Aviva plc: Adoption of Aviva Market Consistent Embedded Value (MCEV) methodology and impact on results
MCEV notes to the financial statements
7 – Geographical analysis
This note provides a geographical split of the MCEV operating earnings part (a), the embedded value part (b), the risk allowances that are within the VIF part (c) and the implied discount rates part (d).
(a) Components of life MCEV operating earnings
| Reviewed 6 months 2008 | |||||||
|---|---|---|---|---|---|---|---|
| UK £m |
France £m |
Ireland £m |
Italy £m |
Nether- lands £m |
Poland £m |
Spain £m |
|
| Value of new business | 53 | 38 | 6 | 12 | (31) | 22 | 43 |
| Earnings from existing business | |||||||
| – expected existing business contribution (reference rate) | 114 | 47 | 12 | 4 | 36 | 30 | 12 |
| – expected existing business contribution (in excess of reference rate) | 59 | 12 | 2 | 1 | 54 | 3 | 6 |
| Experience variances | |||||||
| – maintenance expense | – | – | (3) | – | 1 | 2 | (1) |
| – project and other related expenses1 | (20) | – | (3) | – | (1) | – | (1) |
| – mortality/ morbidity2 | 8 | 11 | 1 | – | (11) | 8 | (1) |
| – lapses3 | (9) | 3 | – | – | 14 | 10 | (3) |
| – other4 | 24 | 6 | (6) | 4 | 4 | 1 | 1 |
| Operating assumption changes: | |||||||
| – maintenance expenses | – | – | (1) | – | (4) | – | – |
| – mortality/ morbidity5 | – | – | – | – | (89) | – | (1) |
| – lapses | – | – | – | – | 7 | – | |
| – other6 | 16 | (3) | – | 4 | (1) | – | – |
| Expected return on shareholders’ net worth | 56 | 31 | 10 | 10 | 53 | 5 | 5 |
| Other operating variances7 | (1) | (1) | 7 | (1) | (17) | – | – |
| Life MCEV operating earnings after tax and minority interests | 300 | 144 | 25 | 34 | 15 | 81 | 60 |
| Reviewed 6 months 2008 | |||||||
|---|---|---|---|---|---|---|---|
| Other Europe £m |
Europe £m |
North America £m |
Asia £m |
Australia £m |
Asia Pacific £m |
Total £m |
|
| Value of new business | 16 | 106 | (5) | 21 | 4 | 25 | 179 |
| Earnings from existing business | |||||||
| – expected existing business contribution (reference rate) | 7 | 148 | 28 | 6 | 10 | 16 | 306 |
| – expected existing business contribution (in excess of reference rate) | – | 78 | 16 | 1 | 1 | 2 | 155 |
| Experience variances | |||||||
| – maintenance expense | (4) | (5) | – | 2 | (1) | 1 | (4) |
| – project and other related expenses1 | (2) | (7) | (1) | – | – | – | (28) |
| – mortality/ morbidity2 | 1 | 9 | 1 | 2 | 1 | 3 | 21 |
| – lapses3 | (2) | 22 | (1) | (8) | 1 | (7) | 5 |
| – other4 | – | 10 | (3) | (1) | – | (1) | 30 |
| Operating assumption changes: | |||||||
| – maintenance expenses | – | (5) | (5) | – | – | – | (10) |
| – mortality/ morbidity5 | – | (90) | – | – | – | – | (90) |
| – lapses | 7 | – | – | – | – | 7 | |
| – other6 | – | – | – | – | – | – | 16 |
| Expected return on shareholders’ net worth | 4 | 118 | 18 | 4 | 3 | 7 | 199 |
| Other operating variances7 | – | (12) | – | 1 | – | 1 | (12) |
| Life MCEV operating earnings after tax and minority interests | 20 | 379 | 48 | 28 | 19 | 47 | 774 |
- Project and other related expenses in the UK reflect project costs associated with strategic initiatives, including developments designed to offer simpler products to customers, and the simplification of systems and processes.
- Mortality experience continues to be better than the assumptions set across a range of businesses.
- Lapse experience has been volatile, in part reflecting wider economic volatility. In the UK, lapse experience for non-profit pension and bond products was worse than expected. In Poland, lapse experience continued to be better than the long-term assumptions for both Life and Pension products. In the Netherlands, the positive lapse variance reflects better than expected persistency in the Group Pensions business.
- Other experience profits reflect an accumulation of small items.
- Mortality assumption changes in the Netherlands reflect the impact of using a new industry mortality basis.
- Other operating assumption changes in the UK reflect the distribution of a special bonus to with profit policyholders.
