Part 1-MCEV Restatement of HY

RNS Number : 7558M

Aviva PLC

04 February 2009

 



Part 1 of 4

News release

4 February 2009

Aviva plc

Aviva announces restatement of interim 2008 and full year 2007 results on an MCEV basis

MCEV is the next step in evolving embedded value reporting

-    Greater transparency and comparability 

-    A shareholder's perspective on value 

-    A market consistent approach to financial risk

-    A greater focus on disclosure of cash being generated by the business

-    Explicit allowances for non-hedgeable risk

MCEV does not change the economics of our business, just the timing of profit recognition

-    General insurance, IFRS and solvency reporting is unchanged

-    The dividend paying capacity remains unchanged

-    Long term savings IRRs remain broadly unchanged

-    Restatement impact on equity shareholders funds: 1% decrease for 2007 and 7% decrease for mid 2008, due to volatile markets

Aviva is a well-diversified group with a strong balance sheet on any measure

Aviva plc ('Aviva') announces the restatement of its supplementary financial information on a Market Consistent Embedded Value basis (MCEV). A presentation for investors and analysts will take place today covering the group's 2008 long-term savings new business sales and the restatement of the full year 2007 and the half year 2008 results on an MCEV basis. This presentation takes place ahead of the group's full year results, which will be announced on 5 March.

Philip Scott, chief financial officer said, 'Embedded value remains key to measuring the performance of long-term business. MCEV is an important step forward in increasing the transparency of our business and we have provided significantly more information and improved our disclosures. 

'The adoption of MCEV does not change the economics of our business, but it does change the timing of when we report the profit that we earn from writing long-term savings business. MCEV does not affect our statutory results, our regulatory capital position or our dividend paying capacity.'

Worldwide highlights 

	MCEV Restated 6 months 2008	EEV Reported  6 months 2008	MCEV Restated Full year  2007	EEV Reported Full year  2007
	Reviewed	Reviewed	Audited	Audited
Equity shareholders' funds	£17,389m	£18,672m	£19,998m	£20,253m
Net asset value per share	654p	702p	763p	772p
Operating profit before tax	£1,509m	£1,719m	£3,065m	£3,286m
(Loss)/profit after tax	£(2,361)m	£(1,275)m	£1,946m	£2,134m
Life and pensions PVNBP	£18,214m	£17,283m	£32,722m	£31,600m
Value of new business gross of tax and minority interests	£352m	£488m	£897m	£912m
New business margin1	1.9%	2.8%	2.7%	2.9%

1.    New business margin is based on the value of new business gross of tax and minorities over PVNBP

  Enquiries:

Analysts:
Charles Barrows	Investor relations director	Telephone [phone]
Jessie Burrows	Head of investor relations	Telephone [phone]
Susie Yeoh	Investor relations, senior manager	Telephone [phone]
Media:
Hayley Stimpson	External Affairs Director	Telephone [phone]
Sue Winston	Head of group media relations	Telephone [phone]
Danielle Anthony	Group media relations, senior manager	Telephone [phone]
Vanessa Rhodes	Group media relations, senior manager	Telephone [phone]
James Murgatroyd/Ed Simpkins	Finsbury	Telephone [phone]

Analysts: 

A presentation to investors and analysts, covering both the long-term savings new business announcement and the restatement of 2007 results onto an MCEV basis, will take place at 1000 hrs (GMT) at St Helen's, 1 Undershaft, London, EC3P 3DQ. The investor and analyst presentation is being filmed for live webcast and can be viewed on the group's website at www.aviva.com or on www.cantos.com. In addition, a replay will be available on these websites later today. There will also be a live teleconference link to the investor and analyst meeting on [phone]. A replay facility will be available until 17 February 2009 on [phone]. The pass code for the whole presentation, including the question and answer session, is 5463049# and for the question and answer session only the pass code is 4478829#.

The presentation slides will be available on the group's website, www.aviva.com/investors/presentations.cfm from 0930 hrs (GMT).

The Aviva media centre at www.aviva.com/media includes images, company information and news release archive. Photographs are available on the Aviva media centre at www.aviva.com/media.

Notes to editors

-     Aviva is a leading provider of life and pensions to Europe with substantial positions in other markets around the world, making it the world's fifth largest insurance group based on gross worldwide premiums at 31 December 2007.

-  Aviva's principal business activities are long-term savings, fund management and general insurance, with worldwide total sales* of £49.2 billion at 31 December 2007 and total funds under management of £359 billion at 30 June 2008.

    *Based on 2007 published life and pensions PVNBP on an EEV basis, total investment sales and general insurance and health net written premiums including share of associates' premiums.

-    Embedded value is a method of reporting the economic value of life insurance business. This information helps investors to value life insurance companies. 

Aviva Plc is a company registered in England No. 2468686
Registered Office
St Helen's
1 Undershaft
London
EC3P 3DQ

________________________

Page 1

Contents list

Section	Page
Adoption of Aviva Market Consistent Embedded Value (MCEV) methodology and impact on results	2
A. Introduction	2
B. Impact of MCEV adoption	2
C. Impact of turbulent market conditions	3
D. Impact of change in accounting policy for latent claims	3
E. Group operating profit before tax	3
F. (Loss)/profit after tax	4
G. Shareholders' equity	5
H. Impact of MCEV methodology for life and related businesses	5
I. MCEV methodology	10
Aviva MCEV Financial Statements	15
Summarised consolidated income statement - MCEV basis	16
Earnings per share - MCEV basis	16
Consolidated statement of recognised income and expenses - MCEV basis	17
Reconciliation of movements in consolidated shareholders' equity - MCEV basis	17
Summarised consolidated balance sheet - MCEV basis	18
Reconciliation between shareholder's equity on an IFRS basis and an MCEV basis	19
Group MCEV analysis of earnings	20
Segmentation of summarised consolidated balance sheet	21
1. Basis of preparation	22
2. Translation of foreign exchange	27
3. Analysis of life and pension MCEV earnings	27
4. New business	29
5. Free surplus emergence	31
6. Maturity profile of business	31
7. Geographical analysis	32
8. Analysis of service companies and fund management businesses within embedded value	37
9. Geographical analysis of fund management operating earnings	38
10. Analysis of other operations and regional costs	38
11. Summary of minority interest in life and related businesses' MCEV results	39
12. Assumptions used in the calculation of MCEV	39
13. Sensitivity analysis	44
14. Return on capital employed	51
Statistical supplement: First time adoption	54
Financial impact of adopting MCEV	54
Reconciliation of segmental analysis of embedded value	54
Reconciliation of segmental analysis of group operating earnings	55
Reconciliation of segmental analysis of PVNBP	56
Reconciliation of segmental analysis of value of new business	57
New business premiums and PVNBP	58
Statement of Directors' responsibility	60
Independent auditors' report for the year ended 31 December 2007.	61
Independent auditors' report for the six months ended 30 June 2008.	62
Glossary	63

Page 2

Adoption of Aviva Market Consistent Embedded Value (MCEV) methodology and impact on results

A - Introduction

This document provides a summary of the impact of adopting Aviva's Market Consistent Embedded Value (MCEV) methodology on the group's supplementary life reporting for the 2007 full year results and 2008 interim results and a statistical supplement with reconciliation tables. The document also includes the impact of a change in the accounting policy for latent claims in the group's general insurance business.

