The carrying amounts of financial assets received and pledged as collateral under stocklending arrangements at 31 December 2006 are £21,153 million and £nil respectively (2005: £20,037 million and £nil respectively). In certain markets, the Group or the Group’s appointed stocklending managers obtain legal ownership of the collateral received and can re-pledge as collateral elsewhere or sell outright. The value of collateral re-pledged or sold is £nil (2005: £nil).
Notes to the consolidated financial statements continued 24 – Receivables and other financial assets £m £m
Amounts owed by contract holders 1,921 1,873 Amounts owed by intermediaries 1,258 1,543 Deposits with ceding undertakings 1,028 1,050 Amounts due from reinsurers 707 820 Other financial assets 3,184 2,488
Expected to be recovered in less than one year 7,668 7,210 Expected to be recovered in more than one year 430 496
Deferred acquisition costs in respect of: Insurance contracts – Long-term business 848 1,118 Insurance contracts – General insurance and health business 1,422 1,281 Participating investment contracts 364 3 Non-participating investment contracts 566 752 Retail fund management business 22 21 3,222 3,175 Surpluses in the staff pension schemes (note 42d(v)) 56 –
Carrying amount at 1 January 3,175 2,709 Acquisition costs deferred during the year 3,248 3,108 Amortisation (3,224) (2,704) Impairment losses – (4) Foreign exchange rate movements (49) 10 Other movements 72 56
The carrying values of assets backing these unit-linked liabilities are as follows: £m £m
Loans 879 – Debt securities 15,308 12,959 Equity securities 25,839 21,593 Other investments 26,712 21,704 Reinsurance assets 1,136 1,232 Cash and cash equivalents 3,648 2,675 27 – Ordinary share capital (a) Details of the Company’s ordinary share capital are as follows: £m £m
(ii) Executive share options These are options granted on various dates from 1996 to 2004, under the Aviva Executive Share Option Scheme or predecessor schemes. Options granted between 1997 and 2000 were subject to the satisfaction of conditions relating to either the Company’s return on equity shareholders’ funds (ROE) or its relative total shareholder return (TSR) against a chosen comparator group. In respect of options granted from 2000 the performance condition has been a mixture of both ROE and TSR measures. In all cases, performance is measured over a three year performance period and the options are normally exercisable between the third and tenth anniversary of their grant.
(vi) Annual bonus plan awards These awards have been made under the Aviva Bonus Plan, and are described in section (b) below and in the Directors’ remuneration report.
(b) Outstanding options and awards (i) Share options At 31 December 2006, options to subscribe for ordinary shares of 25 pence each in the Company were outstanding as follows: Option price Number Option price Number Aviva Savings Related Share Option Scheme p of shares Normally exercisable p of shares Normally exercisable
Option price Number Option price Number Aviva Executive Share Option Scheme p of shares Normally exercisable p of shares Normally exercisable
O therinform ation Aviva plc Annual Report and Accounts 2006 157 28 – Equity compensation plans continued The following table summarises information about options outstanding at 31 December 2006: Weighted average Weighted average Outstanding options remaining contractual life exercise price
Outstanding options remaining contractual life exercise price Range of exercise prices Number Years p
(ii) Share awards At 31 December 2006, awards issued under the Company’s executive incentive plans over ordinary shares of 25 pence each in the Company were outstanding as follows: Number Aviva Long-Term Incentive Plan of shares Vesting period
Number Number Aviva Deferred Bonus Plan of shares Vesting date of shares Vesting date
No options granted after 7 November 2002 were exercised during the year (2005: nil).
O therinform ation Aviva plc Annual Report and Accounts 2006 159 28 – Equity compensation plans continued (ii) Share awards The fair value of the awards was estimated on the date of grant, based on the following weighted average assumptions: Weighted average assumption 2006 2005
Share price 814p 632p Expected volatility* 23% 41% Expected volatility of comparator companies’ share price* 22% 44% Correlation between Aviva and competitors’ share price* 50% 64% Expected life 3.0 years 3.0 years Expected dividend yield 3.60% 4.00% Risk-free interest rate* 4.50% 4.70%
Authorised 200,000,000 cumulative irredeemable preference shares of £1 each 200 200 500,000,000 Sterling preference shares of £1 each 500 500 500,000,000 Sterling new preference shares of £1 each 500 –
Notes to the consolidated financial statements continued 30 – Preference share capital continued At the Annual General Meeting on 10 May 2006, the Company’s authorised preference share capital was increased to £1,200 million and b700 million by the creation of 500 million sterling new preference shares of £1 each.
The euro and sterling direct capital instruments (the DCIs) were issued on 25 November 2004. They have no fixed redemption date but the Company may, at its sole option, redeem all (but not part) of the DCIs at their principal amount on 28 November 2014 and 27 July 2020 for the euro and sterling DCIs respectively, at which dates the interest rates change to variable rates, or on any respective coupon payment date thereafter. In addition, under certain circumstances defined in the terms and conditions of the issue, the Company may at its sole option: (i) redeem all (but not part) of the DCIs at their principal amount at any time prior to 28 November 2014 and 27 July 2020 for the euro and sterling DCIs respectively; (ii) substitute at any time all (but not some only) of the DCIs for, or vary the terms of the DCIs so that they become, Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities; (iii) substitute all (but not some only) of the DCIs for fully paid non-cumulative preference shares in the Company. These preference shares could only be redeemed on 28 November 2014 in the case of the euro DCIs and on 27 July 2020 in the case of the sterling DCIs, or in each case on any dividend payment date thereafter. The Company has the right to choose whether or not to pay any dividend on the new shares, and any such dividend payment will be non-cumulative.
O therinform ation Aviva plc Annual Report and Accounts 2006 161 32 – Reserves (a) Merger reserve £m £m
Balance at 1 January 3,271 2,763 Merger relief on acquisition of AmerUs (note 3(a)(iv)) 871 – Merger relief on acquisition of RAC plc – 508 Transfer to retained earnings on realisation (note 33) (871) –
Arising in the year: Fair value gains – 26 347 – – 373 Fair value gains transferred to profit – – (162) – – (162) Fair value gains transferred to retained earnings on disposals (note 33) – (9) – – – (9) Impairment losses on revalued assets – (2) – – – (2) Reserves credit for equity compensation plans (note 28d) – – – – 48 48 Shares issued under equity compensation plans (note 33) – – – – (18) (18) Foreign exchange rate movements (386) – – 59 – (327) Aggregate tax effect – policyholders’ tax – – – – – – Aggregate tax effect – shareholders’ tax – – (50) – – (50)
Notes to the consolidated financial statements continued 33 – Retained earnings £m £m
Provision for claims incurred but not reported – 2,553 2,553 – 2,324 2,324
(b) Long-term business liabilities (i) Business description The Group underwrites long-term business in a number of countries as follows: – In the UK mainly in
– In the United States, there are two main business segments - protection products and accumulation products. Protection products include interest-sensitive whole life, term life, universal life and indexed life insurance policies. The accumulation product segment includes traditional fixed and indexed deferred annuities for individuals and funding agreements for business customers. In addition, there are two closed blocks of participating contracts arising from demutualisations of subsidiary companies. All products are classified as insurance contracts except for the funding agreements and term certain immediate annuities, which are classified as nonparticipating investment contracts.
Notes to the consolidated financial statements continued 35 – Insurance liabilities continued (ii) Group practice The long-term business provision is calculated separately for each of the Group’s life operations. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, mainly using the net premium method, modified where necessary to reflect the requirements of the Companies Act.
The principal assumptions in the UK, France, the Netherlands and the United States are: (a) UK With-profit business The valuation of with-profit business uses the methodology developed for the Realistic Balance Sheet, adjusted to remove the shareholders’ share of future bonuses. The key elements of the Realistic Balance Sheet methodology are the with-profit benefit reserve (WPBR) and the present value of the expected cost of any payments in excess of the WPBR (referred to as the cost of future policy-related liabilities). The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities. The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract.
O therinform ation Aviva plc Annual Report and Accounts 2006 165 35 – Insurance liabilities continued The principal assumptions underlying the cost of future policy related liabilities are as follows: Future investment return A “risk-free” rate equal to the spot yield on gilts, plus a margin of 0.1% is used. The rates vary, according to the outstanding term of the policy, with a typical rate as at year end 2006 being 4.84% for a policy with ten years outstanding.
Mortality Mortality assumptions are set with regard to recent company experience and general industry trends. Mortality table used
Assurances, pure endowments and Nil or AM92/AF92 Nil or AM92/AF92 deferred annuities before vesting or AM80/AF80 adjusted
Changes have been made to the assumptions for certain non-profit business during 2006, resulting from a decision taken by management to adopt changes permitted by the FSA Policy Statement 06/14, Prudential Changes for Insurers, issued in December 2006. These are as follows: – For certain blocks of protection business, the reserve for some policies may now be negative, where previously it would have been set to zero.
– For certain blocks of unit-linked business, lower levels of expenses are allowed for in the calculation of individual policy reserves, with the remaining expenses being covered by future valuation margins on the overall block of similar policies.
Notes to the consolidated financial statements continued 35 – Insurance liabilities continued The changes in the valuation discount rates since 2005 reflect the changes in the yields on the supporting assets.
