Aviva plc: Adoption of Aviva Market Consistent Embedded Value (MCEV) methodology and impact on results
MCEV notes to the financial statements
4 – New business
This note gives more detail relating to the value of new business. A geographical breakdown is shown together with a product split at a regional level. There is also more detail on the capital required to write new business, the rate of return achieved and how quickly the initial capital invested is paid back.
The table below sets out the PVNBP, written by the life and related businesses the value of new business and the resulting margin net of tax and minority interests.
New business sales are expressed as the present value of new business premiums (PVNBP). The PVNBP calculation is equal to total single premium sales received in the period plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate the value of new business, so the components of the new business margin are on a consistent basis.
The value generated by new business written during the period is the present value of the projected stream of after tax distributable profit from that business. The value of new business has been calculated using economic assumptions at the point of sale which has been implemented with the assumptions being taken as those appropriate to the start of each quarter. For interest sensitive contracts that are re-priced more frequently, weekly or monthly economic assumptions have been used and the same operating assumptions as those used to determine the embedded value. The value of new business is shown after the effect of the frictional costs of holding required capital, and after the effect of the costs of residual non-hedgeable risks on the same basis as for the in-force covered business.
(a) Geographical analysis of new business contribution
| Present value of new business premiums1 | Value of new business2 | New business margin3 | ||||
|---|---|---|---|---|---|---|
| Life and pensions | Reviewed 6 months 2008 £m |
Audited Full year 2007 £m |
Reviewed 6 months 2008 £m |
Audited Full year 2007 £m |
Reviewed 6 months 2008 % |
Audited Full year 2007 % |
| United Kingdom | 6,010 | 11,797 | 53 | 195 | 0.9% | 1.7% |
| France | 1,692 | 3,157 | 38 | 81 | 2.2% | 2.6% |
| Ireland | 524 | 1,335 | 6 | 26 | 1.1% | 1.9% |
| Italy | 649 | 1,284 | 12 | 20 | 1.8% | 1.6% |
| Netherlands (including Belgium and Germany) | 1,965 | 2,941 | (31) | 3 | (1.6)% | 0.1% |
| Poland | 827 | 966 | 22 | 34 | 2.7% | 3.5% |
| Spain | 713 | 1,223 | 43 | 57 | 6.0% | 4.7% |
| Other Europe | 667 | 453 | 16 | 4 | 2.4% | 0.9% |
| Europe | 7,037 | 11,359 | 106 | 225 | 1.5% | 2.0% |
| North America | 2,227 | 3,646 | (5) | 34 | (0.2)% | 0.9% |
| Asia | 680 | 1,133 | 21 | 39 | 3.1% | 3.4% |
| Australia | 212 | 454 | 4 | 11 | 1.9% | 2.4% |
| Asia Pacific | 892 | 1,587 | 25 | 50 | 2.8% | 3.2% |
| Total life and pensions | 16,166 | 28,389 | 179 | 504 | 1.1% | 1.8% |
- PVNBP is calculated net of minorities.
- Value of new business is calculated net of tax and minorities.
- New business margin represents the ratio of the value of new business to PVNBP, expressed as a percentage.
- Total long-term savings includes investment sales. Investment sales are calculated as new single premiums plus annualised value of new regular premiums.
View a more detailed breakdown of the new business premiums.
(b) Post-tax internal rate of return on life and pensions new business and payback period
The new business written requires up-front capital investment, due to high set-up costs and capital requirements. The internal rate of return (IRR) is a measure of the shareholder return expected on this capital investment. It is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the life time of the business written, including allowance for the time value of options and guarantees, is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is the initial capital required to pay acquisition costs and set up statutory reserves in excess of premiums received (“initial capital”), plus required capital at the same level as for the calculation of the value of new business.
The payback period shows how quickly shareholders can expect the total capital to be repaid. The payback period has been calculated based on undiscounted cash flows and allows for the initial and required capital.
The projected investment returns in both the IRR and payback period calculations assume that equities, properties and bonds earn a return in excess of risk-free consistent with the long-term rate of return assumed in operating earnings.
The IRR on life and pensions new business for the group was 12.9% for the first half of 2008 and full year 2007.
| Reviewed 6 months 2008 | ||||
|---|---|---|---|---|
| Internal rate of return % |
Initial capital £m |
Required capital £m |
Total invested capital £m |
|
| United Kingdom | 13% | 130 | 80 | 210 |
| France | 11% | 21 | 60 | 81 |
| Ireland | 9% | 35 | 12 | 47 |
| Italy | 17% | 6 | 23 | 29 |
| Netherlands (including Belgium and Germany) | 6% | 73 | 138 | 211 |
| Poland | 20% | 15 | 7 | 22 |
| Spain | 39% | 13 | 39 | 52 |
| Other Europe | 18% | 38 | 7 | 45 |
| Europe | 13% | 201 | 286 | 487 |
| North America | 11% | 61 | 174 | 235 |
| Asia | 18% | 30 | 12 | 42 |
| Australia | 13% | 2 | 14 | 16 |
| Asia Pacific | 17% | 32 | 26 | 58 |
| Total | 12.9% | 424 | 566 | 990 |
| Audited Full year 2007 | |||||
|---|---|---|---|---|---|
| Internal rate of return % |
Initial capital £m |
Required capital £m |
Total invested capital £m |
Payback period years |
|
| United Kingdom | 13% | 256 | 149 | 405 | 8 |
| France | 12% | 29 | 107 | 136 | 8 |
| Ireland | 11% | 69 | 23 | 92 | 7 |
| Italy | 15% | 4 | 52 | 56 | 6 |
| Netherlands (including Belgium and Germany) | 6% | 78 | 181 | 259 | 22 |
| Poland | 23% | 18 | 10 | 28 | 4 |
| Spain | 28% | 24 | 68 | 92 | 3 |
| Other Europe | 18% | 48 | 4 | 52 | 5 |
| Europe | 13% | 270 | 445 | 715 | 12 |
| North America | 12% | 125 | 280 | 405 | 6 |
| Asia | 23% | 48 | 11 | 59 | 4 |
| Australia | 15% | – | 23 | 23 | 6 |
| Asia Pacific | 21% | 48 | 34 | 82 | 4 |
| Total | 12.9% | 699 | 908 | 1,607 | 9 |
The payback period is only provided for full year 2007 as it will only be updated annually.
The total initial capital for life and pensions new business for half year 2008 of £424 million and for full year 2007 of £699 million shown above is expressed at the point of sale. Hence, it is higher than the impact of writing that new business on net worth of £394 million and £624 million respectively shown in the Analysis of life and pensions MCEV earnings section, because the latter amount includes expected profits from the point of sale to the end of the reporting period, partly offset by the cost of holding the initial capital.
