Enhanced disclosure:

EEV – Equivalent
E i l t Embedded
E b dd d Value
V l

D id R
David Rogers

DRAFT 12 January 2011 V1

1
Purpose of this session

Provide enhanced embedded value information to allow a direct comparison

t EEV:
to EEV

• p
Add back future credit spread earnings
g not captured
p in MCEV

• Show total cash flows expected from in-force policies, how these will
emerge + discounted value of these

• Balance sheet methodology consistent with EEV

2
 More than one lens to value long-term business

Yield

Portfolio y
yield
E pected defaults
Expected defa lts
EV assumption

Spread earnings

Liquidity premium

MCEV assumption

Swap rate

Duration

MCEV EEV equivalent

Expected value from in-force business if all Full expected value from in-force business
financial risk hedged
hedged-out
out over time

Methodology Group Regions 3

Methodology

Core assumptions
p Discount rate + allowance for risk
• Based on real-world expected cash-
flows for all covered business
• Non-economic assumptions
p unchanged
g •
from MCEV:
– Unchanged from end 2009
audited MCEV
– Underpinned by detailed
experience analysis
– MCEV experience variances
published as part of core reporting
• Required capital the greater of economic
capital, statutory capital and
management targets
• Portfolio yield adjusted for expected
average long-term defaults
• Total allowance for risk equivalent to that
used for EEV
Underlying
y g discount rate = risk-free rate
(3.6%) + risk margin (3.4%) = 7.0%
• Cost of financial options and guarantees:
– Calibrated to previous EEV TVOG
~50% of MCEV level
– Equivalent to £500 million specific
allowance
– Incorporated through additional
specific margin (40bps) in discount
rate
• Total discount rate = 7.4%
7 4%

Methodology Group Regions 4

 IRR calculation underpinned by embedded
value methodology
600 Indicative cash flow profile • Full cost of initial expenses /
required capital and all expenses
400 on a fully-loaded
f basis
Emerging profits
• Required capital the greater of
200 economic capital, statutory capital
and management targets
0 • Explicit allowance for options and
Initial capital – including guarantees (on market-consistent
acquisition costs basis where possible)
‐200
• Demographic assumptions identical
‐400 to MCEV assumptions
Required capital
• Prudent allowance for credit
‐600 d f lt equity
defaults; it risk
i k premium
i
Explicit allowance for of 3.5%
options & guarantees
‐800 • Un-levered calculation basis
• Consistent IRR
IRR, IDR and payback
‐1000 period calculations
Full allowance for required
capital - greater of statutory,
economic and management
t
targett capital
it l

Methodology Group Regions 5

 EEV - equivalent Embedded Value – HY10

3Q proforma and
546p pension deficit
po e e t
improvement

617p
3Q10 estimate based
461p on
• 3Q MCEV profit and
market movements
394p 26p

Asset return
“EEV” • pension curtailment
gain 10p
g p reported
p
VIF above risk
at 3Q
MCEV free rate
• Additional reduction
IFRS Discount in pension deficit
rate above 35p
Life
i t
intangibles
ibl risk free to
allow for risk

IFRS MCEV “EEV”

EEV
shareholders’ + £1.8bn shareholders’ + £2.4bn shareholders’
equity equity equity

£11.1bn £12.9bn £15.3bn

Methodology Group Regions 6

 Undiscounted life cash-flow emergence profiles –
HY10

£m
“EEV”
8 000
8,000 • Area under the blue curve represents
undiscounted real-world cash flows
(in 5-year buckets) - total =
£33.5 billion
6,000
MCEV
Total expected • Area under the green curve
represents risk-free cash-flows based
4,000 on MCEV VIF emergence disclosure -
lower initial returns due to low risk -
free yield curve
Additional cash-flows
2,000 Risk free
• Gap between lines around
£13 billion
• Blue line discounted at RDR to give
0 “EEV”
1-5 6-10 11-15 16-20 21-25 26-30 31-35 36+ • Green line discounted at risk-free rate
to give MCEV
Years
Emergence
Total undiscounted cash-flow = £33.5bn • Total in first 5-year bucket ~ £8bn -
Additional earnings not captured in MCEV = with just under £2 billion emerging
in Year 1
£13bn