- Other operating variances reflect the impact of various small modelling changes.
| Audited Full year 2007 | |||||||
|---|---|---|---|---|---|---|---|
| UK £m |
France £m |
Ireland £m |
Italy £m |
Nether- lands £m |
Poland £m |
Spain £m |
|
| Value of new business | 195 | 81 | 26 | 20 | 3 | 34 | 57 |
| Earnings from existing business | |||||||
| – expected existing business contribution (reference rate) | 261 | 90 | 17 | 6 | 66 | 36 | 18 |
| – expected existing business contribution (in excess of reference rate) | 133 | 20 | 5 | 1 | 95 | 5 | 9 |
| Experience variances | |||||||
| – maintenance expense | 7 | 1 | (2) | 3 | (3) | 2 | – |
| – project and other related expenses1 | (61) | 6 | (3) | – | (13) | – | (1) |
| – mortality/ morbidity2 | 8 | 18 | (1) | – | (1) | 10 | (3) |
| – lapses3 | (9) | 5 | 4 | (5) | 4 | 13 | (1) |
| – other4 | (17) | (14) | (4) | 1 | 12 | 5 | 5 |
| Operating assumption changes: | |||||||
| – maintenance expenses5 | 6 | (2) | (2) | – | (12) | 4 | – |
| – project and other related expenses | 1 | (1) | – | – | (3) | – | – |
| – mortality/ morbidity6 | 20 | (1) | – | 1 | (24) | 11 | (5) |
| – lapses | (11) | – | – | – | 2 | 8 | (7) |
| – other7 | (22) | 85 | – | 2 | (23) | (4) | – |
| Expected return on shareholders’ net worth | 66 | 53 | 15 | 12 | 103 | 5 | 6 |
| Other operating variances8 | (2) | – | – | (3) | 11 | – | (3) |
| Life MCEV operating earnings after tax and minority interests | 575 | 341 | 55 | 38 | 217 | 129 | 75 |
| Audited Full year 2007 | |||||||
|---|---|---|---|---|---|---|---|
| Other Europe £m |
Europe £m |
North America £m |
Asia £m |
Australia £m |
Asia Pacific £m |
Total £m |
|
| Value of new business | 4 | 225 | 34 | 39 | 11 | 50 | 504 |
| Earnings from existing business | |||||||
| – expected existing business contribution (reference rate) | 8 | 241 | 48 | 9 | 14 | 23 | 573 |
| – expected existing business contribution (in excess of reference rate) | – | 135 | 14 | 1 | 1 | 2 | 284 |
| Experience variances | |||||||
| – maintenance expense | (4) | (3) | (13) | (1) | (2) | (3) | (12) |
| – project and other related expenses1 | (7) | (18) | – | (1) | – | (1) | (80) |
| – mortality/ morbidity2 | 2 | 25 | (2) | 4 | 2 | 6 | 37 |
| – lapses3 | 1 | 21 | – | (9) | – | (9) | 3 |
| – other4 | 1 | 6 | (18) | 2 | 1 | 3 | (26) |
| Operating assumption changes: | |||||||
| – maintenance expenses5 | (8) | (20) | (19) | 1 | – | 1 | (32) |
| – project and other related expenses | (9) | (13) | – | – | – | – | (12) |
| – mortality/ morbidity6 | 2 | (16) | – | (7) | 3 | (4) | – |
| – lapses | 3 | 6 | (3) | (7) | (1) | (8) | (16) |
| – other7 | (11) | 49 | 6 | (3) | – | (3) | 30 |
| Expected return on shareholders’ net worth | 3 | 197 | 33 | 6 | 6 | 12 | 308 |
| Other operating variances8 | 3 | 8 | – | – | – | – | 6 |
| Life MCEV operating earnings after tax and minority interests | (12) | 843 | 80 | 34 | 35 | 69 | 1,567 |
- Project and other related expenses in the UK reflect project costs associated with strategic initiatives, including developments designed to offer simpler products to customers, and the simplification of systems and processes. In the Netherlands, project costs mainly represent one-off restructuring costs in the Dutch business.
- Mortality experience continues to be better than the assumptions set across a range of businesses.
- Lapse experience in Poland continues to be better than assumptions set across both Life and Pensions businesses.
- Other experience profits reflect an accumulation of small items, including an increased allowance for operational risk in the USA.
- Maintenance expense assumptions have been strengthened in the USA following investment to support the growth of the business, and in the Netherlands following a review of expenses.
- Mortality assumptions in the UK reflect changes to the anti-selection loading on annuities. In the Netherlands, the mortality assumption strengthening reflected a partial implementation of a new industry mortality basis.
- In France, other operating assumption changes reflect increased profitability driven by product development and the increased proportion of unit-linked assets within managed funds.
- Other operating variances in the Netherlands relate to changes in asset management fees.
