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RNS
Aviva PLC  -  AV.   

FY12 part 4 of 5

Released 07:01 07-Mar-2013

RNS Number : 4532Z
Aviva PLC
07 March 2013
 



Part 4 of 5

Page 77

 

New business

 

 

In this section


Page

B1    Life and pensions sales


78

B2    Investment sales


80

B3    Geographical analysis of life, pensions and investment sales


80

B4    Product analysis of life and pensions sales


81

B5    Trend analysis of PVNBP - cumulative


81

B6    Trend analysis of PVNBP - discrete


82

B7    Geographical analysis of regular and single premiums - life and pensions sales


83

B8    Geographical analysis of regular and single premiums - investment sales


83

B9    Life and pensions new business - net of tax and non-controlling interests


84

 

 

 

Page 78

 

B1 - Life and pensions sales

 


Present value of new

business premiums1

Value of new business

New business margin

Gross of tax and non-controlling interest

2012

£m

2011

£m

2012

£m

2011

£m

2012

%

2011

%

United Kingdom

10,410

11,254

420

380

4.0%

3.4%

Ireland

632

917

(8)

(4)

(1.3)%

(0.4)%

United Kingdom & Ireland

11,042

12,171

412

376

3.7%

3.1%

France

3,638

4,047

119

142

3.3%

3.5%

Spain

1,295

1,926

56

86

4.3%

4.5%

Italy

1,971

2,993

29

75

1.5%

2.5%

Other

159

262

-

5

-

1.9%

Developed markets

18,105

21,399

616

684

3.4%

3.2%

Poland

373

487

35

45

9.4%

9.2%

Asia

1,765

1,782

63

71

3.6%

4.0%

Other

403

320

32

20

7.9%

6.3%

Higher growth markets

2,541

2,589

130

136

5.1%

5.3%

Total life and pensions - continuing operations

20,646

23,988

746

820

3.6%

3.4%

Total life and pensions - discontinued operations2

4,039

5,017

(280)

(130)

(6.9)%

(2.6)%

Total life and pensions

24,685

29,005

466

690

1.9%

2.4%

1 Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business.

2 Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011.

 

Total Life and pensions sales are £24,685 million (FY11: £29,005 million). Excluding discontinued business, total life and pensions sales decreased 14% to £20,646 million (FY11: £23,988 million).

      The new business margin for continuing business increased to 3.6% (FY11: 3.4%), principally driven by the improvement in the UK. Value of new business was £746 million (FY11: £820 million) a reduction of 9%, with the impact of the 14% reduction in volume only partially offset by the improvement in new business margin.

      New business internal rates of return (IRR) are included in the Capital Management section, note C2ii.

Developed Markets

United Kingdom & Ireland

In the United Kingdom, overall new business margin improved to 4.0% (FY11: 3.4%) and IRR improved to 18% (FY11: 15%) due
to pricing actions on our core products and the withdrawal of products not meeting our hurdle rates, including large scale bulk purchase annuities, unit linked guarantee bond and building society partnerships.

      Total life and pension sales in the United Kingdom were down 7% to £10,410 million (FY11: £11,254 million). However, excluding bulk purchase annuities sales increased slightly to £10,223 million (FY11: £10,179 million).

      Protection sales were up 20% to £1,228 million (FY11: £1,025 million), benefiting from a full year's sales from our distribution deal with Santander. In 2012 we also secured an exclusive five-year distribution agreement for the sale of protection products with Tesco Bank, with sales starting in the fourth quarter of 2012.

      Total sales of Annuities were down 16% to £3,211 million (FY11: £3,832 million) following our decision to withdraw from the large scale bulk purchase annuity market. However, sales of Individual Annuities were up 10% to £3,024 million despite price increases to manage capital usage and we remain the market leader 1  Sales of Equity Release were up 37% to £434 million (FY11: £317 million) as we deployed risk based pricing expertise, developed in the annuities market, to this product. 

      Pensions sales were down 2% to £5,158 million (FY11: £5,279 million). Within this, Group Personal Pensions sales were up 9% to £3,231 million (FY11: £2,961 million) as we benefited from high levels of activity in the run up to Retail Distribution Review (RDR) and Auto-Enrolment. Individual Pensions (including SIPP) were down 4% to £1,803 million (FY11: £1,876 million) as we maintained
a disciplined approach to pricing. SIPP sales on our Platform grew strongly, up 123% to £408 million (FY11: £183 million). Corporate Pension sales were £124 million (FY11: £442 million).

      Sales of Bonds were down 53% to £379 million, impacted by changes in distribution channels in advance of RDR.

 

Ireland sales were down 31% to £632 million (FY11: £917 million) due to the closure to new business of our joint venture with Allied Irish Bank ("AIB") from April 2012. Our non AIB business sales were £530 million (FY11: £485 million), driven by the success of our fixed rate deposit funds and the re-launch of protection business in the second half of 2012.

