Aviva 2006 Annual Report Download - page 200

Aviva plc
Annual Report and Accounts 2006 196
Notes to the consolidated financial statements continued
49 – Capital statement continued
Within the Aviva Group there exist intra-group arrangements to provide capital to particular business units. Included in these
arrangements is a subordinated loan of £200 million from Aviva plc to the NUL&P non-profit fund to provide capital to support
the writing of new business.
The available capital of the Group’s with-profit funds is determined in accordance with the “Realistic balance sheet” regime prescribed
by the FSA’s regulations, under which liabilities to policyholders include both declared bonuses and the constructive obligation for future
bonuses not yet declared. The available capital resources include an estimate of the value of their respective estates, included as part
of the unallocated divisible surplus. The estate represents the surplus in the fund that is in excess of any constructive obligation to
policyholders. It represents capital resources of the individual with-profit fund to which it relates and is available to meet regulatory
and other solvency requirements of the fund and, in certain circumstances, additional liabilities may arise.
The liabilities included in the balance sheet for the with-profit funds do not include the amount representing the shareholders’ portion of
future bonuses. However, the shareholders’ portion is treated as a deduction from capital that is available to meet regulatory requirements
and is therefore shown as a separate adjustment in the capital statement.
In accordance with the FSA’s regulatory rules under its realistic capital regime, the Group is required 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 the
event of particular adverse changes in market conditions.
31 December 31 December
2006 2005
Realistic Risk
Realistic Realistic orphan capital
assets liabilities estate margin Excess Excess
£bn £bn £bn £bn £bn £bn
CGNU Life 14.3 (11.8) 2.5 (0.5) 2.0 1.6
CULAC 14.1 (11.6) 2.5 (0.5) 2.0 1.3
NUL&P 27.7 (25.9) 1.8 (0.6) 1.2 0.4
Aggregate 56.1 (49.3) 6.8 (1.6) 5.2 3.3
1. These realistic liabilities include the shareholders’ share of future bonuses of £0.7 billion (31 December 2005: £0.7 billion).Realistic liabilities adjusted to eliminate the
shareholders’ share of future bonuses are £48.6 billion (31 December 2005: £50.5 billion).
2. These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within the realistic
liabilities is £0.5 billion, £0.7 billion and £3.0 billion for CGNU life, CULAC and NUL&P respectively. (31 December 2005: £0.7 billion, £0.9 billion and £3.4 billion for CGNU
life, CULAC and NUL&P respectively).
3. The risk capital margin (RCM) is 4.2 times covered by the orphan estate (31 December 2005: 2.7 times).
Under the FSA regulatory regime, UK life with-profits business is required to hold capital equivalent to the greater of their regulatory
requirement based on EU Directives (“regulatory peak”) and the FSA realistic bases (“realistic peak”) described above.
For UK non-participating business, the relevant capital requirement is the minimum solvency requirement determined in accordance with
FSA regulations. The available capital reflects the excess of regulatory basis assets over liabilities before deduction of capital resources
requirement.
For UK general insurance businesses, the relevant capital requirement is the minimum solvency requirement determined in accordance
with the FSA requirements
For overseas businesses in the EEA, US, Canada, Australia, Hong Kong and Singapore, the available capital and the minimum requirement
arecalculated under the locally applicable regulatory regimes. The businesses outside these territories aresubject to the FSA rules for the
purposes of calculation of available capital and capital resource requirement.
For fund management and other businesses, the relevant capital requirement is the minimum solvency requirement determined in
accordance with the local regulator’s requirements for the specific class of business.
All businesses hold sufficient available capital to meet their capital resource requirement.
The available capital resources in each regulated entity are generally subject to restrictions as to their availability to meet requirements that
may arise elsewhere in the Group. The principal restrictions are:
Financial statements continued