Aviva 2009 Annual Report Download - page 181

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Performance review
Aviva plc Notes to the consolidated financial statements continued
Corporate responsibility
Annual Report and Accounts 2009
Governance
Shareholder information
Financial statements IFRS
Financial statements MCEV
Other information
16 – Goodwill continued
(viii) Delta Lloyd (long-term, general insurance, health and fund management)
The recoverable amount of the Delta Lloyd life and general insurance and health cash generating units has 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 their expected useful life. Expected cash flows for future periods have been obtained from the plan
figures for a three to five year period, depending on the management plan period of the unit. Expected cash flows for later periods
have been extrapolated, taking into account the growth rate.
Key assumptions used for the calculation were:
— Expected cash flows for future periods have been obtained from the plan figures for a three to five year period;
— For the year following the end of the management plan period cash flows are extrapolated at a growth rate of nil to 2.6%
depending on the particular circumstances of each unit; and
— Risk-adjusted discount rate of 10.1% to 10.6% depending on management’s assessment of the specific risks of each unit,
represents the rate used to discount expected profits from future new business.
(ix) Spain (long-term business)
This calculation is based on the embedded value of the business together with the present value of expected profits from future
new business. The recoverable amount exceeds the carrying value of the cash generating unit including goodwill.
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 conservative estimate of future growth of 3.0%. This growth rate is in line with industry expectations; and
— Risk adjusted discount rate of 6.5% 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 for new business may differ from that assumed. The test performed in the current year estimates the value of future
new business on an MCEV basis. This methodology incorporates more of the risk of future new business into the underlying
cash flows, and so consequently a lower risk discount rate is applied relative to the prior period.
(x) United States (long-term business)
The recoverable amount of the United States long-term cash generating unit has been determined based on a value in use
calculation.
This calculation is an actuarially-determined appraisal value and is based on an embedded value of the business (the total of
the net worth of the life business and the value of the in-force business) together with the present value of expected profits from
future new business. The value in use exceeds the carrying value of the cash generating unit including goodwill.
Key assumptions used for the calculation were:
— Embedded value represents the shareholder interest in the life business and is based on projected cash flows of the business
including expected investment returns.
— Risk adjusted discount rate of 8.0% is used to calculate the embedded value;
— 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 5.0% for life and annuity business, which is set with regard to past experience
in these markets; and
— Risk adjusted discount rate of 10.0% represents the rate used to discount expected profits from future new business. The
discount rate includes an additional margin to make prudent allowance for the risk that experience in future years for new
business may differ from that assumed.
The recoverable amount for the cash generating unit exceeds its carrying value by £332 million. An increase in the risk adjusted
discount rates applied to calculate the embedded value and the present value of future profits from future new business of 60
basis points would result in the recoverable amount being equal to the carrying value.
Cash flow projections
To comply with paragraph 33(c) of IAS 36, cash flow projections for the period beyond the three year plan period are extrapolated
from the position in the final year of the three year plan period. In all cases we have assumed a steady growth rate for subsequent
years, not an increasing growth rate. The steady growth rate in each case is a positive or nil growth rate. The steady growth rate
selected for each cash generating unit reflects long-term expectations for the markets in which each cash generating unit
participates.
Financial statements IFRS