In October, we communicated our plans for the UK long-term business to analysts and investors. Our focus is on developing the business to exploit new market opportunities, continuing to improve service, rationalising our cost base, simplifying our legacy systems and managing the retention of existing customers. We also announced annual cost savings across both the long-term savings and general insurance businesses of £250 million by 2008, at a cost of £250 million. These cost savings will mean a reduction of 4,000 in our UK headcount, although we will seek to minimise the number of compulsory redundancies through natural staff turnover and voluntary measures.
Total sales and EEV operating profit split by region 1 International 2 Europe 3 UK
The operating results of our long-term savings, fund management and general insurance and health businesses are discussed in detail in the business unit overview section of this review on pages 22 to 49. Other components of our operating profit are discussed below.
On an EEV basis, our other operations recorded a loss of £23 million (2005: £28 million profit) as this excludes the majority of NU Life Services Ltd losses which are incorporated within the life EEV operating return.
Profit for the financial year 2,389 1,898 Attributable to: Equity shareholders 2,215 1,767 Minority interests 174 131
Our profit before tax on an EEV basis was lower at £4,165 million (2005: £5,283 million), and includes favourable investment return variances and short-term investment fluctuations of £468 million (2005: £2,805 million) and positive economic assumption changes of £671 million (2005: £406 million negative).
Net cash from operating activities 1,473 387 1,860 2,409 Net cash from investing activities (162) (1,412) (1,574) (1,303) Net cash flow from financing activities (879) 1,538 659 (117) Net increase in cash and cash equivalents 432 513 945 989 Cash and cash equivalents at 1 January 10,107 2,960 13,067 12,126 Effect of exchange rates (119) (47) (166) (48) Cash and cash equivalents at 31 December 10,420 3,426 13,846 13,067
Cash flows from operating activities were £1,860 million (2005: £2,409 million). Investing activities generated a cash outflow of £1,574 million, primarily reflecting outflows of £1,889 million on the acquisitions of businesses including AmerUs and Ark Life, offset by cash inflows of £616 million relating to disposals of subsidiaries. Over the year, we generated a net increase in cash and cash equivalents of £945 million (2005: £989 million).
Reconciliation of regional and business segment operating profit – EEV basis
Forward thinking 2007 will see us continue to place our customers at the very centre of everything we do, in particular by making Norwich Union easy to do business with.
Norwich Union is the leading brand in the UK life and pensions market. We have brand awareness and consideration that consistently rank above other traditional life and pension providers, and we are a top-four name within the overall UK financial services industry.
Additionally, we have early adopted PS06/14 (non-profit reserving changes) resulting in a £50 million benefit. Other assumptions have also been reviewed, and while none are of individual significance, in aggregate they produce a further benefit of £108 million. In parallel with these assumption changes, we have begun to execute a wideranging customer retention strategy, and we are confident that this, along with an updated assumption set, will reduce future experience variances and place the business on a sustainable basis going forward.
IFRS IFRS Combined Net profit operating operating written Underwriting before tax profit ratio* premium result £m £m % £m £m * General insurance business only.
We have won Insurance Times General Insurer of the year for the fourth successive year and are a partner of choice to the UK’s top brands. During 2006, we signed deals with the Post Office (to provide motor, homeowner and commercial van products), and with the broker Towergate (to provide creditor insurance). We also successfully renewed our contracts with Abbey and Saga to provide homeowner insurance, and our contract with Lloyds TSB to provide creditor insurance.
In addition to sales under the Morley brand, we sell ISAs, unit trusts, open-ended investment companies (Oeics) and structured products under the Norwich Union and The Royal Bank of Scotland brands.
Bancassurance is at the heart of our European strategy. In 2006, we completed a new distribution agreement with AIB in Ireland and significantly expanded our distribution in Italy with UniCredit Group. Elsewhere we have continued to work hard on increasing our penetration of the bank’s customer base and have made good progress in France and Spain. Our Dutch operations have had a difficult year, largely as a result of increased competition in a number of markets and changing economic conditions. Local management continues to seek out new sales opportunities and has taken action to improve efficiency and competitiveness through cost control.
