UK with-profit funds transferred to analysis of net assets on an EEV basis2 | (98) | - | (98) |
| Embedded value at the end of the year | |||
| – Free surplus | 3,569 | ||
| – Required capital1 | 5,314 | ||
| Total/strong> | 8,883 | 9,215 | 18,098 |
- Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.
- The impact of the operating assumption change reflecting the UK with-profits funds contribution to the UK pension scheme deficit funding has been removed from the Life EEV analysis as the pension fund deficit notionally allocated to long-term business net assets on an EEV basis is net of the proportion of funding borne by the UK with-profit funds.
