Aviva 2007 Annual Report Download - page 154
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Annual Report and
Accounts 2007
150
Financial
statements
Notes to the consolidated financial statements continued
8 – Long-term business economic volatility continued
(c) Methodology
The expected investment returns and corresponding expected movements in long-term business liabilities are calculated
separately for each principal long-term business unit.
The expected return on investments for both policyholder and shareholders funds is based on opening economic
assumptions applied to the expected funds under management over the reporting period. Expected funds under
management are equal to the opening value of funds under management, adjusted for sales and purchases during
the period arising from expected operating experience. The actual investment return is affected by differences between
the actual and expected funds under management and changes in asset mix. To the extent that these differences arise
from the operating experience of the long-term business, or management decisions to change asset mix, the effect is
included in the operating profit. The residual difference between actual and expected investment return is included in
investment variances.
The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return
on investments and the impact of experience variances and assumption changes for non-economic items. The effect of
differences between actual and expected experience on liabilities, and changes to economic assumptions used to value
liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked and with-profits
funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.
For other long-term business the profit impact of economic volatility depends on the degree of matching of assets and
liabilities, and exposure to financial options and guarantees.
(d) Assumptions
The expected rate of investment return is determined using consistent assumptions between operations, having regard to
local economic and market forecasts of investment return and asset classification under IFRS.
Where assets are classified as fair value through profit or loss, the Group has applied the same “real-world” economic
assumptions for fixed interest securities, equities and properties as are used under EEV principles. The principal assumptions
underlying the calculation of the expected investment return are:
Expected return Expected return Expected return
Fixed interest Equities Properties
2007 2006 2007 2006 2007 2006
% % % % %%
United Kingdom 4.6 4.1 7.6 7.1 6.6 6.1
France 4.0 3.3 7.0 6.3 6.0 5.3
Netherlands 4.0 3.3 7.0 6.3 6.0 5.3
Where fixed interest securities are classified as available for sale, the expected investment return comprises the expected
interest or dividend payments and amortisation of the premium or discount at purchase.
9 – Longer term investment return for general insurance and health business
For general insurance and health business, the total investment income, including realised and unrealised gains, is split
between a calculated longer term return and short-term fluctuations from this. This note gives details of the longer term
return calculation and the relevant assumptions.
(a) The longer term investment return, net of expenses, attributable to the general insurance and health business result
was £1,029 million (2006: £1,073 million).
(b) The longer term investment return and short-term fluctuation are as follows:
General insurance and
health business
2007 2006
£m £m
Net investment income (note 4a(ii)) 827 1,299
Internal charges included under other headings 18 (77)
845 1,222
Analysed between:
Longer term investment return 1,029 1,073
Short-term fluctuation in investment return (184) 149
845 1,222