Aviva plc (2008)
Notes to the consolidated financial statements [extract]
Note 40 Financial guarantees and options [extract]
(iii) Ireland
Guaranteed annuity options
Products with similar GAO’s to those offered in the UK have been issued in Ireland. The current net of reinsurance provision for such options is 180 million (2007: 160 million). This has been calculated on a deterministic basis, making conservative assumptions for the factors which influence the cost of the guarantee, principally annuitant mortality option take-up and long-term interest rates.
These GAOs are “in the money” at current interest rates but the exposure to interest rates under these contracts has been hedged through the use of reinsurance, using derivatives (swaptions). The swaptions effectively guarantee that an interest rate of 5% will be available at the vesting date of these benefits so there is reduced exposure to a further decrease in interest rates.
“No MVR” guarantees
Certain unitised with-profit policies containing “no MVR” guarantees, similar to those in the UK, have been sold in Ireland.
These guarantees are currently “in-the-money” by 16 million (2007: “out-of-the-money” by 53 million). This has been calculated on a deterministic basis as the excess of the current policy surrender value over the discounted value (excluding terminal bonus) of the guarantees. The value of these guarantees is sensitive to the performance of investments held in the with-profit fund. Amounts payable under these guarantees are determined by the bonuses declared on these policies. It is estimated that the guarantees would be “in-the-money” by 16 million (2007: “out-of-the-money” by46 million) if yields were to increase by 1% per annum and by 16 million (2007: “out-of-the-money” by 29 million) if equity markets were to decline by 10% from year end 2008 levels. There is no sensitivity to either interest rates or equity markets since there is no longer any exposure to equity in those funds and a matching strategy has been implemented for bonds.
Return of premium guarantee
Until 2005, Hibernian Life wrote two tranches of linked bonds with a return of premium guarantee, or a price floor guarantee, after five or six years. The provision for these over and above unit and sterling reserves, at the end of 2008 is 18 million (2007: 0.1 million).
It is estimated that the provision would increase by 4 million (2007: 1 million) if equity markets were to decline by 10% from year end 2008 levels. However, the provision increase would be broadly off-set by an increase in the value of the hedging assets that were set up on sale of these policies. We would not expect any significant impact on this provision as a result of interest rate movements. It is estimated that the provision would increase by 2 million if property values were to decline by 10% form year end 2008 levels. This would be offset by an increase in the value of the hedging assets by 1 million, the difference reflecting the fact that only the second tranche was hedged for property exposure.