(b) Embedded value
| Reviewed 30 June 2008 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Net worth | VIF £m |
Total Embedded value £m |
||||||
| Free surplus £m |
Required capital1 £m |
|||||||
| United Kingdom | 931 | 1,395 | 3,450 | 5,776 | ||||
| France2 | (58) | 1,260 | 1,135 | 2,337 | ||||
| Ireland | 156 | 205 | 502 | 863 | ||||
| Italy | 217 | 227 | 157 | 601 | ||||
| Netherlands (including Belgium and Germany) | 516 | 1,936 | 885 | 3,337 | ||||
| Poland | 69 | 134 | 933 | 1,136 | ||||
| Spain | 83 | 191 | 360 | 634 | ||||
| Other Europe | 35 | 26 | 150 | 211 | ||||
| Europe | 1,018 | 3,979 | 4,122 | 9,119 | ||||
| North America3 | (305) | 1,039 | 240 | 974 | ||||
| Asia | 110 | 66 | 228 | 404 | ||||
| Australia | 17 | 215 | 72 | 304 | ||||
| Asia Pacific | 127 | 281 | 300 | 708 | ||||
| Total | 1,771 | 6,694 | 8,112 | 16,577 | ||||
- Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.
- France has a positive surplus on a statutory basis.
- Aviva USA’s holding company debt amounting to £356 million at 30 June 2008 has been included within non-covered business.
| Audited 31 December 2007 | ||||
|---|---|---|---|---|
| Net worth | VIF £m |
Total Embedded value £m |
||
| Free surplus £m |
Required capital1 £m |
|||
| United Kingdom | 1,255 | 1,389 | 4,267 | 6,911 |
| France | 28 | 1,280 | 1,228 | 2,536 |
| Ireland | 159 | 201 | 465 | 825 |
| Italy | 208 | 156 | 125 | 489 |
| Netherlands (including Belgium and Germany) | 1,247 | 1,713 | 856 | 3,816 |
| Poland | 111 | 116 | 816 | 1,043 |
| Spain | 61 | 175 | 334 | 570 |
| Other Europe | 32 | 24 | 122 | 178 |
| Europe | 1,846 | 3,665 | 3,946 | 9,457 |
| North America2 | (70) | 946 | 330 | 1,206 |
| Asia | 124 | 53 | 190 | 367 |
| Australia | 49 | 187 | 71 | 307 |
| Asia Pacific | 173 | 240 | 261 | 674 |
| Total | 3,204 | 6,240 | 8,804 | 18,248 |
- Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.
- Aviva USA’s holding company debt amounting to £349 million at 31 December 2007 has been included within non-covered business.
The shareholders’ 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. This is split between required capital, net of implicit items, and free surplus.
| Audited 31 December 2006 | ||||
|---|---|---|---|---|
| Net worth | Total | |||
| Free surplus £m |
Required capital1 £m |
VIF £m |
Total Embedded value £m |
|
| United Kingdom | 970 | 1,294 | 4,271 | 6,535 |
| France | 220 | 962 | 993 | 2,175 |
| Ireland | 113 | 193 | 433 | 739 |
| Italy | 177 | 132 | 90 | 399 |
| Netherlands (including Belgium and Germany) | 1,296 | 1,428 | 697 | 3,421 |
| Poland | 93 | 94 | 638 | 825 |
| Spain | 41 | 152 | 318 | 511 |
| Other Europe | 27 | 19 | 86 | 132 |
| Europe | 1,967 | 2,980 | 3,255 | 8,202 |
| North America2 | (4) | 829 | 443 | 1,268 |
| Asia | 92 | 31 | 117 | 240 |
| Australia | 41 | 153 | 67 | 261 |
| Asia Pacific | 133 | 184 | 184 | 501 |
| Total | 3,066 | 5,287 | 8,153 | 16,506 |
- Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.
- Aviva USA’s holding company debt amounting to £362 million at 31 December 2006 has been included within non-covered business.