The results for the year ended 31 December 2007 have been audited by our independent auditors, Ernst & Young LLP. The results for the six months to 30 June 2008 are unaudited but have been reviewed by Ernst & Young LLP. Their reports in respect of the year to 31 December 2007 and the six months to 30 June 2008 are shown on pages 61 and 62.

B - Impact of MCEV adoption

In June 2008 the CFO Forum, a group representing the Chief Financial Officers of major European insurers, launched the Market Consistent Embedded Value Principles, with the intention of improving transparency and comparability in embedded value reporting across Europe. The CFO Forum members agreed that all participants will implement the principles in the form of supplementary reporting from the 2009 year end, with optional early implementation. 

The Aviva plc Board has decided to adopt a market consistent embedded value methodology for supplementary reporting in respect of the financial year ended 31 December 2008 and to restate comparative financial information for the full year ended 31 December 2007 and the six months to 30 June 2008. Aviva's market consistent methodology is described in the basis of preparation note on page 22. In summary, Aviva's methodology adopts the CFO Forum Principles and Guidance published in June 2008 with the exception of the use of an adjusted risk-free yield due to current market conditions for immediate annuities in the UK and Netherlands and for immediate annuities, deferred annuities and all other US contracts. Further detail can be found in the basis of preparation note. 

Aviva's MCEV methodology will therefore replace the European Embedded Value (EEV) basis of reporting as the alternative method of reporting long-term business profits, with effect from the 2008 preliminary results announcement. The directors regard the adoption of MCEV as a refinement to the EEV basis of reporting, which previously complied with some of the CFO Forum MCEV Principles, and believe that value based reporting provides information that is fundamental to understanding the financial performance of the group's life and related businesses. Accordingly the move from the EEV basis to MCEV represents an evolution of the previously adopted approach and is not a wholesale change to Aviva's embedded value reporting basis. Embedded value is also consistent with the way pricing is assessed and the business is managed. In adopting these principles early the directors are seeking to achieve consistency and continuity of performance reporting through supplementary reporting. This is particularly important at a time when phase two of the approach to accounting for insurance business under International Financial Reporting Standards (IFRS) has not yet been implemented.

MCEV is the next step in embedded value reporting bringing improved transparency and comparability. In summary, MCEV provides:

-    a perspective on value, being the present value of future cash flows available to the shareholder, adjusted for the risks of those cash flows;

-    improved consistency of the basic framework for risk valuation through a market consistent approach to financial risk;

-    improved comparability of, and increase in, embedded value disclosures, including a greater focus on disclosure of cash emerging from the business and explicit disclosure of the allowance for non-hedgeable risks; and,

-    mandatory external review.

There is no change to the underlying fundamentals or economics of our business as a result of adopting the MCEV methodology. Financial information on an MCEV basis provides a further perspective on the business, particularly for internal capital allocation purposes. Profits over the life of contracts remain unchanged; however, the timing of profit recognition changes. 

While MCEV is key in assessing our life businesses in respect of value generation and the impact of the cost of capital and capital allocation, it is not the only measure we use to assess our business. We continue to also use statutory IFRS and regulatory capital measures, which are unchanged by the adoption of MCEV. The Group's dividend policy, which is set in relation to operating earnings after tax on an IFRS basis, is also unchanged by MCEV. Additionally, the internal rate of return (IRR) gives a further perspective on the value of all the cashflows associated with new business, including the investment return generated.

With effect from the 2008 preliminary results, the group intends to use the same economic assumptions for equities and properties as those used under the MCEV methodology to calculate the longer-term investment return used in IFRS reporting for its life, general insurance and health business and pension schemes. This will improve the 2008 operating result on the MCEV basis by approximately £80 million. 

  Page 3 

C - Impact of turbulent market conditions

The CFO Forum MCEV Principles were designed during a period of relatively stable market conditions. As announced on 19 December 2008, the CFO Forum has agreed to conduct a review of the impact of turbulent market conditions on the MCEV Principles, the result of which may lead to changes to the published MCEV Principles or the issuance of further guidance. The particular areas under review include implied volatilities, the cost of non-hedgeable risks, the use of swap rates as a proxy for risk-free rates and the effect of liquidity premia. 

Aviva's MCEV methodology adopts the CFO Forum Principles and Guidance with the exception of use of an adjusted risk-free yield due to current market conditions for immediate annuities in the UK and Netherlands and for immediate annuities, deferred annuities and other US contracts. In stable markets, swap curves are an appropriate risk-free rate. However, in the current turbulent market it is possible, for products where backing asset portfolios can be held to maturity, to earn risk free returns in excess of swaps by investing in corporate bonds and credit default swaps (CDS). 

The risk free rate for these products has therefore been increased above the swap curve due to the additional risk-free returns available on backing asset portfolios in the current market. This is not in compliance with Principle 14 of the CFO Forum MCEV Principles, which require that the risk-free rates 'should, wherever possible, be the swap yield curve appropriate to the currency of the cash flows'. Aviva believes that these adjustments are required to maintain consistency with current market prices. Further details can be found in the basis of preparation note on page 22. Sensitivity analysis has been provided on page 44 to changes in the risk free rate. This methodology will be updated if the CFO Forum issues additional guidance.

D - Impact of change in accounting policy for latent claims and other restatement changes

As part of the group's aim to continuously improve the relevance and reliability of its external financial reporting, Aviva undertook a review of the group's General Insurance ('GI') Reserving Policy in 2008.

As part of this review, the group concluded that estimating latent claims provisions on an undiscounted basis, and discounting back to current values, represented an improvement to the existing estimation technique. This approach is in line with best practice for long term liabilities and moves the measurement of latent claims onto a more economic basis, consistent with our internal model for economic capital and the measurement model being proposed for both IFRS Phase II and Solvency II. Further this approach improves consistency with the reporting of other long tail classes of business which are already being discounted, namely certain London Markets latent claims and Netherlands Permanent Health and Injury Business.