General annuity business after vesting IML00/IFL00 adjusted IML00/IFL00 adjusted plus allowance for future plus allowance for future mortality improvement mortality improvement
Pensions business PCMA00/PCFA00 adjusted or PCMA00/PCFA00 adjusted IML00/IFL00 adjusted plus allowance for future plus allowance for future mortality improvement mortality improvement
Life assurances 1.75% to 4.5% PM60-64, TD73-77, PM60-64, TD73-77, TD 88/90 TD 88/90, TF00-02,
O therinform ation Aviva plc Annual Report and Accounts 2006 167 35 – Insurance liabilities continued (c) Netherlands On transition to IFRS, the valuation of most long-term insurance and participating investment contracts was changed from existing methods that generally used historic assumptions to an active basis using current market interest rates. A liability adequacy test is performed in line with IFRS requirements. Where liabilities are based on current market interest rates and assets are valued at market value, the margin in the liability adequacy test is determined by comparison of the liabilities with the present value of best estimate cash flows.
(d) United States For the major part of our US business, insurance liabilities are measured in accordance with US GAAP as at the date of acquisition.
Deferred income reserves are established for fees charged for insurance benefit features which are assessed in a manner that is expected to result in higher profits in earlier years, followed by lower profits or losses in subsequent years. The excess charges are deferred and amortised using the same assumptions and factors used to amortise deferred acquisition costs. Shadow adjustments may be made to deferred acquisition costs, acquired value of in-force business, deferred income reserves and contract liabilities. The shadow adjustments are recognised directly in equity so that unrealised gains or losses on investments that are recognised directly in equity affect the measurement of the liability, or related assets, in the same way as realised gains or losses.
(e) In all other countries, local generally-accepted interest rates and published standard mortality tables are used for different categories of business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people.
Notes to the consolidated financial statements continued 35 – Insurance liabilities continued The effect of changes in the main assumptions is given in note 39.
Netherlands Permanent health and injury 3.61% 3.21% 9 years 7 years
The net outstanding claims provisions before discounting were £12,768 million (2005: £13,014 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.
O therinform ation Aviva plc Annual Report and Accounts 2006 169 35 – Insurance liabilities continued Movements The following changes have occurred in the general insurance and health claims provisions during the year: £m £m
Incurred claims losses and expenses 7,091 6,746 Less: Payments made on claims incurred in the current year (3,765) (3,379) Payments made on claims incurred in prior years (3,771) (3,407) Recoveries on claim payments 304 263
Claims payments made in the year, net of recoveries (7,232) (6,523) Other movements in the claims provisions (7) (9)
Changes in claims reserve recognised as an expense (148) 214 Effect of portfolio transfers, acquisitions and disposals 207 (153) Foreign exchange rate movements (306) 146 Other gross movements – 8
The effect of changes in the main assumptions is given in note 39.
Included within portfolio transfers above is £259 million arising from the acquisition of a general insurance and investment portfolio in the Netherlands.
(d) Loss development tables The tables that follow present the development of claim payments and the estimated ultimate cost of claims for the accident years 2001 to 2006. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year. For example, with respect to the accident year 2002, by the end of 2006 £5,466 million had actually been paid in settlement of claims. In addition, as reflected in the lower section of the table, the original estimated ultimate cost of claims of £6,250 million was re-estimated to be £6,205 million at 31 December 2006. This decrease from the original estimate is due to the combination of a number of factors. The original estimates will be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity.
After the effect of reinsurance, the loss development table is: Accident year £m £m £m £m £m £m £m £m
Net cumulative claim payments At end of accident year (2,970) (2,913) (2,819) (2,870) (3,281) (3,612)
Three years later (5,436) (5,064) (4,924) Four years later (5,648) (5,297) Five years later (5,763)
Estimate of gross ultimate claims 6,219 5,912 5,942 6,082 6,818 7,430
Present value recognised in the balance sheet 1,869 445 605 1,007 1,359 1,870 3,825 10,980
O therinform ation Aviva plc Annual Report and Accounts 2006 171 35 – Insurance liabilities continued The loss development tables include information on asbestos and environmental pollution claims provisions from business written before 2001. The claims provisions, net of reinsurance, in respect of this business were £312 million (2005: £289 million). The movement in the year reflects strengthening of the provisions by £9 million (2005: £83 million) and timing differences between claim payments and reinsurance recoveries.
Carrying amount at 1 January 5,381 4,923 Premiums written during the year 11,427 11,017 Less: Premiums earned during the year (11,516) (10,802) Other movements in UPR – 1
(c) Movements The following movements have occurred in the reinsurance asset during the year: (i) In respect of long-term business provisions £m £m
Carrying amount at 1 January 4,706 5,878 Asset in respect of new business 226 183 Expected change in existing business asset 57 (128) Variance between actual and expected experience (69) 257 Effect of adjusting to PS06/14 realistic basis (502) – Impact of other operating assumption changes (84) (1,178) Impact of economic assumption changes (341) 159 Other movements – 177
Change in reinsurance asset recognised as income (157) (158) Effect of portfolio transfers, acquisitions and disposals (5) (93) Foreign exchange rate movements (32) 26 Other movements 18 (57)
O therinform ation Aviva plc Annual Report and Accounts 2006 173 36 – Reinsurance assets continued (iii) Reinsurers’ share of the provision for unearned premiums (UPR)
Long-term business Participating contracts 49,400 47,258 Non-participating contracts at fair value 38,081 29,304 Non-participating contracts at amortised cost 877 747
In the United States, funding agreements consist of one to ten year fixed rate contracts. These contracts may not be cancelled by the holders unless there is a default under the agreement, but may be terminated by Aviva at any time. The weighted average interest rates for fixed-rate and floating-rate funding agreements in 2006 were 5.07% and 5.55%, respectively. The funding agreements are measured at fair value equal to the present value of contractual cash flows.
There is a small volume of annuity certain business for which the liability is measured at amortised cost using the effective interest method.
Carrying amount at 1 January 47,258 43,974 Provisions in respect of new business 3,001 3,467 Expected change in existing business provisions (2,237) (1,720) Variance between actual and expected experience 2,131 2,034 Effect of adjusting to PS06/14 realistic basis (105) – Impact of operating assumption changes (43) 5 Impact of economic assumption changes (125) 513 Other movements 51 (153)
Included within portfolio transfers above is £122 million reclassified from insurance liabilities (see note 35) 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.
O therinform ation Aviva plc Annual Report and Accounts 2006 175 38 – Financial guarantees and options As a normal part of their operating activities, various Group companies have given guarantees and options, including investment return guarantees, in respect of certain long-term insurance and fund management products. Further information on assumptions is given in notes 35 and 37.
(a) UK Life with-profit business In the UK, life insurers are required to comply with the FSA’s realistic reporting regime for their with-profit funds for the calculation of FSA liabilities. Under the FSA’s rules, provision for guarantees and options within realistic liabilities must be measured at fair value, using market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising from uncertainty surrounding future economic conditions.
The material guarantees and options to which this provision relates are: (i) Maturity value guarantees – Substantially all of the conventional with-profit business and a significant proportion of unitised with-profit business have minimum maturity values reflecting the sums assured plus declared annual bonus. In addition, the guarantee fund has offered maturity value guarantees on certain unit-linked products.
(ii) No market valuation reduction (MVR) guarantees – For unitised business, there are a number of circumstances where a “no MVR” guarantee is applied, for example on certain policy anniversaries, guaranteeing that no market value reduction will be applied to reflect the difference between the accumulated value of units and the market value of the underlying assets.
(b) UK Life non-profit business The Group’s UK non-profit funds are evaluated by reference to statutory reserving rules, including changes introduced in 2006 under FSA Policy Statement 06/14 Prudential Changes for Insurers, as outlined in note 35(b)(iii)(a).
(i) Guaranteed annuity options – Similar options to those written in the with-profit fund have been written in relation to non-profit products. Provision for these guarantees does not materially differ from a provision based on a market-consistent stochastic model, and amounts to £39 million at 31 December 2006 (2005: £44 million).
The most significant of these contracts is the AFER Eurofund which has total liabilities of £21 billion at 31 December 2006 (2005: £22 billion). The guaranteed bonus on this contract equals 65% of the average of the last two years’ declared bonus rates (or 60% of the TME index rates if higher) and was 3.30% for 2006 (2005: 3.51%) compared with an accounting income from the fund of 4.81% (2005: 4.91%).
Guaranteed death and maturity benefits In France, the Group has also sold unit-linked policies where the death and/or maturity benefit is guaranteed to be at least equal to the premiums paid. The reserve held in the Group’s consolidated balance sheet at the end of 2006 for this guarantee is £8 million (2005: £14 million). The reserve is calculated on a prudent basis and is in excess of the economic liability. At the end of 2006, total sums at risk for these contracts were £38 million (2005: £73 million) out of total unit-linked funds of £13 billion (2005: £8 billion). The average age of policyholders was approximately 53. It is estimated that this reserve would increase by £3 million (2005: £1 million) if yields were to decrease by 1% per annum and by £2 million (2005: £0.1 million) if equity markets were to decline by 10% from year end 2006 levels. These figures do not reflect our ability to review the tariff for this option.
(ii) Netherlands Guaranteed minimum return at maturity In the Netherlands, it is market practice to guarantee a minimum return at maturity on traditional savings and pension contracts. Guarantees on older lines of business are 4% per annum while, for business written since 1 September 1999, the guarantee is 3% per annum. On Group pensions business, it is often possible to recapture guarantee costs through adjustments to surrender values or to premium rates.
guarantee guarantee guarantee guarantee 31 December 31 December 31 December 31 December £m £m £m £m
Return of premium guarantee In 2005, Hibernian Life wrote two tranches of linked bonds with a return of premium guarantee after five or six years. The provision for these at the end of 2006 is £nil (2005: £3 million). It is expected that the provision would not increase if equity markets were to decline by 10% from year end 2006 levels. We would not expect any significant impact on this provision as a result of interest movements.
