Aviva 2007 Annual Report Download - page 162
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Annual Report and
Accounts 2007
158
Financial
statements
Notes to the consolidated financial statements continued
16 – Goodwill continued
Key assumptions used for the calculation were:
– Budgeted operating profit represents the operating profit in the business plans, approved by management and as such
reflects the best estimate of future profits based on both historical experience and expected growth rates for the Irish
economy. Some of the assumptions that underline the budgeted operating profit include market share, premium rate
changes, claims inflation and commission rates.
– Growth rate represents the rate used to extrapolate future cash flows beyond the business plan period. Prices are
assumed to remain static in the foreseeable future and volumes are assumed to increase in line with real GDP. These are
consistent with external sources of data (ESRI and PwC European Economic Outlook).
(vi) Italy (long-term, general insurance and health)
The majority of the goodwill and the intangible asset with an indefinite useful life allocated to the Italian business arises
from the acquisitions described in note 3(a), which occurred in the second half of 2007. Since the acquisition dates, the
assets and liabilities of the acquired companies have not changed significantly, and there have been no other events that
might have materially affected the recoverable amount of the unit.
(vii) Netherlands (long-term, general insurance and health)
The recoverable amount of the Netherlands life and general insurance and health cash generating units have been
determined on the basis of a value in use calculation. This calculation is an appraisal value and is based on the discounted
expected future cash flows from the operations over a 25-year period. Expected cash flows for future periods have been
obtained from the plan figures for a three year period. Expected cash flows for later periods have been extrapolated,
taking into account the growth rate.
Key assumptions used for the calculation were:
– Growth rate represents the rate applied to extrapolate new business contributions beyond the business plan period,
and is based on management's best estimate of future growth. The rate is in line with industry expectations of 2.5%.
– Risk-adjusted discount rate represents the rate used to discount expected profits from future new business. The discount
rate is a combination of a risk-free rate and a risk margin to make prudent allowance for the risk that experiences in
future years may differ from those assumed. The rate is fixed at 6.7%.
(viii) Spain (long-term business)
The recoverable amount of the Spanish unit has been determined based on a fair value less costs to sell calculation.
This calculation is an actuarially-determined appraisal value and is based on the embedded value of the business together
with the present value of expected profits from future new business. The recoverable amount significantly exceeds the
carrying value of the cash generating unit including goodwill and a reasonably possible change in a key assumption will
not cause the carrying value of the cash generating unit to exceed its recoverable amount.
Key assumptions used for the calculation were:
– Embedded value represents the shareholder interest in the life business and is calculated in accordance with the
European Embedded Value (EEV) principles. The embedded value is the total of the net worth of the life business and
the value of the in-force business. The underlying methodology and assumptions have been reviewed by a firm of
actuarial consultants and by the Group’s auditors;
– New business contribution represents the present value of projected future distributable profits generated from business
written in a period. This is based on business plans approved by management;
– Growth rate represents the rate used to extrapolate new business contributions beyond the business plan period, and is
based on management’s best estimate of future growth. The rate is in line with industry expectations; and
– Risk adjusted discount rate represents the rate used to discount expected profits from future new business. The discount
rate is a combination of a risk-free rate and a risk margin to make prudent allowance for the risk that experience in
future years may differ from that assumed.
(ix) United States (long-term business)
The recoverable amount of the United States unit has been determined based on a fair value less costs to sell calculation.
This calculation is an actuarially-determined appraisal value and is based on the embedded value of the business together
with the present value of expected profits from future new business. The recoverable amount significantly exceeds the
carrying value of the cash generating unit including goodwill and a reasonably possible change in a key assumption will
not cause the carrying value of the cash generating unit to exceed its recoverable amount.
Key assumptions used for the calculation were:
– Embedded value represents the shareholder interest in the life business and is calculated in accordance with the
European Embedded Value (EEV) principles. The embedded value is the total of the net worth of the life business and
the value of the in-force business. The underlying methodology and assumptions have been reviewed by a firm of
actuarial consultants and by the Group’s auditors;
– New business contribution represents the present value of projected future distributable profits generated from business
written in a period. This is based on business plans approved by management;
– Growth rate represents the rate used to extrapolate new business contributions beyond the business plan period, and is
based on management’s best estimate of future growth. The rate is in line with industry expectations; and
– Risk adjusted discount rate represents the rate used to discount expected profits from future new business. The discount
rate is a combination of a risk-free rate and a risk margin to make prudent allowance for the risk that experience in
future years may differ from that assumed.