 

1.  According to Association of British Insurers (ABI) as at 30 September 2012

 

 

Page 79

 

B1 - Life and pensions sales continued

France

Total life and pensions sales decreased 10% to £3,638 million (FY11: £4,047 million), a reduction of 4% on a local currency basis, with sales in the AFER product declining and sales through the Bancassurance channel remaining broadly flat. This is compared with a 10% fall in the French market2, as the tough economic environment and uncertainty around local tax regimes continue to impact consumer confidence. IRR is 11% (FY11: 11%) and new business margin is 3.3% (FY11: 3.5%)

Spain

Life and pensions sales in Spain decreased by 33% (28% on a local currency basis) to £1,295 million (FY11: £1,926 million). A substantial part of this reduction has been the result of management action focusing on the efficient use of capital. The business has directed attention on retaining profitable protection business, whilst developing capital efficient products, including unit linked savings. However, the economic position and the consolidation of the financial sector have meant that mortgage and loan related risk new business is also down on 2011. Despite this, the IRR remains strong at 21% (FY11: 23%) and new business margin is broadly stable
at 4.3% (FY11: 4.5%).

Italy

Total life and pensions sales fell 34% to £1,971 million (FY11: £2,993 million), a decrease of 30% on a local currency basis. The weak demand for mortgages has led to a 40% deterioration in protection product sales and the reduced consumer appetite for investment products has resulted in 34% lower savings volumes. In addition, we have taken actions to improve profitability and reduce the level of capital intensive products by shifting the business mix away from with-profit to unit-linked products. However, while the change in business mix has helped to maintain IRR at 12% (FY11: 12%) new business margin has reduced to 1.5% (FY11: 2.5%).

Higher growth markets

Poland

In Poland, life and pension sales decreased by 23% to £373 million (FY11: £487 million) a decrease of 17% on a local currency basis, due to a lower appetite for unit-linked products together with a change in regulation to prevent proactive marketing of pension plans. Margin was slightly up at 9.4% (FY11: 9.2%) and IRR was 20% (FY11: 24%).

Asia

Singapore continued its strong double-digit growth for the third consecutive year increasing to £688 million (FY11: £538 million) driven by a positive bancassurance performance through our partnership with Development Bank of Singapore.

      In China, the economic downturn coupled with high commodity prices led to a weakening of consumer purchasing power. Attractive bank interest rates further reduced demand for traditional longer term saving products and life and pension sales decreased by 22% to £286 million (FY11: £366 million).

      In India, long term savings sales decreased by 14% to £81 million (FY11: £94 million), a reduction of 2% on a local currency basis, as regulatory changes continue to disrupt the industry, including new bancassurance regulations and regulatory changes impacting the structure of traditional products. We are one of the first insurers to launch an online insurance sales portal.

      In Hong Kong, life and pension sales decreased by 21% to £122 million (FY11: £154 million) in a difficult market for unit-linked products.

      Life and pensions sales in the rest of Asia were £588 million (FY11: £630 million).

 

The overall IRR for our Asia markets was 11% (FY11: 13%) and new business margin was 3.6% (FY11: 4.0%).

Other Higher growth markets

In Other higher growth markets, life and pension sales increased by 26% to £403 million (FY11: £320 million), mainly in Turkey where life and pension sales increased by 35% to £312 million (FY11: £231 million) as we continue to strengthen bancassurance and direct sales force distribution channels.

Discontinued Operations - United States

Discontinued operations include life and pensions sales in the United States of £4,039 million (FY11: £3,932 million). Life sales, which account for over 36% of total sales, were £1,441 million (FY11: £1,093 million). Sales of our annuity products declined by 8% to £2,598 million (FY11: £2,839 million) as a result of pricing actions we have taken throughout the year in response to the low interest rate environment. The life new business IRR was 17% (FY11: 14%), however, new business margin was negative at 6.9% driven particularly by the current low interest rates in the United States.

2. As published by the Fédération Française des Sociétés d'Assurance as at December 2012

 

Page 80

 

B2 - Investment sales

 

Investment Sales1

2012

£m

2011

£m

United Kingdom & Ireland

1,730

1,689

Aviva Investors

2,727

1,598

Higher growth markets

129

186

Total investment sales - continuing operations

4,586

3,473

Total investment sales - discontinued operations2

-

170

Total investment sales

4,586

3,643

1 Investment sales are calculated as new single premiums plus the annualised value of new regular premiums.

2 Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011.

 

Total investment sales from continuing operations of £4,586 million were 32% higher than last year (FY11: £3,473 million).

      UK & Ireland investment sales (Collective Investments) increased 2% to £1,730 million (FY11: £1,689 million) in difficult trading conditions, supported by growth in sales through our wrap platform, up 151% to £221 million.

      Aviva Investors investment sales were £2,727 million (FY11: £1,598 million). The opening of our distribution offices in Europe contributed to most of this growth together with an increase in higher yield bond sales reflecting new mandates in Taiwan. 

      Investment sales in Higher growth markets were 31% lower at £129 million (FY11: £186 million) reflecting lower consumer confidence in the face of volatile investment markets and challenging economic conditions .

