Aviva 2002 Annual Report Download - page 110

Methodology
(a) Life achieved profit
The achieved profit method of financial reporting is designed to recognise profit as it is earned over the life of an insurance policy.
The total profit recognised over the lifetime of a policy is the same as under the modified statutory basis of reporting, but the timing
of recognition is different.
Distributable profits from long-term businesses arise when they are released to shareholders following actuarial valuations. These are
carried out in accordance with statutory requirements designed to ensure and demonstrate solvency in long-term business funds.
Future distributable profits will depend on experience in a number of areas such as investment return, discontinuance rates, mortality
and administration costs. Using realistic assumptions of future experience, we can project releases to shareholders arising in future years
from the business in-force and associated minimum statutory solvency margin.
The life achieved profit reflects current performance by measuring the movement, from the beginning to the end of the year, in the
present value of projected releases to shareholders from the business in-force and associated minimum statutory margin, together with
the movement in the net assets of the long-term operations, adjusted for any amounts released from or invested in life operations.
The present value of the projected releases to shareholders is calculated by discounting back to the current time using a risk discount
rate. The risk discount rate is a combination of a discount rate to reflect the time value of money and a risk margin to make prudent
allowance for the risk that experience in future years may differ from the assumptions referred to above.
The calculations are carried out on an after-tax basis and the profits are then grossed up for tax at the full rate of corporation tax for the
United Kingdom and at an appropriate rate for each of the other countries.
(b) Embedded value
The shareholders’ interest in the long-term business operations is represented by the embedded value. The embedded value is the total of
the net assets of the long-term operations and the present value at risk discount rates (which incorporate a risk margin) of the projected
releases to shareholders arising from the business in-force, less a deduction for the effect of holding the minimum statutory solvency
margin. This effect of solvency margin is the difference between the nominal value of the solvency margin and the present value at risk
discount rates of the projected release of the solvency margin and investment earnings on the assets deemed to back the solvency margin.
For with-profit funds in the United Kingdom and Ireland, for the purpose of recognising the value of the estate, it is assumed that
terminal bonuses are increased to exhaust all of the free assets over the future lifetime of the in-force with-profit policies.
Principal economic assumptions
Economic assumptions are derived actively based on market yields on risk-free fixed interest assets at each period end. Margins are
applied on a consistent basis to risk free yields to obtain investment return assumptions for ordinary shares and property, and risk
discount rates. The reductions in assumptions in 2002 reflect the fall in actual risk-free yields (for example, in the UK the 15-year gilt)
over the year in each territory. Risk margins remain unchanged in all our key businesses.
The principal economic assumptions used are as follows:
United Kingdom France
2002 2001 2000 2002 2001 2000
Risk discount rate 7.3% 7.7% 7.4% 8.1% 8.6% 8.5%
Pre-tax investment returns:
Base government fixed interest 4.5% 5.0% 4.7% 4.3% 5.1% 5.0%
Ordinary shares 7.0% 7.5% 7.2% 6.3% 7.1% 7.0%
Property 6.0% 6.5% 6.2% 5.8% 6.6% 6.5%
Future expense inflation 3.6% 3.7% 3.7% 2.5% 2.5% 2.5%
Tax rate 30.0% 30.0% 30.0% 35.4% 36.4% 37.8%
Ireland Italy
2002 2001 2000 2002 2001 2000
Risk discount rate 8.7% 9.3% 9.1% 7.3% 7.6% 7.5%
Pre-tax investment returns:
Base government fixed interest 4.6% 5.3% 5.3% 4.4% 5.3% 5.3%
Ordinary shares 7.6% 8.3% 8.3% 7.4% 8.3% 8.3%
Property 6.1% 6.8% 6.8% 5.9% 6.8% 6.8%
Future expense inflation 4.0% 4.0% 5.0% 3.3% 3.3% 3.3%
Tax rate 12.5% 16.0% 20.0% 39.8% 41.0% 43.0%
Netherlands Poland*
2002 2001 2000 2002 2001 2000
Risk discount rate 7.4% 8.0% 8.0% 15.4% 18.5% 20.0%
Pre-tax investment returns:
Base government fixed interest 4.2% 5.1% 5.0% 8.0% 12.5% 12.5%
Ordinary shares 7.2% 8.1% 7.9% 8.0% 12.5% 12.5%
Property 5.7% 6.6% 6.5% n/a n/a n/a
Future expense inflation 2.5% 2.5% 2.5% 5.4% 9.2% 9.2%
Tax rate 25.0% 25.0% 25.0% 27.0% 28.0% 28.0%
*The economic assumptions shown above are those in the calculations for the life business. The economic assumptions for the pension business are identical with the exception
of the risk discount rate which is 13.8% (2001: 16.9%; 2000: 17.3%).
Alternative method of reporting long-term business continued
96 Aviva plc
Annual report + accounts 2002