Aviva 2009 Annual Report Download - page 223

221
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
40 – Financial guarantees and options continued
The most significant of these contracts is the AFER Eurofund which has total liabilities of £33 billion at 31 December 2009 (2008:
£33 billion, 2007: £24 billion)
. The guaranteed bonus on this contract equals 75% of the average of the last two years’ declared
bonus rates and was 3.67% for 2009
(2008: 3.66%, 2007: 3.64%) compared with an accounting income from the fund of 4.62%
(2008: 4.85%,2007: 4.92%) .
Non-AFER contracts with guaranteed surrender values had liabilities of £12 billion at 31 December 2009
(2008: £12 billion,
2007: £8 billion)
and all guaranteed annual bonus rates are between nil and 4.5%.
Guaranteed death and maturity benefits
In France, the Group has also sold unit-linked policies where the death and/or maturity benefit is guaranteed to be at least equal
to the premiums paid. The reserve held in the Group’s consolidated statement of financial position at the end of 2009 for this
guarantee is £97 million
(2008: £113 million, 2007: £30 million) . The reserve is calculated on a prudent basis and is in excess of
the economic liability. At the end of 2009, total sums at risk for these contracts were £372 million
(2008: £1,279 million, 2007:
£63 million)
out of total unit-linked funds of £14 billion (2008: £14 billion, 2007: £15 billion) . The average age of policyholders
was approximately 54. It is estimated that this liability would increase by £71 million
(2008: £59 million, 2007: £17 million) if yields
were to decrease by 1% per annum and by £25 million
(2008: £22 million, 2007: £7 million) if equity markets were to decline by
10% from year end 2009 levels. These figures do not reflect our ability to review the tariff for this option.
(ii) Delta Lloyd
Guaranteed minimum return at maturity
In the Netherlands, it is market practice to guarantee a minimum return at maturity on traditional savings and pension contracts.
Guarantees on older lines of business are 4% per annum while, for business written since 1 September 1999, the guarantee is 3%
per annum. On Group pensions business, it is often possible to recapture guarantee costs through adjustments to surrender values
or to premium rates.
On transition to IFRS, Delta Lloyd changed the reserving basis for most traditional contracts to reflect current market interest
rates, for consistency with the reporting of assets at market value. The cost of meeting interest rate guarantees is allowed for
directly in the liabilities. Although most traditional contracts are valued at market interest rate, the split by level of guarantee
shown below is according to the original underlying guarantee.
The total liabilities for traditional business at 31 December 2009 are £13 billion
(2008: £14 billion, 2007: £10 billion) analysed
as follows:
Liabilities 3% guarantee
2009
£m
2008
£m
2007
£m
Individual
Group pensions
2,206
780
2,214
689 1,387 485
Total 2,986 2,903 1,872
Liabilities 4% guarantee
2009
£m
2008
£m
2007
£m
Individual
Group pensions
3,690
6,329
4,684
6,804 3,671 3,993
Total 10,019 11,488 7,664
Delta Lloyd has certain unit-linked contracts which provide a guaranteed minimum return at maturity from 4% pa to 2% pa.
Provisions consist of unit values plus an additional reserve for the guarantee. The additional provision for the guarantee was
£246 million
(2008: £226 million, 2007: £70 million) . An additional provision of £33 million (2008: £121 million, 2007:
£19 million)
in respect of investment return guarantees on group segregated fund business is held. It is estimated that the
provision would increase by £180 million
(2008: £255 million, 2007: £211 million) if yields were to reduce by 1% pa and by
£42 million
(2008: £56 million, 2007: £21 million) if equity markets were to decline by 10% from year end 2009 levels.
(iii) Ireland
Guaranteed annuity options
Products with similar GAOs to those offered in the UK have been issued in Ireland. The current net of reinsurance provision for
such options is £214 million
(2008: £180 million, 2007: £160 million) . This has been calculated on a deterministic basis, making
conservative assumptions for the factors which influence the cost of the guarantee, principally annuitant mortality option take-up
and long-term interest rates.
These GAOs are “in the money” at current interest rates but the exposure to interest rates under these contracts has been
hedged through the use of reinsurance, using derivatives (swaptions). The swaptions effectively guarantee that an interest rate
of 5% will be available at the vesting date of these benefits so there is reduced exposure to a further decrease in interest rates.
Financial statements IFRS