02006: 30.00p * From continuing operations, including long-term savings result on a European Embedded Value (EEV) basis before adjusting items. ** Return based on opening equity shareholders' funds on an EEV basis. † From continuing operations, including share of associates' premiums. ‡ On an EEV basis.
Aviva is the world’s fifth largest* insurance group and the largest insurance services provider in the UK. We are one of the leading providers of life and pension products in Europe and are actively growing our long-term savings businesses in Asia Pacific and the USA. Our main activities are long-term savings, fund management and general insurance**.
Long-term savings £1,543m Fund management £31m General insurance £442m Other operations £(45)m £1,971m
Our new group chief executive, Andrew Moss, leads a management team based on a global structure of four regions – the UK, Europe, North America and Asia Pacific. We have refocused our strategic vision as “one Aviva, twice the value”. This expresses our commitment to embark upon the next stage of our development from an international group into a truly integrated, global business. We aim to derive the maximum benefit from all parts of the group by sharing our resources and expertise widely and by operating as a single organisation.
We have also set new cost saving targets for our UK and European businesses totalling £350 million. Our number one priority is to manage our existing assets effectively and efficiently, while continuing to invest for growth.
During the course of the year group executive directors Patrick Snowball and Tidjane Thiam left the group. I would like to thank both of them for their important contribution to our strategic thinking on the board and most recently for their leadership of our UK and European businesses. I would also like to pay tribute to Richard Whitaker, who has retired after serving the board as company secretary since 1998.
Allocate capital rigorously: Capital management will continue to be a key focus for Aviva going forward. Capital is treated as a scarce resource, and is allocated to provide the highest sustainable returns for shareholders. We continuously seek improvements in capital structure and efficiency.
– Announced Aviva Investors, designed to capitalise on the existing strengths of Aviva’s asset management businesses around the world
– Invest in new growth opportunities including new clients and new markets, e.g. China 2007 Progress What we achieved in 2007 against these priorities 2007 Measurement/KPIs How we measure progress against each strategic priority 2008 Priorities What we are focused on in 2008
– Developed a clear framework for capital allocation, based on strict financial, strategic, capital management and risk management evaluation criteria
Allocate capital rigorously: – Improved on 2006 customer scores, exceeding customer targets set to increase customer reach by: – Improving customer loyalty
† Return on equity shareholders’ funds is calculated using after-tax return based on operating profit, including long-term savings profit on a European Embedded Value (EEV) basis before adjusting items, and opening equity capital.
The operating results of our long-term savings, fund management, general insurance and other operations are discussed in detail in the regional sections of this report.
Group debt costs and other interest Group debt costs and other interest of £363 million (2006: £381 million) comprise internal and external interest on borrowings, subordinated debt and intra-group loans not allocated to local business operations. Net pension income is also included, being the expected return on pension scheme assets less the interest charge on pension scheme liabilities. Net income from the staff pension scheme fell to £75 million (2006: £77 million).
Short-term fluctuation in return on investments backing general insurance and health business (184) 149
Adjusted for the following: Variation from longer term investment return on long-term business (450) 319
In the USA, realised and unrealised losses on investments were driven by the widening of credit spreads on debt securities, while in the UK there was a negative investment variance on surplus assets backing annuity business due to interest rate changes.
Total UK sales were up 6% to £14,406 million (2006: £13,601 million), within this, life and pension sales were up 5% at £11,655 million (2006: £11,146 million) supported by significant increases in bonds and annuities. Investment sales of £2,751 million (2006: £2,455 million) were up 12% as we extended and diversified our fund offering and focused on improving the performance of our UK equity funds. Our share of sales from the joint venture with the Royal Bank of Scotland Group was up 36% to £1,587 million (2006: £1,169 million), benefiting from the impact of new products and an increase in the number of sales advisers.
On a post cost of capital basis, our new business contribution was 16% higher at £305 million (2006: £263 million) with a margin of 2.6% (2006: 2.4%).
To realise the potential in “one Aviva, twice the value”, we are transforming our UK general insurance business to improve the underlying performance of the portfolio and to be cost leaders in order to deliver benefits of scale consistent with our market leading position. Our strategy is to focus on insurance fundamentals to maximise returns through the insurance cycle. This means disciplined underwriting and pricing, controlling the impact of claims inflation and providing excellent customer service.