B3 - Geographical analysis of life, pension and investment sales




% Growth

Present value of new business premiums1

2012

£m

2011

£m

Sterling

Local

currency2

Life and pensions business





United Kingdom

10,410

11,254

(7)%

(7)%

Ireland

632

917

(31)%

(26)%

United Kingdom & Ireland

11,042

12,171

(9)%

(9)%

France

3,638

4,047

(10)%

(4)%

Spain

1,295

1,926

(33)%

(28)%

Italy

1,971

2,993

(34)%

(30)%

Other

159

262

(39)%

(34)%

Developed markets

18,105

21,399

(15)%

(13)%

Poland

373

487

(23)%

(17)%

China

286

366

(22)%

(25)%

Hong Kong

122

154

(21)%

(22)%

India

81

94

(14)%

(2)%

Singapore

688

538

28%

25%

South Korea

435

481

(10)%

(9)%

Other

556

469

19%

25%

Higher growth markets

2,541

2,589

(2)%

-

Total life and pensions - continuing operations

20,646

23,988

(14)%

(11)%

Total life and pensions - discontinued operations3

4,039

5,017

(19)%

(19)%

Total life and pensions

24,685

29,005

(15)%

(13)%

Investment sales4





United Kingdom & Ireland

1,730

1,689

2%

2%

Aviva Investors

2,727

1,598

71%

80%

Higher growth markets

129

186

(31)%

(32)%

Total investment sales - continuing operations

4,586

3,473

32%

35%

Total investment sales - discontinued operations3

-

170

(100)%

(100)%

Total investment sales

4,586

3,643

26%

29%

Total long-term savings sales - continuing operations

25,232

27,461

(8)%

(5)%

Total long-term savings sales - discontinued operations

4,039

5,187

(22)%

(21)%

Total long-term savings sales

29,271

32,648

(10)%

(8)%

1. Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business.

2. Growth rates are calculated based on constant rates of exchange.

3. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011.

4. Investment sales are calculated as new single premiums plus the annualised value of new regular premiums.

 

 

 

Page 81

 

B4 - Product analysis of life and pensions sales




% Growth

Present value of new business premiums1

2012

£m

2011

£m

Sterling

Local

currency2

Life and pensions business





Pensions

5,158

5,279

(2)%

(2)%

Annuities

3,211

3,832

(16)%

(16)%

Bonds

379

801

(53)%

(53)%

Protection

1,228

1,025

20%

20%

Equity release

434

317

37%

37%

United Kingdom

10,410

11,254

(7)%

(7)%

Ireland

632

917

(31)%

(26)%

United Kingdom & Ireland

11,042

12,171

(9)%

(9)%

Savings

3,462

3,886

(11)%

(5)%

Protection

176

161

9%

17%

France

3,638

4,047

(10)%

(4)%

Pensions

392

532

(26)%

(21)%

Savings

2,623

4,064

(35)%

(31)%

Annuities

39

54

(28)%

(22)%

Protection

371

531

(30)%

(25)%

Italy, Spain and Other

3,425

5,181

(34)%

(29)%

Developed markets

18,105

21,399

(15)%

(13)%

Higher growth markets

2,541

2,589

(2)%

-

Total life and pensions sales - continuing operations

20,646

23,988

(14)%

(11)%

Total life and pensions sales - discontinued operations3

4,039

5,017

(19)%

(19)%

Total life and pensions sales

24,685

29,005

(15)%

(13)%

1. Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business.

2. Growth rates are calculated based on constant rates of exchange.

3. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011.

B5 - Trend analysis of PVNBP - cumulative

 


1Q11 YTD

£m

2Q11  YTD

£m

3Q11 YTD

£m

4Q11 YTD

£m

1Q12  YTD

£m

2Q12 YTD

£m

3Q12 YTD

£m

4Q12 YTD

£m

% Growth

on 4Q11

YTD

Life and pensions business - Present value
of new business premiums1










Pensions

1,105

2,708

3,963

5,279

1,251

2,762

3,963

5,158

(2)%

Annuities

785

1,610

2,434

3,832

662

1,555

2,459

3,211

(16)%

Bonds

271

466

638

801

128

253

322

379

(53)%

Protection

250

490

749

1,025

300

608

920

1,228

20%

Equity release

83

160

234

317

89

209

338

434

37%

United Kingdom

2,494

5,434

8,018

11,254

2,430

5,387

8,002

10,410

(7)%

Ireland

280

553

757

917

199

342

469

632

(31)%

United Kingdom & Ireland

2,774

5,987

8,775

12,171

2,629

5,729

8,471

11,042

(9)%

France

1,271

2,345

3,224

4,047

1,092

1,944

2,671

3,638

(10)%

Spain

524

1,015

1,425

1,926

402

705

934

1,295

(33)%

Italy

874

1,778

2,517

2,993

673

1,259

1,603

1,971

(34)%

Other

79

155

228

262

50

98

146

159

(39)%

Developed markets

5,522

11,280

16,169

21,399

4,846

9,735

13,825

18,105

(15)%

Poland

149

305

403

487

107

201

274

373

(23)%

Asia

426

902

1,343

1,782

442

913

1,367

1,765

(1)%

Other

91

172

237

320

87

181

277

403

26%

Higher growth markets

666

1,379

1,983

2,589

636

1,295

1,918

2,541

(2)%

Total life and pensions

6,188

12,659

18,152

23,988

5,482

11,030

15,743

20,646

(14)%

Investment sales2

869

1,830

2,682

3,473

949

1,934

3,400

4,586

32%

Total long-term saving sales - continuing operations

7,057

14,489

20,834

27,461

6,431

12,964

19,143

25,232

(8)%

Total long-term saving sales - discontinued operations3

1,707

2,913

4,051

5,187

1,034

2,073

3,071

4,039

(22)%

Total long-term saving sales

8,764

17,402

24,885

32,648

7,465

15,037

22,214

29,271

(10)%

1. Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business.

