Aviva 2006 Annual Report Download - page 199

Overview Business review Governance Financial statements Other information
Aviva plc
Annual Report and Accounts 2006 195
49 – Capital statement continued
Analysis of movements in capital
For the year ended 31 December 2006
CGNU CULAC NUL&P Total UK life Other Total
with-profit with-profit with-profit with-profit UK life UK life Overseas life Total life
fund fund fund funds operations operations operations operations
£m £m £m £m £m £m £m £m
Opening available capital resources 2,103 1,941 1,249 5,293 2,044 7,337 8,677 16,014
Effect of new business (56) (49) – (105) (351) (456) (163) (619)
Expected change in available 106 185 404 695 338 1,033 471 1,504
capital resources
Variance between actual 293 288 (4) 577 4 581 (490) 91
and expected experience
Effect of operating 75 159 51 285 478 763 (27) 736
assumption changes
Effect of economic 136 151 383 670 54 724 48 772
assumption changes
Effect of changes in management (53) (83) (143) (279) – (279) (7) (286)
policy
Transfers, acquisitions and disposals – – – – – – 617 617
Foreign exchange movements –– – – – – (202) (202)
Other movements (56) (113) (117) (286) (654) (940) 366 (574)
Closing available capital resources 2,548 2,479 1,823 6,850 1,913 8,763 9,290 18,053
Further analysis of the movement in the liabilities of the long-term business can be found in notes 35 and 37.
The analysis of movements in capital provides an explanation of the movement in available capital of the Group’s life business for the year.
This analysis is intended to give an understanding of the underlying causes of changes in the available capital of the Group’s life business,
and provides a distinction between some of the key factors affecting the available capital.
For the UK with-profit funds, the increase in available capital has been driven by the favourable economic environment. Equity
performance was positive, which had a direct effect on the equity content of the estate assets and an indirect impact from the reduction
in maturity guarantee costs. Fixed interest yields have generally increased. Although this has led to capital depreciation of fixed interest
assets it also resulted in a reduction of guarantee costs, with the increase in yield having a net benefit to the estates of all the funds. Also,
the implied market volatility for equities has reduced, which lowers the assumed future asset share volatility, particularly in CGNU and
CULAC, and consequently guarantee costs are reduced.
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 outlined in Note 35(b), which areincluded in operating assumption
changes.
For the Overseas life operations, the negative variance between actual and expected experience is driven mainly by the increase in market
interest rates, which has led to capital depreciation of fixed interest assets and consequential reduction of the unallocated divisible surplus
in France and other European businesses.
In aggregate, the Group has at its disposal total available capital of £19.5 billion (2005: £18.0 billion),representing the aggregation of the
solvency capital of all of our businesses. This capital is available to meet risks and regulatory requirements set by reference to local
guidance and EU directives.
After effecting the year end transfer to shareholders, the UK with-profit funds’ available capital of £6.9 billion (2005: £5.2 billion) can only
be used to provide support for UK with-profit business and is not available to cover other shareholder risks. This is comfortably in excess
of the required capital margin and, therefore, the shareholders are not required to provide further capital support to this business.
For the remaining life and general insurance operations, the total available capital amounting to £12.6 billion (2005: £12.8 billion) is
significantly higher than the minimum requirements established by regulators and, in principle, the excess is available to shareholders.
In practice, management will hold higher levels of capital within each business operation to provide appropriate cover for risk.
As the total available capital of £19.5 billion is arrived at on the basis of local regulatory guidance, which evaluates assets and liabilities
prudently,it understates the economic capital of the business which is considerably higher.This is a limitation of the Group Capital
Statement which, to be more meaningful, needs to evaluate available capital on an economic basis and compare it with the risk capital
required for each individual operation, after allowing for the considerable diversification benefits that exist in our Group.