(iv) Spain and Italy Guaranteed investment returns and guaranteed surrender values The Group has also written contracts containing guaranteed investment returns and guaranteed surrender values in both Spain and Italy. Traditional profit-sharing products receive an appropriate share of the investment return, assessed on a book value basis, subject to a guaranteed minimum annual return of up to 6% in Spain and 4% in Italy on existing business, while on new business the maximum guaranteed rate is lower. Liabilities are generally taken as the face value of the contract plus, if required, an explicit provision for guarantees calculated in accordance with local regulations. At 31 December 2006, total liabilities for the Spanish business were £3 billion (2005: £2 billion) with a further reserve of £18 million (2005: £20 million) for guarantees. Total liabilities for the Italian business were £5 billion (2005: £4 billion), with a further provision of £46 million (2005: £55 million) for guarantees. Liabilities are most sensitive to changes in the level of interest rates. It is estimated that provisions for guarantees would need to increase by £66 million (2005: £66 million) in Spain and £9 million (2005: £12 million) in Italy if interest rates fell by 1% from end 2006 values. Under this sensitivity test, the guarantee provision in Spain is calculated conservatively, assuming a long-term market interest rate of 1.42% and no lapses or premium discontinuances.
The Group has certain products that credit interest based on a total return strategy, whereby policyholders are allowed to allocate their premium payments to different asset classes within the general account. The Group guarantees a minimum return of premium plus approximately 3% interest over the term of the contracts. The linked general account assets are fixed maturity securities, and both the securities and the contract liabilities are carried at fair value. At 31 December 2006, the liabilities for total return strategy products were £408 million.
(d) Sensitivity In providing these guarantees and options, the Group’s capital position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, real estate prices and equity prices. Interest rate guaranteed returns, such as those available on guaranteed annuity options (GAOs), are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made.
Notes to the consolidated financial statements continued 39 – Effect of changes in assumptions and estimates during the year Certain estimates and assumptions used in determining liabilities for insurance and investment contract business were changed from 2005 to 2006, and had the following effect on the profit recognised for the year with an equivalent effect on liabilities. This disclosure only allows for the impact on liabilities and related assets, such as reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing financial assets.
40 – Tax assets and liabilities (a) General Current tax assets and liabilities recoverable or payable in more than one year are £81 million and £842 million (2005: £78 million and £339 million) respectively.
(b) Deferred tax (i) The balances at 31 December comprise: £m £m
Long-term business technical provisions and other insurance items 1,247 1,155 Deferred acquisition costs (126) (245) Unrealised gains on investments (2,379) (2,561) Provisions and other temporary differences (712) (223) Impairment of assets 2 1 Pensions and other post-retirement obligations 344 488 Unused losses and tax credits 250 57 Other temporary differences (504) (112)
O therinform ation Aviva plc Annual Report and Accounts 2006 179 40 – Tax assets and liabilities continued (iii) The movement in the net deferred tax liability was as follows: £m £m
Of the total, £2,262 million (2005: £2,370 million) is expected to be settled more than one year after the balance sheet date.
Unused amounts reversed – (55) (55) Change in the discounted amount arising from passage of time – 5 5
Notes to the consolidated financial statements continued 42 – Pension obligations (a) Introduction The Group operates a large number of pension schemes around the world, whose members receive benefits on either a defined benefit basis (generally related to a member’s final salary and length of service) or a defined contribution basis (generally related to the amount invested, investment return and annuity rates). The only material defined benefit schemes are in the UK, the Netherlands, Canada and Ireland and, of these, the main UK scheme is by far the largest.
For funding purposes, the scheme’s valuation as at 1 April 2006 is currently being completed, with the obligations calculated using the Projected Unit Method (which is described below).
(ii) Defined contribution (money purchase) section of the ASPS The trustees have responsibility for selecting a range of suitable funds in which the members can choose to invest and for monitoring the performance of the available investment funds. Members are responsible for reviewing the level of contributions they pay and the choice of investment fund to ensure these are appropriate to their attitude to risk and their retirement plans. The employers’ contribution rates for members of the defined contribution section throughout 2006 were 8% of pensionable salaries, together with further contributions up to 4% where members contribute, and the cost of the death-in-service benefits. These contribution rates are unchanged for 2007.
O therinform ation Aviva plc Annual Report and Accounts 2006 181 42 – Pension obligations continued (c) Charges to the income statement The total pension costs of the Group’s defined benefit and defined contribution schemes were: £m £m
There were no significant contributions outstanding or prepaid as at either 31 December 2006 or 2005.
(d) IAS 19 disclosures Disclosures under IAS 19 for the material defined benefit schemes in the UK, the Netherlands, Canada and Ireland are given below. Where schemes provide both defined benefit and defined contribution pensions, the assets and liabilities shown exclude those relating to defined contribution pensions.
There are alternative methods of measuring liabilities, for example by calculating an accumulated benefit obligation (the present value of benefits for service already rendered but with no allowance for future salary increases) or on a solvency basis, using the cost of buying out benefits at a particular date with a suitable insurer. However, neither of these is considered appropriate in presenting fairly the Group’s obligations to the members of its pension schemes on an ongoing basis.
Basis of discount rate AA-rated AA-rated AA-rated AA-rated Eurozone corporate bonds corporate bonds corporate bonds corporate bonds * Age-related scale increases plus 2.4% (2005: 1.4%).
The discount rate and inflation rate are the two assumptions that have the largest impact on the value of the liabilities, with the difference between them being known as the net discount rate. For each country, the discount rate is based on current average yields of high quality debt instruments taking account of the maturities of the defined benefit obligations. A 1% increase in this rate (and therefore the net discount rate) would reduce the liabilities by £1.7 billion.
Notes to the consolidated financial statements continued 42 – Pension obligations continued Mortality assumptions are significant in measuring the Group’s obligations under its defined benefit schemes, particularly given the maturity of these obligations in the material schemes. The mortality tables and average life expectancy used at 31 December 2006 for scheme members are as follows: Life expectancy Life expectancy at NRA of a male at NRA of a female
Normal retirement 20 years 20 years age Currently younger Currently younger Country of scheme Mortality table (NRA) aged NRA than NRA aged NRA than NRA
UK PA92 (calendar year 2007) with a one year age rating deduction 60 27.7 28.9 30.6 31.7 and an allowance for future improvements
The scheme liabilities have an average duration of 22 years in the UK schemes and between 14 and 16 years in the overseas schemes.
The overall rates of return are based on the expected returns within each asset category and on current asset allocations. The expected returns are developed in conjunction with external advisers and take into account both current market expectations of future returns, where available, and historical returns.
(iii) Pension expense As noted above, plan assets in the UK and Dutch schemes include insurance policies with other Group companies. To avoid doublecounting of investment income on scheme assets and the assets backing the underlying policies, adjustments have been made to the former in the current year as shown in the tables below.
Charged to net operating expenses 196 130 Included in profit on disposal of subsidiaries and associates (36)* –
Expected return on scheme assets (530) (439) Less: Income accounted for elsewhere (see above) 40 –
Expected return on scheme assets 530 439 Actual return on these assets (800) (1,270)
Experience (gains)/losses arising on scheme liabilities (63) 86 Changes in assumptions underlying the present value of the scheme liabilities 430 1,292 Loss on acquisitions 1 –
(iv) Experience gains and losses The following disclosures of experience gains and losses will be built up over time to give a five year history. These are based on the assets recorded in the schemes, before Group consolidation adjustments to remove insurance policies with Group companies and income on the assets underlying them.
Notes to the consolidated financial statements continued 42 – Pension obligations continued Excluding insurance policies with Group companies and income on the assets underlying them, the relevant figures are: Fair value of scheme assets at the end of the year 8,137 7,334 5,473 Present value of scheme liabilities at the end of the year (10,196) (9,680) (7,179)
Amount of (gains)/losses (251) (798) (184) Percentage of the scheme assets at the end of the year 3.1% 10.9% 3.4%
Total fair value of assets 7,627 6,727 934 832 206 226 456 424 9,223 8,209
Present value of scheme liabilities (8,601) (8,098) (944) (876) (251) (288) (400) (418) (10,196) (9,680)
The current year surplus in the Irish schemes of £56 million is included in Other assets (see note 25), whilst the deficits in the other schemes of £1,029 million are included in Provisions (see note 41).
O therinform ation Aviva plc Annual Report and Accounts 2006 185 42 – Pension obligations continued Excluding these policies, the total IAS 19 obligations to the schemes are £2,059 million (2005: £2,346 million), as shown in the following table.
As noted above, the long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes. To meet these objectives, each scheme’s assets are invested in a diversified portfolio, consisting primarily of equity and debt securities. These reflect the current long-term asset allocation ranges chosen having regard to the structure of liabilities within the schemes.
(vi) Movements in the scheme deficits and surpluses Movements in the pension schemes’ deficits and surpluses comprise: Adjust for Pension Group IAS19 IAS19
Scheme Scheme scheme insurance pension pension assets liabilities deficit policies deficit deficit £m £m £m £m £m £m
Deficits in the schemes at 31 December 9,223 (10,196) (973) (1,086) (2,059) (2,346)
The change in the pension schemes’ deficits during 2006 is mainly attributable to additional contributions into the schemes and an increase in the market value of their assets, partially offset by changes in assumptions underlying the present value of the schemes’ liabilities. In the UK, the value of the liabilities has increased due to a strengthening to the post-retirement mortality assumptions and higher assumed inflation, partially offset by an increase in the corporate bond yields used for the valuation discount rate. The increase in scheme assets is primarily due to an improvement in equity values since the previous year end, partially offset by a reduction in bond values, together with deficit contribution payments made by the employing companies.
