Aviva 2013 Annual Report Download - page 200

Aviva plc
Annual report and accounts 2013
198
Notes to the consolidated financial statements continued
43 – Financial guarantees and options continued
(iii) Guaranteed annuity options
The Group’s UK with-profit funds have written individual and group pension contracts which contain guaranteed annuity rate
options (GAOs), where the policyholder has the option to take the benefits from a policy in the form of an annuity based on
guaranteed conversion rates. The Group also has exposure to GAOs and similar options on deferred annuities.
Realistic liabilities for GAOs in the UK with-profit funds were £921 million at 31 December 2013 (2012: £1,156 million). With
the exception of the New With-Profits Sub Fund (NWPSF), movements in the realistic liabilities in the with-profit funds are offset by
a corresponding movement in the unallocated divisible surplus, with no net impact on IFRS profit. Realistic liabilities for GAOs in
the NWPSF were £149 million at 31 December 2013 (2012: £180 million).
(iv) Guaranteed minimum pension
The Group’s UK with-profit funds also have certain policies that contain a guaranteed minimum level of pensions as part of the
condition of the original transfer from state benefits to the policy.
(v) Guaranteed minimum maturity payments on mortgage endowments
In addition, the with-profit fund companies have made promises to certain policyholders in relation to their with-profit mortgage
endowments. Top-up payments will be made on these policies at maturity to meet the mortgage value up to a maximum of the
31 December 1999 illustrated shortfall. For UKLAP WP policyholders, these payments are subject to certain conditions.
(b) UK Life non-profit business
The Group’s UK non-profit funds are evaluated by reference to statutory reserving rules, including changes introduced in 2006
under FSA Policy Statement 06/14, Prudential Changes for Insurers (which was designated by the PRA on 1 April 2013).
(i) Guaranteed annuity options
Similar options to those written in the with-profit fund have been written in relation to non-profit products. Provision for these
guarantees does not materially differ from a provision based on a market-consistent stochastic model, and amounts to £31 million
at 31 December 2013 (2012: £35 million).
(ii) Guaranteed unit price on certain products
Certain unit-linked pension products linked to long-term life insurance funds provide policyholders with guaranteed benefits at
retirement or death. No additional provision is made for this guarantee as the investment management strategy for these funds
is designed to ensure that the guarantee can be met from the fund, mitigating the impact of large falls in investment values and
interest rates.
(c) Overseas life businesses
In addition to guarantees written in the Group’s UK life businesses, our overseas businesses have also written contracts containing
guarantees and options. Details of the significant guarantees and options provided by overseas life businesses are set out below.
(i) France
Guaranteed surrender value and guaranteed minimum bonuses
Aviva France has written a number of contracts with such guarantees. The guaranteed surrender value is the accumulated value
of the contract including accrued bonuses. Bonuses are based on accounting income from amortised bond portfolios, where the
duration of bond portfolios is set in relation to the expected duration of the policies, plus income and releases from realised gains
on equity-type investments. Policy reserves are equal to guaranteed surrender values. Local statutory accounting envisages the
establishment of a reserve, ‘Provision pour Aléas Financiers’ (PAF), when accounting income is less than 125% of guaranteed
minimum credited returns. No PAF was established at the end of 2013.
The most significant of these contracts is the AFER Eurofund which has total liabilities of £34 billion at 31 December 2013
(2012: £33 billion). The guaranteed minimum bonus is agreed between Aviva France and the AFER association at the end of each
year, in respect of the following year. The bonus was 3.36% for 2013 (2012: 3.45%) compared with an accounting income from
the fund of 3.85% (2012: 3.94%).
Non-AFER contracts with guaranteed surrender values had liabilities of £15 billion at 31 December 2013 (2012: £14 billion) and
all guaranteed annual bonus rates are between 0% and 4.5%.
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 statement of financial position at the end of 2013 for this
guarantee is £20 million (2012: £101 million). The reserve is calculated on a prudent basis and is in excess of the economic liability.
At the end of 2013, total sums at risk for these contracts were £101 million (2012: £223 million) out of total unit-linked funds of
£15 billion (2012: £12 billion). The average age of policyholders was approximately 54. It is estimated that this liability would
increase by £22 million (2012: £88 million) if yields were to decrease by 1% per annum and by £8 million (2012: £21 million) if
equity markets were to decline by 10% from year end 2013 levels. These figures do not reflect our ability to review the tariff for
this option.
(ii) Ireland
Guaranteed annuity options
Products with similar GAOs to those offered in the UK have been issued in Ireland. The current net of reinsurance provision for
such options is £202 million (2012: £256 million). This has been calculated on a deterministic basis, making conservative
assumptions for the factors which influence the cost of the guarantee, principally annuitant mortality option take-up and long-term
interest rates.
These GAOs are ‘in the money’ at current interest rates but the exposure to interest rates under these contracts has been
hedged through the use of derivatives (receiver swaps and payer swaptions).