Aviva 2002 Annual Report Download - page 94

36 – Subordinated debt
Group and Company
2002 2001
£m £m
6.125% £700 million subordinated notes 2036 679 678
5.75% 1800 million subordinated notes 2021 511 479
1,190 1,157
The 6.125% Fixed/Fixed Rate Reset Subordinated Notes 2036 and the 5.75% Fixed/Floating Rate Reset Subordinated Notes 2021
were issued by the Company on 14 November 2001. The Notes rank below the senior obligations and ahead of the preference and
ordinary share capital issued by the Company. The 2036 Notes are callable at par, at the option of the Company, on 16 November 2026
and 14 November 2031. If the Notes are not called, the interest rate payable will be reset to an amount of 2.85% over the Gross
Redemption Yield on the appropriate five-year benchmark gilt on the reset date. The 2021 Notes are callable at par on 14 November
2011 and at three monthly intervals thereafter up to maturity. If the Notes are not called, the interest payable will be reset to an amount
of 2.12% above three month Euribor.
The fair value of these notes at 31 December 2002 was £1,167 million (2001: £1,133 million).
37 – Long-term business
(a) The Group underwrites long-term business in a number of countries as follows:
(i) In the United Kingdom mainly in
– “with-profit” funds of CGNU Life, Commercial Union Life, Norwich Union Life & Pensions and the Provident Mutual fund, where
the with-profits policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance;
– “non-profit” funds of Norwich Union Annuity, Norwich Union Life & Pensions and Norwich Union Linked Life, where shareholders
are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profit business written by Norwich Union
Life & Pensions and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge
in the non-profit funds.
(ii) In France, where the majority of policyholders’ benefits are determined by investment performance, subject to certain guarantees, and
shareholders’ profits are derived largely from management fees. In addition, a substantial number of policies participate in investment
returns, with the balance being attributable to shareholders.
(iii) In the Netherlands, where the balance of profits, after providing appropriate returns for policyholders, accrues for the benefit of the
shareholders. The bases for determining returns for policyholders are complex, but are consistent with methods and criteria followed
generally in the Netherlands. In addition, a substantial number of policies provide benefits which are determined by investment
performance, subject to certain guarantees, and shareholders’ profits are derived largely from management fees.
(iv) In other overseas operations, using methods similar to those described above.
(b) The directors have been advised by the Group’s reporting actuary that the assets of each of the long-term operations were at least
sufficient to meet their respective liabilities at 31 December 2002.
38 – Long-term business provision
The long-term business provision is calculated separately for each life operation, mainly using the net premium method.
The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, modified where
necessary to reflect requirements of the Companies Act. Material judgement is required in calculating the provisions and is exercised
particularly through the choice of assumptions where there is discretion over these.
The assumptions used to calculate the long-term business provision depend on the circumstances prevailing in each of the life
operations. The principal assumptions in the United Kingdom, France and the Netherlands are:
Interest % Mortality tables used
United Kingdom
Assurance:
With-profit 3.2 to 3.5 AM92/AF92 or A67/70 adjusted
Non-profit 3.2 to 4 AM80/AF80 or AM92/AF92 or
TM92/TF92 adjusted for smoker status
Pure endowment and deferred annuity:
Pensions business (in deferment) 3.5 to 5.5 Nil or AM80/AF80 or AM92/AF92 adjusted
General annuity business (from vesting) 4 IM80/IF80 or IM92/IF92 adjusted plus allowance
for mortality improvement*
Pensions business (from vesting) 4 to 4.5 PMA80/PFA80 or PMA92/PFA92 adjusted plus
allowance for future mortality improvement*
Annuity in payment:
General annuity 4.8 to 5.3 IMA80/IFA80 adjusted plus allowance for
future mortality improvement
Pensions 5 to 5.3 PMA80/PFA80 adjusted plus allowance for future
mortality improvement*
*Allowance for future mortality improvements reflect the “medium cohort” projection from the CMIB working paper published in December 2002, adjusted for females and
for a higher rate of improvement at very old ages.
Notes to the accounts continued
80 Aviva plc
Annual report + accounts 2002