O therinform ation Aviva plc Annual Report and Accounts 2006 35
The integration of Ark Life is proceeding well, including the successful migration of funds previously managed by AIB Investment Managers to Morley. At the end of 2006, our Irish life operations relocated to a single site along with our Irish general insurance business.
i Aviva hat-trick at Milano Finanza awards Aviva Italia won three awards at the annual Milano Finanza Insurance Awards in October 2006. Representing Aviva Italy, Cesare Brugola, chief executive officer, received the insurance elite award for the most distinctive strategy and the most respected and trusted executives. Our joint venture with Banco Popolari Unite (BPU), took the innovation award for its BPU Private Absolute product. Eurovita Assicurazioni SpA won another insurance elite award for the best organic growth performance.
Our combined general insurance and health business reported an operating profit of £63 million (2005: £35 million) with an underwriting result of £6 million (2005: loss of £21 million). The underwriting result benefited from cost savings due to our head office relocation and a favourable claims experience resulting in an improved general insurance COR of 99% (2005: 101%).
During 2006 we have launched a number of new product initiatives providing innovative, customer-focused products. We are developing our internet sales capability to enable us to capitalise on the expected growth of this channel. Building on Hibernian Life & Pension’s strategic partnership with Allied Irish Banks (AIB), we will commence selling motor insurance through AIB’s website, and will seek to develop further opportunities with AIB in the future. Our partnership with Tesco, through which we sell motor insurance, has been successful, while we also continue to invest in flood mapping technology to improve underwriting and pricing.
O therinform ation Aviva plc Annual Report and Accounts 2006 41
We intend to diversify our distribution network. For example, we are exploring the development of our bancassurance business in the US by taking advantage of expertise gained elsewhere in the Aviva group and are looking to develop the broker channel in China.
The discount supports our commitment to environmental management, and fits with our aim to make a leading contribution to the health of the communities in which we operate. It also rewards those of our policyholders who make a conscious choice to protect the environment.
IFRS profit IFRS EEV New New before operating operating business business tax profit profit PVNBP* contribution** margin** £m £m £m £m £m %
Our life EEV operating return increased to £32 million (2005: £25 million) including £22 million from AmerUs, which mainly represented contribution from new business and expected return on opening embedded value. In our operations based in Boston, the operating profit was lower at £10 million affected by some one-off negative lapse variances and operating assumption changes. 2006 full year pro forma new business contribution and life EEV operating return for AmerUs amounted to £94 million and £205 million, respectively.
Navigator is one of the first providers internationally to register with UK regulators as a qualifying regulated overseas pension scheme, which allows UK pension plan members to transfer benefits overseas.
We are increasing levels of customer and broker satisfaction by leveraging our scale and creating greater efficiencies through investment in claims supply-chain initiatives and in technology platforms.
Rest of the world 12 7 12 7 Morley and rest
During 2006, we launched a number of new institutional and retail funds, sold under either the Morley or Norwich Union brand names in the UK, and under the new Aviva Morley Funds brand name overseas.
Our funds under management increased by £12 billion. We achieved strong sales to third-party life companies and discretionary fund managers and also won a number of institutional mandates across our core asset classes of fixed income, UK equities, property, including specialist partnership vehicles, and asset allocation. Growth in funds under management also resulted from generally positive global investment returns. Finally, in May, we completed the take-on of b3.3 billion of funds from the Ark Life Assurance company resulting from Aviva’s bancassurance joint venture with AIB.
– Cost – Running a cost-effective finance function across our businesses
At 31 December 2006, we had £26.4 billion (31 December 2005: £23.0 billion) of total capital employed in our trading operations.
