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Aviva plc
Annual Report and Accounts 2006

Table of contents

  • Page 1
    Aviva plc Annual Report and Accounts 2006

  • Page 2
    Contents

  • Page 3
    ... reconciliation of Group operating profit to profit before tax 117 Consolidated statement of recognised income and expense 117 Reconciliation of movements in consolidated shareholders' equity 118 Consolidated balance sheet Other information 244 Aviva Group of companies 246 Shareholder services 119...

  • Page 4
    ...that will carry us beyond those limits, tomorrow. Within this report, you will find examples of forward thinking in action. Around the world, Aviva is a market leader in developing innovative new products and services as we seek to anticipate what people need and provide solutions. Our vision of the...

  • Page 5
    ... felt I was making progress towards the finish line. "Aviva's support helped me to discover and define my own future in life, and helped me do my own forward thinking. Aviva is a company that helps you take control of your own destiny." Aviva is proud of its continuing partnership with Dee. She is...

  • Page 6
    Aviva plc Annual Report and Accounts 2006 2 Structure and performance Aviva is the world's fifth largest insurance group and the largest insurance services provider in the UK. We are one of the leading providers of life and pension products in Europe and are actively growing our long-term savings...

  • Page 7
    ... changes in economic conditions. ‡ New business contribution after required capital, tax and minority interest. ≠From continuing operations, including long-term savings result on a European Embedded Value (EEV) basis before adjusting items. # Return based on opening equity shareholders' funds...

  • Page 8

  • Page 9
    Overview Business review Governance Financial statements Other information

  • Page 10
    ... capital to support future business growth, using dividend cover on an IFRS operating earnings after tax basis in the 1.5 to 2.0 times range as a guide. Board developments During 2006, we held the first meetings of the newly formed risk and regulatory committee and corporate social responsibility...

  • Page 11
    ... term performance of Aviva depends on motivated staff and satisfied customers. It was very pleasing to see that Aviva has been recognised as one of the top 50 best places for women to work in the UK, according to The Times. Particularly satisfying for me was that we were the only company to be named...

  • Page 12
    ... in the UK In the UK, we have generated exceptional growth in our long-term savings business. Total sales increased by 31% to over £13 billion, helped by strong pension sales resulting from changes brought about by pension simplification following "A-Day" in April. We have increased our share of...

  • Page 13
    ... as they step into their new roles of group chief executive and group finance director, respectively. Our people Financial statements In September, we conducted our second global employee survey, and our first to cover all business units in the group. The results of the survey are helping us to...

  • Page 14

  • Page 15
    Overview Business review Governance Financial statements Other information

  • Page 16
    ... financial performance and strength of the group as a whole. These KPIs comprise: - Return on equity shareholders' funds - Proposed ordinary dividend - Dividend cover - Operating profit (International Financial Reporting Standards basis) - Operating profit (European Embedded Value basis) Management...

  • Page 17
    ... and their health. Our objectives for this are: Offering a superior range of long-term savings, investment and protection products in markets that offer significant opportunities for growth Providing a broad range of competitive motor, property, health and related insurance services to individuals...

  • Page 18
    ... Increasing sales to the customers of our bancassurance partners Meeting targets for our external hire, internal promotion and voluntary staff turnover rates Improving further our employee engagement and leadership performance in our global employee survey and against the global financial services...

  • Page 19
    ..., ahead of plan Other information Collected investment awards in Gained access to additional bank France (best fund manager over five branches in Italy through our joint years) and the UK (two property venture with UniCredit Group fund manager awards) Won the "Best of European Business" award for...

  • Page 20
    ... of rising investment markets. EEV * Return on equity shareholders' funds is calculated using opening equity capital and after-tax return based on operating profit, including long-term savings profit on a European Embedded Value (EEV) basis before adjusting items. ** Dividend cover is measured...

  • Page 21
    ... approaches to customer performance measurement such that in future years, aggregated performance data may be disclosed. Other information ‡ The global financial services benchmark and our global employee climate survey measure employee engagement using slightly different definitions. Using the...

  • Page 22
    Business review continued Group performance Aviva plc Annual Report and Accounts 2006 18 Operating profit Group operating profit - IFRS basis 2006 £m 2005 £m The operating results of our long-term savings, fund management and general insurance and health businesses are discussed in detail in ...

  • Page 23
    ... the use of tax losses in the life businesses and the release of prior year provisions following agreements reached with tax authorities on a number of issues. Dividend The Board has recommended a final dividend increase of 10% to 19.18 pence net per share (2005: 17.44 pence) payable on 17 May...

  • Page 24
    ... operating ratio Return on equity shareholders' funds Earnings per share Basic - EEV operating profit after tax basis Basic - IFRS operating profit after tax basis * Based on worldwide long-term savings new business sales, plus general insurance and health business net written premiums. Our new...

  • Page 25
    ... the benefit of a lower increase of £20 billion in financial investments, reflecting strong effective tax rate on our operating profit. new business sales and investment market performance. Earnings per share Balance sheet and cash flow Summarised group consolidated balance sheet As at 31 December...

  • Page 26
    ... the year and the key priorities for the future. Reconciliation of regional and business segment operating profit - EEV basis 2006 UK £m Morley and Europe International £m £m Total £m 2005 Total £m Long-term savings Fund management General insurance and health 744 (6) 1,075 1,813 1,171...

  • Page 27
    ... of RAC, We commenced a major bancassurance meeting our 2006 cost saving commitments partnership in Ireland with Allied Irish Banks We announced annualised cost savings of £250 million across our UK life and general insurance businesses by the end of 2007 We successfully implemented our pension...

  • Page 28
    ... review continued UK Aviva plc Annual Report and Accounts 2006 24 Dear Shareholder, Any international insurer must be strong in its home market, and our decision to bring together the Norwich Union life and general insurance businesses, including RAC, at the beginning of 2006, has been a key...

  • Page 29
    ... a unique online insurance centre exclusive to eBay users. eBay's 15 million customers can use the central "insurance hub" to access information on Norwich Union's motor, home and travel insurance offerings, obtain quotes and buy insurance via a click-through to Norwich Union Direct. Plus, they can...

  • Page 30
    ...-four name within the overall UK financial services industry. Split of UK PVNBP by product type 6 1 5 Split of UK PVNBP by distribution channel 1 3 2 2 4 1 2 3 4 5 6 Individual pensions Group pensions Annuities Bonds Protection Equity release 3 1 Independent financial advisers 2 Bancassurance...

  • Page 31
    ...Pension Simplification (A-Day). Business review Governance Financial statements Other information i Norwich Union launches Simplified Life Cover We have launched a new-style life insurance product that makes it faster and easier for customers and advisers to take out life policies. The new product...

  • Page 32
    ...in and save it online, or they can print it out and take it to a financial adviser. In the corporate market we will continue to quote on bulk purchase annuity business, only writing business where this adds value. We will also use our unique ability to combine life, general insurance and healthcare...

  • Page 33
    Aviva plc Annual Report and Accounts 2006 29 Overview UK - General insurance, health and related services IFRS profit before tax £m IFRS operating profit £m Combined operating ratio* % Net written Underwriting premium result £m £m Business review 2006 2005 1,087 1,294 1,075 974 95 96 5,...

  • Page 34
    ... record operating profits of £1,075 million (2005: £970 million) and a COR of 95%, despite a reduction in general insurance net written premiums to £5,583 million (2005: £5,832 million), as we continue to focus on our commitment to increase shareholder value by writing profitable business...

  • Page 35
    ...unit trusts, open-ended investment companies (Oeics) and structured products under the Norwich Union and The Royal Bank of Scotland brands. Our operating losses from these businesses amounted to £6 million (2005: £8 million profit) where increased sales through the company's collectives investment...

