Aviva 2013 Annual Report Download - page 151

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
149
Notes to the consolidated financial statements continued
9 – Long-term business economic volatility continued
The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on
investments and the impact of experience variances and assumption changes for non-economic items.
The effect of differences between actual and expected economic experience on liabilities, and changes to economic
assumptions used to value liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked
and with-profits funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on
profit. For other long-term business the profit impact of economic volatility depends on the degree of matching of assets and
liabilities, and exposure to financial options and guarantees.
(d) Assumptions
The expected rate of investment return is determined using consistent assumptions between operations, having regard to local
economic and market forecasts of investment return and asset classification under IFRS.
The principal assumptions underlying the calculation of the expected investment return for equities and properties are:
Equities Properties
2013
%
2012
%
2013
%
2012
%
United Kingdom 5.4 5.8 3.9 4.3
Eurozone 5.1 5.9 3.6 4.4
The expected return on equities and properties is calculated by reference to the opening 10-year swap rate in the relevant currency
plus an appropriate risk margin. These are the same assumptions as are used under MCEV principles to calculate the longer-term
investment return for the Group’s long-term business.
For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average
prospective yields for the actual assets held less an adjustment for credit risks; this includes an adjustment for credit risk on all
Eurozone sovereign debt. Where such securities are classified as available for sale (AFS), the expected investment return comprises
the expected interest or dividend payments and amortisation of the premium or discount at purchase.
10 – Longer-term investment return and economic assumption changes for non-long-term
business
For non-long-term business, the total investment income, including realised and unrealised gains, is split between a calculated
longer-term return, which is included in operating profit, and short-term fluctuations from this, which are disclosed outside
operating profit but are included in profit before tax. This note gives details of the longer-term return calculation and the relevant
assumptions, as well as the economic assumption changes on our general insurance and health business.
(a) The short-term fluctuations in investment return and economic assumption changes attributable to the non-long-term business
result and reported outside operating profit were as follows:
Non-lon
g
-term business
2013
£m
2012
£m
Short-term fluctuations in investment return (see (b) below)
–
continuing operations (336) 7
Economic assumption changes
–
continuing operations (see (g) below) 33 (21)
(303) (14)
Short-term fluctuation in investment return
–
discontinued operations — —
(303) (14)
(b) The longer-term investment return and short-term fluctuation for continuing operations are as follows:
Non-lon
g
-term business – Continuin
g
operations
2013
£m
2012
£m
Analysis of investment income:
Net investment income 266 827
Foreign exchange on unrealised gains/losses and other charges (35) (97)
231 730
Analysed between:
Longer-term investment return, reported within operating profit 567 723
Short-term fluctuation in investment return, reported outside operating profit
General insurance and health (243) 18
Other operations1 (93) (11)
(336) 7
231 730
1 For 2013 represents short term fluctuations on assets backing non-life business in the France holding company and Group centre investments, including the centre hedging programme. For 2012 represents short term fluctuations
on assets backing non-life business in the France holding company.
(c) The longer-term investment return is calculated separately for each principal non-long-term business unit. In respect of equities
and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and
purchases during the year, by the longer-term rate of investment return.