For our non-participating worldwide life insurance businesses, our capital requirements are set as the higher of: – Target levels set by reference to internal risk assessment and internal objectives
Several of our longer term savings businesses sell products where the majority of the market risk is borne by the policyholder. Any market risk attributable to policyholders is prudently managed to satisfy the policyholders’ objectives for risk and reward.
In 2006, we implemented a worldwide employee survey that allows us to benchmark our performance as an employer against the best in the world, identify and share good practice, and focus our efforts on issues that mean the most to our employees.
O therinform ation Aviva plc Annual Report and Accounts 2006 63 p Aviva joins Oxfam 365 Alliance Aviva was one of the first companies to join the Oxfam 365 Alliance, a new initiative developed by Oxfam GB to support its global emergency response operations. To join the Alliance, companies must commit to providing between £500,000 and £1 million over three years. The funding will provide extra help for the international charity’s expanding rapid response team of aid workers and will help run the warehouse which stores one of the world’s largest supplies of emergency equipment. With these resources, Oxfam will always be ready to deal with disasters immediately, wherever and whenever they occur. Oxfam will also provide aid to crises which often go unnoticed by the world’s media.
– Our staff, whose engagement and commitment to delivering a great service to our customers is key. They want to be treated with respect at work and to feel proud of being a part of Aviva
In the UK in September, we were title sponsor of the Aviva Weekend to Breakthrough Breast Cancer. In London and Birmingham, more than 2,000 walkers raised a total of £5.3 million from the two events. Our staff were among the hundreds of volunteers who gave their time to help with tents, serve meals and distribute water and goodie bags to the walkers.
In our annual global employee survey, we achieved further improvement in the measures of employee engagement and leadership.
Richard Harvey FIA (56) Group chief executive Appointed to the board in May 2000 and became group chief executive in April 2001. Joined Norwich Union in 1992, holding senior positions in New Zealand and the UK before joining the Norwich Union board in 1995 and becoming group chief executive of Norwich Union in 1998. Former chairman of the Association of British Insurers. Richard Harvey will retire as the group chief executive in July 2007.
Chairman of the audit committee and a member of the risk and regulatory and nomination committees.
Dividends The directors are recommending a final dividend of 19.18 pence per share (2005: 17.44 pence), which together with the interim dividend of 10.82 pence paid on 17 November 2006 (2005: 9.83 pence), produces a total dividend for the year of 30.00 pence per share (2005: 27.27 pence). The total cost of ordinary dividends for 2006, will amount to £693 million (2005: £598 million), leaving £1,468 million to be transferred to reserves (2005: £1,123 million to reserves). The final dividend for 2006 will be paid on 17 May 2007 to all holders of ordinary shares on the Register of Members at the close of business on 9 March 2007. The Company’s Scrip Dividend Scheme will be available to shareholders in respect of the payment of the final dividend. In addition, a local currency payment service will be available to shareholders residing in certain participating countries outside the UK. Further details of these arrangements can be found in the shareholder services section on pages 246 to 248.
Substantial shareholdings Until 19 January 2007 the Company maintained a register of substantial shareholdings in accordance with the provisions of Section 211 of the Companies Act 1985. At 19 January 2007, the register showed that the holdings exceeding the 3% disclosure threshold were those of Barclays Plc which held 102,377,279 ordinary shares (3.99%) of the issued ordinary share capital of the Company, Legal & General Group Plc which held 93,312,175 ordinary shares (3.65%) and AXA S.A. and its Group companies which held a total of 262,220,441 ordinary shares (10.22%) of which 29,277,260 (1.14%) were held beneficially and 232,943,181 (9.08%) were held non-beneficially.
Matters that are not specifically reserved to the Board and its committees under its terms of reference, or to shareholders in General Meeting, are delegated to the Group Chief Executive. The Board’s terms of reference also set out those matters that must be reported to the Board, such as significant litigation or material regulatory breaches, and cover how matters requiring consideration by the Board that arise between scheduled meetings should be dealt with.