Methodology Group Regions 7

 Undiscounted life cash-flow emergence profiles –
HY10

£m
“EEV”:
8,000
• Undiscounted real-world cash flows =
£33.5 billion
6 000
6,000 • Discount @ RDR (7
(7.4%)
4%)
• Discounted value (“EEV”) =
4,000 £16.9 billion

2,000 Market consistent embedded value:

• Undiscounted risk-free cash flows =
£20.5 billion
0
1-5 6-10 11-15 16-20 21-25 26-30 31-35 36+ • Discount @ risk-free rate
Years • Discounted value (MCEV) =
£14.5 billion

Total undiscounted cash-flow = £33.5bn

Additional earnings not captured in MCEV =
£13bn
£ 3b

Methodology Group Regions 8

Product mix and impact on EV

Key driver of difference is the amount of financial risk taken on behalf of the policy holder
- EV of products with higher financial risk will increase under “EEV”
EEV

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

Risk broadly unchanged although there may be a small impact from
the higher discount rate under “EEV”

For spread-based business MCEV does not capture the

Spread present value of future expected investment returns in excess
of risk free rates

Unit linked earnings are driven by fee-based income - MCEV

projections assume that we earn only risk free rates on unit
Savings fund reserves, and hence lower unit fund charges are projected
but benefit offset by
y the higher
g discount rate under “EEV”

Methodology Group Regions 9

 Product split by region and impact of change to “EEV”

Risk
£2.4 billion uplift for “EEV” driven primarily by recognition of spread earnings –
impact mostly in UK, Delta Lloyd and North America Spread
Savings

UK Europe Delta Lloyd North America Asia Pacific

11%

24%

65%

HY10 HY10 HY10 HY10 HY10

MCEV “EEV” MCEV “EEV” MCEV “EEV” MCEV “EEV” MCEV “EEV”

5.8 6.6 6.0 5.6 1.2 2.0 0.9 2.2 0.6 0.5

£0.8bn £0.4bn £0.8bn £1.3bn £0.1bn

Methodology Group Regions 10

Note: Product split by region based on sales data
 Key messages

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

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

Uplift recognises the additional real-world

real world cash-flows,
cash flows,
primarily spread earnings, that aren’t captured in MCEV

Aviva’s strength in credit and insurance risk management means

that we’re confident of realising these margins in the real-world

* including 45p for changes in the pension scheme deficit to end November 2010
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Enhanced disclosure:
EEV – Equivalent
E i l t Embedded
E b dd d Value
V l

A
Appendix
di

DRAFT 12 January 2011 V1

12
“EEV” shareholders’ equity and life embedded value

£1.2bn £16.9bn
£2 5bn
£2.5bn
£15.3bn £(2.1)bn

HY10 Remove life Remove Add back HY10

Shareholders’ goodwill and non-life preference Life EV
equity intangibles net shares and
liabilities DCI

13
Undiscounted life cash flow emergence

Split
p by y region
g Split
p by yp
period

£bn
Region £bn 10 9
8
UK 13.5 8 7

Europe 10.5 6 5
4
Delta Lloyd 4.3 4

North America 4.3 2

Asia Pacific 0.9 0

1-5
1 5 6-10
6 10 11-15
11 15 16-20
16 20 21+
Total 33.5 Years

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 Comparison of MCEV versus EEV

Time Value
O ti
Options and
d
Time Value Guarantees
Options and
Guarantees

Cost of Non-
Value of Cost of Hedgeable Risks
Future Required Value of
Profits Capital Future
Profits Frictional
Costs

EEV

Net MCEV
Worth Net
Worth

15