The application of discounting to our latent claims provisions for IFRS purposes represents a change in accounting policy and therefore has been applied retrospectively. The cumulative impact of discounting on the opening balance sheet as at 1 January 2007 is £153 million, and as a prior year adjustment, has been made. The group has also made some changes to the IFRS balance sheet to reflect the consolidation of funds and treatment of shares held by employee trusts. 

The impact of the change in accounting policy and restatement changes on the six months to 30 June 2008 and full year ended 31 December 2007 are set out in the basis of preparation section on page 26.

E - Group operating profit before tax

The adoption of the MCEV methodology has resulted in:

-    group operating profit before tax for the six months to 30 June 2008 of £1,509 million compared to £1,719 million under EEV; and, 

-    group operating profit before tax for the year to 31 December 2007 of £3,065 million compared to £3,286 million under EEV.

Analysis of operating profit

The group's operating profit can be analysed as follows:

	MCEV Restated 6 months 2008 £m	EEV  Reported 6 months  2008 £m	MCEV Restated Full year  2007 £m	EEV  Reported Full year 2007 £m
	Reviewed	Reviewed	Audited	Audited
Life and pensions operating earnings	1,280	1,480	2,544	2,753
Fund management1	30	30	90	90
General insurance and health	528	538	1,021	1,033
Other:
Other operations and regional costs	(57)	(57)	(70)	(70)
Corporate centre	(71)	(71)	(157)	(157)
Group debt costs and other interest	(201)	(201)	(363)	(363)
Operating profit before tax	1,509	1,719	3,065	3,286

1.    Excludes the proportion of the results of Aviva Investors and other fund management businesses within the Group that arise from the provision of fund management services to our life businesses. These results are included within the life and pensions MCEV operating earnings consistent with Aviva's MCEV methodology.

  Page 4

E - Group operating profit before tax continued

The conversion from EEV to MCEV does not impact on the operating profit of our non-life businesses. However, the general insurance and health figures have been restated for the change in accounting policy in respect of discounting latent claims.

Life and pensions operating earnings in the first half of 2008 were £1,280 million on an MCEV basis compared to £1,480 million on an EEV basis due to the impact of widening credit spreads on the value of new business and changes in operating assumptions. 

For 2007, life and pensions operating earnings were £2,544 million compared to £2,753 million on an EEV basis due to movements in experience variances and operating assumption changes.

The components of the life and pensions operating earnings are shown below.

	MCEV Restated 6 months 2008 £m	EEV  Reported 6 months  2008 £m	MCEV Restated Full year  2007 £m	EEV  Reported Full year 2007 £m
	Reviewed	Reviewed	Audited	Audited
Value of new business	352	488	897	912
Earnings from existing business
- expected returns at the reference rate	465	-	877	-
- expected returns in excess of the reference rate	227	-	420	-
- expected returns	692	694	1,297	1,266
- experience variances	42	43	(111)	(16)
- operating assumption changes	(97)	(46)	(25)	114
- other operating variances	(19)	-	1	-
Expected return on shareholders' net worth	310	301	485	477
Life and pension operating earnings before tax	1,280	1,480	2,544	2,753

For both time periods, operating earnings reduce because of the lower recognised value of new business. Additionally, experience variances and operating assumption changes have a more significant impact due to MCEV economic methodology, which discounts future cashflows at a lower rate than under EEV. The expected return on in-force remains broadly unchanged for both time periods.

F - (Loss)/profit after tax

Analysis of profit

The table below sets out the reconciliation of the Group's operating profit before tax to (loss)/profit after tax, on both an MCEV and an EEV basis:

	MCEV Restated 6 months 2008 £m	EEV  Reported 6 months  2008 £m	MCEV Restated Full year  2007 £m	EEV  Reported Full year 2007 £m
	Reviewed	Reviewed	Audited	Audited
Operating profit before tax	1,509	1,719	3,065	3,286
Effect of economic variances on long-term business1	(4,086)	(2,783)	(19)	67
Short-term fluctuations in return on investments backing general insurance and health business	(314)	(314)	(184)	(184)
Economic assumption changes on general insurance and health business	6	-	2	-
Impairment of goodwill	(42)	(42)	(10)	(10)
Amortisation and impairment of intangible assets	(44)	(44)	(89)	(89)
Profit on disposal of subsidiaries and associates	9	9	20	20
Integration and restructuring costs	(132)	(132)	(153)	(153)
Exceptional Items2	(155)	(84)	-	-
(Loss)/profit before tax	(3,249)	(1,671)	2,632	2,937
Tax on operating earnings	(453)	(523)	(924)	(992)
Tax on other activities	1,341	919	238	189
(Loss)/profit after tax	(2,361)	(1,275)	1,946	2,134

1.    On an EEV basis, £(2,783) million for the six months 2008 includes variation from longer term investment return on long-term business of £(2,638) million and effect of economic assumption changes on long-term business of £(145) million. £67 million for the full year 2007 includes variation from longer term investment return on long-term business of £(450) million and effect of economic assumption changes on long-term business of £517 million.

2.    Exceptional items includes £84 million in costs due to the closure of the wrap platform in the UK and migration of the operations to a third party provider, Scottish Friendly and £71 million in the Netherlands, reflecting the provision for restricting charges on existing unit-linked contracts in line with the Ombudsman's recommendations. Under EEV this was reported within operating assumption changes.

  Page 5 

Economic variances are the key area of change. This is largely due to the difference in treatment of credit spreads. Under EEV, the increases in credit spreads had a limited impact on the embedded value as an allowance was taken for higher expected future income within the value of in-force which broadly offset the fall in asset values. Under MCEV, however, no future spreads in excess of the risk-free rate are allowed for. As a result, when credit spreads increased in the first half of 2008, the market value of assets reduced but assumed investment cashflows did not change. The adverse impact of removing future investment returns in excess of the risk-free rate more than offset the positive impact of lower discount rates.

Economic assumption changes on general insurance and health business reflect the change between opening and closing discount rates on the latent claims provisions.

G - Shareholders' equity

The reported value of shareholders' funds has reduced under the MCEV basis, as a result of changes described in Section H. 

The value of shareholders' funds attributable to non-life businesses are unaffected by the new MCEV methodology, but have reduced due to restatement changes and changes to the IFRS accounting for latent claims described in Section D.