The Board evaluation process assesses the executive directors in their capacities as directors of the Company. They are evaluated in respect of their executive duties through a separate process whereby the Chairman and the non-executive directors assess the Group Chief Executive and the Group Chief Executive assesses the executive directors.
Control environment The Group has an established governance framework, the key features of which include: – Terms of reference for the Board and each of its committees; – A clear organisational structure, with documented delegation of authority from the Board to executive management; – A Group policy framework, which sets out risk management and control standards for the Group’s operations worldwide; – Defined procedures for the approval of major transactions and capital allocation; – Committees of senior executives responsible for reviewing the Group’s financial risks (Asset and Liability Management Committee) and non-financial ie operational risks (Group Operational Risk Committee).
Management monitors the completeness of the Group’s risk profile on a regular basis through a Group risk monitoring framework.
Whilst the Audit Committee has the overall responsibility of monitoring the Group’s internal control process on behalf of the Board, it is assisted by the Risk and Regulatory Committee which oversees the regulatory compliance and non-financial control processes and reports to the Board regarding such. In addition, the Audit Committee performs an annual review of the effectiveness of the internal audit function and the framework for the Group’s systems of internal control. Throughout 2006, the Audit Committee and the Risk and Regulatory Committee received quarterly reports from the Group Audit Director on issues arising, and updates on previously reported items. More detailed reports on the work of these committees during 2006 are set out below.
Directors’ responsibilities The directors are required to prepare accounts for each accounting period that comply with the relevant provisions of the Companies Act 1985 and International Financial Reporting Standards (IFRS) as adopted by the European Union, and which present fairly the financial position, financial performance and cash flows of the Company and the Group at the end of the accounting period. A fair presentation of the financial statements in accordance with IFRS requires the directors to: – select suitable accounting policies and verify they are applied consistently in preparing the accounts, on a going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business; – present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; – provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company and the Group’s financial position and financial performance; and
In line with the Combined Code requirement the Board undertook a review of the effectiveness of all its committees during the year, including the Audit Committee.
The Group Chief Executive is normally invited to attend the meetings of the Committee, except when his own remuneration is being discussed, as is the Group Human Resources Director. The Chairman of the Board is invited to attend the Committee meetings when executive directors’ pay is being discussed.
The only other modifications made during the year were to the rules of the share plans to ensure compliance with the age discrimination legislation which became effective in October 2006.
Vesting of the shares is dependent upon two equally weighted performance measures; Return on Capital Employed (ROCE) and relative Total Shareholder Return (TSR), reflecting shareholders’ long-term interests in both absolute (ROCE) and relative (TSR) performance.
Andrew Moss The value of Andrew Moss’ UURB was transferred into the Pension Scheme and therefore at retirement he will receive a deferred pension of currently c.£20,000 pa. Further accrual in the pension scheme ceased from April 2006.
O therinform ation Aviva plc Annual Report and Accounts 2006 95
7. No former directors received any increase in retirement benefits in excess of the amount to which they were entitled on the later of the date when the benefits first became payable on 31 March 1997.
Philip Scott Savings related options 2002 4,096 – – – 4,096 401.0 December 2007 – May 2008
The Aviva Annual Bonus Plan was approved by shareholders in April 2005 and it replaced the Aviva Deferred Bonus Plan.
5. “Aviva Share Plan” relates to shares held under the Plan referred to above in which only Andrew Moss participated.
Associates and joint ventures Associates are entities over which the Group has significant influence, but which it does not control. Generally, it is presumed that the Group has significant influence if it has between 20% and 50% of voting rights. Joint ventures are entities whereby the Group and other parties undertake an economic activity which is subject to joint control arising from a contractual agreement. In a number of these, the Group’s share of the underlying assets and liabilities may be greater than 50% but the terms of the relevant agreements make it clear that control is not exercised. Such jointlycontrolled entities are referred to as joint ventures in these financial statements.