2007 was a tough year for our general insurance business in the UK as we experienced a combination of higher weather claims and competitive conditions in most lines of business. In particular it was a year that will be remembered for the summer flooding experienced in the north and west of England. Following the events in June and July last year, NUI helped over 45,000 households and 6,000 businesses get back on their feet after the floods, and has made interim or full payments to 99% of those affected. Supporting our customers when they need us most and to provide them with peace of mind is, of course, what NUI is here for. In response to these events we ensured a network of loss adjusters, contractors and claims teams were on site at the time (including our mobile advice centre manned by claims and repair specialists) and call centre staff numbers were doubled to deal with the extra calls we received.
(2006: £891 million) giving overall new business sales of £16,486 million (2006: £13,731 million).
The general insurance combined operating ratio remained stable at 99% (2006: 99%) with the claims ratio reflecting a continuation of favourable claims experience and strong control of costs. The underwriting result was £11 million (2006: £6 million) and total operating profit, including longer term investment return, progressed to
The outlook for 2008 remains positive although a slowing in the rate of Irish economic growth and greater uncertainty in the Irish property market is expected to reduce the rate of market growth. Hibernian is well placed to capture the market opportunities through its leading broker distribution and by building on the current momentum in the bank channel.
The outlook for 2008 is that the market will continue to remain challenging but the potential for Aviva Italy’s growth remains strong as it continues to develop its bancassurance relationships.
In December 2007, we agreed the sale of our health operations to O.W.M CZ Groep Zorgverkeraar U.A (CZ) with effect from 1 January 2009, in a transaction that will give Delta Lloyd the opportunity to sell life, pensions and general insurance products to CZ’s existing customer base from January 2008.
Major operating brands Aviva USA ranks first and second in the indexed life and indexed annuity markets, respectively
Looking ahead, we expect that the Canadian general insurance market will continue to experience low growth driven by a softening of commercial lines rates and greater stability for rates in personal lines. Motor insurance rate increases in Ontario will positively impact the outlook for premium and profit growth.
The global finance conference at the beginning of October gave the finance leadership team the chance to see the benefits of working together to deliver financial clarity and simplicity across the group. We are committed to creating a “One Finance” team and to play our part in achieving “one Aviva, twice the value”. Philip Scott Group finance director
Manage risk – The risk management framework and guidance was rolled out across the group during 2007
Our principal UK general insurance regulated subsidiaries are AII and Norwich Union Insurance (NUI). During 2007, NUI was transferred to become a subsidiary of the AII Group, bringing all of the UK general insurance operations under AII. The combined businesses of the AII Group have a strong solvency position as set out in the table below. On an aggregate basis the estimated excess solvency margin (representing the regulatory value of excess available assets over the required minimum margin) amounted to £3.7 billion (31 December 2006: £3.8 billion) after covering the minimum capital base of £5.5 billion (31 December 2006: £4.5 billion).
A de-risking strategy has been implemented in CGNU Life and CULAC to protect the estate from variations in equity and property values. While the asset mix for funds backing policyholder liabilities were unchanged by this, the de-risking involved the reduction of the equity proportion of the assets backing the cost of guarantees and the inherited estate by approximately £2 billion.
Risk and capital management We believe that the measurement of economic capital provides a clear and consistent way to monitor and compare the risks in our businesses.
Our GIC continually monitors exposure against a risk appetite set and agreed by the Board, and has a process in place to manage the exposure in different market conditions, including extreme movements.
Business ethics and values We keep standards of business conduct at the front of our minds in our day-to-day work and do this in part by continuing to encourage our employees to live the Aviva values of integrity, performance, progressiveness and teamwork. Programmes around the world continue to reinforce these values. The value ambassador programme is one which recognises employees and teams whose actions exemplify the Aviva values. Some countries also include induction on values for new joiners and refresh the key principles in people processes and management training. All efforts are monitored through the employee survey which captures feedback on whether managers and employees are living the Aviva values.
We also launched the customer and employee centricity “wiki” – an online knowledge sharing and discussion tool – as a forum for “agents of change” to share best practice across the group. In April 2008 our ambition is to further build on this by launching an orchestrated programme of activities focused on customer centricity.