2. Investment sales are calculated as new single premiums plus the annualised value of new regular premiums.

3. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011.

 

 

 

Page 82

 

 

B6 - Trend analysis of PVNBP - discrete

 


1Q11

£m

2Q11

£m

3Q11

£m

4Q11

£m

1Q12

£m

2Q12

£m

3Q12

£m

4Q12

£m

% Growth

on 3Q12

Sterling

Life and pensions business - Present value of new business premiums1










Pensions

1,105

1,603

1,255

1,316

1,251

1,511

1,201

1,195

-

Annuities

785

825

824

1,398

662

893

904

752

(17)%

Bonds

271

195

172

163

128

125

69

57

(17)%

Protection

250

240

259

276

300

308

312

308

(1)%

Equity release

83

77

74

83

89

120

129

96

(26)%

United Kingdom

2,494

2,940

2,584

3,236

2,430

2,957

2,615

2,408

(8)%

Ireland

280

273

204

160

199

143

127

163

28%

United Kingdom & Ireland

2,774

3,213

2,788

3,396

2,629

3,100

2,742

2,571

(6)%

France

1,271

1,074

879

823

1,092

852

727

967

33%

Spain

524

491

410

501

402

303

229

361

58%

Italy

874

904

739

476

673

586

344

368

7%

Other

79

76

73

34

50

48

48

13

(73)%

Developed markets

5,522

5,758

4,889

5,230

4,846

4,889

4,090

4,280

5%

Poland

149

156

98

84

107

94

73

99

36%

Asia

426

476

441

439

442

471

454

398

(12)%

Other

91

81

65

83

87

94

96

126

31%

Higher growth markets

666

713

604

606

636

659

623

623

-

Total life and pensions

6,188

6,471

5,493

5,836

5,482

5,548

4,713

4,903

4%

Investment sales2

869

961

852

791

949

985

1,466

1,186

(19)%

Total long-term saving sales - continuing operations

7,057

7,432

6,345

6,627

6,431

6,533

6,179

6,089

(1)%

Total long-term saving sales - discontinued operations3

1,707

1,206

1,138

1,136

1,034

1,039

998

968

(3)%

Total long-term saving sales

8,764

8,638

7,483

7,763

7,465

7,572

7,177

7,057

(2)%

1. Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business.

2. Investment sales are calculated as new single premiums plus the annualised value of new regular premiums.

3. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011.

 

 

 

Page 83

 

B7 - Geographical analysis of regular and single premiums - life and pensions sales

 


Regular premiums

Single premiums


2012

£m

Local

currency

growth

WACF

Present

value

£m

2011

£m

Local

currency

growth

WACF

Present

value

£m

2012

£m

2011

£m

Local

currency

growth

Pensions

595

(2)%

4.3

2,565

608

40%

4.5

2,750

2,593

2,529

3%

Annuities

-

-

-

-

-

-

-

-

3,211

3,832

(16)%

Bonds

-

-

-

-

-

-

-

1

379

800

(53)%

Protection

176

11%

7.0

1,228

158

10%

6.5

1,025

-

-

-

Equity release

-

-

-

-

-

-

-

-

434

317

37%

United Kingdom

771

1%

4.9

3,793

766

32%

4.9

3,776

6,617

7,478

(12)%

Ireland

33

(34)%

3.8

127

53

(20)%

3.9

205

505

712

(24)%

United Kingdom & Ireland

804

(1)%

4.9

3,920

819

27%

4.9

3,981

7,122

8,190

(13)%

France

74

(3)%

7.9

584

81

(11)%

6.7

540

3,054

3,507

(7)%

Spain

67

(22)%

5.6

375

92

(17)%

5.4

501

920

1,425

(31)%

Italy

54

-

5.9

317

58

14%

5.4

316

1,654

2,677

(34)%

Other

7

(59)%

8.9

62

19

(31)%

8.8

168

97

94

7%

Developed markets

1,006

(4)%

5.2

5,258

1,069

16%

5.2

5,506

12,847

15,893

(16)%

Poland

36

(22)%

7.3

261

50

-

7.3

367

112

120

2%

Asia

282

(4)%

5.3

1,482

295

21%

4.9

1,444

283

338

(17)%

Other

79

22%

3.7

290

68

23%

3.6

246

113

74

61%

Higher growth markets

397

(2)%

5.1

2,033

413

19%

5.0

2,057

508

532

(3)%

Total life and pension sales - continuing operations

1,403

(4)%

5.2

7,291

1,482

17%

5.1

7,563

13,355

16,425

(16)%

Total life and pension sales - discontinued operations1

130

(27)%

11.1

1,440

182

(32)%

9.6

1,751

2,599

3,266

(20)%

Total life and pension sales

1,533

(6)%

5.7

8,731

1,664

8%

5.6

9,314

15,954

19,691

(17)%

1. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011.