  • Page 36
    ... stretched public finances will create to provide customers with our products and services. Continental Europe now contributes 41% of the group's total sales and is a key source of growth and profits for Aviva. We continued to grow at a healthy pace in 2006, increasing our total long-term sales by...

  • Page 37
    ... Annual Report and Accounts 2006 33 Overview Business review p Romania: Aviva staff build better tomorrows We volunteered to partner international aid agency Habitat for Humanity to raise funds and build four new homes for families in Romania in one w eek. A hundred volunteers from across Aviva...

  • Page 38
    ... on higher-margin unit-linked products in which our market share is 6% . We offer a comprehensive range of life and savings products, mainly for private clients, with a strong focus on providing a lifetime service to customers and a long-term approach to savings and investments. Our distribution is...

  • Page 39
    ..., customers will be able to perform a greater number of transactions online. Our life EEV operating return rose to £402 million (2005: £321 million). The underlying profitability of in-force life business has been enhanced with the proportion of AFER in-force funds invested in unit-linked products...

  • Page 40
    ... The Italian long-term savings market has significant medium-term growth potential and Aviva's prospects for continued growth in 2007 are good. i Ireland: Hibernian publishes new report into pension crisis In April 2006, Hibernian published a report called " The Global Pensions Puzzle" , w hich...

  • Page 41
    ... from the rise in long-term interest rates during 2006 prompting a release from the provision for guarantees on unit-linked contracts, and from an increase in equity and property investment gains. New products were launched via the direct sales force channel in 2006 with additional developments...

  • Page 42
    ... with our existing bancassurance partners to improve penetration of the customer base. In T urkey, our main products are unit-linked pension plans supplemented by life, saving and protection policies, predominantly sold through our direct sales force. We continue to develop our direct sales force...

  • Page 43
    ... AFER unit-linked products. During 2006, we have increased activity in our commercial operations, predominantly in our health business, and for selfemployed customers in order to maintain the product spread of our portfolio. We also launched a credit insurance product on new car sales and plan to...

  • Page 44
    ... Broker Association service excellence awards. We also won the most effective use of software at the Information Age Effective IT awards. Our motor, van and home insurance policy documents have won the crystal mark for plain English. During 2006 we have launched a number of new product initiatives...

  • Page 45
    ... French fund managers for his performance over the last three years. Operating profit has increased to £33 million (2005: £26 million), reflecting our well-established fund management expertise, an inflow of funds from unit-linked sales in our life business and strongly performing equity markets...

  • Page 46
    ..., ranking number one in sales of indexed life insurance and third in sales of indexed annuities. The combined Aviva USA business is now the fourth-largest long-term savings operation in the Aviva group. During 2006 we completed a major new bancassurance agreement in India with Centurion Bank of...

  • Page 47
    ... in Quebec w ho drive hybrid vehicles w ith an automatic 10% discount on their Aviva auto policy premium. The discount supports our commitment to environmental management, and fits w ith our aim to make a leading contribution to the health of the communities in w hich w e operate. It also rew ards...

  • Page 48
    Business review continued International and Morley continued Aviva plc Annual Report and Accounts 2006 44 Rest of the w orld - Long-term savings 2006 IFRS profit before tax £m IFRS operating profit £m EEV operating profit £m New business PVNBP* contribution* * £m £m New business margin* * %...

  • Page 49
    ... terms of business quality by NMG Consulting. Our business superannuation product has been given the top rating by Chant West Financial Services; however, we have seen a shift from corporate pension sales towards Navigator retirement funds, which we record as investment sales, as a result of changes...

  • Page 50
    ... constituent companies. Our life EEV operating return increased to £32 million (2005: £25 million) including £22 million from AmerUs, which mainly represented contribution from new business and expected return on opening embedded value. In our operations based in Boston, the operating profit was...

  • Page 51
    Aviva plc Annual Report and Accounts 2006 47 Overview Rest of the w orld - General insurance and health 2006 IFRS profit before tax £m IFRS operating profit £m Combined operating ratio* * % Net written Underwriting premium result £m £m We are increasing levels of customer and broker ...

  • Page 52
    ...our alternatives business, adding one multi-strategy and a number of single-strategy hedge funds to our range of absolute return products. T o meet high demand for new property-related investments, we launched new specialist funds, including the European institutional fund Encore+ and a global real...

  • Page 53
    ... with key brokers, an increased fund choice and an ongoing buoyant economic environment. Our businesses reported operating profits of £12 million (2005: £7 million) reflecting strong product offerings and the benefit of buoyant investment markets. Business review Governance Financial statements...

  • Page 54
    .... Such risk-based capital models are increasingly being used to inform our decision-making processes and will, in time, allow us to improve capital efficiency. Our return on equity shareholders' funds of 13.1% (2005: 15.0%), exceeds our stated target return of 12.5% , notwithstanding our opening...

  • Page 55
    ... to us achieving our longer term aims for our finance community. They w ill allow us to provide an operating platform that has a robust risk and control environment, meets FSA requirements and meets the governance expectations of the Aviva board. Governance Financial statements Other information

  • Page 56
    ... how that capital is funded: 2006 £m 2005 £m Long-term savings General insurance and health Other business Corporate Total capital employed Financed by: Equity shareholders' funds and minority interests Direct capital instrument Preference shares Subordinated debt External debt Net internal debt...

  • Page 57
    ...operational performance in 2006. Accordingly, our net asset value per ordinary share, based on equity shareholders' funds was higher at 683 pence per share (2005: 622 pence per share). Financial statements Regulatory basis - European Insurance Groups Directive 2006 2005 Insurance Groups Directive...

  • Page 58
    ... date to be paid to in-force policy holders in the future in respect of smoothing costs, guarantees and promises. Realistic balance sheet information is shown below for the three main UK with-profit funds: - CGNU Life - Commercial Union Life Assurance Company (CULAC) - Norwich Union Life & Pensions...

  • Page 59
    Aviva plc Annual Report and Accounts 2006 55 Overview The aggregate investment mix of assets in the three main with-profit funds at 31 December 2006 was: 31 December 2006 % 31 December 2005 % General insurance Business review Economic basis We use a number of measures of risk-based capital to ...

  • Page 60
    ...continued Finance continued Aviva plc Annual Report and Accounts 2006 56 Risk The Group's approach to risk and capital management As part of our overall corporate governance framework described on pages 77 to 81 we have established a risk and financial management structure whose primary objective...

  • Page 61
    ...condition reports (FCRs). FCRs cover the medium-term financial outlook of the business, including forecasts of the overall financial position and key performance indicators under a variety of economic and operating scenarios, allowing for new business sales, to inform our capital and risk management...

  • Page 62
    ... management strategy taking into account the full range of our equity holdings. Interest rate risk Interest rate risk is the risk that arises from both the products we sell and the value of our investments due to changes in the level of interest rates. For example, long-term debt and fixed income...

  • Page 63
    ... Annual Report and Accounts 2006 59 Overview Credit risk We have a significant exposure to credit risk through our investments in corporate bonds, commercial mortgages, and other securities. We hold these investments for the benefit of both our policyholders and shareholders. We monitor and manage...

  • Page 64
    ... of embedded value operating profit. Where possible, the financial impact of lapses is reduced through appropriate product design. The group life insurance risk committee has developed guidelines on persistency management, sharing best practice on the setting of lapse assumptions, product design...

  • Page 65
    ... in the development of new standards would increase was welcomed. Financial statements Other information Longer term investment return The long-term nature of much of our operations means that shortterm realised and unrealised gains and losses on general insurance and health business are shown as...

  • Page 66
    ... a worldwide employee survey that allows us to benchmark our performance as an employer against the best in the world, identify and share good practice, and focus our efforts on issues that mean the most to our employees. We launched task forces on three key people-related challenges: building great...

