Aviva plc: Adoption of Aviva Market Consistent Embedded Value (MCEV) methodology and impact on results
F – (Loss)/profit after tax
Analysis of profit
The table below sets out the reconciliation of the Group's operating profit before tax to (loss)/profit after tax, on both an MCEV and an EEV basis:
| 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 | |
| Operating profit before tax | 1,509 | 1,719 | 3,065 | 3,286 |
| Effect of economic variances on long-term business1 | (4,086) | (2,783) | (19) | 67 |
| Short-term fluctuations in return on investments backing general insurance and health business | (314) | (314) | (184) | (184) |
| Economic assumption changes on general insurance and health business | 6 | – | 2 | – |
| Impairment of goodwill | (42) | (42) | (10) | (10) |
| Amortisation and impairment of intangible assets | (44) | (44) | (89) | (89) |
| Profit on disposal of subsidiaries and associates | 9 | 9 | 20 | 20 |
| Integration and restructuring costs | (132) | (132) | (153) | (153) |
| Exceptional items2 | (155) | (84) | – | – |
| (Loss)/profit before tax | (3,249) | (1,671) | 2,632 | 2,937 |
| Tax on operating earnings | (453) | (523) | (924) | (992) |
| Tax on other activities | 1,341 | 919 | 238 | 189 |
| (Loss)/profit after tax | (2,361) | (1,275) | 1,946 | 2,134 |
- On an EEV basis, £(2,783) million for the six months 2008 includes variation from longer term investment return on long-term business of £(2,638) million and effect of economic assumption changes on long-term business of £(145) million. £67 million for the full year 2007 includes variation from longer term investment return on long-term business of £(450) million and effect of economic assumption changes on long-term business of £517 million.
- 2. Exceptional items includes £84 million in costs due to the closure of the wrap platform in the UK and migration of the operations to a third-party provider, Scottish Friendly and £71 million in the Netherlands, reflecting the provision for restricting charges on existing unit-linked contracts in line with the Ombudsman's recommendations. Under EEV this was reported within operating assumption changes.
Economic variances are the key area of change. This is largely due to the difference in treatment of credit spreads. Under EEV, the increases in credit spreads had a limited impact on the embedded value as an allowance was taken for higher expected future income within the value of in-force which broadly offset the fall in asset values. Under MCEV, however, no future spreads in excess of the risk-free rate are allowed for. As a result, when credit spreads increased in the first half of 2008, the market value of assets reduced but assumed future investment cashflows did not change. The adverse impact of removing future investment returns in excess of the risk-free rate more than offset the positive impact of lower discount rates.
Economic assumption changes on general insurance and health business reflect the change between opening and closing discount rates on the latent claims provisions.