Carrying Within Over value Denominated 1 year 1-5 years 5-10 years 10-15 years 15 years Total £m currency £m £m £m £m £m £m
Debenture loans 2.5% subordinated perpetual loan notes 119 a – – – – 337 337 Other loans 17 Various – – 17 – – 17
Total contractual undiscounted cash flows 1,056 2,240 2,973 2,270 16,608 25,147
Where subordinated debt is undated or loan notes are perpetual, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £91 million (2005: £88 million).
Contractual undiscounted interest payments are calculated based on underlying fixed interest rates or prevailing market floating rates as applicable. Year end exchange rates have been used for interest projections on loans in foreign currencies.
All the above borrowings are stated at amortised cost, except for the loan notes issued in connection with the UK lifetime mortgage business which are carried at fair value. These have been designated at fair value through profit and loss in order to present the relevant mortgages, borrowings and derivative financial instruments at fair value, since they are managed as a portfolio. This presentation provides more relevant information and eliminates any accounting mismatch.
Notional amount Issue date Redemption date of the Company from each applicable reset date to £700 million 14 Nov 2001 14 Nov 2036 16 Nov 2026 5 year Benchmark Gilt + 2.85% a800 million 14 Nov 2001 14 Nov 2021 14 Nov 2011 3 month Euribor + 2.12% a650 million 29 Sep 2003 02 Oct 2023 02 Oct 2013 3 month Euribor + 2.08% a500 million 29 Sep 2003 Undated 29 Sep 2015 3 month Euribor + 2.35% £800 million 29 Sep 2003 Undated 29 Sep 2022 5 year Benchmark Gilt + 2.40% US$300 million 19 Dec 2006 19 Jun 2017 19 Jun 2012 US LIBOR + 0.84%
The subordinated notes were issued by the Company. They rank below its senior obligations and ahead of its preference shares and ordinary share capital. The dated subordinated notes rank ahead of the undated subordinated notes. The fair value of these notes at 31 December 2006 was £3,076 million (2005: £3,148 million), calculated with reference to quoted prices.
The 5.95% Senior Notes had been issued by a United States subsidiary prior to acquisition by the Group. These notes may be redeemed at the Group’s option at any time, in whole or in part, subject to payment of a redemption premium. On 23 February 2007, the subsidiary exercised its option to redeem the notes early for an amount not significantly different to their carrying value. As a result, these notes have been shown in table (a) as maturing within one year.
Other loans comprise borrowings in the United States and the Netherlands.
Fixed rate borrowings comprise £535 million (2005: £317 million) of the total carrying value of £644 million (2005: £334 million). The fair value of debenture loans at 31 December 2006 was £703 million (2005: £405 million), calculated with reference to quoted prices or discounted future cash flows as appropriate.
(iv) Commercial paper The commercial paper consists of £733 million in the Company (2005: £499 million) and £4 million in France (2005: £4 million). All commercial paper is repayable within one year and is issued in a number of different currencies, primarily sterling, euros and US dollars.
The fair value of the commercial paper is considered to be the same as its carrying value.
(c) Movements during the year Movements in borrowings during the year were: £m £m
Net cash inflow 901 856 Foreign exchange rate movements (183) (170) Borrowings acquired for non-cash consideration 11 –
Movements in the year 1,124 923 Balance at 1 January 11,013 10,090
Payables arising out of direct insurance 1,389 1,639 Payables arising out of reinsurance operations 408 618 Deposits received from reinsurers 1,244 883 Loans from associates – 3 Bank overdrafts 696 690 Derivative liabilities 355 526 Bank customer accounts 2,008 2,317 Bank deposits received from other banks 1,013 565 Other financial liabilities 2,122 2,340 Less: Amounts classified as held for sale – (96)
Bank overdrafts arise substantially from unpresented cheques and amount to £266 million (2005: £115 million) in long-term business operations and £430 million (2005: £575 million) in general business and other operations. Other financial liabilities include the obligation to repay £722 million (2005: £467 million) received under stock repurchase arrangements entered into in the UK and the Netherlands.
Expected to be settled within one year 3,468 2,539 Expected to be settled in more than one year 766 781 46 – Contingent liabilities and other risk factors (a) Uncertainty over claims provisions Note 35 gives details of the estimation techniques used in determining the general business outstanding claims provisions and of the methodology and assumptions used in determining the long-term business provisions, which are designed to allow for prudence and the appropriate cost of future policy-related liabilities. Both are estimated to give a result within the normal range of outcomes. To the extent that the ultimate cost falls outside this range, for example where experience is worse than that assumed, or future general business claims inflation differs from that expected, there is uncertainty in respect of this liability.
(b) Asbestos, pollution and social environmental hazards In the course of conducting insurance business, various companies within the Group receive general insurance liability claims, and become involved in actual or threatened litigation arising therefrom, including claims in respect of pollution and other environmental hazards. Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including the UK, Australia and Canada. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents which they cover and the uncertainties associated with establishing liability and the availability of reinsurance, the ultimate cost cannot be determined with certainty. However, the Group’s net exposure to such liabilities is not significant and, on the basis of current information and having regard to the level of provisions made for general insurance claims, the directors consider that any costs arising are not likely to have a material impact on the financial position of the Group.
(f) Other In the course of conducting insurance and investment business, various Group companies receive liability claims, and become involved in actual or threatened litigation arising therefrom. In the opinion of the directors, adequate provisions have been established for such claims and no material loss will arise in this respect.
47 – Commitments (a) Capital commitments Contractual commitments for acquisitions or capital expenditures of investment property, property and equipment and intangible assets, which have not been recognised in the financial statements, are as follows: £m £m
Later than 1 year and not later than 5 years 386 393 Later than 5 years 873 914
Notes to the consolidated financial statements continued 48 – Cash flow statement (a) The reconciliation of profit/(loss) before tax to the net cash inflow from operating activities is: £m £m
Cash at bank and in hand 4,087 3,530 Cash equivalents 10,455 10,227
Available capital resources CGNU CULAC NUL&P Total UK life Other Total with-profit with-profit with-profit with-profit UK life UK life Overseas life Total life Other 2006 2005 fund fund fund3 funds operations operations operations operations operations4 Total Total £m £m £m £m £m £m £m £m £m £m £m
Non-participating 1. Other sources of capital include Subordinated debt of £2,937 million issued by Aviva and £153 million of other qualifying capital issued by Dutch, Italian and US subsidiary undertakings.
The regulatory and valuation admissibility restrictions for 2005 have been changed following a revised application of the technical rules. This has increased total capital resources by £4.4 billion, all attributable to life operations.
The analysis of movements in capital provides an explanation of the movement in available capital of the Group’s life business for the year. This analysis is intended to give an understanding of the underlying causes of changes in the available capital of the Group’s life business, and provides a distinction between some of the key factors affecting the available capital.
After effecting the year end transfer to shareholders, the UK with-profit funds’ available capital of £6.9 billion (2005: £5.2 billion) can only be used to provide support for UK with-profit business and is not available to cover other shareholder risks. This is comfortably in excess of the required capital margin and, therefore, the shareholders are not required to provide further capital support to this business.
For the remaining life and general insurance operations, the total available capital amounting to £12.6 billion (2005: £12.8 billion) is significantly higher than the minimum requirements established by regulators and, in principle, the excess is available to shareholders. In practice, management will hold higher levels of capital within each business operation to provide appropriate cover for risk.
2. These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within the realistic liabilities is £0.5 billion, £0.7 billion and £3.0 billion for CGNU life, CULAC and NUL&P respectively. (31 December 2005: £0.7 billion, £0.9 billion and £3.4 billion for CGNU life, CULAC and NUL&P respectively).
3. The risk capital margin (RCM) is 4.2 times covered by the orphan estate (31 December 2005: 2.7 times).
All businesses hold sufficient available capital to meet their capital resource requirement.
The available capital resources in each regulated entity are generally subject to restrictions as to their availability to meet requirements that may arise elsewhere in the Group. The principal restrictions are: Financial statements continued
O therinform ation Aviva plc Annual Report and Accounts 2006 197 49 – Capital statement continued (i) UK with-profit funds – (CGNU Life, CULAC and NUL&P) – any available surplus held in each fund can only be used to meet the requirements of the fund itself or be distributed to policyholders and shareholders. With-profit policyholders are entitled to at least 90% of the distributed profits while the shareholders receive the balance. The latter distribution would be subject to a tax charge, which is met by the fund in the case of CGNU Life, CULAC and NUL&P.
Regulatory impact on risk and risk assessments Where the Group’s long-term savings businesses have written insurance products where the majority of investment risks are borne by its policyholders, these risks are actively and prudently managed in order to satisfy the policyholders’ risk and reward objectives. In addition, the Group’s worldwide insurance operations are subject to numerous local regulatory requirements that prescribe the type, quality, and concentration of investments, and the level of assets to be maintained in local currency in order to meet local insurance liabilities. These requirements help to maintain the Group’s market risk levels at an acceptable level in each of the jurisdictions in which it operates.