  • Page 67
    ...plc Annual Report and Accounts 2006 63 Overview Business review p Aviva joins Oxfam 365 Alliance Aviva w as one of the first companies to join the Oxfam 365 Alliance, a new initiative developed by Oxfam GB to support its global emergency response operations. T o join the Alliance, companies must...

  • Page 68
    ...- Our shareholders, who wish to receive a return on their investment, but also to be assured that the company is behaving responsibly in how it operates - Our customers, who rightly expect us to treat them fairly and to be open and honest in the products and services we offer them - Our staff, whose...

  • Page 69
    ... SRI funds under under our key operating regions: UK, Europe and International management. The SRI team, has seen continued growth from both and Morley. retail and institutional channels since joining Morley in 2001. Financial statements Other information United Kingdom Norwich Union Life helped...

  • Page 70
    ... travel, including air, car and train, across all of our global operations. We are also looking at ways in which to help our customers reduce their own CO2 emissions through the provision of innovative products such as " Pay As You Driveâ„¢" and by offering reduced premium insurance for drivers...

  • Page 71
    ... plc Annual Report and Accounts 2006 67 Overview Community We are committed to working in partnership with the communities in which we operate. In 2006, we invested £6.3 million in community initiatives worldwide. Our investment includes 34,000 hours of staff volunteering. Our forward thinking...

  • Page 72
    ... with our employees. Our human resources policies govern our relationships with our people. The policies cover management development and training, reward, diversity, recruitment and health and safety. View these at www.aviva.com/csr. In our annual global employee survey, we achieved further...

  • Page 73
    ... Norwich Union Life and general insurance business. The remainder relates to increasing the number of roles (in line with plans announced in 2005) in the Indian and Sri Lankan operations that currently support Norwich Union and Aviva Canada customers. Reinforcing the importance of our brand values...

  • Page 74

  • Page 75
    Overview Business Business review review Governance Governance Financial statements Other information

  • Page 76
    ...'s United Kingdom businesses namely Norwich Union Insurance, Norwich Union Life and RAC. A member of the Financial Services Authority's Practitioner Panel. Andrew M oss (48) Group finance director Appointed to the board in May 2004 upon joining the company. Previously director - finance, risk...

  • Page 77
    ...), Federal Home Loan Mortgage Corporation (Freddie Mac) (financial services), New Germany Fund (investment trust) and a director of The London School of Economics and Political Science. A former chief financial officer of American Express Company (financial services), NatWest Group plc (banking...

  • Page 78
    ... countries outside the UK. Further details of these arrangements can be found in the shareholder services section on pages 246 to 248. Share capital At the Company's Annual General Meeting, held on 10 May 2006, shareholders approved an increase in the Company's authorised share capital from £1.45...

  • Page 79
    ... flow, liquidity, interest rates, and equity and property prices. Details of the objectives and management of these instruments are contained in the Business Review and an indication of the exposure of the Group companies to such risks is contained in note 51 to the accounts. Health and safety The...

  • Page 80
    ... local business unit intranets), Aviva radio, which can be accessed via mobile phone or computer, and poster campaigns. Employees have opportunities to voice their opinions and ask questions through intranet sites and climate surveys. Face-to-face briefings and team meetings are actively encouraged...

  • Page 81
    ... Code can be found on the Financial Reporting Council's website, www.frc.org.uk. The Board and its committees operate in line with work plans agreed prior to the start of each year. At Board and committee meetings, directors receive regular reports on the Group's financial position, risk management...

  • Page 82
    ... take place over a number of months at times convenient for the director. The sessions include presentations from key members of senior management, visits to the Group's main operating businesses, meetings with the external auditor, and one of the Company's corporate brokers. Further or follow-up...

  • Page 83
    ... are set out below. Internal controls The Combined Code requires directors to review and report annually to shareholders on the effectiveness of the Company's systems of internal control which include financial, operational and compliance controls, and risk management. The Board has the overall...

  • Page 84
    ...with the assistance of its sub-committees, considers the risks relating to life assurance, general insurance, reserving, capital management, credit and investment. Similarly, a Group Operational Risk Committee monitors risks associated with information technology, business protection, human resource...

  • Page 85
    ... changes to the directors' pension arrangements and the introduction of a long-term savings arrangement, details of which are set out in the Directors' remuneration report below. Institutional investor Morley Fund Management Limited (Morley), the Group's asset management company, believes that good...

  • Page 86
    ... Committee also reviews the annual work plan for the Group's internal audit function. The Committee reports to the Board regarding the effectiveness of the Group's overall systems of internal control. The Committee itself reviews the financial controls and works closely with the Risk and Regulatory...

  • Page 87
    Aviva plc Annual Report and Accounts 2006 83 Overview Internal audit The Group's internal audit function advises management on the effectiveness of the Company's internal control systems, the adequacy of these systems to manage business risk and to safeguard the Group's assets and resources. ...

  • Page 88
    ... considered Board on issues of directors' conflicts of interest and independence. able to match the profile was prepared against which the The full terms of reference for the Committee can be found on the Company's internal candidates were benchmarked. Through this Company's website www.aviva.com...

  • Page 89
    ... Regulatory Committee but changed its name in June 2006 to the Risk and Regulatory Committee to more closely describe its main accountabilities. The full terms of reference for the Committee can be found on the Company's website www.aviva.com and are available from the Group Company Secretary. The...

  • Page 90
    ... Group's corporate social responsibility (CSR) programme, review the risks and opportunities relating to the eight individual elements in the programme (namely; standards of business conduct, environment, human rights, health and safety, community, customers, suppliers and workforce) and to monitor...

  • Page 91
    ... on the calculation of total shareholder return for the purposes of the long-term incentive plans. In addition, Nic Nicandrou, in his previous role as Group Financial Control Director provided material assistance to the Committee in relation to its consideration of the financial objectives relevant...

  • Page 92
    ... and "stretch" performance when 100% of an LTIP award vests. Policy Total remuneration How delivered - Basic salary - Annual bonus - LTIP - Pension - Long-term savings - Benefits - All-employee share schemes Details Positioned at median against a FTSE 30 comparator group, although account is taken...

  • Page 93
    ... measures; Return on Capital Employed (ROCE) and relative Total Shareholder Return (TSR), reflecting shareholders' long-term interests in both absolute (ROCE) and relative (TSR) performance. Business review Long-Term Incentive Plan - Awards are made annually in the form of This plan exists to...

  • Page 94
    ... Company would not pay or compensate managers for any increase in their personal tax liability arising from pension simplification; and - The long-term cost exposure associated with the current final salary arrangements should be reduced. The relevant features of the Pension Scheme defined benefit...

  • Page 95
    ... such further termination payment is capped at 52 weeks' basic salary. Any amount is subject to mitigation and phased payments. As described in this Report. The detailed operation of the annual bonus and LTIP plans is at the Company's discretion and in the case of the long-term savings plans at the...

  • Page 96
    ... Provision Policy Period Termination Fees Expenses Time commitment Non-compete Appointment dates Three-year term which can be extended by mutual consent. By the director or the Company giving the other one month's written notice without compensation. As described below. Reimbursement of travel and...

  • Page 97
    ... financial performance by the Group as reported in the Company's 2005 Annual Report and Accounts. In deciding basic salary increases, the Committee reviewed: Business review Governance - FTSE 50 basic salaries for executive directors; - Deloitte's and Towers Perrin's basic pay increase projections...

  • Page 98
    ... and as a director on the Boards of some of the Group's European operations. Under this arrangement, a fee of £145,000 was paid to him in 2006. During the year, shares granted to certain former executive directors under the company's incentive plans vested. Details of these awards were fully...

  • Page 99
    ... Prices Index or 5%) subject to the LTA. In addition Mr Harvey is entitled to a pension benefit of cNZ$25,000 pa from a New Zealand defined benefit scheme in respect of his service with the Group's former operations in that country. In calculating the actuarial value of the amount to be transferred...