Initiation and other “front-end” fees (fees that are assessed against the policyholder balance as consideration for origination of the contract) are charged on some non-participating investment and investment fund management contracts. Where the investment contract is recorded at amortised cost, these fees are deferred and recognised over the expected term of the policy by an adjustment to the effective yield. Where the investment contract is measured at fair value, the front-end fees that relate to the provision of investment management services are deferred and recognised as the services are provided.
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(L) Reinsurance The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies, using assumptions consistent with those used to account for these policies.
Goodwill on acquisitions prior to 1 January 2004 (the date of transition to IFRS) is carried at its book value (original cost less cumulative amortisation) on that date, less any impairment subsequently incurred. Goodwill arising before 1 January 1998 was eliminated against reserves and has not been reinstated. Goodwill arising on the Group’s investments in associates and joint ventures since that date is included within the carrying value of these investments.
(T) Loans Loans with fixed maturities, including policyholder loans, mortgage loans on investment property, securitised mortgages and collateral loans, are recognised when cash is advanced to borrowers. The majority of these loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, nonrefundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method. Loans with indefinite future lives are carried at unpaid principal balances or cost.
(Z) Income taxes The current tax expense is based on the taxable profits for the year, after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits before taxation and amounts charged or credited to reserves as appropriate.
In addition to paying tax on shareholders’ profits, the Group’s life businesses in the UK, Ireland and Australia pay tax on policyholders’ investment returns (“policyholder tax”) on certain products at policyholder tax rates. Policyholder tax is accounted for as an income tax and is included in the total tax expense. The Group has decided to show separately the amounts of policyholder tax to provide a more meaningful measure of the tax the Group pays on its profits. In the pro forma reconciliations, operating profit has been calculated after charging policyholder tax.
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The residual goodwill of £669 million represents future synergies expected to arise in the combined life operations, the value of new business from new distribution channels and customers going forward, and the value of the workforce and management, related know-how and other future business value not included in the intangibles and the AVIF.
Notes to the consolidated financial statements continued 4 – Segmental information continued (ii) Segmental results by business segment
Segment result before share of profit/(loss) of joint ventures and associates 1,543 125 1,994 (304) 3,358 Share of profit/(loss) of joint ventures and associates 322 (1) 1 18 340
Goodwill 631 – 398 1,245 2,274 Acquired value of in-force business and intangible assets 424 – 265 114 803 Investments in joint ventures and associates 2,815 46 39 114 3,014 Property and equipment 367 4 126 388 885 Investment property 12,895 – 338 42 13,275 Loans 18,240 – 3,661 2,643 24,544 Financial investments 166,211 22 12,496 3,659 182,388 Other assets 23,185 490 9,425 2,059 35,159
Gross written premiums 12,276 4,376 3,956 5,118 959 2,050 28,735 Premiums ceded to reinsurers (1,012) (65) (119) (179) (27) (99) (1,501)
Net investment income 15,473 23,722 Share of profit after tax of joint ventures (note 17) 462 326 Share of profit after tax of associates (note 18) 23 14 Share of profit after tax of joint ventures and associates 485 340 Profit on disposal of subsidiaries and associates (note 3b) 222 153
(d) The principal assumptions underlying the calculation of the longer term investment return are: Longer term rates of return Longer term rates of return
Ordinary dividends declared and charged to equity in the year Final 2004 – 16.00 pence per share, paid on 17 May 2005 – 364 Interim 2005 – 9.83 pence per share, paid on 17 November 2005 – 234 Final 2005 – 17.44 pence per share, paid on 17 May 2006 418 – Interim 2006 – 10.82 pence per share, paid on 17 November 2006 275 –
(d) Additional information Summarised aggregate financial information on the Group’s interests in its joint ventures is as follows: £m £m
At 31 December 2005 54 499 89 655 368 1,665 Additions 31 43 1 154 66 295 Acquisitions of subsidiaries – 6 1 2 2 11 Disposals – (78) (78) (99) (72) (327) Transfers to investment property – (6) – – – (6)
The fair value of investment properties leased to third-parties under operating leases was as follows: £m £m
O therinform ation Aviva plc Annual Report and Accounts 2006 153 23 – Financial investments continued (b) The following is a summary of the cost/amortised cost, gross unrealised gains and losses and fair value of financial investments: Cost/ amortised Unrealised Unrealised cost gains losses Fair value £m £m £m £m
Concentrations of credit risk with respect to receivables are limited due to the size and spread of the Group’s trading base. No further credit risk provision is therefore required in excess of the normal provision for doubtful receivables.
