Aviva plc: Adoption of Aviva Market Consistent Embedded Value (MCEV) methodology and impact on results
MCEV notes to the financial statements
3 – Analysis of life and pensions MCEV earnings
The components of the life MCEV earnings in the consolidated income statement have been further analysed in this note. This analysis is performed in two ways. Part (a) shows the life MCEV earnings gross of both taxes and minorities analysed in total. Part (b) shows the movement between the opening and closing embedded value with a breakdown into the different components of that embedded value, net of tax and minorities. Part (b) analysis follows the CFO Forum disclosure requirements.
(a) Life and pensions MCEV earnings
In this table the life and pensions MCEV earnings have been broken down into constituent parts. The life and pensions MCEV operating earnings comprise:
- the value of new business written during the period;
- the earnings from existing business; and,
- the expected investment return on the shareholders’ net worth.
These components are calculated using economic assumptions as at the start of the year (in-force business) or start of the quarter (new business) and operating (demographic and expenses) assumptions as at the end of the period.
| Life and pensions MCEV earnings | Reviewed 6 months 2008 £m |
Audited Full year 2007 £m |
|---|---|---|
| Value of new business | 352 | 897 |
| Earnings from existing business | ||
| - expected returns at the reference rate | 465 | 877 |
| - expected returns in excess of the reference rate | 227 | 420 |
| - expected returns | 692 | 1,297 |
| - experience variances | 42 | (111) |
| - operating assumption changes | (97) | (25) |
| - other operating variances | (19) | 1 |
| Expected return on shareholders’ net worth | 310 | 485 |
| Life and pensions operating earnings before tax | 1,280 | 2,544 |
| Economic variances | (4,086) | (19) |
| Other non-operating variances | (71) | – |
| Life and pensions earnings before tax | (2,877) | 2,525 |
| Tax on operating earnings | (365) | (754) |
| Tax on other activities | 1,206 | 48 |
| Life and pensions earnings after tax | (2,036) | 1,819 |
There were no separate development costs reported in these periods.
The table above presents a summarised breakdown of the life and pensions MCEV earnings on a gross of minorities basis and gross of tax with tax shown separately. The group favours the gross presentation for consistency with the IFRS results. The table below compares the key items on the different bases as the subsequent analysis is provided predominately on a net of tax and minorities basis as preferred by the CFO Forum Principles.
| Reviewed 6 months 2008 | Audited Full year 2007 | |||
|---|---|---|---|---|
| Key indicators | Net of minorities and tax £m |
Gross of minorities and tax £m |
Net of minorities and tax £m |
Gross of minorities and tax £m |
| Value of new business | 179 | 352 | 504 | 897 |
| Life and pensions operating earnings | 774 | 1,280 | 1,567 | 2,544 |
| Life and pensions earnings | (2,062) | (2,877) | 1,619 | 2,524 |
(b) Presentation of analysis of earnings
The following table provides an analysis of the movement in embedded value for the life and related businesses for 30 June 2008 and 31 December 2007. The analysis is shown separately for free surplus, required capital and the value of in-force covered business, and includes amounts transferred between these categories. Included within capital and dividend flows is the transfer to life and related businesses from other segments consisting of service company profits and losses during the reported period 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 and minority interests.
| Reviewed 6 months 2008 £m |
Audited Full year 2007 £m |
|||||||
|---|---|---|---|---|---|---|---|---|
| Earnings on MCEV analysis | Earnings on MCEV analysis | |||||||
| Free surplus | Required capital1 | VIF | Total MCEV | Free surplus | Required capital1 | VIF | Total MCEV | |
| Opening MCEV | 3,204 | 6,240 | 8,804 | 18,248 | 3,066 | 5,287 | 8,153 | 16,506 |
| New business value | (905) | 511 | 573 | 179 | (1,432) | 808 | 1,128 | 504 |
| Expected existing business contribution (reference rate) | – | – | 306 | 306 | – | – | 573 | 573 |
| Expected existing business contribution (in excess of reference rate) | – | – | 155 | 155 | – | – | 284 | 284 |
| Transfers from VIF and required capital to the free surplus | 949 | (308) | (641) | – | 1,683 | (439) | (1,244) | – |
| Experience variances | 65 | 17 | (58) | 24 | 271 | (13) | (336) | (78) |
| Assumption changes | 182 | (109) | (150) | (77) | 18 | (8) | (40) | (30) |
| Expected return on shareholders’ net worth | 111 | 88 | – | 199 | 172 | 136 | – | 308 |
| Other operating variance | 9 | (27) | 6 | (12) | 2 | 12 | (8) | 6 |
| Operating MCEV earnings | 411 | 172 | 191 | 774 | 714 | 496 | 357 | 1,567 |
| Economic variances | (1,450) | (97) | (1,243) | (2,790) | 37 | 112 | (97) | 52 |
| Other non-operating variance | 3 | (4) | (45) | (46) | – | – | – | – |
| Total MCEV earnings | (1,036) | 71 | (1,097) | (2,062) | 751 | 608 | 260 | 1,619 |
| Capital and dividend flows | (599) | – | – | (599) | (829) | – | – | (829) |
| Foreign exchange variance | 123 | 325 | 352 | 800 | 172 | 308 | 371 | 851 |
| Acquired/divested business | 79 | 58 | 53 | 190 | 44 | 37 | 20 | 101 |
| Closing MCEV | 1,771 | 6,694 | 8,112 | 16,577 | 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.