  • Page 100
    ...and the mid-market prices during the year ranged from 690 pence to 850.5 pence. During the year, directors made an aggregate gain of £8,355 upon the exercise of share options. Share awards The Aviva Long-Term Incentive Plan 2005 was approved by shareholders at the 2005 Annual General Meeting and is...

  • Page 101
    ... Plan compensate Andrew Moss for the value of the long-term incentive awards granted to him by his previous employer and which lapsed when he resigned to join Aviva. Andrew Moss is the only participant in the Plan. On 10 May 2004, the date Andrew Moss joined the Company, 103,846 shares in the Aviva...

  • Page 102
    ... Directors' remuneration report continued Aviva plc Annual Report and Accounts 2006 98 Long-Term Incentive Plan Awards At 1 January 2006 Number Awards granted during year Number Awards vesting during year Number Awards lapsing during year Number At Market price Market price 31 December at date...

  • Page 103
    Aviva plc Annual Report and Accounts 2006 99 Overview Dilution Awards granted under the Aviva Annual Bonus Plan 2005 and the Aviva Long-Term Incentive Plan 2005 are met by the issue of new shares at the time that the awards vest. The Committee monitors the number of shares issued under its various...

  • Page 104
    ...if the performance conditions are achieved. 4. "Options" are options over shares granted under the Savings Related Share Option Scheme. 5. "Aviva Share Plan" relates to shares held under the Plan referred to above in which only Andrew Moss participated. The following changes to directors' interests...

  • Page 105
    ... Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group's corporate...

  • Page 106

  • Page 107
    Overview Financial statements Business review Governance Other information

  • Page 108
    ... policies Aviva plc Annual Report and Accounts 2006 104 Aviva plc (the "Company"), a public limited company incorporated and domiciled in the United Kingdom (UK), together with its subsidiaries (collectively, the "Group" or "Aviva") transacts life assurance and long-term savings business, fund...

  • Page 109
    .... These invest mainly loss on sale. The cumulative translation differences were deemed to in equities, bonds, cash and cash equivalents, and properties, be zero at the transition date to IFRS. and distribute most of their income. Where Group companies Foreign currency transactions are accounted for...

  • Page 110
    ... and before any sales-based taxes or duties. Where policies lapse due to non-receipt of premiums, then all the related premium income accrued but not received from the date they are deemed to have lapsed is offset against premiums. General insurance and health premiums written reflect business...

  • Page 111
    ... by the UK's Financial Services Authority, adjusted to remove the shareholders' share of future bonuses. For certain UK non-profit insurance contracts, the Group has adopted the realistic regulatory basis as set out in the FSA Policy Statement 06/14 Prudential Changes for Insurers from 31 December...

  • Page 112
    ... in-force long-term business is reviewed annually for any impairment in value and any reductions are charged as expenses in the income statement. The full embedded value of the long-term business and further details of the methodology and assumptions are included as supplementary information on...

  • Page 113
    ... qualified staff of the Group in overseas operations. Changes in fair values are recorded in the income statement in net investment income. (P) Impairment of non-financial assets Property and equipment and other non-financial assets are reviewed for impairment losses whenever events or changes in...

  • Page 114
    ... in relation to the hedged risk, are recognised in a of payments calculated as the difference between the fixed and separate reserve within equity. Gains and losses accumulated in this floating rate interest payments. Currency swaps, in their simplest reserve are included in the income statement on...

  • Page 115
    ... funds. The pension plans are generally funded by payments from employees and the relevant Group companies, taking account of the recommendations of qualified actuaries. (T) Loans Loans with fixed maturities, including policyholder loans, mortgage loans on investment property, securitised mortgages...

  • Page 116
    ... the fair value of the share awards or option plans at date of deferred tax asset or liability. grant, which is recognised in the income statement over the expected vesting period of the related employees and credited to In addition to paying tax on shareholders' profits, the Group's life the equity...

  • Page 117
    ... from total shareholders' equity. Gains and losses on sales of own shares are charged or credited to the treasury share account in equity. (AC) Fiduciary activities Assets and income arising from fiduciary activities, together with related undertakings to return such assets to customers, are...

  • Page 118
    ... premiums Net earned premiums Fee and commission income Net investment income Share of profit after tax of joint ventures and associates Profit on the disposal of subsidiaries and associates Expenses Claims and benefits paid, net of recoveries from reinsurers Change in insurance liabilities, net...

  • Page 119
    ... Operating profit before tax attributable to shareholders' profits Long-term business Fund management General insurance and health Other - other operations - corporate costs Unallocated interest charges Operating profit before adjusting items and tax attributable to shareholders' profits Adjusted...

  • Page 120
    ... 2006 Aviva plc Annual Report and Accounts 2006 116 Operating profit can be further analysed into the following geographical segments: Long-term business £m Fund management £m General insurance and health £m Total £m Year ended 31 December 2006 UK France Netherlands Other Europe United...

  • Page 121
    ... losses on revalued assets Share of fair value changes in joint ventures and associates taken to equity Actuarial (losses) on pension schemes Foreign exchange rate movements Aggregate tax effect - policyholder tax Aggregate tax effect - shareholder tax Net income recognised directly in equity Profit...

  • Page 122
    ...income Cash and cash equivalents Assets of operations classified as held for sale Total assets Equity Capital Ordinary share capital Preference share capital Capital reserves Share premium Merger reserve Other reserves Retained earnings Equity attributable to shareholders of Aviva plc Direct capital...

  • Page 123
    ...payments Capital contributions from minority shareholders Dividends paid to minority interests of subsidiaries Non-trading cash flows between operations Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 January Effect of exchange rate changes...

  • Page 124
    ...Irish Banks plc (AIB) in exchange for a 24.99% stake in the enlarged HLH and a balancing cash payment of a196 million (£134 million) which also reflects the transfer of the management of Ark Life funds to Hibernian Investment Managers Limited, part of the Group's fund management business. The final...

  • Page 125
    ... life operations. As disclosed in the supplementary information on page 231, the embedded value of the long-term business acquired was £310 million, representing the net assets adjusted for other intangible assets net of tax. (ii) Eagle Insurance Company Limited On 1 February 2006, the Group...

  • Page 126
    ... the acquired in-force life insurance contracts over their IFRS net asset value, and is calculated as the difference between the acquired net tangible assets on a European Embedded (EEV) value basis and the same net assets on an IFRS basis. Deferred acquisition costs (DAC) totalling £1,297 million...

  • Page 127
    ...financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at 1 January 2006, nor is it necessarily indicative of future results. 2006 £m Business review Revenues (net earned premiums and fee income) Profit before tax...

  • Page 128
    ... Management Limited and RAC Software Solutions Limited, to VT Group plc. Receipts from the completion of the disposal of the MSS division totalled £111 million, resulting in a profit of £12 million before tax. In 2005, the Group sold certain operational assets and liabilities of Hyundai Cars (UK...

  • Page 129
    ... of the Group is financial services, which is managed using the following reportable segments: long-term business, fund management, general insurance and health. Long-term business Our long-term business comprises life insurance, long-term health and accident insurance, savings, pensions and annuity...

  • Page 130
    Financial statements continued Aviva plc Annual Report and Accounts 2006 126 Notes to the consolidated financial statements continued 4 - Segmental information continued (ii) Segmental results by business segment Long-term business £m Fund management £m General insurance and health £m Other ...

  • Page 131
    Aviva plc Annual Report and Accounts 2006 127 Overview 4 - Segmental information continued Pro forma reconciliation to operating profit before tax attributable to shareholders' profits Long-term business £m Fund management £m General insurance and health £m Other £m Total £m Business review...

  • Page 132
    ... consolidated financial statements continued 4 - Segmental information continued Long-term business £m Fund management £m General insurance and health £m Other £m Total £m For the year ended 31 December 2005 Gross written premiums Premiums ceded to reinsurers Net written premiums Net change...