25 – Deferred acquisition costs and other assets (a) The carrying amount comprises: Total Total 2006 2005 £m £m
1m 1m 700,000,000 Euro preference shares of 11 each 700 700 £m £m
Less: Obligations to staff pension schemes transferred to provisions (note 41a) (1,086) – (1,086) (875) – (875)
Equities 17% (for UK stocks) Property 15% Gilts 3.25% (NUL&P WP)/4.5% (other WP funds) Corporate bonds 5.25% (NUL&P WP)/6.5% (other WP funds)
Pensions business after vesting and PCMA00/PCFA00 PCMA00/PCFA00 or PMA92/ pensions annuities in payment adjusted plus allowance PFA92 adjusted plus allowance for future mortality for future mortality improvement improvement
GBM/V 85-90 and GBM/V 90-95 Annuities in deferment and in payment Actual swap rate GBMV 76-80, GBMV 85-90,
Movements The following movements have occurred in the long-term business provisions during the year: £m £m
Included within portfolio transfers is £287 million reclassified to investment contracts (see note 37) as a result of Prudential Rule No 49 issued by the Australian Prudential Regulation Authority (APRA), which requires further unbundling of certain savings products between insurance liabilities and investment contracts.
Carrying amount at 1 January 12,965 12,750 Impact of changes in assumptions 2 (6) Claim losses and expenses incurred in the current year 7,639 7,124 Decrease in estimated claim losses and expenses incurred in prior years (550) (372)
Carrying amount at 31 December 5,182 5,381 36 – Reinsurance assets (a) Carrying amounts (i) The reinsurance assets at 31 December comprised: £m £m
Most non-participating investment contracts measured at fair value are unit-linked in structure and the fair value liability is equal to the unit reserve plus additional non-unit reserves if required on a fair value basis. For this business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term. The amount of the related deferred acquisition cost asset is shown in note 25 and the deferred income liability is shown in note 45.
Non-AFER contracts with guaranteed surrender values had liabilities of £6 billion (2005: £7 billion) at 31 December 2006 and guaranteed annual bonus rates are between 0% and 4.5% on 98.3% of liabilities. For non-AFER business, the accounting income return exceeded guaranteed bonus rates in 2006.
Deferred tax liabilities of £527 million (2005: £347 million) have not been established for temporary differences associated with investments in subsidiaries and interests in joint ventures and associates (including tax payable on remittance of overseas retained earnings) because the Group can control the timing of the reversal of these differences and it is probable that they will not reverse in the foreseeable future. Such unremitted earnings totalled £2,552 million at 31 December 2006 (2005: £1,659 million).
(i) Defined benefit section of the ASPS The Company works closely with the trustees who are required to consult it on the funding of the scheme and its investment strategy. At 31 March 2005, the date of the last actuarial valuation, this section of the scheme had an excess of obligations over available assets. The Company is currently discussing with the trustees the period over which it will aim to eliminate the funding deficit and will monitor funding levels on an annual basis.
The above tables used to measure post-retirement mortality are considered appropriate based on the mortality experience of the schemes. However, the extent of future improvements in longevity is subject to considerable uncertainty and judgement is required in setting this assumption. In the UK schemes, which are by far the most material to the Group, the assumptions include an allowance for future mortality improvement, based on the actuarial profession’s medium cohort projection table. In the main UK scheme, the effect of assuming all members were one year younger would increase the schemes’ liabilities by £200 million.
