Aviva 2006 Annual Report Download - page 58

Aviva plc
Annual Report and Accounts 2006 54
Finance continued
Long-term businesses
Regulatory basis
For our non-participating worldwide life insurance businesses,
our capital requirements are set as the higher of:
–Target levels set by reference to internal risk assessment and
internal objectives
–Minimum capital requirements (ie the level of solvency capital
at which the local regulator is empowered to take action).
Having assessed the level of operational, demographic, market
and currency risk of each of our life businesses, the required level
of capital for each business is quantified and expressed as a
percentage of the EU minimum. The required capital across our
business varies between 100% and 250% of the EU minimum or
equivalent.
The weighted average level of required capital for the whole of
our non-participating life businesses, expressed as a percentage
of the EU minimum solvency margin or equivalent is 134% (2005:
128%).This is a blended rate and is expected to change over time
with changes in the product mix.
The required capital levels discussed above are used in the
calculation of our embedded value to assess the cost of locked-in
capital. At 31 December 2006, the aggregate regulatory capital,
based on the requirements of the EU minimum test amounted to
£4.3 billion (31 December 2005: £3.9 billion).As at this date, the
actual net worth held in our long-term businesses was £8.9 billion
(31 December 2005: £7.2 billion),which represents 206%
(31 December 2005: 183%) of these minimum requirements.
The increase in this ratio reflects the impact of favourable equity
market performance on the net worth and acquisition of AmerUs.
UK life operations
Available capital
The realistic inherited estate represents the available capital of our
with-profit funds. It is comprised of the assets of the long-term
with-profit funds less the realistic liabilities of non-profit policies,
less asset shares aggregated across the with-profit policies and any
additional amounts expected at the valuation 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 (NUL&P)
The realistic liabilities have been included in the gross insurance
liabilities and the gross liability for investment contracts on our IFRS
balance sheet at 31 December 2006.
31 December 31 December
2006 2005
Estimated Estimated
Estimated realistic risk
realistic Realistic inherited capital Estimated Estimated
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
*Realistic liabilities include shareholders’ proportion of future bonuses of £0.7 billion
(31 December 2005: £0.7 billion).Realistic liabilities adjusted to eliminate
shareholders’ proportion of future bonuses are £48.6 billion (31 December 2005:
£50.5 billion).
† Realistic liabilities make allowance for guarantees, options and promises on a
market consistent stochastic basis. The value of this provision included in 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 respectively).
‡ The estimated realistic estate at 31 December 2005 was £2.1 billion, £1.9 billion
and £1.2 billion for CGNU Life, CULAC and NUL&P respectively.
≠The risk capital margin is 4.2 times covered by the estimated realistic
inherited estate (31 December 2005: 2.7 times).
#The NUL&P fund includes the Provident Mutual (PM) fund, which has realistic
assets and liabilities of £2.3 billion and therefore does not impact the realistic
inherited estate.
Business review continued