  • Page 133
    Aviva plc Annual Report and Accounts 2006 129 Overview 4 - Segmental information continued Pro forma reconciliation to operating profit before tax attributable to shareholders' profits Long-term business £m Fund management £m General insurance and health £m Other £m Total £m Business review...

  • Page 134
    ... Aviva plc Annual Report and Accounts 2006 130 Notes to the consolidated financial statements continued 4 - Segmental information continued Long-term business £m Fund management £m General insurance and health £m Other £m Total £m As at 31 December 2005 Goodwill Acquired value of in-force...

  • Page 135
    ... £m Rest of the World £m Total £m Business review Gross written premiums Premiums ceded to reinsurers Internal reinsurance revenue Net written premiums Net change in provision for unearned premiums Net earned premiums Fee and commission income Other income Segment income Segmental result before...

  • Page 136
    ... Life and pensions and investment sales - new business and total income For the purpose of recording life and pensions new business premiums, the Group's policy is to include life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance...

  • Page 137
    Aviva plc Annual Report and Accounts 2006 133 Overview 5 - Details of income 2006 £m 2005 £m Business review Gross written premiums (note 4a) Long-term: Insurance contracts Participating investment contracts General insurance and health Less: premiums ceded to reinsurers (note 4a) Gross change...

  • Page 138
    Financial statements continued Aviva plc Annual Report and Accounts 2006 134 Notes to the consolidated financial statements continued 6 - Details of expenses 2006 £m 2005 £m Claims and benefits paid Claims and benefits paid to policyholders on long term-business Insurance contracts ...

  • Page 139
    Aviva plc Annual Report and Accounts 2006 135 Overview 6 - Details of expenses continued 2006 £m 2005 £m Business review Other expenses Other operating expenses Staff costs and other expenses Central costs and sharesave schemes Global finance transformation programme Corporate costs ...

  • Page 140
    ... insurance and health business unit. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer term rate of investment return. The longer term rate of investment return...

  • Page 141
    ... Group's general insurance and health operating profit before tax to changes in the longer term rates of return: Movement in investment return for By Change in 2006 £m 2005 £m Equities Properties 1% higher/lower 1% higher/lower Group operating profit before tax Group operating profit before tax...

  • Page 142
    ... financial statements Fees payable to Ernst & Young LLP and its associates for other services to Group companies: Audit of Group subsidiaries pursuant to legislation Other services pursuant to legislation Tax services Services relating to information technology Services relating to corporate finance...

  • Page 143
    ...the Group's profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows: 2006 £m 2005 £m Profit before tax Tax calculated at standard UK corporation tax rate of 30% (2005: 30%) Different basis of tax for UK life insurance...

  • Page 144
    ...£m 2005 Total £m Profit before tax Tax attributable to shareholders' profits Profit for the year Minority interests Preference dividends Coupon payments in respect of direct capital instrument (net of tax) Profit attributable to ordinary shareholders (ii) Basic earnings per share is calculated as...

  • Page 145
    ... equity in the year Coupon payments on direct capital instrument Financial statements - - 418 275 693 17 52 762 364 234 - - 598 17 42 657 Other information Subsequent to 31 December 2006, the directors proposed a final dividend for 2006 of 19.18 pence per ordinary share, £492 million in total...

  • Page 146
    ...) The recoverable amount of the UK general insurance and health unit has also been determined based on a value in use calculation. The calculation uses cash flow projections based on business plans approved by management covering a three year period and a risk adjusted discount rate of 10.45% (2005...

  • Page 147
    ...the shareholder interest in the life business and is calculated in accordance with the European Embedded Value (EEV) principles. The embedded value is the total of the net worth of the life business and the value of the in-force business. The underlying methodology and assumptions have been reviewed...

  • Page 148
    ... in the shadow adjustment made to the carrying value of the AVIF in Aviva USA. Intangible assets with indefinite useful lives comprise the RAC and BSM brands, and the value of the Union Financière de France Banque sales force, where the existing lives of the assets and their competitive position...

  • Page 149
    ... policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies hold equity stakes...

  • Page 150
    ... aggregate financial information on the Group's interests in its joint ventures is as follows: 2006 £m 2005 £m Income Expenses Share of results before tax Long-term assets Current assets Share of total assets Long-term liabilities Current liabilities Share of total liabilities Share of net assets...

  • Page 151
    ... before tax Share of tax Share of results after tax Amortisation of acquired value of in-force business Share of profit after tax Acquisitions and additions Fair value (losses) taken to equity Dividends received Foreign exchange rate movements Other movements and reclassifications as held for sale...

  • Page 152
    ... Accounts 2006 148 Notes to the consolidated financial statements continued 18 - Investments in associates continued (b) The principal associates included above are: Company Type of business Class of share Proportion held Country of incorporation and operation Aviva Life Insurance Company India...

  • Page 153
    ... of the Group in overseas operations, all with recent relevant experience. Values are calculated on the basis of existing use, being the estimated arm's-length value at which the properties could be exchanged with vacant possession and without allowing for alternatives to their current use. If owner...

  • Page 154
    ... and measured at fair value. The fair value has been calculated by discounting the future cashflows using appropriate current interest rates for each portfolio of mortgages. The change in fair value of these loans during the year, attributable to a change in credit risk, was £nil (2005: £nil...

  • Page 155
    Aviva plc Annual Report and Accounts 2006 151 Overview 22 - Securitised mortgages and related assets The Group has loans secured by mortgages, subject to non-recourse finance arrangements, in a UK long-term business subsidiary and in three Dutch subsidiaries. Details of the relevant transactions ...

  • Page 156
    ... the balance sheet date. 2005 At fair value through profit or loss Trading £m Other than trading £m Available for sale* £m Total £m Debt securities UK government Non-UK government Corporate - UK Corporate - Non-UK Other Equity securities Corporate - UK Corporate - Non-UK Other investments Unit...

  • Page 157
    ... gains £m Unrealised losses £m Business review Fair value £m Debt securities Equity securities Other investments Unit trusts and specialised investment vehicles Derivatives financial instruments Deposits with credit institutions Minority holdings in property management undertakings Other 111...

  • Page 158
    ...-term business Insurance contracts - General insurance and health business Participating investment contracts Non-participating investment contracts Retail fund management business Surpluses in the staff pension schemes (note 42d(v)) Other assets Total Less: Amounts classified as held for sale 848...

  • Page 159
    ... the terms of the Companies Act 1985 and the nominal value of the shares is charged to the share premium account. 28 - Equity compensation plans (a) Description of the plans The Group maintains a number of active stock option and award schemes. These are as follows: (i) Savings-related options These...

  • Page 160
    ... in the Directors' remuneration report. (b) Outstanding options and awards (i) Share options At 31 December 2006, options to subscribe for ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva Savings Related Share Option Scheme Option price p Number of shares Normally...

  • Page 161
    ... Bonus Plan Vesting date 3,226,201 31 March 2009 The vesting of awards under the Aviva Long-Term Incentive Plan is subject to the attainment of performance conditions as described in the Directors' remuneration report. Shares which do not vest, lapse. (iii) Shares to satisfy awards and options...

  • Page 162
    ...Aviva plc Annual Report and Accounts 2006 158 Notes to the consolidated financial statements continued 28 - Equity compensation plans continued (c) Movements in the year A summary of the status of the option plans as at 31 December 2006 and 2005, and changes during the years ended on those dates...

  • Page 163
    .... The risk-free interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the expected life of the options. Financial statements 29 - Shares held by employee trusts Movements in the carrying value of...

  • Page 164
    Financial statements continued Aviva plc Annual Report and Accounts 2006 160 Notes to the consolidated financial statements continued 30 - Preference share capital continued At the Annual General Meeting on 10 May 2006, the Company's authorised preference share capital was increased to £1,200 ...