Amount of (gains)/losses (63) 86 (12) Percentage of the present value of scheme liabilities 0.6% 0.9% 0.2%
UK Netherlands Canada Ireland Total £m £m £m £m £m £m £m £m £m £m
Deficits in the schemes at 1 January 8,209 (9,680) (1,471) (875) (2,346) (1,706)
All movements in fair value in 2006 and 2005 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions. These loan notes have external credit ratings which have not changed since the inception of the loans.
Notes to the consolidated financial statements continued 45 – Other liabilities £m £m
(c) Guarantees on long-term savings products Note 38 gives details of guarantees and options given by various Group companies as a normal part of their operating activities, in respect of certain long-term insurance and fund management products. In the UK, in common with other pension and life policy providers, the Group wrote individual and group pension policies in the 1970s and 1980s with a guaranteed annuity rate option (GAO). Since 1993, such policies have become more valuable to policyholders, and more costly for insurers, as current annuity rates have fallen in line with interest rates and improving longevity. Reserving policies for the cost of GAOs varied until a ruling by the House of Lords in the Equitable Life case in 2000 which effectively required full reserving by all companies. Prior to the ruling, consistent with the Group’s ordinary reserving practice in respect of such obligations, full reserves for GAOs had already been established. No adjustment was made, or was necessary, to the Group’s reserving practice as a result of the ruling. The directors continue to believe that the existing provisions are sufficient.
(b) Operating lease commitments (i) Future contractual aggregate minimum lease rentals receivable under non-cancellable operating leases are as follows: £m £m
Profit before tax 3,323 3,450 Adjustments for: Share of profits of joint ventures and associates (485) (340) Dividends received from joint ventures and associates 71 95 Profit on sale of investment property (46) (41) Profit on sale of property and equipment (2) (2) Profit on sale of subsidiaries, joint ventures and associates (222) (153) Profit on sale of investments (5,334) (4,616) Fair value gains on investment property (1,507) (1,571) Fair value losses/(gains) on investments 790 (8,813) Fair value (gains)/losses on borrowings (52) 62 Depreciation of property and equipment 122 112 Equity compensation plans, equity settled expense 48 22 Impairment of goodwill on subsidiaries 94 43 Impairment of other investments and loans (5) 19 Impairment of acquired value of in-force business and intangibles 26 35 Impairment of non financial assets 5 38 Amortisation of premium or discount on debt securities 278 (93) Amortisation of premium or discount on loans – (38) Amortisation of premium or discount on borrowings 5 2 Amortisation of acquired value of in-force business and intangibles 130 65 Change in unallocated divisible surplus 558 1,474 Interest expense on borrowings 825 607 Finance income on pension deficit (77) (32) Foreign currency exchange gain/loss (99) 203 Changes in working capital (Increase)/decrease in reinsurance assets 966 1,192 (Increase)/decrease in deferred acquisition costs 51 (466) (Increase)/decrease in insurance liabilities and investment contracts 9,974 18,581 (Increase)/decrease in other assets and liabilities (4,301) 135 Net purchases of operating assets Purchases of investment property (1,888) (1,956) Proceeds on sale of investment property 1,587 1,292 Net purchases of financial investments (2,380) (6,522)
The changes in management policy relate to the review of bonus rates for with-profit business.
For UK general insurance businesses, the relevant capital requirement is the minimum solvency requirement determined in accordance with the FSA requirements
Equity price risk The Group is subject to equity price risk due to daily changes in the market values of its equity securities portfolio. The Group’s shareholders are exposed to both direct equity shareholdings in its shareholder assets, from the indirect impact from changes in the value of equities held in policyholders funds from which management charges or a share of performance are taken, and from its interest in the free estate of long-term funds.
