Aviva 2009 Annual Report Download - page 220

218
Aviva plc Notes to the consolidated financial statements continued
Annual Report and Accounts 2009
39 – Liability for investment contracts
This note analyses our investment contract liabilities by type of product and describes how we calculate these liabilities and what
assumptions we have used.
(a) Carrying amount
The liability for investment contracts at 31 December comprised:
2009 2008 2007
£m £m £m
Long-term business
Participating contracts 66,559 65,278 53,609
Non-participating contracts at fair value 41,289 39,509 43,608
Non-participating contracts at amortised cost 2,167 2,772 1,027
43,456 42,281 44,635
Total 110,015 107,559 98,244
(b) Long-term business investment liabilities
Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer, and are
therefore treated as financial instruments under IFRS.
Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right
to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are
measured according to the methodology and Group practice for long-term business liabilities as described in note 38. They are
not measured at fair value as there is currently no agreed definition of fair valuation for discretionary participation features under
IFRS. In the absence of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall.
The IASB has deferred consideration of participating contracts to Phase II of its insurance contracts project.
For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified
as a liability, referred to as unallocated distributable surplus. Guarantees on long-term investment products are discussed in note 40.
Investment contracts that do not contain a discretionary participation feature are referred to as non-participating contracts and
the liability is measured at either fair value or amortised cost.
Of the non-participating investment contracts measured at fair value, £39,686 million are unit-linked in structure and the
fair value liability is equal to the unit reserve plus additional non-unit reserves if required on a fair value basis. These contracts
are classified as ‘Level 1’ in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied
by the number units in issue, and any non-unit reserve is insignificant. Of the remaining non-participating contracts measured at
fair value at 31 December 2009, £238 million are classified as ‘Level 1’, £1,203 million are classified as ‘Level 2’ and £162 million
are classified as ‘Level 3’ in the fair value hierarchy. ‘Level 3’ investment contracts had a fair value of £178 million at 31 December
2008, with the movement in the year represented by foreign exchange movements of £19 million offset by new policy issuances
of £3 million. We believe that changing one or more of the assumptions that support the ‘Level 3’ valuation to reasonably possible
alternative assumptions would not change the fair value significantly. In respect of investment contracts carried at fair value there
were no transfers between different levels of the fair value hierarchy during 2009.
For unit-linked business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of
transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are
amortised on a systematic basis over the contract term. The amount of the related deferred acquisition cost asset is shown in note
26 and the deferred income liability is shown in note 50.
In the United States, funding agreements consist of one to ten year fixed rate contracts. These contracts may not be cancelled
by the holders unless there is a default under the agreement, but may, subject to a call premium, be terminated by Aviva at any
time. Aviva issued no new funding agreements in 2009. The weighted average interest rates for fixed-rate and floating-rate
funding agreements as at 31 December 2009 were 4.79% and 0.37% respectively. Funding agreements issued before 2008 are
measured at fair value equal to the present value of contractual cash flows, and for business issued since 2008 are measured at
amortised cost. Most funding agreements are fully collateralised and therefore their fair values are not adjusted for own credit risk.
Funding agreements carried at fair value total £1,093 million and are classified as ‘Level 2’ in the fair value hierarchy.
There is a small volume of annuity certain business for which the liability is measured at amortised cost using the effective
interest method.
The fair value of contract liabilities measured at amortised cost is not materially different from the amortised cost liability.