At business unit level, equity price risk is actively managed in order to mitigate anticipated unfavourable market movements where this lies outside the risk appetite of the fund concerned. In addition local asset admissibility regulations require that business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdings of unquoted equity securities.
O therinform ation Aviva plc Annual Report and Accounts 2006 199 50 – Risk management continued Interest rate risk Interest rate risk arises primarily from the Group’s investments in long-term debt and fixed income securities, which are exposed to fluctuations in interest rates. Exposure to interest rate risk is monitored through several measures that include Value-at-Risk analysis, position limits, scenario testing, stress testing and asset and liability matching using measures such as duration.
Interest rate risk also exists in products sold by the group, in particular from policies that carry investment guarantees on early surrender or at maturity, where claim values can become higher than the value of backing assets when interest rates rise or fall. The Group manages this risk by adopting close asset liability matching criteria, to minimise the impact of mismatches between the value of assets and liabilities from interest rate movements. However where any mismatch is within our risk appetite, the impact is monitored through economic capital measures such as ICA.
On short-term business such as general insurance business the Group requires a close matching of assets and liabilities by duration to minimise this risk.
At 31 December 2006, the Group had entered into a number of interest rate swap agreements to mitigate the effects of potential adverse interest rate movements, and to enable close matching of assets and liabilities.
Currency risk The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately half of the Group’s premium income arises in currencies other than sterling and the Group’s net assets are denominated in a variety of currencies, of which the largest are euro, sterling, and US dollars. The Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group’s business and meet local regulatory and market requirements.
The Group’s foreign exchange policy requires that each of the Group’s subsidiaries maintain sufficient assets in their local currencies to meet local currency liabilities. Therefore, capital held by the Group’s business units should be able to support local business activities regardless of foreign currency movements. However, such movements may impact the value of the Group’s consolidated shareholders’ equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. The Group’s foreign exchange policy is to manage these exposures by aligning the deployment of capital by currency, with the Group’s regulatory capital requirements by currency. Limits are set to control the extent to which the deployment of capital is not aligned fully with the Group’s capital requirement for each major currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set.
At 31 December 2006, the Group’s total equity deployment by currency was: Sterling Euro US$ Other Total £m £m £m £m £m
The Group has minimal exposure to currency risk from financial instruments held by Business Units in currencies other than their functional currencies, as nearly all such holdings are backing either unit-linked or with-profit contract liabilities. For this reason, no sensitivity analysis is given for these holdings.
(c) Credit risk Credit risk is the risk of loss in the value of financial assets due to counterparties failing to meet all or part of their obligations. The Group’s management of credit risk includes monitoring exposures at a Group level and requiring business units to implement local credit risk policies. The local business unit credit risk policies involve the establishment and operation of specific risk management committees and the detailed reporting and monitoring of the financial asset portfolio against pre-established risk criteria. Large individual counterparty exposures exceeding £25 million are aggregated and monitored at Group level against centrally-set limits reflecting the credit ratings by companies such as Standard & Poor’s. In addition, the Group evaluates the concentration of exposures by industry sector and geographic region through the Group Credit committee.
The following table provides information regarding the aggregated credit risk exposure, for financial assets with external credit ratings, of the Group at 31 December 2006.
Reinsurance credit exposures The Group is exposed to concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures and the impact from reinsurer default is measured regularly, in particular through the ICA tests, and is managed accordingly. Both the Credit committee and Reinsurance Security committee have a monitoring role over this risk. The Group’s largest reinsurance counterparty is National Indemnity Corporation, a member of the Berkshire Hathaway Group. At 31 December 2006 the reinsurance asset recoverable from National Indemnity Corporation was £1.3 billion. This exposure is monitored on a regular basis with the forecast to completion monitored for any shortfall in the claims history to verify that the contract is progressing as expected and that no further exposure for the Group will arise.
In the event of a catastrophic event, the counterparty exposure to a single reinsurer is estimated not to exceed 1.0% of shareholders’ equity.
Carrying value Neither Financial assets in the past due 6 months– Greater than that have been balance sheet nor impaired 0–3 months 3–6 months 1 year 1 year impaired £m
Receivables and other financial assets 94.6% 4.4% 0.5% 0.3% 0.2% – 7,706
The fair value of collateral held against loans that are past due or impaired at 31 December 2006 was £61 million (2005: £130 million). This predominantly consists of commercial properties.
Notes to the consolidated financial statements continued 50 – Risk management continued (d) Insurance risk (i) Life insurance risk Type of risk Life insurance risk in the Group arises through its exposure to mortality and morbidity insurance and exposure to worse than anticipated operating experience on factors such as persistency levels and management and administration expenses.
Risk management The Group has developed a life insurance risk policy and guidelines on the practical application of this policy. Individual life insurance risks are managed at a business unit level.
The management of life insurance risk is undertaken primarily in business units but is also monitored at Group level. The impact of life insurance risks is monitored by the business units as part of the control cycle of business management. Exposure is monitored through the assessment of liabilities, the asset liability management framework, profit reporting (under both IFRS and EEV), financial condition reporting, and the ICA process. Significant insurance risks will be reported through the Group Risk Monitoring framework and overseen by the Life Insurance Risk Committee. At Group level the overall exposure to life insurance risk is measured through the ICA, FCRs, and other management reporting.
The committee has also developed guidance for business units on management of a number of areas of life insurance risk to ensure best practice is shared throughout the group and common standards are adopted.
Persistency risk is managed at a business unit level through frequent monitoring of company experience, benchmarked against local market information. Where possible the financial impact of lapses is reduced through appropriate product design. The Group Life insurance Risk Committee has developed guidelines on persistency management.
(ii) General insurance risk Type of risk General insurance risk in the Group arises from: – Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations; – Unexpected claims arising from a single source; – Inaccurate pricing of risks when underwritten; – Inadequate reinsurance protection or other risk transfer techniques; and
The majority of the general insurance business underwritten by the Group is of a short tail nature such as motor, household and commercial property insurances. The Group’s underwriting strategy and appetite is agreed by the Executive Committee and communicated via specific policy statements and guidelines. Like life insurance risk, General Insurance risk is managed at business unit level and Group level.
The General Insurance Risk Committee monitors and develops the management of insurance risk in the general insurance business units, and assesses the aggregate risk exposure. It is responsible for the development, implementation, and review of the Group policies for underwriting, claims handling, reinsurance and reserving that operate within the Group risk management framework. The implementation of these policies and the management of these risks is supported by sub-committees for each of these four areas of risk.
Notes to the consolidated financial statements continued 50 – Risk management continued Actuarial management The adequacy of the Group’s general insurance claims provisions is ultimately overseen by the Reserving Committee, which covers both life and general insurance reserving. Actuarial claims reserving is conducted by local actuaries in the various general insurance business units according to the General Insurance Reserving policy. The General Insurance Risk Committee monitors and maintains the General Insurance Reserving policy, and conducts quarterly reviews of the Group’s general insurance claims provisions, and their adequacy. The reviews are conducted under the direction of the Aviva General Insurance Actuarial Director and include peer reviews of the business unit’s own conclusions as well as independent analysis to confirm the reasonableness of the local reviews. A number of business units also have periodic external reviews by local consultant actuaries (often as part of the local regulatory requirement).
This definition is intended to include all risks to which the Group is exposed, other than the financial risks described previously, and strategic and Group risks that are considered elsewhere. Hence, operational risks include for example, information technology, information security, human resources, project management, outsourcing, tax, legal, fraud and compliance risks.
In accordance with Group policies, business unit management has primary responsibility for the effective identification, management, monitoring and reporting of risks to the business unit executive management team and to Group as part of the quarterly risk reporting process. Each operational risk is assessed by considering the potential impact and the probability of the event occurring. Impact assessments are made against financial, operational and reputational criteria.
Business unit risk management and governance functions are responsible for implementing the Group risk management methodologies and frameworks to assist line management in this work. They also provide support and independent challenge on the completeness, accuracy and consistency of risk assessments, and the adequacy of mitigating action plans. As a result, the business unit executive management team satisfies itself that all material risks falling outside our risk appetite are being mitigated, monitored and reported at an appropriate level. Any risks with a high impact level are continually monitored centrally.
The Group Operational Risk Committee (ORC) has been established and determines the risk appetite that the group can work within for these types of risk, assesses and monitors overall operational risk exposures, identifying any concentrations of operational risk across the group, and in particular verifies that mitigating action plans are implemented.
Total Within 1 year 1–5 years 5–15 years Over 15 years £m £m £m £m £m
For long-term business in particular, sensitivities of EEV performance indicators to changes in both economic and non-economic experience are continually used to manage the business and to inform the decision making process. More information on EEV sensitivities can be found in the presentation of results on an EEV basis in the supplementary notes to this report.
Some results of sensitivity testing for long-term business, general insurance and health business and the fund management and non-insurance business are set out below. For each sensitivity test the impact of a reasonably possible change in a single factor is shown, with other assumptions left unchanged. Sensitivity Factor Description of sensitivity factor applied
Assets backing life shareholders’ funds (280) 305 60 (60) – – –
Assets backing life shareholders’ funds (320) 345 95 (95) – – –
Interest Interest Equity/ Equity/ Assurance Annuitant rates rates property property Expenses mortality mortality +1% –1% +10% -10% +10% +5% –5%
Investment non-participating (5) – 35 (35) – – – Assets backing life shareholders’ funds (240) 255 90 (90) – – –
O therinform ation Aviva plc Annual Report and Accounts 2006 209 51 – Derivative financial instruments The Group uses cash flow, fair value and net investment hedges to mitigate risk, as detailed below.