B8 - Geographical analysis of regular and single premiums - investment sales


Regular

Single

PVNBP

Investment sales

2012

£m

2011

£m

Local

currency

growth

2012

£m

2011

£m

Local

currency

growth

Local

currency

growth

United Kingdom & Ireland

9

6

50%

1,721

1,683

2%

2%

Aviva Investors

5

6

(17)%

2,722

1,592

81%

80%

Higher growth markets

-

-

-

129

186

(32)%

(32)%

Total investment sales - continuing operations

14

12

17%

4,572

3,461

35%

35%

Total investment sales - discontinued operations1

-

-

-

-

8

(100)%

(100)%

Total investment sales

14

12

17%

4,572

3,469

35%

29%

1. Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011.

 

Page 84

 

B9 - Life and pensions new business - net of tax and non-controlling interests

 


Present value of new

business premiums

Value of new business

New business margin

Net of tax and non-controlling interest

2012

£m

2011

£m

2012

£m

2011

£m

2012

%

2011

%

United Kingdom

10,410

11,254

319

281

3.1%

2.5%

Ireland

474

688

(6)

(3)

(1.3)%

(0.4)%

United Kingdom & Ireland

10,884

11,942

313

278

2.9%

2.3%

France

2,996

3,376

67

79

2.2%

2.3%

Spain

719

1,054

15

28

2.1%

2.7%

Italy

841

1,336

8

23

1.0%

1.7%

Other

158

262

-

4

-

1.5%

Developed markets

15,598

17,970

403

412

2.6%

2.3%

Poland

339

440

26

34

7.7%

7.7%

Asia

1,748

1,756

50

55

2.9%

3.1%

Other

403

320

26

16

6.5%

5.0%

Higher growth markets

2,490

2,516

102

105

4.1%

4.2%

Total life and pensions - continuing operations

18,088

20,486

505

517

2.8%

2.5%

Total life and pensions - discontinued operations1

4,039

4,531

(182)

(85)

(4.5)%

(1.9)%

Total life and pensions

22,127

25,017

323

432

1.5%

1.7%

1.      Current period represents the results of the United States and prior period represents the results of the United States and Delta Lloyd up to 6 May 2011.

 

 

 

 


 

Page 85

 

Capital management

 

 

In this section


Page

C1    Capital management


86

       C1i Capital management objectives and approach


86

         C1ii Economic capital


87

C2 Capital performance


89

         C2 i - Capital generation and utilisation


89

         C2 ii - Capital required to write new business, internal rate of return and payback period


89

         C2 iii - Analysis of IFRS basis return on equity


91

         C2 iv - Analysis of MCEV basis return
on equity


92

C3    Group capital structure


93

C4    Sources of liquidity


95

C5    EEV equivalent embedded value


96

C6    Regulatory capital


97

C7    IFRS sensitivity analysis


99

 

 

 

 


Page 86

 

Capital management

 

C1 - Capital management

C1i - Capital Management objectives and approach

The primary objective of capital management is to optimise the balance between return and risk, whilst maintaining economic and regulatory capital in accordance with risk appetite. Aviva's capital and risk management objectives are closely interlinked, and support the dividend policy and earnings per share growth, whilst also recognising the critical importance of protecting policyholder and other stakeholder interests.

      Overall capital risk appetite, which is reviewed and approved by the Aviva board, is set and managed with reference to the requirements of a range of different stakeholders including shareholders, policyholders, regulators and rating agencies. Risk appetite is expressed in relation to a number of key capital and risk measures, and includes an economic capital risk appetite of holding sufficient capital resources to enable the Group to meet its liabilities in extreme adverse scenarios, on an ongoing basis, calibrated at a level consistent with a AA range credit rating.

      In managing capital we seek to:

n maintain sufficient, but not excessive, financial strength in accordance with risk appetite, to support new business growth and satisfy the requirements of our regulators and other stakeholders giving both our customers and shareholders assurance of our financial strength;

n optimise our overall debt to equity structure to enhance our returns to shareholders, subject to our capital risk appetite and balancing the requirements of the range of stakeholders;

n retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit facilities and access
to a range of capital markets;

n allocate capital rigorously across the Group, to drive value adding growth through optimising risk and return; and

n declare dividends with reference to factors including growth in cash flows and earnings

 

In line with these objectives, the capital generated and invested by the Group's businesses is a key management focus. Operating capital generation, which measures net capital generated after taking into account capital invested in new business (before the impact of non-operating items) is a core regulatory capital based management performance metric used across the Group. This is embedded in the Group business planning process and other primary internal performance and management information processes.

      Capital is measured and managed on a number of different bases. These are discussed further in the following sections.

Regulatory capital

Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Financial Services Authority (FSA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate Group level, where we have a regulatory obligation to have a positive position at all times. This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the UK and Ireland with-profit life funds. The minimum solvency requirement for our European businesses is based on the Solvency 1 Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our major non-European businesses (the US and Canada) a risk charge on assets and liabilities approach
is used.

Rating agency capital

Credit ratings are an important indicator of financial strength and support access to debt markets as well as providing assurance
to business partners and policyholders over our ability to service contractual obligations. In recognition of this, we have solicited relationships with a number of rating agencies. The agencies generally assign ratings based on an assessment of a range of financial factors (e.g. capital strength, gearing, liquidity and fixed charge cover ratios) and non financial factors (e.g. strategy, competitive position, and risk management).