Property price risk The Group is subject to property price risk due to holdings of investment properties in a variety of locations worldwide. The investment in property is managed at business unit level, and will be subject to local regulations on asset admissibility, liquidity requirements and the expectations of policyholders. At 31 December 2006, no material derivative contracts had been entered into to mitigate the effects of changes in property prices.
A number of policyholder participation features have an influence on the Group’s interest rate risk. The major features include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. Details of material guarantees and options are given in note 38.
The vast majority of the Group’s general insurance business is managed and priced in the same country as the domicile of the customer.
Notes to the consolidated financial statements continued 50 – Risk management continued Long-term business Sensitivities as at 31 December 2006 Impact on profit before tax (£m)
Financial statements of the Company continued Notes to the Company financial statements For the year ended 31 December 2006
I – Risk management policies The business of the Company is managing its investments in subsidiary operations. Its risks are considered to be the same as those in the operations themselves and full details of the risk management policies are given in note 50. The fair values of the subsidiaries themselves are estimated using applicable valuation models, underpinned by the Company’s market capitalisation. This uses a three month rolling average of the Company’s share price and is therefore sensitive to movements in that price.
This report is made solely to the Company’s directors, as a body. Our audit work has been undertaken so that we might state to the Company’s directors those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s directors as a body, for our audit work, for this report, or for the opinions we have formed.
(1,137) Dividends and appropriations (note 15) (762) (657) 1,331 Issue of share capital for the acquisition of AmerUs Group Co. (2005: RAC plc), net of transaction costs 892 530 64 Other issues of share capital, net of transaction costs 43 59 303 Shares issued in lieu of dividends 203 100 593 Capital contribution from minority shareholders 397 212
The results for 2006 and 2005 have been audited by our auditors, Ernst & Young LLP. Their report in respect of 2006 is included in the Report and Accounts on page 219 of this document.
Covered business The EEV calculations cover the following lines of business: life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of the other life and related business written in our associated undertakings and joint ventures, as well as the equity release business written in the UK. The Group’s definition of new business under EEV includes contracts that meet the definition of “non-participating investment” contracts under IFRS.
New business premiums New business premiums include: – premiums arising from the sales of new contracts during the year; – non-contractual additional premiums, including future Department of Work and Pensions (DWP) rebate premiums; and
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Annual premium equivalent business premiums New business contribution1 New business margin2
Netherlands (including Belgium, Germany and Luxembourg) 56 55 Rest of Europe (83) 2
O therinform ation Aviva plc Annual Report and Accounts 2006 233
8. In the UK, the lapse assumption change relates to bonds and pension business while the change in Ireland relates to the Celebration Bond and unit-linked bonds. In France, lapse assumptions have been changed for non-AFER business in Aviva Vie. In Spain, lapse assumptions have been changed for risk business and some savings products.
Closing life and related businesses’ embedded value 16,711 1,387 18,098 15,113
Asset Classes The significant asset classes for UK participating business are equities, property and long-term fixed rate bonds. The most significant assumption is the distribution of future long-term interest rates, since this is the most important factor in the cost of guaranteed annuity options.
Market value of external debt, subordinated debt, preference shares and direct capital instrument 5,991 5,868
Netherlands (including Belgium, Germany and Luxembourg) 3,867 225 (225) 405 (415) 95
No future management actions are modelled in reaction to the changing non-economic assumptions. In each sensitivity calculation, all other assumptions remain unchanged. No changes to valuation bases have been included.
New business contribution before required As reported maintenance decrease in morbidity rates – annuity capital (gross of tax) on page 228 expenses lapse rates – life insurance business
United Kingdom RBS Life Investments Limited (49.99%) RBSG Collective Investments Limited (49.99%) British Aviation Insurance Company Limited (38.1%) The Group also has interests in several property limited partnerships. Further details are provided in note 17
Banks and nominee companies 13,395 2.05 2,199,002,281 85.71 Pension fund managers and insurance companies 97 0.02 114,546 0
Aviva plc on the alternative method of reporting long-term business profits 220 Alternative method of reporting long-term business profits