Aviva 2007 Annual Report Download - page 255
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Please find page 255 of the 2007 Aviva annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Basis of preparation – EEV basis
The summarised consolidated income statement and balance sheet on pages 247 to 249 present the Group’s results and
financial position for the life and related businesses on the European Embedded Value (EEV) basis and for its non-life
businesses on the International Financial Reporting Standards (IFRS) basis. The EEV methodology adopted is in accordance
with the EEV Principles introduced by the CFO Forum in May 2004 and the Additional Guidance on EEV Disclosures
published by the CFO Forum in October 2005.
The Directors consider that the EEV methodology represents a more meaningful basis of reporting the value of the Group’s
life and related businesses and the drivers of performance, than IFRS methodology. This basis allows for the impact of
uncertainty in the future investment returns more explicitly and is consistent with the way the business is priced and
managed.
At the time the Group adopted EEV principles in 2004, its approach to establishing economic assumptions, including
investment returns, required capital and discount rates, was reviewed by Tillinghast, a firm of actuarial consultants. The
approach used by the Group is based on the established ‘capital asset pricing model’ theory and remains in line with EEV
principles and guidance.
The results for 2007 and 2006 have been audited by our auditors, Ernst & Young LLP. Their report in respect of 2007 is
included in the Report and Accounts on page 246 of this document.
Covered business
The EEV calculations cover the following lines of business: life insurance, long-term health and accident insurance, savings,
pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our
share of the other life and related business written in our associated undertakings and joint ventures, as well as the equity
release business written in the UK. The Group’s definition of new business under EEV includes contracts that meet the
definition of “non-participating investment” contracts under IFRS.
Covered business includes the Group’s share of our joint venture operations including our arrangement with The Royal
Bank of Scotland Group (RBSG) and our operations in India, China, Turkey, Malaysia and Taiwan. In addition, the results of
Group companies providing significant administration, investment management and other services and of Group holding
companies have been included to the extent that they relate to covered business. Together these businesses are referred to
as “Life and related businesses”.
New business premiums
New business premiums include:
– premiums arising from the sales of new contracts during the year;
– non-contractual additional premiums, including future Department of Work and Pensions (DWP) rebate premiums; and
– expected renewals on new contracts and expected future contractual alterations to new contracts.
For products sold to individuals, premiums are generally considered to represent new business in certain circumstances,
including where a new contract has been signed, or where underwriting has been performed. Renewal premiums include
contractual renewals, non-contractual variations that are reasonably predictable and recurrent single premiums that are
pre-defined and reasonably predictable.
For group products, new business includes new contracts and increases to aggregate premiums under existing contracts.
Renewal premiums are based on the level of premium received during the reporting period and allow for premiums
expected to be received beyond the expiry of any guaranteed premium rates.
Foreign exchange adjustments
Embedded value and other balance sheet items denominated in foreign currencies have been translated to sterling using
the appropriate closing exchange rate. New business contribution and other income statement items have been translated
using an average exchange rate for the relevant period. The exchange rates adopted in this announcement are shown
on page 132.
EEV Methodology
Overview
Under the EEV methodology, profit is recognised as it is earned over the life of products defined within covered business.
The total profit recognised over the lifetime of a policy is the same as under the IFRS basis of reporting, but the timing of
recognition is different.
Calculation of the embedded value
The shareholders’ interest in the life and related businesses is represented by the embedded value. The embedded value
is the total of the net worth of the life and related businesses and the value of in-force covered business. Calculations are
performed separately for each business and are based on the cash flows of that business, after allowing for both external
and intra-group reinsurance. Where one life business has an interest in another life business, the net worth of that
business excludes the interest in the dependent company.
The embedded value is calculated on an after-tax basis applying current legislation and practice together with future
known changes. Profits are then grossed up for tax at the full rate of corporation tax for the UK and at an appropriate
rate for each of the other countries based on opening year tax rates.
Aviva plc
Annual Report and
Accounts 2007
251
Financial
statements