External Benchmarking Our CSR achievements in 2007 were recognised by our continued inclusion in some of the leading external benchmarks, which provide a good measure of our progress. Some of the key achievements are highlighted below: – The Dow Jones Sustainability World and STOXX indices track the financial performance of the leading sustainability-driven companies worldwide. Aviva continued to feature in these indices in 2007.
We are looking at ways in which to help our customers reduce their own CO2 emissions through the provision of innovative products such as “Pay As You Drive™” and by offering reduced premium insurance for drivers of hybrid and flexi-fuel in the UK, Canada and the Netherlands. Aviva France offers reduced premium household insurance for energy efficient houses. Delta Lloyd has a motor insurance product, which as part of the product provides emission offsetting for the mileage covered by the driver.
Age 50 Appointed to the Board in May 2003. A member of the New York and Paris bars, practising law in Europe and the United States specialising in private equity and EU regulatory matters. Currently a non-executive director of Toepfer International GmbH (trading), Dairy Crest Group plc (dairy foods) and a member of the biotech advisory board of Monsanto (biotechnology). Former non-executive vice-chairman of governmental affairs for Tate & Lyle plc (agricultural/industrial) and S A Spadel N.V. (food and beverages) and former chairman of Amylum Group (agricultural/industrial).
The biographical details of the persons currently serving as directors appear on page 77.
Internal audit The Group’s internal audit function advises management on the effectiveness of its internal control systems, the adequacy of these systems to manage business risk and to safeguard the Group’s assets and resources. Through the Group Audit Director, the internal audit function provides objective assurance on risk and control to both the Audit Committee and Risk and Regulatory Committee. The effectiveness of the Group’s internal audit function is reviewed each year by the Audit Committee.
The Company has policies aimed at safeguarding and supporting the independence and objectivity of the external auditors. The policies regulate the appointment of former audit employees to senior finance positions in the Group and set out the approach to be taken by the Group when using the services of the auditor. It distinguishes between those matters where an independent view is required, such as audit and assurance work, and other advisory services. In addition to statutory audits, audit and assurance work includes reviewing statutory returns, actuarial assurance, regulatory advice requiring auditor reporting, due diligence on acquisitions and disposals, fraud investigations and control reviews and audit reviews. As a general principle the auditor cannot be engaged by the Company for any other purpose, although the policy recognises that there may be areas of minor significance where, for pragmatic reasons, it may be in the Group’s interests to use the external auditor for this work.
This report provides details of the role of the Risk and Regulatory Committee and the work it has undertaken during the year, and should be read in conjunction with the report on the Group’s approach to risk and capital management on pages 54 to 62.
Nikesh Arora joined the Committee on his appointment to the Board on 1 July 2007. There were no other changes in the membership of the Committee during the year. The Group Company Secretary acts as the secretary to the Committee. The Committee met on seven occasions in 2007 and the members’ attendance record is set out in the Corporate governance report above. In addition the Committee held separate meetings with members of senior management and Ernst & Young for the purposes of induction and training.
– A decision on the award to be made under the UK’s All Employee Share Ownership Plan to UK employees and on the operation of Hibernian’s All Employee Share Scheme
– Approval of an invitation to UK employees Reference for a review of to participate in a Save As You Earn scheme executive directors’ remuneration
Basic salary £467,833 during the year – Mr Thiam received a basic salary increase of £14,000 (3.5%) As at 1 January £400,000 from 1 April and a further increase in May when appointed an As at 31 December £500,000 executive director.
Our customer metrics do not yet have the same degree of consistency and external comparability in all business units as our employee climate survey. Different methodologies and measures are used in different parts of the business. We already derive suitable performance targets from available data and are working to establish greater consistency and external comparability.
– Matching will be on a straight-line basis for performance between threshold and stretch.
Share ownership requirements A requirement was introduced in 2005 that the Group Chief Executive and any executive directors should build, over a five year period, a shareholding in the Company equivalent to 175% of basic salary and 150% of basic salary respectively. Shares held in compulsory bonus deferrals and performance shares held in unvested LTIPs are not taken into account in applying this test.
Details of holdings under these plans can be found on page 110.
8. Fees earned in 2007 by the non-executive directors are set out below.
2. Mr. Moss ceased accrual in the Pension Scheme with effect from 31 March 2006, and as a result, his post-March 2006 pension benefit was £19,556 pa. This will increase in line with deferred pensions (the lower of the increase in RPI or 5%) subject to the LTA. At 31 December 2007 it increased to £20,260 pa. The amounts shown above are rounded to the nearest thousand, thus showing no increase in pension for Mr. Moss.