	MCEV Restated 6 months 2008 £m	EEV  Reported 6 months  2008 £m	MCEV Restated Full year  2007 £m	EEV  Reported Full year 2007 £m
	Reviewed	Reviewed	Audited	Audited
Embedded Value (including minority interests)	18,579	19,867	20,096	20,319
Goodwill and intangible assets allocated to long-term business	2,495	2,335	2,359	2,253
Notional allocation of IAS 19 pension fund deficit to long-term business	(140)	(140)	(58)	(58)
Minority interest in property investment vehicles	-	838	-	758
Long-term business net assets	20,934	22,900	22,397	23,272
General insurance and other net assets	282	347	1,292	1,302
Total equity	21,216	23,247	23,689	24,574
Preference share capital and direct capital instruments	(1,190)	(1,190)	(1,190)	(1,190)
Minority interests	(2,637)	(3,385)	(2,501)	(3,131)
Equity attributable to ordinary shareholders of Aviva plc	17,389	18,672	19,998	20,253
Net asset value per share	654p	702p	763p	772p

H - Impact of MCEV methodology for life and related businesses

The MCEV methodology has introduced the following key changes to embedded value reporting:

-    economic assumptions are now market consistent;

-    explicit allowance is made for the cost of non-hedgeable risk;

-    required capital also takes account of business unit targets; and, 

-    operating assumptions have been reviewed to confirm that they are probability-weighted, mean best estimates of expected future experience.

In summary, the impact of the restatement to MCEV varies by product type.

Risk contracts, for example, term assurances, tend to increase in value under MCEV compared to EEV. This is because these contracts contain lower than average levels of market risk. Under EEV, an aggregate discount rate was used for all contracts. Under MCEV, market and non-market risks are allowed for separately and explicitly. 

The impact on savings contracts, for example, unit linked contracts, tends to be broadly neutral. If the assets backing the savings contracts are predominantly invested in lower risk assets then the value will tend to increase as the lower discount rate applied to future cashflows more than offsets the reduced assumed future investment returns. However, contracts with significant guarantees tend to reduce in value under MCEV as the market consistent cost of the guarantees is typically higher than under EEV.

Immediate annuities, deferred annuities and other contracts where shareholders are exposed directly to asset risk tend to reduce in value. MCEV anticipates no profits at outset from the taking of asset risk, whereas EEV recognised the expected profits from taking asset risk, net of expected defaults. This approach is consistent with the market price of corporate bonds and equities. The profits from taking asset risk will be recognised through the earnings from existing business over the life of the contracts. These types of contracts have been referred to as 'spread contracts' in this document.

The tables below show how the introduction of MCEV methodology has impacted the results. In particular they detail the impact of each element of the changes in the move from EEV to MCEV.

  Page 6 

Impact of MCEV methodology on embedded value

The embedded values on an MCEV basis at 31 December 2007 and 31 December 2006 were 1% lower at £20,096 million (EEV: £20,319 million) and £18,004 million (EEV: £18,098 million), respectively. This is in line with our expectations, as previously stated, that the group's embedded value would not significantly change as a result of adopting MCEV in a stable market. This reflects Aviva's diversity geographically and by product mix.

The embedded value on an MCEV basis at 30 June 2008 reduced by 6% to £18,579 million (EEV: £19,867 million) due to turbulent market conditions which resulted in the adverse impact of changes in economic assumptions. This is due to the difference in treatment of credit spreads under MCEV as credit spreads widened in the first half of 2008.

Impact of changes in economic assumptions (including discounting at risk-free rate)

In 2008, under EEV, the impact of credit spreads widening was reduced as an allowance was taken for higher expected future investment income which broadly offset the fall in market values within the net worth. Under MCEV, however, no future spreads in excess of risk-free are allowed for. As a result, when credit spreads increased in the first half of 2008, the market value of assets reduced resulting in adverse economic variances with no increase in projected future investment cash flows. This compares with a favourable impact on transition from EEV to MCEV of economic assumptions changes at the end of 2007 and 2006 which reflected the lower discount rate applied under MCEV. This partly offset the cost of residual non-hedgeable risk, the impact of changes in operating assumptions and model changes.

Cost of residual non-hedgeable risk

The cost of residual non-hedgeable risk allows for risks not allowed for elsewhere in the value of future profits from in-force and new business. The cost of residual non-hedgeable risk is equivalent to a 2.5% charge applied to the group-diversified economic capital required to cover the non-hedgeable risks over the life of the contracts. The cost of residual non-hedgeable risk has increased over the restatement period as the required levels of economic capital for non-hedgeable risks have increased.

Changes to required capital

The change to required capital reflects the consideration of business unit targets and the review of economic capital requirements. Capital requirements by country under the two bases are set out on page 40. Capital requirements have increased for certain businesses under MCEV, notably the US and the Netherlands. For the UK annuity business capital was actually higher in 2006 under EEV than MCEV at 150% of the EU minimum. This was revised down to 100% from 2007 onwards, reflecting the capital fungibility within the UK. Therefore the change to 110% for the UK annuity business under MCEV represents a reduction in capital for 2006 but an increase for 2007 and 2008.

Impact of changes in operating assumptions

This reflects the updating of lapse assumptions for UK, Poland, the US and Spain. These changes are described in Section I.

Other

This mainly reflects modelling refinements in the US, France and the Netherlands.

Embedded value	Reviewed 30 June 2008 £m	Audited 31 December 2007 £m	Audited 31 December2006 £m
EEV basis as reported	19,867	20,319	18,098
Impact of changes in economic assumptions (including discounting at risk-free rate)	(365)	521	624
Cost of residual non-hedgeable risk	(604)	(568)	(491)
Changes to required capital	(86)	(69)	(6)
Impact of changes in operating assumptions	(93)	(134)	(155)
Other	(140)	27	(66)
MCEV basis gross of minority interests	18,579	20,096	18,004
Minority interests	(2,002)	(1,848)	(1,498)
MCEV basis net of minority interests	16,577	18,248	16,506

Analysed by:

	MCEV Restated 6 months 2008 £m	EEV  Reported 6 months  2008 £m	MCEV Restated Full year  2007 £m	EEV  Reported Full year 2007 £m	MCEV Restated Full year  2006 £m	EEV  Reported Full year 2006 £m
	Reviewed	Reviewed	Audited	Audited	Audited	Audited
United Kingdom	5,776	6,547	6,911	7,106	6,535	6,636
Europe	11,109	10,949	11,293	10,988	9,690	9,524
North America	974	1,714	1,206	1,588	1,268	1,478
Asia Pacific	720	657	686	637	511	460
Embedded value gross of minority interests	18,579	19,867	20,096	20,319	18,004	18,098

  Page 7 

In the United Kingdom, the embedded value has reduced on an MCEV basis compared to EEV due to business mix as the lower embedded value of annuities more than offset the higher value of term assurance. This effect increases over the restatement period as corporate bond yields have increased.