  • Page 165
    ... Hedging Equity instruments compensation reserve (see reserve (see accounting accounting policy S) policy Y) £m £m Financial statements Total £m Balance at 1 January 2005 Arising in the year: Fair value gains/(losses) Fair value losses transferred to profit Share of fair value changes in joint...

  • Page 166
    ...2006 £m 2005 £m Balance at 1 January Profit for the year attributable to equity shareholders Actuarial losses on pension schemes (note 42d (iii)) Dividends and appropriations (note 14) Shares issued in lieu of dividends Shares issued under equity compensation plans (note 32b) Transfer from merger...

  • Page 167
    ... Norwich Union Life & Pensions and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the non-profit funds. - In France, where the majority of policyholders' benefits are determined by investment performance, subject to certain guarantees...

  • Page 168
    ... regular and final bonuses. The items included in the cost of future policy-related liabilities include: - Maturity Guarantees; - Smoothing (which can be negative); - Guaranteed Annuity Options; - GMP underpin on Section 32 transfers; and - Expected payments under Mortgage Endowment Promise. In the...

  • Page 169
    Aviva plc Annual Report and Accounts 2006 165 Overview 35 - Insurance liabilities continued The principal assumptions underlying the cost of future policy related liabilities are as follows: Future investment return A "risk-free" rate equal to the spot yield on gilts, plus a margin of 0.1% is used...

  • Page 170
    ... continued Aviva plc Annual Report and Accounts 2006 166 Notes to the consolidated financial statements continued 35 - Insurance liabilities continued The changes in the valuation discount rates since 2005 reflect the changes in the yields on the supporting assets. Valuation discount rates 2006...

  • Page 171
    ...current product assumptions. The indexed life and annuity products guarantee the return of principal to the customer, and credit interest based on certain indices. A portion of the premium from each customer is invested in fixed income securities and is intended to cover the minimum guaranteed value...

  • Page 172
    Financial statements continued Aviva plc Annual Report and Accounts 2006 168 Notes to the consolidated financial statements continued 35 - Insurance liabilities continued The effect of changes in the main assumptions is given in note 39. Included within portfolio transfers is £287 million ...

  • Page 173
    Aviva plc Annual Report and Accounts 2006 169 Overview 35 - Insurance liabilities continued Movements The following changes have occurred in the general insurance and health claims provisions during the year: 2006 £m 2005 £m Business review Carrying amount at 1 January Impact of changes in ...

  • Page 174
    Financial statements continued Aviva plc Annual Report and Accounts 2006 170 Notes to the consolidated financial statements continued 35 - Insurance liabilities continued Before the effect of reinsurance, the loss development table is: Accident year All prior years £m 2001 £m 2002 £m 2003 £m...

  • Page 175
    ...381 Financial statements 2006 £m 2005 £m Long-term business General insurance and health Total 5,601 2,224 7,825 4,733 2,397 7,130 Other information Of the above total, £3,848 million (2005: £3,717 million) is expected to be recovered more than one year after the balance sheet date. (ii...

  • Page 176
    ... continued Aviva plc Annual Report and Accounts 2006 172 Notes to the consolidated financial statements continued 36 - Reinsurance assets continued (b) Assumptions The assumptions used for reinsurance contracts follow those used for insurance contracts. Reinsurance assets are valued net of...

  • Page 177
    ... contracts at fair value Non-participating contracts at amortised cost Total 49,400 38,081 877 38,958 88,358 47,258 29,304 747 30,051 77,309 Other information (b) Long-term business investment liabilities Investment contracts are those that do not transfer significant insurance risk from the...

  • Page 178
    ... savings products between insurance liabilities and investment contracts. The effect of changes in main assumptions is given in note 39. (ii) Non-participating investment contracts 2006 £m 2005 £m Carrying amount at 1 January Provisions in respect of new business Expected change in existing...

  • Page 179
    ... operating activities, various Group companies have given guarantees and options, including investment return guarantees, in respect of certain long-term insurance and fund management products. Further information on assumptions is given in notes 35 and 37. (a) UK Life with-profit business In the UK...

  • Page 180
    ... income return exceeded guaranteed bonus rates in 2006. Guaranteed death and maturity benefits In France, the Group has also sold unit-linked policies where the death and/or maturity benefit is guaranteed to be at least equal to the premiums paid. The reserve held in the Group's consolidated balance...

  • Page 181
    ... calculated conservatively, assuming a long-term market interest rate of 1.42% and no lapses or premium discontinuances. (v) United States Indexed and total return strategy products In the United States, the Group writes indexed life and deferred annuity products. These products guarantee the return...

  • Page 182
    ... impacts relate primarily to assumption changes in the UK and Ireland. The impact on existing business of implementing FSA Policy Statement 06/14, Prudential Changes for Insurers, in 2006 is £132 million, arising mainly on expenses and persistency rates in both insurance and investment contracts...

  • Page 183
    ...amounts 2006 £m 2005 £m Financial statements Other information Deficits in the staff pension schemes (note 42d (v)) Other obligations to staff pension schemes - insurance policies issued by Group companies (note 35a) Total IAS 19 obligations to staff pension schemes Restructuring provision Other...

  • Page 184
    ... related to a member's final salary and length of service) or a defined contribution basis (generally related to the amount invested, investment return and annuity rates). The only material defined benefit schemes are in the UK, the Netherlands, Canada and Ireland and, of these, the main UK scheme...

  • Page 185
    Aviva plc Annual Report and Accounts 2006 181 Overview 42 - Pension obligations continued (c) Charges to the income statement The total pension costs of the Group's defined benefit and defined contribution schemes were: 2006 £m 2005 £m Business review UK defined benefit schemes UK defined ...

  • Page 186
    ..., their expected rates of return are included in the appropriate line in the table above. (iii) Pension expense As noted above, plan assets in the UK and Dutch schemes include insurance policies with other Group companies. To avoid doublecounting of investment income on scheme assets and the...

  • Page 187
    ...£m Business review Current service cost Past service cost/(credit) (Gain)/loss on curtailments Total pension cost Charged to net operating expenses Included in profit on disposal of subsidiaries and associates Total pension cost as above Expected return on scheme assets Less: Income accounted for...

  • Page 188
    Financial statements continued Aviva plc Annual Report and Accounts 2006 184 Notes to the consolidated financial statements continued 42 - Pension obligations continued Excluding insurance policies with Group companies and income on the assets underlying them, the relevant figures are: 2006 £m ...

  • Page 189
    ... for Group insurance policies £m IAS19 pension deficit £m 2005 IAS19 pension deficit £m Other information Scheme assets £m Scheme liabilities £m Deficits in the schemes at 1 January Employer contributions Employee contributions Benefits paid Current and past service cost (see (iii) above...

  • Page 190
    ... plc Annual Report and Accounts 2006 186 Notes to the consolidated financial statements continued 43 - Borrowings (a) Carrying amounts The following table provides information about the maturity periods of the Group's borrowings. Borrowings are considered current if the contractual maturity dates...

  • Page 191
    ... guaranteed bonds 2016 2.5% subordinated perpetual loan notes Other loans Amounts owed to credit institutions Bank loans Commercial paper Securitised mortgage loan notes UK lifetime mortgage business Dutch domestic mortgage business Total Contractual undiscounted interest payments Total contractual...

  • Page 192
    ...UK long-term business subsidiaries, Norwich Union Life & Pensions Limited (NULAP), entered into a securitisation arrangement with The Royal Bank of Scotland Group plc (RBSG), to provide funding to cover initial new business acquisition and administration costs. Under the arrangement, an RBSG company...

  • Page 193
    ... out of direct insurance Payables arising out of reinsurance operations Deposits received from reinsurers Loans from associates Bank overdrafts Derivative liabilities Bank customer accounts Bank deposits received from other banks Other financial liabilities Less: Amounts classified as held for sale...