4. Tidjane Thiam was appointed to the Board on 1 May 2007 and resigned from the Board with effect from 21 September 2007.
3. “Long Term Incentive Awards” are awards granted under the Aviva Long Term Incentive Plans which vest only if the performance conditions are achieved.
Long-term business provisions Under current IFRS requirements, insurance and participating investment contract liabilities are measured using accounting policies consistent with those adopted previously under existing accounting practices, with the exception of liabilities remeasured to reflect current market interest rates and those relating to UK with-profit and non-profit contracts, to be consistent with the value of the backing assets. In the United States, shadow adjustments are made to the liabilities or related deferred acquisition costs and are recognised directly in equity. This means that the measurement of these items is adjusted for unrealised gains or losses on the backing assets such as AFS financial investments (see policy S), that are recognised directly in equity, in the same way as if those gains or losses had been realised. The Group has adopted FRS 27, Life Assurance, for liabilities relating to such contracts, which adds to the requirements of IFRS but does not vary them in any way. Further details are given in policy A above.
– The Group has transferred its rights to receive cash flows from the asset and has either transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
For certain mortgage loans, the Group has taken advantage of the revised fair value option under IAS 39 to present the mortgages, associated borrowings, other liabilities and derivative financial instruments at fair value, since they are managed together on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these items. The fair values of mortgages classified as FV are estimated using discounted cash flow forecasts, based on a risk-adjusted discount rate which reflects the risks associated with these products. They are revalued at each period end, with movements in their fair values being taken to the income statement.
The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract.
Liabilities 209,644 Gross insurance liabilities K & 38 153,040 144,230 134,581 Gross liabilities for investment contracts L & 39 98,244 88,358 5,452 Net asset value attributable to unitholders C 3,980 3,810 3,464 Deferred tax liabilities AB & 44b 2,529 3,077 1,629 Current tax liabilities 44a 1,189 1,262 24,740 Payables and other financial liabilities R & 48 18,060 11,364 1,290 Liabilities of operations classified as held for sale AG & 3d 942 –
Consolidated cash flow statement For the year ended 31 December 2007
(ii) The amortisation of acquired value of in-force business (AVIF) on both insurance and investment contracts is now included within operating profit. This change matches the emergence of benefit from the acquired book with the associated amortisation expense.
The results of Petunia, Banca Network and Area Life have been included in the consolidated financial statements of the Group with effect from 26 September 2007, and have contributed £nil to the consolidated profit before tax.
The acquisition of Avipop Assicurazioni has given rise to goodwill on acquisition of £52 million, calculated as follows: Purchase cost: £m
3 – Subsidiaries continued The value of the agreement to distribute through Banco Popolare’s branch network has been identified as a separate intangible asset and has been valued by an independent third party at £386 million (100% share), using estimated post-tax cash flows and discount rates. The intangible asset has been assessed as having an indefinite useful life, subject to annual tests for impairment. The distribution agreement is initially for ten years, with five year automatic renewal periods. It is expected to be renewed indefinitely, due to the unfavourable terms of the put option for failure to renew.
The results of Cyrte Investments have been included in the consolidated financial statements of the Group with effect from 27 September 2007, and have contributed £2 million to the consolidated profit before tax.
Gross written premiums 19,622 – 11,369 – 30,991 Premiums ceded to reinsurers (858) – (800) – (1,658)
Amortisation of acquired value of in-force business (160) – – – (160) Net Impairment of acquired value of in-force business – – – – – Amortisation and net impairment of intangible assets (62) (6) (25) (17) (110) Impairment of goodwill (1) (9) – – (10) Other impairment losses recognised in the income statement (45) – (10) (2) (57)
Impairment of goodwill 1 9 – – 10 Amortisation and impairment of intangibles 55 6 25 17 103 Short-term fluctuation in return on investments backing general insurance and health business – – 184 – 184 (Profit)/loss on the disposal of subsidiaries and associates – – 7 (56) (49)
Realised gains on AFS investments 391 162 Net income from investment properties
(b) Economic volatility The investment variances and economic assumption changes excluded from the long-term business operating profit are as follows: Long-term business £m £m
(e) The table below compares the actual return on investments attributable to the general insurance and health business, after deducting investment management expenses and charges, with the aggregate longer term return over a four year period. This table will be built up over time to give aggregate and comparative figures over a five year period.