The impact of MCEV on the embedded value in Europe is relatively neutral reflecting the diversity of our European portfolio by geography and product. Excluding the Netherlands, the Europe business mix is predominantly risk and savings. In the Netherlands, contracts and their backing assets contain a significant amount of equity and credit risk. This tends to reduce the value under MCEV. Overall, the impact on the aggregate Europe embedded value is limited. 

North America sells predominantly spread-type contracts. As MCEV makes no allowance for investment returns in excess of the risk-free rate, the MCEV value reduces substantially compared to EEV. The impact of adopting MCEV has increased over the restatement period as risk-free rates have reduced and corporate bond spreads have increased. 

The embedded value of our businesses in Asia Pacific increases under MCEV as EEV included territory-specific additional margins in the risk discount rate. This has been changed to an allowance in the cost of residual non-hedgeable risks under MCEV which results in an increase in value. Additionally, the Asia Pacific business is predominantly risk and savings business.

Impact of MCEV methodology on new business

The group's life and pensions sales, as measured by the present value of new business premiums (PVNBP), in the first half of 2008 were 5% higher at £18,214 million on an MCEV basis (EEV: £17,283 million) and for 2007 were 4% higher at £32,722 million (EEV: £31,600 million). PVNBP is higher under MCEV as this reflects the use of the risk-free discount rate. This is lower than the risk discount rate used under EEV which included a risk margin to allow for both economic and non-economic risks that were not explicitly allowed for elsewhere. 

The impact of economic assumption changes depends on the proportion of regular premium business and the difference between the EEV risk discount rate and the risk-free rate. As the risk free rate has reduced between 2007 and half-year 2008, the impact on PVNBP increased. 

The new business tables below provide life and pensions sales, the value of new business and new business margins net of minority interests and tax where applicable. This is consistent with the CFO Forum required presentation of the analysis of earnings, which is shown net of tax and minority interests.

PVNBP	Reviewed  6 months 2008 £m	Audited  Full year 2007 £m
EEV basis as reported	17,283	31,600
Impact of changes in economic assumptions (including discounting at risk-free rate)	997	970
Impact of changes in operating assumptions	(66)	152
MCEV basis gross of minority interests	18,214	32,722
Minority interests	(2,048)	(4,333)
MCEV basis net of minority interests	16,166	28,389

Analysed by:

	Net of minority interests		Gross of minority interests
Reviewed  6 months 2008	MCEV Restated £m	EEV Reported £m	MCEV Restated  £m	EEV Reportd£m
United Kingdom	6,010	5,863	6,010	5,863
Europe	7,037	6,364	9,081	8,431
North America	2,227	2,205	2,227	2,205
Asia Pacific	892	781	896	784
Total life and pension PVNBP	16,166	15,213	18,214	17,283

	Net of minority interests		Gross of minority interests
Audited Full year 2007	MCEV Restated  £m	EEV Reported  £m	MCEV Restated  £m	EEV Reported  £m
United Kingdom	11,797	11,655	11,797	11,655
Europe	11,359	10,726	15,684	14,914
North America	3,646	3,602	3,646	3,602
Asia Pacific	1,587	1,421	1,595	1,429
Total life and pension PVNBP	28,389	27,404	32,722	31,600

  Page 8 

Value of new business and new business margin

The value of new business reduced to £352 million for the six months to 30 June 2008 (EEV new business contribution after the effect of required capital: £488 million) and £897 million in 2007 from £912 million after the effect of required capital reported under EEV. This, combined with the increase in PVNBP has resulted in a lower group margin of 1.9% on an MCEV basis for half year 2008 (margin after required capital on an EEV basis: 2.8%) and 2.7% for 2007, compared to 2.9% on an EEV basis. 

Value of new business	Reviewed  6 months 2008 £m	Audited  Full year  2007 £m
EEV basis as reported (after the effect of required capital)	488	912
Impact of changes in economic assumptions (including discounting at risk-free rate)	(67)	138
Cost of residual non-hedgeable risk	(59)	(91)
Changes to required capital	(11)	(16)
Impact of changes in operating assumptions	2	(35)
Other	(1)	(11)
MCEV basis gross of tax and minority interests	352	897
Tax and minority interests	(173)	(393)
MCEV basis net of tax and minority interests	179	504

Analysed by:

	Net of tax and minority interests		Gross of tax and minority interests
Reviewed  6 months 2008	MCEV Restated  £m	EEV Reported  £m	MCEV Restated  £m	EEV Reported  £m
United Kingdom	53	111	73	154
Europe	106	109	255	245
North America	(5)	44	(8)	68
Asia Pacific	25	16	32	21
Total value of new business	179	280	352	488

	Net of tax and minority interests		Gross of tax and minority interests
Audited Full year 2007	MCEV Restated  £m	EEV Reported  £m	MCEV Restated  £m	EEV Reported  £m
United Kingdom	195	214	278	305
Europe	225	213	502	456
North America	34	70	52	108
Asia Pacific	50	32	65	43
Total value of new business	504	529	897	912

	Net of tax and minority interests		Gross of tax and minority interests
Reviewed 6 months 2008	MCEV Restated  %	EEV Reported  %	MCEV Restated  %	EEV Reported  %
United Kingdom	0.9%	1.9%	1.2%	2.6%
Europe	1.5%	1.7%	2.8%	2.9%
North America	(0.2)%	2.0%	(0.4)%	3.1%
Asia Pacific	2.8%	2.0%	3.6%	2.7%
New business margin	1.1%	1.8%	1.9%	2.8%

  Page 9

	Net of tax and minority interests		Gross of tax and minority interests
Audited Full year 2007	MCEV Restated  %	EEV Reported  %	MCEV Restated  %	EEV Reported  %
United Kingdom	1.7%	1.8%	2.4%	2.6%
Europe	2.0%	2.0%	3.2%	3.1%
North America	0.9%	1.9%	1.4%	3.0%
Asia Pacific	3.2%	2.3%	4.1%	3.0%
New business margin	1.8%	1.9%	2.7%	2.9%

United Kingdom

The reduction in margin under MCEV is attributable to the non-recognition of that element of the asset yield (net of credit default allowances) which we have secured above the risk-free rate. This effect is more pronounced in the first half of 2008 due to the widening of asset yields secured (net of credit default allowances) over the risk-free rate. The half year 2008 margin also reflects the greater proportion of annuity business in this period.

