Aviva 2013 Annual Report Download - page 253

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
251
Financial and operating performance continued
investment return, a transfer out of the unallocated divisible
surplus finances bonus declarations and related shareholders’
profit.
The unallocated divisible surplus consists of future (as yet
undetermined) policyholder benefits, associated shareholders’
profit and the orphan estate. The orphan estate serves as
working capital for our with-profits funds. It affords the with-
profits funds a degree of freedom to invest a substantial portion
of the funds’ assets in investments yielding higher returns than
might otherwise be obtainable without being constrained by the
need to demonstrate solvency.
Other participating business
Outside of the UK, most of our long-term operations write
participating business. This is predominantly savings or pensions
business, where the policyholders receive guaranteed minimum
investment returns, and additional earnings are shared between
policyholders and shareholders in accordance with local
regulatory and policy conditions. This may also be referred to as
‘with-profits’ business.
Other long-term insurance and savings business
Non-profit business falls into two categories: investment type
business, and risk cover and annuity business.
Investment type business, which accounts for most of our
non-profit business, includes predominantly unit-linked life and
pensions business where the risk of investing policy assets is
borne entirely by the policyholder. Operating earnings arise
from unit-linked business when fees charged to policyholders
based on the value of the policy assets exceed costs of
acquiring new business and administration costs. Shareholders
bear the risk of investing shareholder capital in support of
these operations.
Risk cover business includes term assurance, or term life
insurance business. Annuity business includes immediate
annuities purchased for individuals or on a bulk purchase basis
for groups of people. The risk of investing policy assets in this
business is borne entirely by the shareholders. Operating
earnings arise when premiums, and investment return earned
on assets supporting insurance liabilities and shareholder capital,
exceed claims and benefit costs, costs of acquiring new business
and administration costs.
General insurance and health business
Operating earnings within our general insurance and health
business arise when premiums and investment return earned
on assets supporting insurance liabilities and shareholder capital
exceed claims costs, costs of acquiring new business and
administration costs.
Fund management
Fund management operating earnings consist of fees earned for
managing policyholder funds and external retail and institutional
funds on behalf of clients, net of operating expenses.
Arrangements for the management of proprietary funds are
conducted on an arm’s length basis between our fund
management and insurance businesses. Such arrangements
exist mainly in the UK, France, Ireland and Canada. Proprietary
insurance funds in most other countries are externally managed.
Other operations
Other operations includes our operations other than insurance
and fund management, including Group Centre expenses.
Financial highlights
The following analysis is based on our consolidated financial
statements and should be read in conjunction with those
statements. In order to fully explain the performance of our
business, we discuss and analyse the results of our business in
terms of certain financial measures which are based on ‘non-
GAAP measures’ and which we use for internal monitoring
purposes. We review these in addition to GAAP measures, such
as profit before and after tax.
The remainder of the financial performance section focuses
on the activity of the Group’s continuing operations. Details of
the performance of the United States business which has been
classified as discontinued and was sold on 2 October 2013, can
be found in the market performance section.
Non-GAAP measures
Sales
The total sales of the Group consist of long-term insurance and
savings new business sales and general insurance and health net
written premiums.
Long-term insurance and savings new business sales
Sales of the long-term insurance and savings business consist of:
 Insurance and participating investment business
– This includes traditional life insurance, annuity business and
with-profits business.
– There is an element of insurance risk borne by the Group
therefore, under IFRS, these are reported within net
written premiums.
 Non-participating investment business
– This includes unit-linked business and pensions business.
– The amounts received for this business are treated as
deposits under IFRS and an investment management fee is
earned on the funds deposited.
– For new business reporting in the UK, companies continue
to report non-participating investment business within their
‘covered business’ sales, in line with the historic treatment
under UK GAAP.
 Non-covered business or investment sales:
– These include retail sales of mutual fund type products.
– There is no insurance risk borne by the Group therefore,
under IFRS, these are treated as deposits and investment
management fee income is earned on the funds deposited.
These have never been treated as ‘covered business’ for
long-term insurance and savings reporting so we show
these separately as investment sales.
Sales is a non-GAAP financial measure and financial
performance indicator that we report to our key decision
makers in the businesses in order to help assess the value of
new business from our customers and compare performance
across the markets in which we operate.
For long-term insurance and savings new business, we
define sales as the sum of the present value of new business
premiums (PVNBP) of life, pension and savings products and
investment sales.
PVNBP is equal to total single premium sales received in the
year plus the discounted value of annual premiums expected to
be received over the terms of newly incepted contracts and is
calculated as at the date of sale. We adjust annual premiums to
reflect the expected stream of business coming from this new
business over future years. In the view of management, this
performance measure better recognises the relative economic
value of regular premium contracts compared with single
premium contracts. PVNBP is a European insurance industry
standard measure of new business.
For our long-term insurance and savings business, we
believe that sales is an important measure of underlying
performance and a better measure for new business than IFRS
net written premiums. We consider that the use of sales over
IFRS net written premiums provides a:
 Consistent treatment of long-term insurance and investment
contracts: IFRS net written premiums do not include deposits
received on non-participating investment contracts. Long-
term insurance contracts and participating investment
contracts both contain a deposit component, which are
included in IFRS net written premiums, in addition to an