(b) Fair value hedges The Group had no fair value hedge activity at 31 December 2006 (2005: nil).
(c) Net investment hedges To reduce the Group’s exposure to foreign currency risk, the Group has designated a portion of its Euro and US dollar denominated debt as a hedge of the net investment in its European and American subsidiaries. The carrying value of the debt at 31 December 2006 was £1,875 million (2005: £1,921 million) and its fair value at that date was £1,973 million (2005: £2,070 million).
(d) Non-hedge derivatives The Group’s non-hedge derivative activity at 31 December 2006 was as follows: Contract/ Contract/ notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability £m £m £m £m £m £m
Within one year 162 423 Between one and two years 63 8 Between two and three years 7 8 Between three and four years 7 8 Between four and five years 18 8 After five years 214 144 52 – Assets under management The total Group assets under management are: £m £m
Total assets included in the consolidated balance sheet 292,722 263,447 Additional value of internally-generated in-force long-term business 6,794 6,454 Third party funds under management
53 – Related party transactions The Group received income from related parties from transactions made in the normal course of business. Loans to related parties are made on normal arm’s length commercial terms.
Associates 50 1 47 12 Joint ventures 16 241 13 128 Employee pension schemes 6 – 3 –
The related parties’ receivables are not secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit terms. Details of guarantees, indemnities and warranties provided on behalf of related parties are given in note 46(f).
There were no services provided by related parties in either 2005 or 2006.
Salary and other short-term benefits 32 24 Post-employment benefits 1 1 Equity compensation plans 16 9 Termination benefits 4 –
Financial statements of the Company Income statement For the year ended 31 December 2006
Expenses Operating expenses C (201) (160) Interest payable to Group companies (1,341) (238) Interest payable on borrowings (215) (224)
Fair value gains on investments in subsidiaries B 4,075 1,521 Fair value gains transferred to income statement (94) – Aggregate tax effect 15 13 Actuarial losses on pension scheme (4) –
Net income recognised directly in equity 3,992 1,534 (Loss)/profit for the year (24) 1,347
Balance at 1 January 18,746 15,812 Total recognised income and expense for the year 3,968 2,881 Dividends and appropriations 14 (762) (657) Issue of share capital for the acquisition of AmerUs (2005: RAC plc) net of transaction costs 3a 892 530 Other issues of share capital, net of transaction costs 27 43 59 Shares issued in lieu of dividends 33 203 100 Reserves credit for equity compensation plans 9 48 22 Other movements (2) (1)
Assets Non-current assets Investments in subsidiaries B 27,886 22,919 Investment in joint venture 17c 35 22 Loans owed by subsidiaries 2,641 3,612 Deferred tax assets D 9 2 Current tax assets 545 200
Current assets Loans owed by subsidiaries 645 869 Other amounts owed by subsidiaries 3,163 – Other assets 78 55 Cash and cash equivalents 5 2
Equity Ordinary share capital 27 641 599 Preference share capital 30 200 200
Called up capital 841 799 Share premium account 27b 1,189 1,167 Merger reserve E 735 735 Investment valuation reserve E 17,303 13,322 Equity compensation reserve E 73 43 Retained earnings E 2,005 1,690 Direct capital instrument 31 990 990
Where applicable, the accounting policies of the Company are the same as those of the Group on pages 104 to 113. The notes (identified alphabetically) on pages 214 to 218 are an integral part of these separate financial statements. Where the same items appear in the Group financial statements, reference is made to the notes (identified numerically) on pages 120 to 210.
O therinform ation Aviva plc Annual Report and Accounts 2006 213
All the Company’s operating and investing cash requirements are met by subsidiary companies and settled through intercompany loan accounts. As the direct method of presentation has been adopted for these activities, no further disclosure is required. In respect of financing activities, the following items pass through the Company’s own bank accounts.
B – Investments in subsidiaries (i) Movements in the Company’s investments in its subsidiaries are as follows: £m £m
As explained in note 3(a)(iv) of the consolidated financial statements, the Company raised £892 million, net of transaction costs, in July 2006 through the placing of new ordinary shares in connection with the acquisition of AmerUs Group Co. On 2 November 2006, the Company transferred this sum to AGH in return for the issue to it of further new shares in AGH for this amount, which is also included in Additions in the table above.
On 31 July 2006, the Company transferred its entire shareholding in CGNU Holdings (Australia) Limited (renamed Undershaft (No 1) Limited on 12 July 2006) at its fair value to Norwich Union Holdings Limited (since renamed Aviva Group Holdings Limited (AGH)). This gave rise to a profit on disposal of £94 million. The consideration of £670 million was satisfied by the issue of new shares in AGH to the Company for this amount, which is included in Additions in the table above.
Staff costs and other employee related expenditure 87 62 Other operating costs 71 120 Net foreign exchange losses/(gains) 43 (22)
Defined benefit schemes (see (iii) below) 6 7 Defined contribution schemes 2 –
Full disclosure on the Group’s pension schemes is given in note 42.
Tax calculated at standard UK corporation tax rate of 30% (2005: 30%) 163 (388) Adjustment to tax charge in respect of prior years 76 30 Non-assessable dividends 259 513 Disallowable expenses (12) (23) Non-taxable profit on sale of subsidiary 28 – Deferred tax asset not recognised 7 (55) Other – (23)
Financial statements of the Company continued Notes to the Company financial statements continued
Net asset at 1 January 2 7 Amounts credited/(charged) to profit 7 (5)
The Company has unrecognised tax losses of £nil (2005: £167 million) to carry forward against future taxable profits.
Arising in the year: Profit for the year – – – 1,347 Fair value gains on investments in subsidiaries – 1,521 – – Dividends and appropriations – – – (657) Reserves credit for equity compensation plans – – 22 – Shares issued in lieu of dividends – – – 100 Merger relief on acquisition of RAC plc 508 – – – Aggregate tax effect – – – 13 Other movements – – – (1)
Arising in the year: Loss for the year – – – (24) Fair value gains on investments in subsidiaries – 4,075 – – Fair value gains transferred to income statement – (94) – – Actuarial losses on pension schemes – – – (4) Dividends and appropriations – – – (762) Reserves credit for equity compensation plans – – 48 – Shares issued in lieu of dividends – – – 203 Issue of share capital under equity compensation scheme – – (18) 18 Merger relief on acquisition of AmerUs (note 3 (a)(iv)) 871 – – – Transfer to retained earnings on realisation of merger reserve (871) – – 871 Aggregate tax effect – – – 15 Other movements – – – (2)
O therinform ation Aviva plc Annual Report and Accounts 2006 217
Total contractual undiscounted cash flows 3,900 3,055 6,955 3,540 3,515 7,055
Where subordinated debt is undated, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £68 million (2005: £69 million).
Further details of these borrowings can be found in note 43.
G – Derivative financial instruments Non-hedge derivatives The Company’s non-hedge derivative activity at 31 December 2006 was as follows: Contract/ Contract/ notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability £m £m £m £m £m £m
J – Related party transactions The Company receives dividend and interest income from subsidiaries and pays interest and fee expense to those subsidiaries in the normal course of business. These activities are reflected in the table below.
Principal Interest Total Principal Interest Total £m £m £m £m £m £m
Other related party balances comprise dividend and interest receivable and payable, as well as inter-company balances for fees and other transactions in the normal course of business.
O therinform ation Aviva plc Annual Report and Accounts 2006 219
We have audited the alternative method of reporting long-term business on pages 220 to 243 in respect of the year ended 31 December 2006, which comprises a European Embedded Value basis Summarised Consolidated Income Statement, Consolidated Statement of Recognised Income and Expense, Summarised reconciliation of movements in consolidated shareholders’ funds, Summarised Consolidated Balance Sheet and the related notes on pages 220 to 243. The alternative method of reporting long-term business has been prepared in accordance with the European Embedded Value Principles published by the CFO Forum in May 2004 and the Additional Guidance on European Embedded Value Disclosures published by the CFO Forum in October 2005 as described on, and using the methodology and assumptions set out on, pages 224 to 226.
Summarised consolidated income statement – EEV basis For the year ended 31 December 2006 1m £m £m
4,772 Operating profit before tax attributable to shareholders’ profits 3,245 2,904 Adjusted for the following: (138) Impairment of goodwill (94) (43) (68) Amortisation and impairment of intangibles (46) (21)
9 Financial Services Compensation Scheme and other levies 6 – 688 Variation from longer term investment return 468 2,805 987 Effect of economic assumption changes 671 (406) 237 Profit on the disposal of subsidiaries and associates 161 153
2. Excludes the proportion of the results of Norwich Union Life Services relating to the services provided to the UK life business. These results are included within the Life EEV operating return. Other subsidiaries providing services to our life businesses do not materially impact the Group results.