      Certain rating agencies have proprietary capital models which they use to assess available capital resources against capital requirements as a component in their overall criteria for assigning ratings. Managing our capital and liquidity position in accordance with our target rating levels is a core consideration in all material capital management and capital allocation decisions.

      The Group's overall financial strength is reflected in our credit ratings.  The Group's rating from Standard and Poors is A+ ("strong") with a Stable outlook; Aa3 ("excellent") with a Negative outlook from Moody's; and A ("excellent") with a Stable outlook from AMBest.

 

 

Page 87

 

C1 - Capital management continued

C1 ii Economic capital

We use a risk-based capital model to assess economic capital requirements and to aid in risk and capital management across the Group. The model is based on a framework for identifying the risks to which business units, and the group as a whole, are exposed. Where appropriate, businesses also supplement these with additional risk models and stressed scenarios specific to their own risk profile. When aggregating capital requirements at business unit and group level, we allow for diversification benefits between risks and between businesses, with restrictions to allow for non-fungibility of capital where appropriate. This means that the aggregate capital requirement is less than the sum of capital required to cover all of the individual risks. The capital requirement reflects the cost of mitigating the risk of insolvency to a 99.5% confidence level over a one year time horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial tests.

      The financial modelling techniques employed in economic capital enhance our practice of risk and capital management. They enable understanding of the impact of the interaction of different risks allowing us to direct risk management activities appropriately. These same techniques are employed to enhance product pricing and capital allocation processes. Unlike more traditional regulatory capital measures, economic capital also recognises the value of longer-term profits emerging from in-force and new business, allowing for consideration of longer-term value emergence as well as shorter-term net worth volatility in our risk and capital management processes. We continue to develop our economic capital modelling capability for all our businesses as part of our development programme to increase the focus on economic capital management and meeting the emerging requirements of the Solvency II framework and external agencies.

Capital Management

The estimated economic capital surplus represents the excess of Available Economic Capital over Required Economic Capital. Available Economic Capital is based on MCEV1 net assets, adjusted for items to convert to an economic basis. Required Economic Capital is based on Aviva's own internal assessment and capital management policies. The term 'economic capital' does not imply capital as required by regulators or other third parties.

Summary analysis of Estimated Economic Capital Position

 


2012
£bn

2011
£bn

Available economic capital

16.6

15.7

Standalone required economic capital

(18.1)

(18.9)

Diversification benefit

6.8

6.8

Diversified required economic capital

(11.3)

(12.1)

Estimated economic capital position at 31 December 2012

5.3

3.6

Cover Ratio

147%

130%

Proforma impacts

1.8

n/a

Estimated proforma economic capital position at 31 December 2012

7.1

n/a

Proforma cover ratio

172%

n/a

Analysis of Change

 




2012
£bn

Economic capital position at 31 December 2011


3.6

MCEV operating earnings


0.9

Economic variances


0.7

Other non-operating items


(0.6)

Dividend and appropriations, net of shares issued in lieu of dividends


(0.7)

Net impact of fixed rate note issuance/call


0.2

Other


0.4

Change in available economic capital


0.9

Impact of trading operations and other


0.4

Impact of credit hedging


0.2

Capital requirement benefits from Delta Lloyd partial sell-down


0.2

Change in diversified required economic capital


0.8

Estimated economic capital position at 31 December 2012


5.3

Proforma impacts


1.8

Estimated proforma Economic capital position at 31 December 2012


7.1

 

 

 

 

 

 

 

 

 

 

 

1 MCEV: market consistent embedded value. In preparing the MCEV information, the directors have done so in accordance with the MCEV principles with the exception of stating held for sale operations at their expected fair value, as represented by expected sales proceeds, less costs to sell. For more information on MCEV reporting please refer to Supplement 2 MCEV Financial Statements.

 

 

 

 

Page 88

 

 

C1 - Capital management continued

Summary analysis of Diversified Required Economic Capital

 


Proforma 2012
£bn

2011
£bn

Credit risk 1

2.3

3.5

Equity risk 2

1.7

2.2

Interest rate risk 3

0.1

0.2

Other market risk 4

1.5

1.5

Life insurance risk 5

1.0

1.1

General insurance risk 6

0.9

0.7

Other risk 7

2.4

2.9

Total (FY12 proforma basis)

9.9

12.1

Total (FY12 base results)

11.3

12.1

1 Capital held in respect of credit risk recognises the Group's shareholder exposure to changes in the market value of assets and defaults. Assets captured within this category include corporate bonds and non-domestic sovereign. A range of specific stresses are applied reflecting the difference in assumed risk relative to the investment grade and duration. The reduction in the year primarily reflects the disposal of the US but also includes the benefit of hedging instruments purchased in the year.

Capital held in respect of equity risk recognises the Group's shareholder exposure to changes in the market value of assets. The reduction in equity risk during the year primarily reflects the impact of the sell-down in Delta Lloyd.

3 Capital held in respect of interest rate risk recognises the Group's shareholder exposure to changes in the market value of assets. A range of specific stresses are applied reflecting the difference in assumed risk relative to investment grade and duration.

4Capital held in respect of other market risk recognises the Group's shareholder exposure to changes in the market value of commercial mortgages and property, but also captures risk in association with inflation and foreign exchange.

5Capital held in respect of life insurance risk recognises the Group's shareholder exposure to life insurance specific risks, such as longevity and lapse.

