Aviva 2009 Annual Report Download - page 310

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Aviva plc MCEV financial statements continued
Annual Report and Accounts 2009
M18 – Principal economic assumptions continued
For service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company.
In current markets, the following adjustments are made to the swap rate for immediate annuity type contracts and all US
contracts. The risk-free rate is taken as the swap yield curve for the currency of the liability, adjusted by:
Embedded
New business value
4Q 2009 3Q 2009 1H 2009 4Q 2008 3Q 2008 1H 2008 2009 2008
UK 0.90%/0.45% 1.10%/0.95% 1.50% 1.45% 0.85% 0.55% 1.00% 1.50%
France n/a n/a n/a n/a n/a n/a 0.30% 1.00%
Spain 0.30% 0.75% 1.00% 0.95% 0.55% 0.35% 0.30% 1.00%
Delta Lloyd 0.20% 0.40% 1.50% 0.75% 0.45% 0.30% 0.15% 0.80%
US immediate annuities 1.05% 1.50% 3.00% 2.00% 0.65% 0.55% 0.65% 3.00%
US deferred annuities and all other contracts 0.90% 1.25% 2.50% 1.50% 0.65% 0.55% 0.55% 2.50%
Risk premium – used for operating profit, Implied Discount Rates (IDR), Internal Rates of Return (IRR) and payback period
For life and pensions operating earnings, Aviva uses normalised investment returns. For 2008, the normalised investment returns
were expressed as one year swap returns plus an asset risk premium. For 2009, the normalised investment returns are expressed as
a swap rate based on the typical duration of the assets held plus an asset risk premium. More detail is given in note M1 – Basis of
Preparation.
The use of asset risk premia only impacts operating earnings as expected returns reflect management’s long-term expectations
of asset returns in excess of the reference rate from investing in different asset classes. This assumption does not impact the
embedded value or value of new business as asset risk premia are not recognised until earned. The asset risk premia set out in the
table below are added to the ten year swap rate to calculate expected returns.
All territories
2009 2008 2007
Equity risk premium 3.5% 3.5% 3.5%
Property risk premium 2.0% 2.0% 2.0%
Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for credit risk.
Required capital and tax
Required capital
Tax rates5 (% EU minimum or equivalent)
2009 2008 2007 2009 2008
United Kingdom1 28.0% 28.0% 28.0% 100%/110% 100%/110%
France 34.4% 34.4% 34.4% 110% 110%
Ireland 12.5% 12.5% 12.5% 150% 150%
Italy2 32.4% 32.4% 32.4% 115%/184% 115%/184%
Poland 19.0% 19.0% 19.0% 150% 150%
Spain3 30.0% 30.0% 30.0% 110%/125% 110%/125%
Delta Lloyd4 25.5% 25.5% 25.5% 139% 168%
United States 0.0% 0.0% 35.0% 325% 325%
1.The required capital in the United Kingdom under MCEV is 100% for unit-linked and other non-participating business and 110% for annuity business. with 200% for an immaterial amount
of BPA business. In addition, the reattribution of the inherited Estate has led to additional capital being locked in to support the with profit business, and this has been included within
required capital.
2.Required capital in Italy under MCEV is 184% of the EU minimum for Eurovita and 115% for other companies.
3.Required capital in Spain is 125% of the EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies.
4.This capital level is the aggregate capital required for Delta Lloyd.
5.Current tax legislation and rates have been assumed to continue unaltered except where changes in future tax rates have been announced.
Other economic assumptions
Required capital relating to with-profit business is generally assumed to be covered by the surplus within the with-profit funds and
no effect has been attributed to shareholders. Where the fund is insufficient, and additional shareholder support is required, this is
included within required capital, including the RIEESA in the UK. Bonus rates on participating business have been set at levels
consistent with the economic assumptions. The distribution of profit between policyholders and shareholders within the with-profit
funds assumes that the shareholder interest in conventional with-profit business in the United Kingdom and Ireland continues at
the current rate of one-ninth of the cost of bonus.
(b) Economic Assumptions – Stochastic calculations
The calculation of time value of options and guarantees allows for expected management and policyholder actions in response to
varying future investment conditions. The management actions modelled include changes to asset mix, bonus rates and rates of
interest and other guarantees granted to policyholders. Modelled policyholder actions are described under “Other assumptions”.
The embedded value of the US spread based products anticipates the application of management discretion allowed for
contractually within the policies, subject to contractual guarantees. This includes the ability to change the crediting rates and
indexed strategies available within the policy. Consideration is taken of the economic environment assumed in future projections
and returns in excess of the reference rate are not assumed. Anticipated market and policyholder reaction to management action
has been considered. The anticipated management action is consistent with current decision rules and has been approved and
signed off by management and legal counsel.