Profit after tax for the year on an EEV basis, attributable to ordinary shareholders of Aviva plc 154.6c Basic (pence per share) 105.1p 146.3p 152.8c Diluted (pence per share) 103.9p 145.1p
O therinform ation Aviva plc Annual Report and Accounts 2006 221
Consolidated statement of recognised income and expense – EEV basis For the year ended 31 December 2006 1m £m £m 62 Fair value gains on AFS securities, owner-occupied properties and hedging instruments 42 92 (26) Fair value (gains)/losses transferred to profit (18) 14 (3) Impairment losses on revalued assets (2) (45)
(168) Actuarial (losses) on pension schemes (114) (547) (590) Foreign exchange rate movements (401) (44)
(112) Minority share of dividends declared in the year (75) (70) 228 Minority interest in acquired/(disposed) subsidiaries 153 (36) 72 Reserves credit for equity compensation plans 48 22
Equity 957 Ordinary share capital 641 599 10,174 Additional retained profit on an EEV basis 6,817 6,431 26,166 Equity attributable to ordinary shareholders of Aviva plc 17,531 14,899 1,776 Preference share capital and direct capital instrument 1,190 1,190
– Liabilities of operations classified as held for sale – 145 447,039 Total equity and liabilities 299,516 269,901
Liabilities of the long-term business (241,892) – (241,892) (215,624) – (215,624) Liabilities of the general insurance and other businesses – (36,766) (36,766) – (36,731) (36,731)
Net assets on an EEV basis2 19,663 1,195 20,858 15,598 1,948 17,546
IFRS basis retained earnings 5,082 2,597 Additional EEV basis retained profit 6,817 6,431
Preference share capital and direct capital instrument 1,190 1,190 Minority interests 2,137 1,457
Long-term business net assets on an EEV basis 19,663 15,598 3. Effective from 31 December 2005, the value of the Aviva Staff Pension Scheme deficit has been notionally allocated between segments, based on current funding and the life proportion has been included within the long-term business net assets on an EEV basis.
4. Effective from 31 December 2006, the pension fund deficit notionally allocated to long-term business is net of the proportion of funding borne by the UK with-profits funds.
Basis of preparation – EEV basis The summarised consolidated income statement and balance sheet on pages 220 to 222 present the Group’s results and financial position for the life and related businesses on the European Embedded Value (EEV) basis and for its non-life businesses on the International Financial Reporting Standards (IFRS) basis. The EEV methodology adopted is in accordance with the EEV Principles introduced by the CFO Forum in May 2004 and the Additional Guidance on EEV Disclosures published by the CFO Forum in October 2005 applicable for financial reporting for the year ending 31 December 2006.
In the Directors’ opinion, the EEV basis provides a more accurate reflection of the performance of the Group’s life and related operations year on year than results presented under the IFRS basis. The Directors consider that the EEV methodology represents a more meaningful basis of reporting the underlying value of the Group’s life and related businesses and the underlying drivers of performance. This basis allows for the impact of uncertainty in the future investment returns more explicitly and is consistent with the way the business is priced and managed.
– expected renewals on new contracts and expected future contractual alterations to new contracts.
For products sold to individuals, premiums are generally considered to represent new business in certain circumstances, including where a new contract has been signed, or where underwriting has been performed. Renewal premiums include contractual renewals, non-contractual variations that are reasonably predictable and recurrent single premiums that are pre-defined and reasonably predictable.
EEV methodology continued Risk discount rates Under the EEV methodology, a risk discount rate (RDR) is required to express a stream of expected future distributable profits as a single value at a particular date (the present value). It is the interest rate that an investment equal to the present value would have to earn in order to be able to replicate exactly the stream of future profits. The RDR is a combination of a risk free rate to reflect the time value of money plus a risk margin to make prudent allowance for the risk that experience in future years may differ from that assumed. In particular, a risk margin is added to allow for the risk that expected additional returns on certain asset classes (e.g. equities) are not achieved.
The RDR is only one component of the overall allowance for risk in EEV calculations. Risk is also allowed for in the cost of holding statutory reserving margins, additional required capital and in the time value of options and guarantees. Hence to derive the RDR the Group WACC is adjusted to reflect the average level of required capital assumed to be held, and to reflect the explicit valuation of the time value of options and guarantees.
Following the review of the risk margin at 31 December 2006, the Directors have decided to leave the life embedded value risk margin unchanged at 2.7%. The market assessed risk factor (beta) has reduced in recent periods, implying a reduction of the risk in the life business. Management will keep the risk margin under review and will make adjustments as necessary to reflect past trends and future expected trends in the riskiness of the life business, based on the beta.
The sensitivity disclosures on page 240 indicate the impact to the embedded value that would arise from a change in the risk discount rate.
As the EEV methodology incorporates the impact of profits and losses arising from subsidiary companies providing administration, investment management and other services to the Group’s life companies, the equivalent profits and losses have been removed from the relevant segment (non insurance or fund management) and are instead included within the results of life and related businesses. In addition, the underlying basis of calculation for these profits has changed from the IFRS basis to the EEV basis.
New business contribution (after the effect of required capital) 683 612 Profit from existing business
Life EEV operating return before tax 2,033 1,814 Investment return variances 319 2,288 Effect of economic assumption changes 671 (406)
New business contribution The following tables set out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out on page 224.
Total (before the effect of required capital) 3,258 2,745 25,852 22,246 892 808 3.5% 3.6%
1. New business margin represents the ratio of new business contribution before the effect of required capital to PVNBP, expressed as a percentage.
New business contribution continued New business contribution before the effect of required capital includes minority interests in 2006 of £175 million (2005: £156 million). This comprises minority interests in France of £24 million (2005: £19 million), Ireland £3 million (2005: £nil), Italy £41 million (2005: £35 million), Netherlands £9 million (2005: £10 million), Poland £4 million (2005: £2 million), Spain £93 million (2005: £89 million), Other Europe nil (2005: £1 million) and Asia £1 million (2005: nil).
Total (after the effect of required capital) 25,852 22,246 683 612 2.6% 2.8%
New business contribution after the effect of required capital includes minority interests in 2006 of £142 million (2005: £120 million). This comprises minority interests in France of £15 million (2005: £10 million), Ireland £1 million (2005: £nil), Italy £29 million (2005: £21 million), Netherlands £7 million (2005: £7 million), Poland £3 million (2005: £2 million), Spain £86 million (2005: £79 million), Other Europe nil (2005: £1 million) and Asia £1 million (2005: nil).
Netherlands (including Belgium, Germany and Luxembourg) (9) 2 Rest of Europe 29 13
O therinform ation Aviva plc Annual Report and Accounts 2006 231
Life EEV operating return includes minority interests in 2006 of £247 million (2005: £216 million). This comprises minority interests in France of £33 million (2005: £24 million), Ireland £(11) million (2005: £nil), Italy £60 million (2005: £52 million), Netherlands £30 million (2005: £17 million), Poland £25 million (2005: £18 million), Spain £108 million (2005: £103 million), Other Europe £nil (2005: £2 million) and Asia £2 million (2005: £nil).
2. The impact of the operating assumption change reflecting the UK with-profits funds contribution to the UK pension scheme deficit funding has been removed from the Life EEV analysis as the pension fund deficit notionally allocated to long-term business net assets on an EEV basis is net of the proportion of funding borne by the UK withprofits funds.
Analysis of movement in life and related businesses embedded value continued The embedded value of business acquired in 2006 of £1,434 million represents the embedded value of Ark Life Assurance Company Limited, Eagle Insurance Company Limited and AmerUs Group Co.
Required capital has increased in the year by £866 million. The movement comprises an increase of £553 million in relation to new business written, a reduction of £188 million in relation to in-force business, £607 million additional in-force required capital relating to acquisitions during the year and a reduction of £106 million in relation to movements in foreign exchange rates. The decrease in the in-force required capital includes the impact of PS06/14 on the amount of shareholder capital required to support the business and the effect of the increase in long-term interest rates, which has decreased statutory reserves and, therefore, capital requirements.
Life EEV return after tax 1,499 1,052 2,551 Exchange rate movements (54) (45) (99) Embedded value from business disposed of (19) (19) (38) Amounts injected into life and related businesses 266 – 266 Amounts released from life and related businesses (751) – (751) Transfer to life and related businesses from other segments 23 – 23 UK Life pension fund deficit transferred to analysis of net assets on an EEV basis2 – 147 147
Segmental analysis of the components of life EEV operating return Other United
5. Maintenance expenses in UK relate to Morley’s change in profit margin. The change in Delta Lloyd is driven by improved asset management profitability. The adverse movement in the US is due to a reassessment of expenses in Boston-based operations.
Year ended UK France Ireland Italy Netherlands Poland Spain Europe States Other Total
Life EEV operating return before tax 589 321 20 96 349 132 214 (6) 25 74 1,814 1. Exceptional expenses in the UK reflect £47 million relating to ongoing transformation of the life business and £101 million of other exceptional and project costs associated with regulatory change and strategic initiatives.
3. Lapse experience in the UK has been worse than assumed and mainly relates to bonds and pension business. In Ireland, the adverse persistency has mainly arisen on unit-linked pensions business.
4. In the UK, other experience profits includes better than assumed default experience on corporate bonds and commercial mortgages.
Segmental analysis of life and related businesses embedded value Value of
Netherlands (including Belgium, Germany and Luxembourg) 1,067 1,701 1,461 (362) 3,867
1. Required capital is shown net of implicit items permitted by local regulators to cover minimum solvency margins.
2. AmerUs holding company debt amounting to £362 million at 31 December 2006 has been included with non-insurance.
The shareholders’ net worth is the market value of the shareholders’ funds and the shareholders’ interest in the surplus held in the non-profit component of the long-term business funds, determined on a statutory solvency basis and adjusted to add back any non-admissible assets. Required capital, net of implicit items, of £5,314 million at 31 December 2006 (31 December 2005: £4,448 million) is included within the net worth.
The embedded value at the end of 2006 includes minority interests of £1,387 million (2005: £1,000 million). This comprises minority interests in France of £162 million (2005: £148 million), Ireland £216 million (2005: nil), Italy £413 million (2005: £365 million), Netherlands £102 million (2005: £70 million), Poland £118 million (2005: £107 million), Spain £366 million (2005: £310 million) and Other £10 million (2005: nil).