6Capital held in respect of general insurance risk recognises the Group's shareholder exposure to general insurance specific risks, such as claims volatility and catastrophe.

7 Capital held in respect of other risk recognises the Group's shareholder exposure to specific risks unique to particular business units. The reduction in the year primarily reflects the disposal of the US.

Solvency II

Following regulatory delays in finalising the Omnibus II Directive, which underpins Solvency II, it became clear that Solvency II would not come into effect on 1 January 2014. Currently the earliest expected effective date is 2 years later, on 1 January 2016. Aviva has been early adopting a number of Solvency II requirements into the ICA, which is the current economic regulatory basis in the UK. Aviva is well placed for review by the FSA on an "ICA plus" basis ("ICA plus" represents how the FSA is addressing the regulatory uncertainty left in the wake of continuing Solvency II implementation delays). Aviva continues to enhance and develop its economic capital infrastructure for full Solvency II compliance by the effective date and actively participate in developments through the key European industry working groups, and engaging with the FSA and HM Treasury to inform the on-going negotiations in Brussels.

 

 

 

Page 89

 

C2 - Capital performance

C2 i - Capital generation and utilisation

The active management of the generation and utilisation of capital is a primary Group focus, with the balancing of new business investment and shareholder distribution with operating capital generation a key financial priority.

      Operating capital generation for the full-year 2012 was £2.0 billion. Life businesses generated £2.1 billion of capital (FY11: £2.3 billion), with a further £0.6 billion (FY11: £0.6 billion) generated by the general insurance and fund management businesses and other operations. Capital invested in new business was £0.7 billion (FY11: £0.8 billion), and continues to benefit from management actions to improve capital efficiency. The £0.7 billion of capital investment is primarily in life new business with the impact of capital investment in non-life business broadly neutral over the period.

 


2012
£bn

2011
£bn

Operating capital generation:



Life in-force profits1

2.1

2.3

General insurance, fund management and other operations profits

0.6

0.6

Operating capital generated before investment in new business

2.7

2.9

Capital invested in new business

(0.7)

(0.8)

Operating capital generated after investment in new business

2.0

2.1

1 The Life in-force profits in 2012 exclude the negative impact of a true up relating to a prior estimate of required capital, which is included in the MCEV Free Surplus Emergence, as this does not impact the actual capital generated in 2012.

Operating capital generation comprises the following components:

-  Operating Free surplus emergence, including release of required capital, for the life in-force business (net of tax and non-controlling interests);

-  Operating profits for the general insurance and non-life businesses (net of tax and non-controlling interests);

-  Capital invested in new business. For life business this is the impact of initial and required capital on free surplus. For general insurance business this reflects the movement in required capital, which has been assumed to equal the regulatory minimum multiplied by the local management target level. Where appropriate movements in capital requirements exclude the impact of foreign exchange and other movements deemed to be non-operating in nature.

-  Post deconsolidation on 6 May 2011, all Delta Lloyd capital generation, including life business, has been included within general insurance, fund management and other operations profits on an IFRS basis.

The amount of operating capital remitted to Group is dependent upon a number of factors including non-operating items and local regulatory requirements.

 

As well as financing new business investment, the operating capital generated is used to finance corporate costs, service the Group's debt capital and to finance shareholder dividend distributions. After taking these items into account the net operating capital generation after financing is £0.5 billion.

 


2012
£bn

2011
£bn

Operating capital generated after investment in new business

2.0

2.1

Interest, corporate and other costs

(0.8)

(0.6)

External dividends and appropriations, net of shares issued in lieu of dividends

(0.7)

(0.5)

Net operating capital generation after financing

0.5

1.0

C2 ii - Capital required to write new business, internal rate of return and payback period

As set out in C2i, the Group generates a significant amount of capital each year. This capital generation supports both shareholder distribution and reinvestment in new business. The new business written requires up front capital investment, due to high set-up costs and capital requirements.

      The internal rate of return (IRR) is a measure of the shareholder return expected on this capital investment. It is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the life time of the business written, including allowance for the time value of options and guarantees, is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is the initial capital required to pay acquisition costs and set up statutory reserves in excess of premiums received ('initial capital'), plus required capital at the same level as for the calculation of the value of new business.

      The payback period shows how quickly shareholders can expect the total capital to be repaid. The payback period has been calculated based on undiscounted cash flows and allows for the initial and required capital.

      The projected investment returns in both the IRR and payback period calculations assume that equities, properties and bonds
earn a return in excess of risk-free consistent with the long-term rate of return assumed in operating earnings.

 

 

Page 90

 

 

C2 - Capital performance continued

C2 ii - Capital required to write new business, internal rate of return and payback period continued

The internal rates of return on new business written during the period are set out below.

