aviva uk enhanced disclosure: equivalent embedded value january 2011

8/7/2019 Aviva UK Enhanced Disclosure: Equivalent Embedded Value January 2011

1/15

Enhanced disclosure:

qu va en m e e a ue

av ogers

DRAFT 12 January 2011 V1DRAFT 12 January 2011 V1

1


2/15

Purpose of this session

Provide enhanced embedded value information to allow a direct comparisono :

Add back future credit s read earnin s not ca tured in MCEV

Show total cash flows expected from in-force policies, how these will

Balance sheet methodology consistent with EEV

2


3/15

More than one lens to value long-term business

Yield

Portfolio yield

x u

Spread earnings

EV assumption

Liquidity premium

MCEV assumption

Duration

Swap rate

EEV equivalent

Full expected value from in-force businessover time

MCEV

Expected value from in-force business if all-

3

Methodology Group Regions


4/15

Methodology

Discount rate + allowance for riskCore assum tions

Total allowance for risk equivalent to that

used for EEV

Underl in discount rate = risk-free rate

Based on real-world expected cash-

flows for all covered business

Non-economic assumptions unchan ed(3.6%) + risk margin (3.4%) = 7.0%

Cost of financial options and guarantees:

Calibrated to previous EEV TVOG

from MCEV:

Unchanged from end 2009audited MCEV

~50% of MCEV level Equivalent to 500 million specific

allowance

Underpinned by detailedexperience analysis

MCEV experience variances

Incorporated through additionalspecific margin (40bps) in discountrate

Required capital the greater of economiccapital, statutory capital and

management targets.

Portfolio yield adjusted for expectedaverage long-term defaults

4Methodology Group Regions


5/15

IRR calculation underpinned by embeddedvalue methodology

600 Full cost of initial expenses /required capital and all expenses

Indicative cash flow profile

200

400on a fully-loaded basis

Required capital the greater of

economic capital, statutory capital

Emerging profits

200

0

Initial capital includingacquisition costs

Explicit allowance for options andguarantees (on market-consistentbasis where possible)

400

Required capital

Demographic assumptions identicalto MCEV assumptions

Prudent allowance for credit

800

600

Explicit allowance foroptions & guarantees

e au s; equ y r s prem umof 3.5%

Un-levered calculation basis

1000

Full allowance for requiredcapital - greater of statutory,economic and management

,period calculations

arge cap a



6/15

EEV - equivalent Embedded Value HY10

546p3Q proforma and

pension deficit

im rovement

461p

617p

3Q10 estimate basedon

EEV

394p

Asset return

3Q MCEV profit andmarket movements26p

pension curtailmentgain 10p reported

IFRSMCEV

Life

free rate

Discount

rate above

at 3Q

Additional reductionin pension deficit35p

n ang es allow for risk

shareholders

equity

shareholders

equity

11.1bn 12.9bn 15.3bn

+ 1.8bn + 2.4bn

shareholdersequity



7/15

Undiscounted life cash-flow emergence profiles HY10

EEVm

6,000

,

undiscounted real-world cash flows(in 5-year buckets) - total =

33.5 billion

4,000

Area under the green curverepresents risk-free cash-flows based

on MCEV VIF emergence disclosure --

Total expected

2,000

free yield curveAdditional cash-flows

Gap between lines aroundRisk free

0

1-5 6-10 11-15 16-20 21-25 26-30 31-35 36+

Blue line discounted at RDR to give

EEV

Green line discounted at risk-free rate

Emergence

Total in first 5-year bucket ~ 8bn -with just under 2 billion emerging

Total undiscounted cash-flow = 33.5bnAdditional earnings not captured in MCEV =

Years

7

13bn

Methodology Group Regions


8/15


9/15

Product mix and impact on EV

Key driver of difference is the amount of financial risk taken on behalf of the policy holder -

RiskProtection business, with little or no investment risk, will be

broadly unchanged although there may be a small impact fromthe higher discount rate under EEV

For spread-based business MCEV does not capture the

resent value of future ex ected investment returns in excessof risk free rates

Savings

Unit linked earnings are driven by fee-based income - MCEVprojections assume that we earn only risk free rates on unitfund reserves, and hence lower unit fund charges are projected

but benefit offset b the hi her discount rate under EEV



10/15

Product split by region and impact of change to EEV

Risk

Spread2.4 billion uplift for EEV driven primarily by recognition of spread earnings

impact mostly in UK, Delta Lloyd and North America

UK Europe Delta Lloyd North America Asia Pacific

11%

24%

65%

HY10 HY10 HY10 HY10 HY10

MCEV EEV

5.8 6.6

MCEV EEV

6.0 5.6

MCEV EEV

1.2 2.0

MCEV EEV

0.9 2.2

MCEV EEV

0.6 0.5

10

0.8bn 0.4bn 0.8bn 1.3bn 0.1bn

Methodology Group RegionsNote: Product split by region based on sales data


11/15

Key messages

EEV of the Aviva business is 617p* at end September 2010,

an uplift of c.85p compared with current MCEV reporting

- - ,

primarily spread earnings, that arent captured in MCEV

Avivas strength in credit and insurance risk management means

that were confident of realising these margins in the real-world

11* including 45p for changes in the pension scheme deficit to end November 2010


12/15

Enhanced disclosure:

qu va en m e e a ue

ppen x

DRAFT 12 January 2011 V1DRAFT 12 January 2011 V1

12


13/15

EEV shareholders equity and life embedded value

16.9bn1.2bn

(2.1)bn.

15.3bn

HY10Life EV

Add backpreference

shares andDCI

Removenon-life

netliabilities

Remove lifegoodwill and

intangibles

HY10Shareholders

equity

13


14/15

Undiscounted life cash flow emergence

S lit b re ion S lit b eriod

bn

Region bn

UK 13.58

7

9

8

10

Europe 10.5

Delta Lloyd 4.3

54

4

6

North America 4.3

Asia Pacific 0.9

0

2

- - - -

Total 33.5 Years

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15/15

Comparison of MCEV versus EEV

Time Value

Time Value

Options and

Guarantees

p ons anGuarantees

Value ofFuture Value of

Cost of Non-Hedgeable RisksCost of

Required

Profits Future

Profits FrictionalCosts

Capital

EEV

NetWorth Net

Worth

MCEV

15

aviva uk enhanced disclosure: equivalent embedded value january 2011

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