The time value of options and guarantees (TVOG) is most significant in the United Kingdom, France, the Netherlands and the United States. In the United Kingdom, this relates mainly to non-market value adjustment (MVA) guarantees on unitised with-profit business and guaranteed annuity rates. In France, this relates mainly to guaranteed crediting rates and surrender values on traditional business including the AFER fund. In the Netherlands, this relates mainly to maturity guarantees on unit-linked products and interest rate guarantees on traditional individual and Group profit sharing business. In the United States, this relates to crediting rate, death benefit and surrender on life business.
New business contribution including effect of required capital 541 142 683 612
O therinform ation Aviva plc Annual Report and Accounts 2006 237
Principal economic assumptions – deterministic calculations Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting period. The same margins are applied on a consistent basis across the Group to gross risk-free yields to obtain investment return assumptions for ordinary shares and property and to produce risk discount rates. Additional country-specific risk margins are applied to smaller businesses to reflect additional economic, political and business-specific risk, which result in the application of risk margins ranging from 3.7% to 8.7% in our eastern European and Asian business operations. Expense inflation is derived as a fixed margin above a local measure of long-term price inflation. Risk free rates and price inflation have been harmonised across territories within the Euro currency zone, except for expense inflation in Ireland where significant differences remain. Required capital is shown as a multiple of the EU statutory minimum solvency margin or equivalent.
Investment return assumptions are generally derived by major product class, based on hypothecating the assets at the valuation date. Future assumed reinvestment rates are consistent with implied market returns at 31 December 2006. Rates have been derived using rates from the current yield curve at a duration based on the term of the liabilities, or directly from forward yield curves where considered appropriate. Assumptions about future investment mix are consistent with long-term plans. In most cases, the investment mix is assumed to continue unchanged throughout the projection period. The changes in assumptions between reporting dates reflect the actual movements in risk free yields in the United Kingdom, the Eurozone and other territories. The principal economic assumptions used are as follows: UK France
For service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company. Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for credit risk. Required capital in the United Kingdom is 150% EU minimum for Norwich Union Annuity Limited and 100% for other companies. Required capital in Spain is 125% EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies. The level of required capital for the US business is 250% of the risk based capital at the company action level set by the National Association of Insurance Commissioners. The required capital is equivalent to 5% of the insurance liabilities on a local regulatory basis which is broadly equivalent to the required capital we hold for our main European businesses.
This section describes the models used to generate future investment simulations, and gives some sample statistics for the simulations used. Two separate models have been used, for the UK businesses and for International businesses, as each of these models better reflect the characteristics of the businesses.
Government Bonds 4.6% 3.25-4.5%3 1. Means have been calculated by accumulating a unit investment for the required number of years in each simulation, averaging the accumulation across all simulations, and converting the result to an equivalent annual rate (by taking the nth root of the average accumulation minus 1).
O therinform ation Aviva plc Annual Report and Accounts 2006 239
Borrowings excluding non-recourse funding – EEV basis 5,069 4,710 Less: Operational financing by businesses (874) (900)
External debt and subordinated debt – EEV basis 4,195 3,810 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 – EEV basis 5,635 5,250 Effect of marking these instruments to market 356 618
1% increase 1% decrease 1% increase 1% decrease As reported in discount in discount in interest in interest
Netherlands (including Belgium, Germany and Luxembourg) 3,867 (165) 195 50 (210)
1% increase 1% decrease 1% increase 1% decrease New business contribution As reported in discount in discount in interest in interest before required capital (gross of tax) on page 228 rates rates rates rates
Sensitivity analysis – non-economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2006 and the new business contribution before the effect of required capital for 2006 to the following changes in non-economic assumptions: – 10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of £10pa would represent an expense assumption of £9pa). Where there is a “look through” into service company expenses, the fee charged by the service company is unchanged while the underlying expense decreases; – 10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% pa would represent a lapse rate of 4.5%pa); – 5% decrease in both mortality and morbidity rates disclosed separately for life assurance and annuity business.
Netherlands (including Belgium, Germany and Luxembourg) 3,867 75 15 15 (45)
Netherlands (including Belgium, Germany and Luxembourg) 56 10 9 5 (2)
United Kingdom Aviva Employment Services Limited Aviva Insurance Limited Aviva International Insurance Limited CGNU Life Assurance Limited CGU Bonus Limited CGU Underwriting Limited Commercial Union Life Assurance Company Limited Gresham Insurance Company Limited HPI Limited Lifetime Group Limited London & Edinburgh Insurance Group Limited Morley Fund Management Limited Morley Pooled Pensions Limited Norwich Union Annuity Limited Norwich Union Central Services Limited Norwich Union Collective Investments Limited Norwich Union Consumer Products Limited Norwich Union Equity Release Limited Norwich Union Healthcare Limited Norwich Union Insurance Limited Norwich Union Insurance Services Limited Norwich Union Investment Funds Limited Norwich Union Life (RBS) Limited Norwich Union Life & Pensions Limited Norwich Union Life Services Limited Norwich Union Risk Services Limited NUI Investments Limited RAC Auto Windscreens Limited RAC Insurance Limited RAC Motoring Services RAC plc The British School of Motoring Limited
Canada Aviva Canada Inc and its principal operating subsidiaries: Aviva Insurance Company of Canada Pilot Insurance Company Traders General Insurance Company
Germany Delta Lloyd Deutschland AG and its principal subsidiary: Delta Lloyd Lebensversicherung AG (99.5%)
Ireland Hibernian Group plc and its principal subsidiaries: Ark Life Assurance Company Limited Hibernian General Insurance Limited Hibernian Life & Pensions Limited
Poland Commercial Union Polska – Towarzystwo Ubezpieczen Ogolnych SA (90.0%) Commercial Union Polska – Towarzystwo Ubezpieczen Na Zycie SA (90.0%) Commercial Union Powszechne Towarzystwo Emerytalne BPH CU WBK S.A. (75.0%)
Spain Aseguradora Valenciana SA, de Seguros y Reaseguros (Aseval) (50.0%) Aviva Vida y Pensiones, Sociedad Anonima de Seguros y Reaseguros Bia Galicia, de Seguros y Reaseguros SA (50.0%) Caja Espana Vida, Compania de Seguros y Reaseguros (50.0%) General Vida, Sociedad Agencia de Seguros, S.L. (25.0%) Unicorp Vida, Compania de Seguros y Reaseguros (50.0%)
United States AmerUs Group Co and its principal subsidiaries: American Investors Life Insurance Company, Inc. AmerUs Annuity Group Co. (AAG) AmerUs Life Insurance Company Aviva Capital Management Bankers Life Insurance Company of New York ILICO Holdings, Inc.
Aviva plc Annual Report and Accounts 2006 246Other information continued Aviva plc Annual Report and Accounts 2006
Consolidated Tax Vouchers Private shareholders who currently receive dividends paid directly into their bank or building society account receive one consolidated tax voucher each year instead of a voucher with each dividend payment, unless they request otherwise.
Scrip Dividend The Aviva Scrip Dividend Scheme (the “Scheme”) provides shareholders with the opportunity to receive their dividends in the form of new ordinary shares in the Company instead of cash. Shareholders who have not joined the Scheme but wish to do so should contact Lloyds TSB Registrars and request a mandate form. The completed mandate form will need to be received by Lloyds TSB Registrars no later than 18 April 2007 in order to be effective for the 2006 final dividend. Further details are included on the Company’s website www.aviva.com/scripdividend.
Share dealing The Company has arranged the following services that can be used to buy or sell Aviva shares. Alternatively, if shareholders hold a share certificate they can also use any bank, building society or stockbroker offering share dealing facilities to sell their shares. Shareholders in any doubt about buying or selling their shares should seek professional financial advice.
Share dealing facilities for UK shareholders/share account members – You can buy or sell shares via the internet or by telephone through Shareview Dealing, a share dealing service provided by Lloyds TSB
Registrars. For internet purchases and sales log on to www.shareview.co.uk/dealing and for telephone purchases and sales call 0870 850 0852 between 8.00am and 4.30pm, Monday to Friday. All 0870 numbers are charged at national rates, and are only available if you are calling from the UK. Lloyds TSB Registrars is authorised and regulated by the Financial Services Authority, registered number 119278.
– To buy or sell shares over the telephone, shareholders can contact Barclays Stockbrokers on 0870 549 3002 (for shareholders with a share certificate) or 0870 549 3001 (for shareholders with a share account statement). To check instructions and maintain high quality service standards, Barclays Stockbrokers may record and monitor calls. New Business Development hours are 8.00am and 6.00pm Monday to Friday, excluding Bank Holidays. Barclays Stockbrokers is authorised and regulated by the Financial Services Authority, registered number 124247.
Shareholder information Shareholder profile The categories of ordinary shareholders and the range and size of shareholdings as at 31 December 2006 are set out below: Analysis of shareholders No. of shareholders % No. of shares %
Useful contact details Detailed below are the contact details that shareholders may find useful if they have a query in respect of their shareholding.
Aviva Group www.aviva.com UK long-term savings and general insurance www.norwichunion.com Fund management www.morleyfm.com Aviva worldwide internet sites www.aviva.com/websites
Aviva plc Registered Office: St Helen’s, 1 Undershaft, London EC3P 3DQ
Board photography by Chris Moyse. Portrait photography by Arnhel de Serra.