  • Page 194
    ...respect of certain long-term insurance and fund management products. In the UK, in common with other pension and life policy providers, the Group wrote individual and group pension policies in the 1970s and 1980s with a guaranteed annuity rate option (GAO). Since 1993, such policies have become more...

  • Page 195
    Aviva plc Annual Report and Accounts 2006 191 Overview 46 - Contingent liabilities and other risk factors continued In August 2004, the Group confirmed its intention to introduce time barring on mortgage endowment complaints, under FSA rules. The Group now includes details of its endowment ...

  • Page 196
    ... of premium or discount on borrowings Amortisation of acquired value of in-force business and intangibles Change in unallocated divisible surplus Interest expense on borrowings Finance income on pension deficit Foreign currency exchange gain/loss Changes in working capital (Increase)/decrease...

  • Page 197
    Aviva plc Annual Report and Accounts 2006 193 Overview 48 - Cash flow statement continued (b) Cash flows in respect of the acquisition of subsidiaries, joint ventures and associates 2006 £m 2005 £m Business review Cash consideration for subsidiaries, joint ventures and associates acquired Less...

  • Page 198
    ...Mutual with-profit fund. 4. Other operations include general insurance and fund management business. The regulatory and valuation admissibility restrictions for 2005 have been changed following a revised application of the technical rules. This has increased total capital resources by £4.4 billion...

  • Page 199
    .... The changes in management policy relate to the review of bonus rates for with-profit business. The capital position of the Other UK life operations was augmented by changes to reserving for UK non-profit business permitted under the FSA Policy Statement PS06/14 Prudential Changes for Insurers, as...

  • Page 200
    ...to hold sufficient capital in its UK life with-profit funds to meet the FSA capital requirements, based on the risk capital margin (RCM). The determination of the RCM depends on various actuarial and other assumptions about potential changes in market prices, and the actions management would take in...

  • Page 201
    Aviva plc Annual Report and Accounts 2006 197 Overview 49 - Capital statement continued (i) UK with-profit funds - (CGNU Life, CULAC and NUL&P) - any available surplus held in each fund can only be used to meet the requirements of the fund itself or be distributed to policyholders and shareholders...

  • Page 202
    ... is responsible for managing market risk at Group level, and a number of investment related risks, in particular those faced by the shareholder funds throughout the Group. The financial impact from changes in market risk (such as interest rates, equity prices and property values) is examined through...

  • Page 203
    ... Report and Accounts 2006 199 Overview 50 - Risk management continued Interest rate risk Interest rate risk arises primarily from the Group's investments in long-term debt and fixed income securities, which are exposed to fluctuations in interest rates. Exposure to interest rate risk is monitored...

  • Page 204
    ...on the Group's interest rate risk. The major features include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. Details of material guarantees and options are given in note 38. (c) Credit risk Credit risk is the risk of loss in the value of financial...

  • Page 205
    ... on mortgages or debt matching annuity liabilities) this risk is translated into a more conservative discount rate used to value the liabilities, creating a greater capital requirement, and this credit risk is actively managed. The impact of aggregation of credit risk is monitored as described...

  • Page 206
    ... risk further. Persistency risk is managed at a business unit level through frequent monitoring of company experience, benchmarked against local market information. Where possible the financial impact of lapses is reduced through appropriate product design. The Group Life insurance Risk Committee...

  • Page 207
    ... Group are: Options: call, put, surrender and maturity options, guaranteed annuity options, option to cease premium payment, options for withdrawals free of market value adjustment, annuity option, guaranteed insurability options. Business review Governance Guarantees: embedded floor (guaranteed...

  • Page 208
    ... Aviva plc Annual Report and Accounts 2006 204 Notes to the consolidated financial statements continued 50 - Risk management continued Actuarial management The adequacy of the Group's general insurance claims provisions is ultimately overseen by the Reserving Committee, which covers both life...

  • Page 209
    ... report. Life insurance and Investment contracts The nature of long-term business is such that a number of assumptions are made in compiling these financial statements. Assumptions are made about investment returns, expenses, mortality rates, and persistency in connection with the in-force policies...

  • Page 210
    ... plc Annual Report and Accounts 2006 206 Notes to the consolidated financial statements continued 50 - Risk management continued Long-term business Sensitivities as at 31 December 2006 Impact on profit before tax (£m) Interest rates +1% Interest rates -1% Equity/ property +10% Equity/ property...

  • Page 211
    ... assets as available for sale in some business units, for which movements in unrealised gains or losses would be taken directly to shareholders' equity. The economic impacts on profit before tax for insurance contracts relate mainly to the effect of minimum return guarantees in the Netherlands...

  • Page 212
    ... plc Annual Report and Accounts 2006 208 Notes to the consolidated financial statements continued 50 - Risk management continued Fund management and non-insurance business Sensitivities as at 31 December 2006 Impact on profit before tax (£m) Interest rates +1% Interest rates -1% Equity/ property...

  • Page 213
    ... £m Fair value asset £m 2005 Business review Governance Financial statements Fair value liability £m Foreign exchange contracts OTC Forwards Interest and currency swaps Options Total Interest rate contracts OTC Forwards Swaps Options Exchange traded Futures Options Total Equity/Index contracts...

  • Page 214
    ... authority and responsibility for planning, directing and controlling the activities of the Group, including the executive and non-executive directors is as follows: 2006 £m 2005 £m Salary and other short-term benefits Post-employment benefits Equity compensation plans Termination benefits Total...

  • Page 215
    Aviva plc Annual Report and Accounts 2006 211 Overview Financial statements of the Company Income statement For the year ended 31 December 2006 Note 2006 £m 2005 £m Business review Income Dividends received from subsidiaries Interest receivable from Group companies Profit on disposal of ...

  • Page 216
    ... Other assets Cash and cash equivalents Total assets Equity Ordinary share capital Preference share capital Called up capital Share premium account Merger reserve Investment valuation reserve Equity compensation reserve Retained earnings Direct capital instrument B 17c D 27,886 35 2,641...

  • Page 217
    ...29) 31 2 Governance Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Financial statements Other information Where applicable, the accounting policies of the Company are the same as those of the Group on pages 104...

  • Page 218
    ... Company's net investment in GA and therefore the dividend has not been reflected through the income statement. On 31 July 2006, the Company transferred its entire shareholding in CGNU Holdings (Australia) Limited (renamed Undershaft (No 1) Limited on 12 July 2006) at its fair value to Norwich Union...

  • Page 219
    ... is no contractual agreement or policy for charging the net defined benefit cost for this scheme across the participating Group entities but, instead, this cost is recognised in the financial statements of the main UK employing company. The Company therefore recognises a pension expense equal to its...

  • Page 220
    ... Fair value gains on investments in subsidiaries Fair value gains transferred to income statement Actuarial losses on pension schemes Dividends and appropriations Reserves credit for equity compensation plans Shares issued in lieu of dividends Issue of share capital under equity compensation scheme...

  • Page 221
    ... and full details of the risk management policies are given in note 50. The fair values of the subsidiaries themselves are estimated using applicable valuation models, underpinned by the Company's market capitalisation. This uses a three month rolling average of the Company's share price and is...

  • Page 222
    Financial statements continued Aviva plc Annual Report and Accounts 2006 218 Financial statements of the Company continued Notes to the Company financial statements continued J- Related party transactions The Company receives dividend and interest income from subsidiaries and pays interest and ...

  • Page 223
    ... in accordance with the European Embedded Value basis. We also report to you if we have not received all the information and explanations we require for our audit of the alternative method of reporting long-term business. Financial statements Other information Ernst & Young LLP Registered Auditor...

  • Page 224
    ... 340 4,234 Operating profit before tax attributable to shareholders' profits Life EEV operating return Fund management 1 General insurance and health Other: Other operations2 Corporate costs Unallocated interest charges Operating profit before tax attributable to shareholders' profits Adjusted for...

