Aviva plc: Adoption of Aviva Market Consistent Embedded Value (MCEV) methodology and impact on results
E – Group operating profit before tax
The adoption of the MCEV methodology has resulted in:
- group operating profit before tax for the six months to 30 June 2008 of £1,509 million compared to £1,719 million under EEV; and,
- group operating profit before tax for the year to 31 December 2007 of £3,065 million compared to £3,286 million under EEV.
Analysis of operating profit
The group's operating profit can be analysed as follows:
| MCEV Restated 6 months 2008 £m |
EEV Reported 6 months 2008 £m |
MCEV Restated Full year 2007 £m |
EEV Reported Full year 2007 £m |
|
|---|---|---|---|---|
| Reviewed | Reviewed | Audited | Audited | |
| 1. Excludes the proportion of the results of Aviva Investors and other fund management businesses within the Group that arise from the provision of fund management services to our life businesses. These results are included within the life and pensions MCEV operating earnings consistent with Aviva's MCEV methodology. | ||||
| Life and pensions operating earnings | 1,280 | 1,480 | 2,544 | 2,753 |
| Fund management1 | 30 | 30 | 90 | 90 |
| General insurance and health | 528 | 538 | 1,021 | 1,033 |
| Other: | ||||
| Other operations and regional costs | (57) | (57) | (70) | (70) |
| Corporate centre | (71) | (71) | (157) | (157) |
| Group debt costs and other interest | (201) | (201) | (363) | (363) |
| Operating profit before tax | 1,509 | 1,719 | 3,065 | 3,286 |
The conversion from EEV to MCEV does not impact on the operating profit of our non-life businesses. However, the general insurance and health figures have been restated for the change in accounting policy in respect of discounting latent claims.
Life and pensions operating earnings in the first half of 2008 were £1,280 million on an MCEV basis compared to £1,480 million on an EEV basis due to the impact of widening credit spreads on the value of new business and changes in operating assumptions.
For 2007, life and pensions operating earnings were £2,544 million compared to £2,753 million on an EEV basis due to movements in experience variances and operating assumption changes.
The components of the life and pensions operating earnings are shown below.
| MCEV Restated 6 months 2008 £m |
EEV Reported 6 months 2008 £m |
MCEV Restated Full year 2007 £m |
EEV Reported Full year 2007 £m |
|
|---|---|---|---|---|
| Reviewed | Reviewed | Audited | Audited | |
| Value of new business | 352 | 488 | 897 | 912 |
| 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 | 694 | 1,297 | 1,266 |
| – experience variances | 42 | 43 | (111) | (16) |
| – operating assumption changes | (97) | (46) | (25) | 114 |
| – other operating variances | (19) | – | 1 | – |
| Expected return on shareholders' net worth | 310 | 301 | 485 | 477 |
| Life and pension operating earnings before tax | 1,280 | 1,480 | 2,544 | 2,753 |
For both time periods, operating earnings reduce because of the lower recognised value of new business. Additionally, experience variances and operating assumption changes have a more significant impact due to MCEV economic methodology, which discounts future cashflows at a lower rate than under EEV. The expected return on in-force remains broadly unchanged for both time periods.
