Aviva 2009 Annual Report Download - page 43

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Performance review
Aviva plc Financial and operating performance continued
Corporate responsibility
Annual Report and Accounts 2009
— Effect of capitalisation factor on regular premium
long-term business:
PVNBP is derived from the single and regular premiums of
the products sold during the financial period and is expressed
at the point of sale. The PVNBP calculation is equal to total
single premium sales received in the year plus the discounted
value of regular premiums expected to be received over the
term of the new contracts. The discounted value of regular
premiums is calculated using the market consistent
embedded value methodology proposed by the CFO Forum
Principles, which we believe will be adopted by all European
insurance businesses.
The discounted value reflects the expected income
streams over the life of the contract, adjusted for expected
levels of persistency, discounted back to present value. The
discounted value can also be expressed as annualised regular
premiums multiplied by a weighted average capitalisation
factor (WACF). The WACF varies over time depending
on the mix of new products sold, the average outstanding
term of the new contracts and the projection assumptions.
— Share of long-term new business sales from joint ventures
and associates:
Total long-term new business sales include our share of sales
from joint ventures and associates. Under IFRS reporting,
premiums from these sales are excluded from our
consolidated accounts, with only our share of profits or
losses from such businesses being brought into the income
statement separately.
— Annualisation impact of regular premium long-term business:
As noted above, the calculation of PVNBP includes annualised
regular premiums. The impact of this annualisation is removed
in order to reconcile the non-GAAP new business sales to IFRS
premiums and will vary depending on the volume of regular
premium sales during the year.
— Deposits taken on non-participating investment contracts:
Under IFRS, non-participating investment contracts are
recognised on the statement of financial position by
recording the cash received as a deposit and an associated
liability and are not recorded as premiums received in the
income statement. Only the margin earned is recognised in
the income statement.
— Retail sales of mutual fund type products (investment sales):
Investment sales included in the total sales number represent
the cash inflows received from customers to invest in mutual
fund type products such as unit trusts and OEICs. We earn
fees on the investment and management of these funds
which are recorded separately in the IFRS income statement
as “fees and commissions received” and are not included in
statutory premiums.
— IFRS gross written premiums from existing long-term
business:
The non-GAAP measure of long-term and savings sales
focuses on new business written in the year under review
while the IFRS income statement includes premiums received
from all business, both new and existing.
Governance
Shareholder information
Financial statements IFRS
Financial statements MCEV
Other information
Adjusted operating profit
We report to our chief operating decision makers in the
businesses the results of our operating segments using a
financial performance measure we refer to herein as “adjusted
operating profit”. We define our segment adjusted operating
profit as profit before income taxes and minority interests in
earnings, excluding the following items: investment return
variances and economic assumption changes on long-term
and non long-term business, impairment of goodwill,
amortisation and impairment of other intangibles (excluding
the acquired value of in-force business), profit or loss on
the disposal of subsidiaries and associates, integration and
restructuring costs and exceptional items.
While these excluded items are significant components
in understanding and assessing our consolidated financial
performance, we believe that the presentation of adjusted
operating profit enhances the understanding and comparability
of the underlying performance of our segments by highlighting
net income attributable to ongoing segment operations.
Adjusted operating profit for long-term insurance and
savings business is based on expected investment returns on
financial investments backing shareholder and policyholder
funds over the period, with consistent allowance for the
corresponding expected movements in liabilities. The expected
rate of return is determined using consistent assumptions
between operations, having regard to local economic and
market forecasts of investment return and asset classification.
Where assets are classified as fair value through profit and loss,
expected return is based on the same assumptions used under
embedded value principles for fixed income securities, equities
and properties. Where fixed interest securities are classified as
available for sale, such as in the US, the expected return
comprises interest or dividend payments and amortisation of
the premium or discount at purchase. Adjusted operating profit
includes the effect of variances in experience for non-economic
items, such as mortality, persistency and expenses, and the
effect of changes in non-economic assumptions. Changes due
to economic items, such as market value movement and interest
rate changes, which give rise to variances between actual and
expected investment returns, and the impact of changes in
economic assumptions on liabilities, are disclosed as non-
operating items.
Adjusted operating profit for non long-term insurance
business is based on expected investment returns on financial
investments backing shareholder funds over the period.
Expected investment returns are calculated for equities and
properties by multiplying the opening market value of the
investments, adjusted for sales and purchases during the year,
by the longer-term rate of return. This rate of return is the same
as that applied for the long-term business expected returns. The
longer-term return for other investments is the actual income
receivable for the period. Changes due to market value
movement and interest rate changes, which give rise to
variances between actual and expected investment returns, are
disclosed as non-operating items. The impact of changes in the
discount rate applied to claims provisions is also treated outside
adjusted operating profit.
Adjusted operating profit is not a substitute for profit
before income taxes and minority interests in earnings or net
income as determined in accordance with IFRS. Our definition of
adjusted operating profit may differ from similar measures used
by other companies, and may change over time.
Performance review