Aviva 2009 Annual Report Download - page 312

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Aviva plc MCEV financial statements continued
Annual Report and Accounts 2009
M18 – Principal economic assumptions continued
Property implied volatilities
Best estimate levels of volatility have been used, in the absence of meaningful option prices from which implied levels of volatility
can be derived.
For the UK and Delta Lloyd, model property implied volatility is 15% for 31 December 2009 (31 December 2008: 15%).
Demographic assumptions
Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva’s recent operating experience
with a view to giving a best estimate of future experience. We have anticipated future changes in experience where that is
appropriate, e.g. we have allowed for improvements in future policyholder longevity.
We have set the assumptions based on a best estimate of shareholder outcomes. In particular, where the policyholder
behaviour varies with economic experience, we have set assumptions which are dynamic, i.e. vary depending on the economic
assumptions. For example, surrender and option take up rate assumptions that vary according to the investment scenario under
consideration have been used in the calculation of the time value of options and guarantees, based on our assessment of likely
policyholder behaviour in different investment scenarios.
Additionally, where demographic experience is not driven by economic scenarios but is asymmetric on a stand-alone basis, the
best estimate assumption considers the weighted-average expected experience, not simply the median or most likely outcome.
Expense assumptions
Management expenses and operating expenses of holding companies attributed to life and related businesses have been included
in the MCEV calculations and split between expenses relating to the acquisition of new business, the maintenance of business in-
force and project expenses. Future expense assumptions include an allowance for maintenance expenses and a proportion of
recurring project expenses. Certain expenses of an exceptional nature, when they occur, are identified separately and are generally
charged as incurred. No future productivity gains have been anticipated.
Where subsidiary companies provide administration, investment management or other services to our life businesses, the value
of profits or losses arising from these services have been included in the embedded value and value of new business.
Non-hedgeable risk
A charge of 2.5% has been applied to the group-diversified capital required on a 1-in-200 one-year basis over the remaining
lifetime of in-force business.
(c) Other assumptions
Valuation of debt
Borrowings in the MCEV consolidated statement of financial position are valued on an IFRS basis, consistent with the primary
financial statements. At 31 December 2009 the market value of the group’s external debt, subordinated debt, preference shares
including General Accident plc preference shares of £250 million (classified as minority interests) and direct capital instrument was
£6,634 million (31 December 2008: £4,911 million).
2009 2008
£m £m
Borrowings per summarised consolidated statement of financial position – MCEV basis 15,000 15,201
Add: amount included within held for sale — —
Less: Securitised mortgage funding (7,329) (7,785)
Borrowings excluding non-recourse funding – MCEV basis 7,671 7,416
Less: Operational financing by businesses (2,182) (1,891)
External debt and subordinated debt – MCEV basis 5,489 5,525
Add: Preference shares (including General Accident plc) and direct capital instrument 1,440 1,440
External debt, subordinated debt, preference shares and direct capital instrument – MCEV basis 6,929 6,965
Effect of marking these instruments to market (295) (2,054)
Market value of external debt, subordinated debt, preference shares and direct capital instrument 6,634 4,911
Other
It has been assumed that there will be no changes to the methods and bases used to calculate the statutory technical provisions
and current surrender values, except where driven by varying future investment conditions under stochastic economic scenarios.