Fees payable to Ernst & Young LLP and its associates for other services to Group companies: Audit of Group subsidiaries pursuant to legislation 8,388 7,731 Additional fees related to the prior year audit of Group subsidiaries pursuant to legislation 372 – Other services pursuant to legislation 2,124 2,326 Tax services 201 187 Services relating to information technology 173 40 Services relating to corporate finance transactions 736 1,432 All other services – Supplementary reporting (see below) 931 885
Deferred tax Origination and reversal of temporary differences (348) 221 Changes in tax rates or tax laws (88) (7) Write-down of deferred tax assets (6) (15)
(ii) The tax credit attributable to policyholders’ returns included above is £nil (2006: £nil).
Total tax charged to income statement (note 13a) 352 934 14 – Earnings per share This note shows how we calculate earnings per share, based both on the present shares in issue (the basic earnings per share) and the potential future shares in issue, including conversion of share options granted to employees (the diluted earnings per share). We have also shown the same calculations based on our operating profit as we believe this gives a better indication of operating performance.
Profit attributable to ordinary shareholders 1,273 2,588 49.2 2,161 2,469 87.5 Dilutive effect of share awards and options – 24 (0.5) – 27 (0.9)
(ii) Diluted earnings per share on operating profit attributable to ordinary shareholders is calculated as follows: Weighted Weighted average average number number Restated
Preference dividends declared and charged to equity in the year 17 17 Coupon payments on direct capital instrument 53 52
– Growth rate represents the rate used to extrapolate future cash flows beyond the business plan period. Prices are assumed to remain static in the foreseeable future and volumes are assumed to increase in line with real GDP. These are consistent with external sources of data (ESRI and PwC European Economic Outlook).
Profit on disposal before reserve release 74 Release of balance on currency translation reserve (note 34) (3)
22 – Loans This note analyses the loans our Group companies have made, the majority of which are mortgage loans.
(b) Cost, unrealised gains and fair value The following is a summary of the cost/amortised cost, gross unrealised gains and losses and fair value of financial investments: Cost/ amortised Unrealised Unrealised cost gains losses Fair value £m £m £m £m
(i) Stock lending arrangements The Group has entered into stock lending arrangements in the UK and overseas during the year in accordance with established market conventions. The majority of the Group’s stock lending transactions occur in the UK, where investments are lent to EEA-regulated, locally-domiciled counterparties and governed by agreements written under English law.
This note shows the products on which we are deferring some of our acquisition costs and details the movements in the balance during the year.
(iv) Long-term incentive plan awards These awards have been made to senior Group executives since 2001 and are described in section (b) below and in the Directors’ remuneration report.
(vi) Annual bonus plan awards These awards have been made under the Aviva Annual Bonus Plan 2005, and are described in section (b) below and in the Directors’ remuneration report.
Number exercise Number exercise of options price of options price p p
Share price 733.5p 781p Exercise price 563p 593p Expected volatility 24% 26% Expected life 4.07 years 3.82 years Expected dividend yield 3.83% 3.70% Risk-free interest rate 5.09% 4.80%
Balance at 1 January 3,271 3,271 Merger relief on acquisition of AmerUs – 871 Transfer to retained earnings on realisation (note 35) – (871)
Foreign exchange rate movements 758 – – (141) – 617 Aggregate tax effect – shareholders’ tax – – 73 – – 73
(a) Carrying amount Insurance liabilities at 31 December comprise: General General Long-term insurance Long-term insurance business and health Total business and health Total £m £m £m £m £m £m
The items included in the cost of future policy-related liabilities include: – Maturity Guarantees; – Smoothing (which can be negative); – Guaranteed Annuity Options; – GMP underpin on Section 32 transfers; and
Life assurances Actual swap rate GBM 61-65, GMB GBM/V 76-80, GBM 80-85, GBM/V 85-90 and GBM/V90-95
39 – Liability for investment contracts This note analyses our investment contract liabilities by type of product and describes how we calculate these liabilities and what assumptions we have used.
The negative variance between actual and expected experience relates to lower than expected investment returns on unit funds and adverse lapse experience.