Europe

For Europe, the value of new business is higher than EEV in 2007, caused mainly by the positive impact of economic assumption changes. The small decrease in 2008 is mainly driven by the more adverse impact of economic assumption changes in the Netherlands, due to the sale of several large group contracts, which are adversely affected by the move to MCEV, and market movements increasing the expected costs of policyholder guarantees on contracts written during the period.

North America

North America margins reduce as the main product types are deferred annuity and other spread-type contracts. MCEV does not recognise at outset any earnings in excess of the risk-free rate. In 2008 the adverse impact is made more pronounced as the risk-free rate in the US has reduced over the 6 month period. 

Asia Pacific

The Asia Pacific value of new business increases under MCEV, as EEV included territory-specific additional margins in the risk discount rate. This has been changed to an allowance in the cost of residual non-hedgeable risks under MCEV which results in an increase in value. The majority of the business sold in Asia is savings business and the margin for this business has increased by around 50%.

Impact of MCEV methodology on life and pension earnings

	Reviewed  6 months  2008 £m	Audited  Full year 2007 £m
Group life and pension earnings
EEV basis as reported	1,480	2,753
Impact of changes in economic assumptions (including discounting at risk-free rate)	(268)	(133)
Cost of residual non-hedgeable risk	(14)	(49)
Changes to required capital	(8)	(86)
Impact of changes in operating assumptions	44	46
Other	46	13
MCEV earnings gross of tax and minority interests	1,280	2,544
Tax and minority interests	(506)	(977)
MCEV earnings net of tax and minority interests	774	1,567

Analysed by:

	MCEV Restated 6 months 2008 £m	EEV  Reported 6 months  2008 £m	MCEV Restated Full year  2007 £m	EEV  Reported Full year 2007 £m
	Reviewed	Reviewed	Audited	Audited
United Kingdom	417	471	822	864
Europe	728	823	1,503	1,543
North America	74	139	124	255
Asia Pacific	61	47	95	91
Life and pension operating earnings before tax	1,280	1,480	2,544	2,753

  Page 10 

United Kingdom

UK operating earnings have reduced largely reflecting the change in the value of new business. Other changes reflect the aggregate impact of minor items and the reclassification under MCEV of credit default experience profits from operating earnings to economic variances.

Europe

European operating earnings are lower than EEV in both periods. The larger fall in 2008 is mainly driven by the negative impact of economic assumption changes, where, particularly in France and the Netherlands, the market falls and increased market volatility have had a more severe impact on the cost of policyholder guarantees than under EEV. 

Operational assumption changes and other impacts were favourable overall in 2008 and adverse overall in 2007. In 2007, the other impacts are driven mainly by the Netherlands (updating assumptions in the German with profits fund model increased the shareholder share of surplus in positive scenarios) and Spain (the removal of positive credit default assumption changes that are no longer relevant under MCEV), offset by France (modelling refinements). In 2008, the positive other impacts in France are due to modelling refinements, and in the Netherlands, are due to the impact of the re-allocation out of operating profit of a provision held for compensation settlement with regard to unit-linked insurance policies, which have been the subject of an industry review. 

North America

As the business has been growing, the return on the existing business has been more than offset by the lower recognised value of new business.

Asia Pacific

The value of new business has increased by around 50% as discussed above. Other changes are due to the strengthening of annuitant mortality assumptions and the analysis of lapse experience.

I - MCEV methodology

Aviva's MCEV methodology is described in the basis of preparation note on page 22. Aviva's MCEV methodology, except for the adjustment noted below, follows the CFO Forum's 17 MCEV Principles and supporting guidance issued in June 2008, which set out an improved approach to calculating the valuation of shareholders' interest in a life insurance company. 

Due to current market conditions, an adjustment has been made to the risk-free rate for immediate annuity contracts in the UK and the Netherlands and immediate annuities, deferred annuities and other contracts in the US. This does not comply with the CFO Forum Principle 14 which requires that the risk-free rates 'should, wherever possible, be the swap yield curve appropriate to the currency of the cash flows'. In stable markets, swap curves are an appropriate proxy for risk-free rates; however, in the current turbulent market it is possible, for products where backing asset portfolios can be held to maturity, to earn returns in excess of swaps by investing in corporate bonds and credit default swaps (CDS). The risk free rate for these products has been therefore increased above the swap curve due to additional risk-free returns available in the current market.

Under EEV, the group was already complying with a number of the CFO Forum Principles. Accordingly, the directors regard the adoption of MCEV as an enhancement to the EEV basis of reporting. The new basis is also consistent with the way pricing is assessed and the business is managed.

The MCEV methodology does not change the fundamentals of embedded value reporting, where the life embedded value is the sum of the net worth, representing the value of shareholder assets, and the present value of in-force business (VIF), reflecting the present value of margins locked into statutory reserves. 

Of the 17 principles, the following have led to a change in the group's results:

Revised economic basis

Under the CFO Forum MCEV Principles the mechanism through which risk is allowed for in the overall embedded value calculation has changed. Under EEV, in order to reflect the overall risk profile of the group's business, a risk margin within the discount rate allowed for any residual risks that were not explicitly allowed for. Under MCEV, all risks are allowed for explicitly and therefore the risk discount rate does not include any risk margin.

Principle 12 - Economic assumptions, Principle 13 - Investment returns and discount rates and Principle 14 - Reference rates 

Under MCEV, each cash flow is discounted at a rate consistent with the riskiness of that cash flow as implied by observable market data. To implement this, the group has used a methodology in which a risk-free reference rate is used for both investment returns and discount rates (a 'certainty equivalent' approach). 

With the exception of UK and Netherlands immediate annuities and immediate annuities, deferred annuities and other contracts, the reference rate has been taken in line with CFO Forum guidance as the swap yield curve where this is well defined in a market. For UK and Netherlands immediate annuities and US immediate annuities, deferred annuities and other contracts, an adjusted risk-free rate has been used to reflect the additional risk-free returns in excess of swap yields available in the current markets. 

  Page 11 

Where swap yields are not available or reliable, the lower of government bond yields and available swap rates (or other similar yield information) from the most highly rated banks in the market have been used. In contrast under EEV, government bonds were used in setting the risk free rate and for the restated periods the risk-free rates used were typically slightly higher. 