(c) Risk allowances within the present value of in-force (“VIF”)
Within the VIF in the tables above there are additional allowances for risks not included within the basic present value of future profits calculation. These are set out below:
| Reviewed 30 June 2008 | |||||
|---|---|---|---|---|---|
| PVFP £m |
Frictional costs £m |
Non- hedgeable risks £m |
Time value of financial options and guarantees £m |
VIF £m |
|
| United Kingdom | 3,893 | (200) | (154) | (89) | 3,450 |
| France | 1,712 | (150) | (133) | (294) | 1,135 |
| Ireland | 530 | (10) | (17) | (1) | 502 |
| Italy | 200 | (24) | (7) | (12) | 157 |
| Netherlands (including Belgium and Germany) | 1,550 | (306) | (76) | (283) | 885 |
| Poland | 1,029 | (19) | (69) | (8) | 933 |
| Spain | 411 | (20) | (26) | (5) | 360 |
| Other Europe | 158 | (4) | (3) | (1) | 150 |
| Europe | 5,590 | (533) | (331) | (604) | 4,122 |
| North America | 516 | (110) | (27) | (139) | 240 |
| Asia | 256 | (10) | (9) | (9) | 228 |
| Australia | 130 | (34) | (18) | (6) | 72 |
| Asia Pacific | 386 | (44) | (27) | (15) | 300 |
| Total | 10,385 | (887) | (539) | (847) | 8,112 |
| Audited 31 December 2007 | |||||
|---|---|---|---|---|---|
| PVFP £m |
Frictional costs £m |
Non- hedgeable risks £m |
Time value of financial options and guarantees £m |
VIF £m |
|
| United Kingdom | 4,698 | (183) | (154) | (94) | 4,267 |
| France | 1,713 | (132) | (126) | (227) | 1,228 |
| Ireland | 491 | (9) | (16) | (1) | 465 |
| Italy | 160 | (17) | (9) | (9) | 125 |
| Netherlands (including Belgium and Germany) | 1,422 | (263) | (67) | (236) | 856 |
| Poland | 897 | (15) | (60) | (6) | 816 |
| Spain | 378 | (17) | (22) | (5) | 334 |
| Other Europe | 128 | (3) | (3) | – | 122 |
| Europe | 5,189 | (456) | (303) | (484) | 3,946 |
| North America | 581 | (105) | (28) | (118) | 330 |
| Asia | 210 | (7) | (7) | (6) | 190 |
| Australia | 123 | (30) | (16) | (6) | 71 |
| Asia Pacific | 333 | (37) | (23) | (12) | 261 |
| Total | 10,801 | (781) | (508) | (708) | 8,804 |
| Audited 31 December 2006 | |||||
|---|---|---|---|---|---|
| PVFP £m |
Frictional costs £m |
Non- hedgeable risks £m |
Time value of financial options and guarantees £m |
VIF £m |
|
| United Kingdom | 4,711 | (175) | (147) | (118) | 4,271 |
| France | 1,419 | (107) | (115) | (204) | 993 |
| Ireland | 456 | (8) | (14) | (1) | 433 |
| Italy | 116 | (13) | (5) | (8) | 90 |
| Netherlands (including Belgium and Germany) | 1,244 | (217) | (62) | (268) | 697 |
| Poland | 703 | (12) | (45) | (8) | 638 |
| Spain | 354 | (14) | (18) | (4) | 318 |
| Other Europe | 92 | (3) | (3) | – | 86 |
| Europe | 4,384 | (374) | (262) | (493) | 3,255 |
| North America | 626 | (104) | (20) | (59) | 443 |
| Asia | 126 | (3) | (4) | (2) | 117 |
| Australia | 106 | (22) | (12) | (5) | 67 |
| Asia Pacific | 232 | (25) | (16) | (7) | 184 |
| Total | 9,953 | (678) | (445) | (677) | 8,153 |
The TVOG is most significant in the United Kingdom, France, the Netherlands and the United States. In the United Kingdom, this relates mainly to unitised with-profit business without market value adjustment (MVA) guarantees, guaranteed annuity rates and negative equity guarantees on equity release business. In France, this relates mainly to surrender value guarantees and investment rate guarantees on some traditional business. In the Netherlands, this relates mainly to maturity guarantees on unit-linked products and interest rate guarantees on traditional individual and group profit sharing business. In the United States, this relates to crediting rate, death benefit and surrender guarantees on life business.
(d) Implied risk discount rates
In the valuation of a block of business, the implied discount rate is the rate of discount such that a traditional embedded value for the business equates to the MCEV.
The cashflows projected are the expected future cashflows including expected investment cashflows from equities, bond 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 and the value of new business.
| Audited Full year 2007 | New business % |
Total in-force business % |
|---|---|---|
| United Kingdom | 10.2% | 8.4% |
| France | 5.3% | 6.8% |
| Ireland | 6.4% | 6.2% |
| Italy | 5.9% | 6.5% |
| Netherlands (including Belgium and Germany) | 9.1% | 9.0% |
| Poland | 7.1% | 7.2% |
| Spain | 5.6% | 6.5% |
| Other Europe | 10.1% | 11.3% |
| Europe | 6.8% | 7.5% |
| North America | 19.3% | 14.3% |
| Asia | 8.5% | 9.5% |
| Australia | 9.0% | 9.1% |
| Asia Pacific | 8.5% | 9.4% |
| Average | 9.1% | 8.0% |
