Aviva 2006 Annual Report Download - page 57

Overview Business review Governance Financial statements Other information
Aviva plc
Annual Report and Accounts 2006 53
Different measures of capital
Wemeasure our capital using different bases that include measures
that comply with the regulatory regime in which we operate and
measures that the directors consider appropriate for effective
management of the business. The measures that we use are:
Accounting basis
Weare required to report our results on an IFRS basis; however,
the directors consider that EEV principles provide a more relevant
and meaningful view of our life operations and so we analyse and
measure the net asset value and total capital employed for the
group on this basis.
Regulatory basis
Relevant capital and solvency regulations are used to measure
and report the financial strength of our insurance subsidiaries.
These measures are based on local regulatory requirements and
are consolidated under the European Insurance Groups Directive
(IGD). The regulatory capital tests verify that we retain an excess of
solvency capital above the required minimum level calculated using
aseries of prudent assumptions about the type of business written
by our insurance subsidiaries.
In addition to the FSA realistic reporting regime, the UK Accounting
Standards Board requires certain capital disclosures to be made in
accordance with Financial Reporting Standard 27, Life Assurance
(FRS 27). The purpose of the capital statement is to set out the
financial strength of the entity and to provide an analysis of the
disposition and constraints over the availability of capital to meet
risks and regulatory requirements. The disclosures required by
FRS 27 are set out in note 49.
Economic bases
Webelieve that economic capital provides a clear measurement of
the risks facing our business. Additionally, it informs the amount of
capital that we need to hold to mitigate the risk of insolvency.
We provide full details of our economic measures of capital in the
“ Risk and capital management” section on page 57.
Group
Accounting basis
Our capital funding is allocated so that the capital employed by
trading operations is greater than the capital provided to those
operations by the shareholders and subordinated debt holders.
As a result, we are able to enhance the returns earned on our
equity capital.
2006 2005
Shareholders’ funds – EEV basis £20.9bn £17.5bn
Total capital employed – EEV basis £26.4bn £23.0bn
Net asset value per share – EEV basis 683p 622p
Shareholders’ funds have increased by £3.4 billion to £20.9 billion
(2005: £17.5 billion), reflecting our strong operational performance
in 2006.
Accordingly, our net asset value per ordinary share, based on
equity shareholders’ funds was higher at 683 pence per share
(2005: 622 pence per share).
Regulatory basis – European Insurance Groups Directive
2006 2005
Insurance Groups Directive (IGD) excess solvency £3.6bn £3.6bn
Cover (times) 1.8 times 1.8 times
As at 31 December 2006, we had an estimated excess regulatory
capital of £3.6 billion (2005: £3.6 billion),as measured under the
European Insurance Groups Directive. This measure represents the
excess of the aggregate value of regulatory capital employed in
our business over the aggregate minimum solvency requirements
imposed by local regulators, excluding the surplus held in our UK
life funds.
In broad terms, for our long-term business, the minimum solvency
requirements are set at 4% and 1% for non-linked and unit-linked
reserves respectively. For our general insurance portfolio of business,
the minimum solvency requirement is the higher of 18% of gross
premiums or 26% of gross claims, in both cases adjusted to reflect
the level of reinsurance recoveries. For our other major non-
European businesses (USA, Australia and Canada), a risk charge on
assets and liabilities approach is used.
Our excess solvency of £3.6 billion reflects operational performance
generating solvency capital during the year, offset by the acquisition
of AmerUs, which reduced the solvency surplus by £0.7 billion, and
the funding of the pension deficit. From 31 December 2006, we
have been required to have positive solvency on an IGD basis. Our
risk management processes ensure adequate review of this measure
at all times.