Aviva 2007 Annual Report Download - page 60
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Please find page 60 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.31 December
31 December
2007
2006
AII Group
pro forma
AII Group
including NUI
Capital resources £9.2bn £8.3bn
Capital resources requirement £5.5bn £4.5bn
Solvency surplus £3.7bn £3.8bn
Cover 1.7 times 1.8 times
Regulatory basis – Long-term businesses
For the Group’s non-participating worldwide life assurance
businesses, our capital requirements, expressed as a
percentage of the EU minimum, are set for internal
management and embedded value reporting purposes
as the higher of:
– Target levels set by reference to internal risk
assessment and internal objectives, taking account of
the level of operational, demographic, market and
currency risk.
– Minimum capital level (ie level of solvency capital at
which local regulator is empowered to take action).
The required capital across the Group’s life businesses
varies between 100% and 250% of EU minimum or
equivalent. During the year, we reduced the required
capital for the UK annuity business from 150% to 100%
of required minimum margin, bringing it into line with
the remainder of the non-profit portfolio. The weighted
average level of required capital for the Group’s non-
participating life business, expressed as a percentage
of the EU minimum (or equivalent) solvency margin has
decreased to 130% (31 December 2006: 134%) reflecting
the reduction in the level of required capital for the UK
annuities business.
These levels of required capital are used in the
calculation of the Group’s embedded value to evaluate
the cost of locked in capital. At 31 December 2007 the
aggregate regulatory requirements based on the EU
minimum test amounted to £5.1 billion (31 December
2006: £4.3 billion). At this date, the actual net worth
held in the Group’s long-term business was £10.5 billion
(31 December 2006: £8.9 billion) which represents
205% (31 December 2006: 206%) of these minimum
requirements.
Regulatory basis – UK Life with-profit funds
The available capital of the with-profit funds is represented
by the realistic inherited estate. The estate represents the
assets of the long-term with-profit funds less the realistic
liabilities for non-profit policies within the funds, less asset
shares aggregated across the with-profit policies and any
additional amounts expected at the valuation date to be
paid to in-force policyholders in the future in respect of
smoothing costs, guarantees and promises. Realistic
balance sheet information is shown below for the three
main UK with-profit funds; CGNU Life, Commercial Union
Life Assurance Company (CULAC) and Norwich Union Life
& Pensions (NUL&P). These realistic liabilities have been
included within the long-term business provision and
the liability for insurance and investment contracts on the
Group’s IFRS balance sheet at 31 December 2007 and
31 December 2006. Aviva recently announced a one off,
special bonus of £2.3 billion in respect of the CGNU Life
and CULAC with-profits funds, the impact of this special
bonus is reflected in the numbers presented below.
31 December
December
2007
2006
Estimated Estimated
Estimated realistic risk
realistic Realistic inherited capital Estimated Estimated
assets liabilities*estate** margin†excess excess
£bn £bn £bn £bn £bn £bn
CGNU Life 14.5 (13.1) 1.4 (0.3) 1.1 2.0
CULAC 13.9 (12.7) 1.2 (0.4) 0.8 2.0
NUL&P‡26.1 (24.2) 1.9 (0.6) 1.3 1.2
Aggregate 54.5 (50.0) 4.5 (1.3) 3.2 5.2
* These realistic liabilities include the shareholders’ share of future bonuses of
£1.2 billion (31 December 2006: £0.7 billion). Realistic liabilities adjusted
to eliminate the shareholders’ share of future bonuses are £48.8 billion
(31 December 2006: £48.6 billion).
These realistic liabilities make provision for guarantees, options and
promises on a market consistent stochastic basis. The value of the
provision included within realistic liabilities is £0.7 billion, £0.8 billion
and £3.0 billion for CGNU Life, CULAC and NUL&P respectively
(31 December 2006: £0.5 billion, £0.7 billion and £3.0 billion for
CGNU Life, CULAC and NUL&P respectively).
** Estimated realistic inherited estate at 31 December 2006 was
£2.5 billion, £2.5 billion and £1.8 billion for CGNU Life, CULAC
and NUL&P respectively. The distribution has resulted in a £2.3 billion
reduction in the estimated realistic inherited estate.
† The risk capital margin (RCM) is 3.5 times covered by the inherited estate
(31 December 2006: 4.2 times). The RCM is lower as a result
of de-risking the cost of guarantees.
‡ The NUL&P fund includes the Provident Mutual (PM) fund which
has realistic assets and liabilities of £2.1 billion and therefore does
not impact the realistic inherited estate.
Investment mix
The aggregate investment mix of the assets in the three
main with-profit funds at 31 December 2007 was:
31 December
31 December
2007
2006
%
%
Equity 37% 42%
Property 13% 16%
Fixed interest 37% 36%
Other 13% 6%
100% 100%
The equity backing ratios, including property,
supporting with-profit asset shares are 75% in CGNU
Life, and CULAC and 70% in NUL&P. New with-profit
business is mainly written through CGNU Life.
A de-risking strategy has been implemented in CGNU
Life and CULAC to protect the estate from variations in
equity and property values. While the asset mix for funds
backing policyholder liabilities were unchanged by this,
the de-risking involved the reduction of the equity
proportion of the assets backing the cost of guarantees
and the inherited estate by approximately £2 billion.
Potential reattribution of the inherited estate
Aviva’s negotiations with the Policyholder Advocate,
Clare Spottiswoode, regarding the potential reattribution
of the remainder of the inherited estates of CGNU
Life and CULAC continue. We are keen to bring this
to a conclusion soon so that we can put an offer to
policyholders as early as possible. We will only complete
this process if we are able to negotiate an arrangement
that is fair to policyholders and shareholders.
Aviva plc
Annual Report and
Accounts 2007
Business review continued:
Capital management continued
56
Business
review