As a result of the adoption of MCEV, we have reviewed and reassessed all economic assumptions. As a consequence, the assumed equity risk premium has been revised to 3.5% over swaps from 3.0% over government bonds. The property risk premium has been retained at 2.0%. This reflects management's view of expected asset performance relative to risk-free returns and has been used to calculate expected returns within operating earnings. This assumption does not impact the embedded value as asset risk premia are not recognised until earned. The difference between the operating expected return and the actual return is taken to economic variances. The asset risk premium assumptions also affect the Internal Rate of Return (IRR), the Implied Discount Rate (IDR) and payback period calculations.

Assumptions 

Principle 11 - Assessment of appropriate non economic projection assumptions

We have reviewed our best estimate assumptions to ensure that links to economic scenarios (dynamic assumptions) and other asymmetries are appropriately allowed for. Existing dynamic lapse assumptions in North America have been revised to consider the lower average returns from market consistent scenarios while those in France have been maintained as they are considered to be appropriate. Lapse rates in other business units have been reviewed for evidence of a link between persistency and economic scenarios. As evidence is generally not sufficiently strong to justify dynamic lapse assumptions, uncertainty around lapse rates has been reflected as indirect allowances for asymmetries within the mean best estimate lapse assumptions.

Whilst reviewing best estimate assumptions, we have also taken the opportunity to revise a number of demographic experience assumptions. In aggregate, these changes have no material impact on the embedded value however, the impact on individual business units are as follows:

UK Life - On pensions business, the assumed transfer rate assumptions have increased reflecting an allowance asymmetries. The effect of this change and other minor changes in demographic assumptions for UK Life business was a reduction in the embedded value of £134 million at 30 June 2008, £142 million at 31 December 2007 and £84 million at 31 December 2006.

For MCEV, we have revised our definition of required capital and used consistent levels of required capital throughout the restatement. In contrast under EEV, the level of required capital held for the UK annuity business reduced in 2007 with the impact broadly offset by a change in annuitant mortality assumptions. In order to provide a meaningful comparison of MCEV and EEV profit in 2007, the mortality assumption change has been treated as an adjustment to the opening balance sheet, reducing the MCEV at 31 December 2006 by £117 million. There is no change to the embedded value at 31 December 2007. 

Poland - Life and pensions lapse assumptions have been reduced reflecting emerging experience. This results in increases in the embedded value of £165 million at 30 June 2008, £143 million at 31 December 2007 and £142 million at 31 December 2006.

Spain - The lapse assumptions on bancassurance, group risk and unit linked business were revised using the latest calendar year experience where negative trends were discernible, excluding any possible future positive effects that may emerge from existing and new management actions to control lapses. Additional adjustments were made to allow for the asymmetric impacts of policyholder behaviour. These revisions resulted in a decrease in the embedded value of £36 million at 30 June 2008, £33 million at 31 December 2007 and £30 million at 31 December 2006.

USA - On Fixed and Indexed Annuity business lapse rates have been changed by including an allowance for partial withdrawals to allow for the emerging best estimate view. In addition, on the same products, there have been other, less significant, changes to the lapse rates to reflect our latest view of experience. The impact of these changes is a decrease in the embedded value of £70 million at 30 June 2008, £69 million at 31 December 2007 and £62 million at 31 December 2006.

Principle 15 - Stochastic models

Stochastic models have been used for all material covered business classes. These have been calibrated to market conditions at the valuation dates. 

  Page 12 

Required capital

Principle 5 - Required capital

Under the CFO Forum MCEV Principles, the level of required capital should reflect at least the minimum level of solvency capital below which the local supervisor is empowered to take action. In addition it should include any further capital which is not available for distribution to shareholders because it is required to meet internal objectives. For each business we have assessed the required capital as the amount deemed to be locked in to support the business objectives and to meet regulatory requirements. We have also taken into account the group's pricing bases and internal economic capital targets.

The directors consider that, in all cases, the level of required capital represents an appropriate level of capital to be carried to match the risks of the group's current portfolio of business.

The table below summarises the level of required capital across the business units, expressed as a percentage of the EU minimum solvency margin (or equivalent):

Capital requirement  % of EU minimum (or equivalent)	2007 MCEV basis %	2007 EEV basis %
United Kingdom1	100% / 110%	100%
France	110%	115%
Ireland	150%	150%
Italy2	115% / 184%	115%
Netherlands (including Belgium and Germany) 3	188%	150%
Poland	150%	150%
Spain4	110% / 125%	110% / 125%
North America	325%	250%

1.    The required capital in the United Kingdom under the EEV basis was 100% following the change made in 2007 to the required capital in Norwich Union Annuity Limited (NUA). The required capital under MCEV is 100% for unit-linked and other non-participating business and 110% for annuity business.

2.    Required capital in Italy under MCEV is 184% of the EU minimum for Eurovita and 115% for other companies.

3.    Required capital in the Netherlands is 188% for full-year 2007 and 190% for the six months to 30 June 2008. This capital level is the aggregate capital required for the Netherlands.

4.    Required capital in Spain is 125% of the EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies.

The required capital across the group's life businesses varies between 100% and 325% of the EU minimum solvency margin (or equivalent). The weighted average level of required capital as a percentage of the EU minimum solvency margin (or equivalent) has increased to 139% on an MCEV basis (EEV: 130%). 

The required capital for annuity business in the United Kingdom is 110% under MCEV compared to 100% under EEV as economic capital requirements become higher than statutory capital requirements towards the end of the contracts. We have reviewed the economic capital requirements of our businesses and this has resulted in changes to the required capital in the Netherlands, Eurovita in Italy and France. The required capital level in France has reduced as economic capital is below the statutory capital requirement. In Aviva USA, required capital of 325% reflects rating agency commitments.

Principle 8 - Frictional costs of required capital

Under the CFO Forum MCEV Principles, the cost of holding the required capital is taken to be the present value of any additional taxation and investment costs that shareholders will incur as a result of the capital being tied up within the company rather than it being directly invested in the market. These additional costs are known as frictional costs and a deduction for these has been taken in all the value of in-force and new business numbers quoted, except where stated.

The frictional costs calculated under MCEV are significantly less than the cost of capital under EEV This reflects the difference between the risk discount rate, which included an explicit risk margin, and the expected post-tax investment return on the assets backing the required capital. Under MCEV, risks are modelled explicitly and the risk margin is not needed. Where implicit items have been allowed by local regulators, these have been deducted from the level of required capital at each balance sheet date in the table below.

			MCEV basis			EEV basis
Group cost of capital	Total  Frictional  costs £m	Required  capital £m	Frictional  costs/ Required  capital %	Cost of  capital £m	Required  capital £m	Cost of  capital/ Required  capital %
30 June 2008 Reviewed	964	7,419	13%	1,783	6,751	26%
31 December 2007 Audited	852	6,895	12%	1,588	6,331	25%
31 December 2006 Audited	733	5,834	13%	1,450	5,314	27%

  Page 13

Risk allowances within the value of in-force

In the table below there is a comparison at a group level of the impact of the risk allowances on the VIF on both the EEV and MCEV basis.