  • Page 225
    ... 302 3,549 Fair value gains on AFS securities, owner-occupied properties and hedging instruments Fair value (gains)/losses transferred to profit Impairment losses on revalued assets Actuarial (losses) on pension schemes Foreign exchange rate movements Aggregate tax effect - shareholder tax 42 (18...

  • Page 226
    ... profit on an EEV basis Equity attributable to ordinary shareholders of Aviva plc Preference share capital and direct capital instrument Minority interests Total equity Liabilities Gross insurance liabilities Gross liabilities for investment contracts Unallocated divisible surplus Net asset value...

  • Page 227
    ... to ordinary shareholders of Aviva plc on an EEV basis Preference share capital and direct capital instrument Minority interests EEV basis total equity Other information 1. The analysis between the Group's and the minority interest's share of the additional value of in-force long-term business is...

  • Page 228
    ...annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of the other life and related business written in our associated undertakings and joint ventures, as well as the equity release business written in the UK. The Group's definition of new...

  • Page 229
    ... shareholders from life businesses. The value of in-force covered business includes an allowance for the impact of financial options and guarantees arising from best estimate assumptions (the intrinsic value) and from additional costs related to the variability of investment returns (the time value...

  • Page 230
    Financial statements continued Aviva plc Annual Report and Accounts 2006 226 Alternative method of reporting long-term business profits continued EEV methodology continued Risk discount rates Under the EEV methodology, a risk discount rate (RDR) is required to express a stream of expected future...

  • Page 231
    ... review Governance Financial statements Life EEV return 2006 £m 2005 £m New business contribution (after the effect of required capital) Profit from existing business - expected return - experience variances - operating assumption changes Expected return on shareholders' net worth 683...

  • Page 232
    Financial statements continued Aviva plc Annual Report and Accounts 2006 228 Alternative method of reporting long-term business profits continued New business contribution The following tables set out the premium volumes and contribution from new business written by the life and related ...

  • Page 233
    ...2.4% 2.8% International United Kingdom Total (after the effect of required capital) Other information Germany has been reclassified from Other Europe to the Netherlands, Lithuania has been reclassified from Other Europe to Poland and Norwich Union's Dublin-based offshore life and savings business...

  • Page 234
    ... statements continued Aviva plc Annual Report and Accounts 2006 230 Alternative method of reporting long-term business profits continued EEV basis - new business contribution after the effect of required capital, tax and minority interest Annual premium equivalent 2006 £m 2005 £m Present value...

  • Page 235
    ... Total New business contribution (after the effect of required capital) Expected return on existing business - return on VIF Expected return on existing business - transfer to net worth Experience variances and operating assumption changes Expected return on shareholders' net worth Investment return...

  • Page 236
    ... Total New business contribution (after the effect of required capital) Expected return on existing business - return on VIF Expected return on existing business - transfer to net worth Experience variances and operating assumption changes Expected return on shareholders' net worth Investment return...

  • Page 237
    ... to bonds and pension business while the change in Ireland relates to the Celebration Bond and unit-linked bonds. In France, lapse assumptions have been changed for non-AFER business in Aviva Vie. In Spain, lapse assumptions have been changed for risk business and some savings products. 9. In the UK...

  • Page 238
    Financial statements continued Aviva plc Annual Report and Accounts 2006 234 Alternative method of reporting long-term business profits continued Segmental analysis of the components of life EEV operating return Year ended 31 December 2005 UK £m France £m Ireland £m Italy £m Netherlands £m ...

  • Page 239
    Aviva plc Annual Report and Accounts 2006 235 Overview Segmental analysis of life and related businesses embedded value Net worth Required capital1 £m Free surplus £m Value of in-force covered business Present value of in-force £m Cost of required capital £m T otal Business review 31 ...

  • Page 240
    ..., 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 on life business. The TVOG has increased to £372...

  • Page 241
    ... assumptions used are as follows: UK 2006 2005 2004 2006 2005 France 2004 Business review Governance Financial statements Risk discount rate Pre-tax investment returns: Base government fixed interest Ordinary shares Property Future expense inflation T ax rate Required Capital (% EU minimum...

  • Page 242
    ... statements continued Aviva plc Annual Report and Accounts 2006 238 Alternative method of reporting long-term business profits continued Principal economic assumptions - deterministic calculations continued Spain 2006 2005 2004 2006* 2005 US 2004 Risk discount rate Pre-tax investment returns...

  • Page 243
    ... of historical data. Returns for corporate fixed interest investments in each scenario are equal to the return on Government bonds plus a fixed additional amount, based on current spreads less a margin for credit risk. Business review International Model Government nominal interest rates are...

  • Page 244
    Financial statements continued Aviva plc Annual Report and Accounts 2006 240 Alternative method of reporting long-term business profits continued Principal economic assumptions - deterministic calculations continued 2006 £m 2005 £m Borrow ings per summarised consolidated balance sheet - EEV ...

  • Page 245
    ... 1% increase in equity/ property returns £m 1% decrease 10% rise in 10% fall in in equity/ equity/ equity/ EU minimum property property property capital returns market values market values (or equivalent) £m £m £m £m Business review Embedded value (net of tax) 31 December 2006 France Ireland...

  • Page 246
    ... Annual Report and Accounts 2006 242 Alternative method of reporting long-term business profits continued Sensitivity analysis - economic assumptions continued New business contribution before required capital (gross of tax) 2006 As reported on page 228 £m 1% increase in equity/ property returns...

  • Page 247
    ...decrease in in mortality/ in mortality/ morbidity rates morbidity rates - annuity - life insurance business £m £m Embedded value (net of tax) 31 December 2006 As reported on page 235 £m 10% decrease in lapse rates £m France Ireland Italy Netherlands (including Belgium, Germany and Luxembourg...

  • Page 248
    ... Annuity Limited Ireland Norwich Union Central Services Limited Hibernian Group plc and its principal subsidiaries: Norwich Union Collective Investments Limited Ark Life Assurance Company Limited Norwich Union Consumer Products Limited Hibernian General Insurance Limited Norwich Union Equity Release...

  • Page 249
    ... Financial statements United States AmerUs Group Co and its principal subsidiaries: American Investors Life Insurance Company, Inc. AmerUs Annuity Group Co. (AAG) AmerUs Life Insurance Company Aviva Capital Management Bankers Life Insurance Company of New York ILICO Holdings, Inc. Indianapolis Life...

  • Page 250
    ...an alternative to having dividends paid by cheque, shareholders can, if they wish, have them credited directly into their bank or building society account on the dividend payment date. Having the dividend paid directly into their bank account offers shareholders the benefits of avoiding the risk of...

  • Page 251
    ... are set out below: Analysis of shareholders No. of shareholders % No. of shares % Financial statements Individuals Banks and nominee companies Pension fund managers and insurance companies Other corporate bodies 635,178 13,395 97 4,093 652,763 No. of shareholders 97.3 2.05 0.02 0.63 100 % 247...

  • Page 252
    ...of which interlink with each other. Aviva Group UK long-term savings and general insurance Fund management Aviva worldwide internet sites www.aviva.com www.norwichunion.com www.morleyfm.com www.aviva.com/websites Aviva plc Registered Office: St Helen's, 1 Undershaft, London EC3P 3DQ T elephone +44...

  • Page 253
    ...it. This year our annual report and accounts has been printed by ...plan to use naturally cooled water from their well to supply the existing air conditioning system. Based in Foxton in Cambridgeshire, Burlington are a privately owned business employing over 100 local people, as a rural employer...

  • Page 254
    Aviva plc St Helen's, 1 Undershaft London EC3P 3DQ Telephone +44 (0)20 7283 2000 www.aviva.com Registered in England Number 2468686