Aviva 2006 Annual Report Download - page 180

Aviva plc
Annual Report and Accounts 2006 176
Notes to the consolidated financial statements continued
38 – Financial guarantees and options continued
(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 2006.
The most significant of these contracts is the AFER Eurofund which has total liabilities of £21 billion at 31 December 2006
(2005: £22 billion).The guaranteed bonus on this contract equals 65% of the average of the last two years’ declared bonus rates
(or 60% of the TME index rates if higher) and was 3.30% for 2006 (2005: 3.51%) compared with an accounting income from the
fund of 4.81% (2005: 4.91%).
Non-AFER contracts with guaranteed surrender values had liabilities of £6 billion (2005: £7 billion) at 31 December 2006 and guaranteed
annual bonus rates arebetween 0% and 4.5% on 98.3% of liabilities. For non-AFER business, the accounting income returnexceeded
guaranteed bonus rates in 2006.
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 balance sheet at the end of 2006 for this guarantee is £8 million
(2005: £14 million).The reserve is calculated on a prudent basis and is in excess of the economic liability. At the end of 2006, total sums
at risk for these contracts were £38 million (2005: £73 million) out of total unit-linked funds of £13 billion (2005: £8 billion).The average
age of policyholders was approximately 53. It is estimated that this reserve would increase by £3 million (2005: £1 million) if yields were
to decrease by 1% per annum and by £2 million (2005: £0.1 million) if equity markets were to decline by 10% from year end 2006
levels. These figures do not reflect our ability to review the tariff for this option.
(ii) Netherlands
Guaranteed minimum return at maturity
In the Netherlands, it is market practice to guarantee a minimum return at maturity on traditional savings and pension contracts.
Guarantees on older lines of business are 4% per annum while, for business written since 1 September 1999, the guarantee is 3% per
annum. On Group pensions business, it is often possible to recapture guarantee costs through adjustments to surrender values or to
premium rates.
On transition to IFRS, Delta Lloyd changed the reserving basis for most traditional contracts to reflect current market interest rates, for
consistency with the reporting of assets at market value. The cost of meeting interest rate guarantees is allowed for directly in the
liabilities. Although most traditional contracts are valued at market interest rate, the split by level of guarantee shown below is according
to the original underlying guarantee.
The total liabilities for traditional business at 31 December 2006 are £8 billion (2005: £8 billion) analysed as follows:
Liabilities 3% Liabilities 3% Liabilities 4% Liabilities 4%
guarantee guarantee guarantee guarantee
31 December 31 December 31 December 31 December
2006 2005 2006 2005
£m £m £m £m
Individual 1,222 1,148 2,989 3,074
Group pensions 518 408 3,180 3,333
Total 1,740 1,556 6,169 6,407
Delta Lloyd has certain unit-linked contracts which provide a guaranteed minimum returnat maturity from 4% pa to 2% pa.
Provisions consist of unit values plus an additional reserve for the guarantee. The additional provision for the guarantee was £76 million
(2005: £127 million).An additional provision of £43 million (2005: £77 million) in respect of investment return guarantees on group
segregated fund business is held. It is estimated that the provision would increase by £163 million (2005: £293 million) if yields wereto
reduce by 1% pa and by £25 million (2005: £44 million) if equity markets were to decline by 10% from year end 2006 levels.
Financial statements continued