The present value of future profits (PVFP) is the present value of the distributable profits to shareholders arising from the in-force covered business projected using economic and best estimate non-economic assumptions as described above. In order to calculate the present value of in-force (VIF) it is necessary to allow explicitly for all risks not allowed for in this discounting process. This includes the frictional cost of required capital outlined above, the time value of financial options and guarantees and any residual non-hedgeable risks. Hedgeable market risks are allowed for on a market consistent basis through the use of risk-free investment return and discount rate assumptions.

	Reviewed 30 June 2008		Audited 31 December 2007
Gross of minority interests	MCEV £m	EEV £m	MCEV £m	EEV £m
Present value of future profits (PVFP)	11,539	12,364	11,881	11,841
Frictional costs (MCEV)/cost of capital (EEV)	(964)	(1,783)	(852)	(1,588)
Cost of residual non-hedgeable risk	(604)	-	(568)	-
Time value of financial options and guarantees	(893)	(444)	(745)	(392)
Value of in-force covered business (VIF)	9,078	10,137	9,716	9,861

Principle 7 - Financial options and guarantees

Financial options and guarantees can affect shareholder cash flows in an asymmetric way. In adverse scenarios shareholders can be liable for the entire cost of the option or guarantee, whereas in favourable scenarios shareholders may get only part of the benefit. Under MCEV and EEV methodologies, we explicitly calculate the time value of financial options and guarantees (TVOG) using stochastic simulations. This is determined by deducting the average value of shareholder cash flows under a large number of stochastic economic scenarios from the deterministic shareholder value under best estimate assumptions (the PVFP).

The TVOG is higher under MCEV than EEV as market-consistent scenarios are more heavily weighted to scenarios with low investment returns, increasing the cost of guarantees. The removal of asset risk premiums from the valuation of options and guarantees is most significant in the US, France and Netherlands. The TVOG also increases as future cashflows are discounted at a rate consistent with risk-free returns in each scenario, rather than the higher, constant risk-discount rate used under EEV. 

Market volatility assumptions have been used for MCEV compared to long-term expected volatilities under EEV. Market volatilities are typically higher than long-term, expected volatilities over the restatement period. This has increased the TVOG.

All assumptions have been reviewed to ensure that asymmetries are modelled explicitly where material. Dynamic lapse assumptions have been used in the US and France, since in these countries we have sufficient evidence to be able to set credible assumptions. 

For many contracts there is general uncertainty about future lapse rates and the evidence for dynamic lapse behaviour is limited. In such cases we have included an allowance in the mean best estimate assumption where it is considered appropriate.

Principle 9 - Cost of residual non-hedgeable risks

The cost of residual non-hedgeable risks covers risks not already allowed for in the time value of options and guarantees or the PVFP. The allowance includes the impact of both non-hedgeable financial and non- financial risks. The most significant risk not included in the PVFP or TVOG is operational risk.

Aviva's methodology includes a cost of non-hedgeable risk equivalent to a charge of 2.5% applied to Group-diversified capital. The allowance equals £604 million, £568 million and £491 million at the 30 June 2008, 31 December 2007 and 31 December 2006 balance sheet dates. The cost has been calculated as a 1.5% charge applied to business unit-level capital that is, allowing for diversification within a business unit, but not between business units. The charge was set so as to give an aggregate allowance that was in excess of the expected operational risk costs arising from the in-force covered business over its remaining lifetime.

The capital levels are projected to be sufficient to cover non-hedgeable risks at the 99.5% confidence level one-year after the valuation date. The capital is equal to the capital from the independently reviewed ICA results for those risks considered, and has been projected as running-off over the remaining life of the in-force portfolio in line with the drivers of the capital requirement.

In addition to the operational risk allowance, financial non-hedgeable risks and other product level asymmetries have been allowed for. These allowances are not material as significant financial non-hedgeable risks and product level asymmetries are either modelled explicitly and included in the TVOG or are included in the PVFP through the use of appropriate best estimate assumptions. No allowance has been made within the cost of non-hedgeable risk for symmetrical risks as such risks are diversifiable by investors.

  Page 14 

Value of new business and margins 

Principle 10 - New business and renewals

The group's definition of new business under the previous methodology is consistent with Principle 10 and therefore there has been no change in our classification of premiums as new business or renewals.

The CFO Forum has stated that the value of new business should be calculated using economic assumptions in line with market conditions at the point of sale for all business; however, it recognises that this is not practical and therefore allows companies to make reasonable approximations to this. Aviva has complied with this principle by calculating the value of new business on a quarterly basis with the assumptions being taken as those appropriate to the start of each quarter. For interest sensitive contracts that are re-priced more frequently, weekly or monthly economic assumptions have been used.

The calculation of the present value of new business premiums (PVNBP) is equal to the discounted value of new regular premiums plus the total amount of single premiums received in the period. The discounted value of regular premiums is based on the policy conditions of the contracts sold, and the same projection assumptions are used for calculating the value of new business. Under MCEV, the risk free discount rate is used which is lower than the risk discount rate previously used under EEV, and hence the PVNBP generated by each regular premium contract if higher.

The tables on pages 7 to 9 set out the present value of life and pensions new business premiums, the value of new business and the new business margin expressed as a percentage of that value on both bases.

Implied discount rates

As described earlier, under MCEV methodology the risk-free reference rate is used to discount the cash flows to calculate the present value of future profits. Deductions are then made for risk allowances to arrive at the MCEV. It is possible to calculate a discount rate that, when applied to all expected cash flows including expected asset spread earnings, gives a value of future profits that equates to the MCEV. This is the implied discount rate (IDR). The IDR would typically be higher than the EEV discount rate as EEV explicitly allows for options and guarantees.

Audited 31 December 2007	Total in-force business %	New  business %
United Kingdom	8.4%	10.2%
Europe	7.5%	6.8%
North America	14.3%	19.3%
Asia Pacific	9.4%	8.5%
Average	8.0%	9.1%

The IDR for existing business in the UK and the US reflects the amount of credit spread business. 

Outside the UK and the US, new business IDRs are lower than for existing business, indicating that the level of market risk in new business has reduced. This reflects new business sales of products where the policyholder takes a greater level of investment risk, such as unit-linked products, and lower levels of guarantees.

End of part 1 of 4

 

END

 

 

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