Carrying amount at 1 January 5,534 4,706 Asset in respect of new business 216 226 Expected change in existing business asset (124) 57 Variance between actual and expected experience 52 (69) Effect of adjusting to PS06/14 realistic basis – (502) Impact of other operating assumption changes 14 (84) Impact of economic assumption changes (122) (341) Other movements (40) –
Unused amounts reversed – (11) (11) Change in the discounted amount arising from passage of time – 5 5
(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 2007 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 2008.
** 2.0% until 2011 and 2.4% thereafter (2006: 1.9% and 1.9% respectively).
Mortality table age (NRA) aged NRA than NRA aged NRA than NRA
The cumulative amount of actuarial gains and losses on the pension schemes recognised in the statement of recognised income and expense since 1 January 2004 (the date of transition to IFRS) is a loss of £161 million at 31 December 2007 (2006: loss of £809 million).
Current and past service cost (see (iv) above) (4) (195) (199) – (199) Losses on curtailments (see (iv) above) – 39 39 – 39 Credit/(charge) to investment income (see (iv) above) 530 (453) 77 (40) 37
Carrying Denominated Within Over value currency 1 year 1-5 years 5-10 years 10-15 years 15 years Total £m £m £m £m £m £m £m
The table below provides the information on the UK with-profits funds on a realistic basis.
The management of market risk is undertaken in both business units and at Group level. Business units manage market risks locally using their market risk framework and within local regulatory constraints. Business units may also be constrained by the requirement to meet policyholders’ reasonable expectations and to minimise or avoid market risk in a number of areas. The Group Investment committee is responsible for managing market risk at Group level, and a number of investment related risks, in particular those faced by them shareholder funds throughout the Group.
A sensitivity to changes in property prices is given in section (g) below.
(d) Liquidity risk The Group has a strong liquidity position and through the application of a Group Liquidity Management policy seeks to maintain sufficient financial resources to meet its obligations as they fall due. In addition to its strong liquidity position, the Group maintains significant committed borrowing facilities from a range of highly rated banks to further mitigate this risk.
Analysis of maturity of liabilities For non-linked insurance business, the following table shows the gross liability at 31 December 2007 analysed by remaining duration. The total liability is split by remaining duration in proportion to the cash-flows expected to arise during that period, as permitted under IFRS4 Insurance Contracts.
Sensitivities as at 31 December 2006 Impact on profit before tax (£m)
Interest Interest Equity/ Equity/ Assurance Annuitant rates rates property property Expenses mortality mortality +1% –1% +10% –10% +10% +5% –5%
Changes in sensitivities between 2006 and 2007 reflect movements in market interest rates, portfolio growth, changes to asset mix and the relative durations of assets and liabilities, and asset liability management actions.
B – Operating expenses (i) Operating expenses Operating expenses comprise: £m £m
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 given by the Company on behalf of related parties are given in note 50(h).
Summarised consolidated income statement – EEV basis For the year ended 31 December 2007
Group’s share included in shareholders’ funds 7,694 6,817 877 Minority interest share 578 439 139 Movement in AFS securities (290) (462) 172
New business contribution (after the effect of required capital) 263 110 9 50 25 25 168 (6) 381 8 22 9 31 683
Embedded value at the beginning of the year – Free surplus 3,569 – Required capital1 5,314
Closing life and related businesses’ embedded value 162 216 413 102 118 366 1,377 10 1,387 16,711 18,098 1. There are no minorities in the United Kingdom or North America.
Asset classes The significant asset classes for UK participating business are equities, property and long-term fixed rate bonds. The most significant assumption is the distribution of future long-term interest rates, since this is the most important factor in the cost of guaranteed annuity options.
Netherlands (including Belgium and Germany) 4,176 265 (275) 475 (470) 125
In general, the magnitude of the sensitivities will reflect the size of the embedded values, though this will vary as the sensitivities have different impacts on the different components of the embedded value. In addition, other factors can have a material impact, such as the nature of the options and guarantees, as well as the types of investments held. The interest rate sensitivity will vary significantly by territory, depending on the type of business written: for example, where non-profit business is well matched by backing assets, the favourable impact of reducing the risk discount rate is the dominant factor.
Non-economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2007 and the new business contribution before the effect of required capital for 2007 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.
As reported maintenance in lapse rates – life – annuity Embedded value (net of tax) on page 259 expenses rates assurance business 31 December 2007 £m £m £m £m £m