Aviva 2009 Annual Report Download - page 180

178
Aviva plc Notes to the consolidated financial statements continued
Annual Report and Accounts 2009
16 – Goodwill continued
Europe
Long-term business
The recoverable amount of long-term business cash generating units in the Europe region, has been determined based on a value
in use calculation. The first step of the test was to compare the carrying value of each cash generating unit, including goodwill, to
the Market Consistent Embedded Value (MCEV) of that cash generating unit. If the MCEV is less than the carrying value of a cash
generating unit the present value of profits from expected new business for that cash generating unit is considered. If the value
of profits from expected new business for a cash generating unit is expected to grow beyond the period of the initial plan, this
growth rate is set with regard to past experience in each market and market expectations of future growth in each country.
For European long-term business cash generating units a key assumption used for the calculation was the embedded value
which represents the shareholder interest in the life business and is calculated in accordance with the Market Consistent Embedded
Value (MCEV) principles. The embedded value is the total of the net worth and the value of the in-force life business.
General insurance, health and other
The recoverable amount of general insurance, health and other non-life cash generating units in the Europe region has been
determined based on a value in use calculation. Value in use is calculated for each cash generating unit using a discounted cash
flow projection based on business plans and growth assumptions approved by management for each cash generating unit and
discounted at a risk discount rate appropriate for each cash generating unit. If the cash flows are expected to grow beyond the
period of the initial plan, this growth rate is set with regard to past experience in each market and market expectations of future
growth in each country.
(iii) France (long-term business)
The recoverable amount of the indefinite life intangible asset has been assessed as part of the recoverable amount
of the French long-term business cash generating unit. The MCEV of the French long-term business was significantly greater than
its carrying value, including indefinite life intangible assets.
(iv) Ireland (long-term business)
The MCEV of the Irish long-term business is greater than its carrying value so the recoverable value will be significantly in excess
of its carrying value, including goodwill.
(v) Ireland (general insurance and health)
The recoverable amount of the Irish general insurance and health business exceeds the carrying value of the cash generating unit
including goodwill.
Key assumptions used for the calculation were:
— Budgeted operating profit for an initial three year period which represents the operating profit in the business plans, approved
by management and reflecting the best estimate of future profits based on both historical experience and expected growth
rates for the Irish economy. The assumptions that underline the budgeted operating profit include market share, premium rate
changes, claims inflation and commission rates;
— Future cash flows are extrapolated beyond the three year business plan period assuming nil growth for general insurance
business and a 7% growth rate for the health business; and
— A risk adjusted discount rate of 10.8%.
(vi) Italy (long-term business)
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.
Key assumptions (in addition to MCEV principles) used for the calculation were:
— New business contribution represents the present value of projected future distributable profits generated from business written
in a period. This is initially based on the most recent three year 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 estimate of future growth of 2.0%; and
— Risk adjusted discount rate of 10.2% represents the rate used to discount expected profits from future new business. The
discount rate includes a risk-free rate and a risk margin to make prudent allowance for the risk that experience in future years
for new business may differ from that assumed.
(vii) Italy (non-life)
The recoverable amount exceeds the carrying value of the cash generating unit including goodwill.
Key assumptions used for the calculation were:
— Budgeted operating profit for an initial three year period represents the operating profit in the most recent 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 Italian economy;
— Growth rate of 3.0% represents the rate used to extrapolate future cash flows beyond the business plan period; and
— A risk adjusted discount rate of 10.2%.