 

Gross of non-controlling interests

2012

Internal

rate of

return

%

Initial

capital

£m

Required

capital

£m

Total

invested

capital

£m

New business impact on free surplus

Payback

period

years

United Kingdom

18%

112

164

276

6

6

Ireland

2%

31

10

41

31

25

United Kingdom & Ireland

16%

143

174

317

37

8

France

11%

33

113

146

125

8

Spain

21%

21

42

63

35

4

Italy

12%

20

69

89

41

6

Other

8%

12

1

13

15

10

Developed markets

15%

229

399

628

253

8

Poland

20%

20

8

28

25

4

Asia

11%

60

29

89

82

11

Other

28%

17

15

32

29

3

Higher growth markets

16%

97

52

149

136

8

Total - excluding United States

14.9%

326

451

777

389

8

Total - United States

17%

24

292

316

319

4

Total

15.5%

350

743

1,093

708

7

 

Gross of non-controlling interests

2011

Internal

rate of

return

%

Initial

capital

£m

Required

capital

£m

Total

invested

capital

£m

New business impact on free surplus

Payback

period

years

United Kingdom

15%

155

187

342

89

7

Ireland

6%

27

22

49

38

12

United Kingdom & Ireland

14%

182

209

391

127

8

France

11%

45

127

172

153

8

Spain

23%

25

70

95

50

4

Italy

12%

24

117

141

66

6

Other

9%

25

1

26

25

8

Developed markets

14%

301

524

825

421

7

Poland

24%

25

9

34

30

4

Asia

13%

56

31

87

80

12

Other

22%

15

12

27

27

4

Higher growth markets

17%

96

52

148

137

9

Total - excluding Delta Lloyd and United States

14.5%

397

576

973

558

7

Total - Delta Lloyd1 and United States

14%

53

328

381

376

6

Total

14.3%

450

904

1,354

934

7

1  Comparative periods include the results of Delta Lloyd up to 6 May 2011.

 

In Ireland, the closure of Ark Life to new business in the first half of 2012 has adversely impacted IRR and payback period as current expenses are spread over a smaller volume of business.

      Total invested capital is gross of non-controlling interests and valued on a point of sale basis. This differs from the new business impact on the free surplus which is stated net of non-controlling interests, valued on a year-end basis and benefits from the writing of new business in the UK Life RIEESA. The reconciliation is as follows:

 


2012

£m

2011

£m

Total capital invested

1,093

1,354

Non-controlling interests1

(112)

(180)

Benefit of RIEESA on new business funding in UK

(220)

(190)

Timing differences (point of sale versus year end basis) 2

(53)

(50)

New business impact on free surplus

708

934

1 Non controlling interests primarily in Italy and Spain

2 Timing differences across all markets

 

 

 

Page 91

 

 

C2 - Capital performance continued

C2 iii - Analysis of IFRS basis return on equity

 


Operating return1



2012

Before Tax

£m

After tax

£m

Opening

shareholders'

funds

including non-

controlling

interests

£m

Return on

equity

%

Life assurance

1,831

1,542

11,237

13.7%

General insurance and health2

858

633

5,875

10.8%

Fund management

51

36

184

19.6%

Other business

(193)

(135)

(1,102)

12.3%

Corporate3

(466)

(538)

508

n/a

Return on total capital employed (excluding Delta Lloyd and United States)

2,081

1,538

16,702

9.2%

Delta Lloyd

112

84

776

10.8%

United States

251

173

3,140

5.5%

Return on total capital employed (including Delta Lloyd and United States)

2,444

1,795

20,618

8.7%

Subordinated debt

(294)

(222)

(4,550)

4.9%

External debt

(23)

(17)

(705)

2.4%

Return on total equity

2,127

1,556

15,363

10.1%

Less: Non-controlling interests


(184)

(1,530)

12.0%

Direct capital instruments and fixed rate tier 1 notes


(55)

(990)

5.6%

Preference capital


(17)

(200)

8.5%

Return on equity shareholders' funds


1,300

12,643

10.3%

1  The operating return is based upon Group adjusted operating profit, which is stated before impairment of goodwill, amortisation of intangibles, exceptional items and investment variances.

2  The general insurance & health return on capital employed reduces when compared to 2011 due to the reallocation of goodwill from other business to general insurance and health upon the sale of RAC in 2011. 

3  The 'Corporate' loss before tax of £466 million comprises costs of £136 million, net finance charge on the main UK pension scheme of £35 million and interest on internal lending arrangements of £319 million offset by investment return
of £24 million. The corporate ROCE has been reported as 'n/a' as the opening capital is impacted by movements in the pension scheme, thereby making the percentage incomparable with the prior year.

 


Operating return1



2011

Before Tax

£m

After tax

£m

Opening

shareholders'

funds

including non-

controlling

interests

£m

Return on

equity

%

Life assurance

1,926

1,512

11,356

13.3%

General insurance and health

903

657

4,747

13.8%

Fund management

62

49

192

25.5%

Other business

(207)

(148)

(119)

124.4%

Corporate2

(436)

(391)

(232)

n/a

Return on total capital employed (excluding Delta Lloyd and United States)

2,248

1,679

15,944

10.5%

Delta Lloyd

352

288

5,089

5.7%

United States

231

88

2,758

3.2%

Return on total capital employed (including Delta Lloyd and United States)

2,831

2,055

23,791

8.6%

Subordinated debt

(302)

(222)

(4,572)

4.9%

External debt

(26)

(19)

(1,494)

1.3%

Return on total equity

2,503

1,814

17,725

10.2%

Less: Non-controlling interests


(223)

(3,741)

6.0%

Direct capital instruments and fixed rate tier 1 notes


(43)

(990)

4.3%

Preference capital


(17)

(200)

8.5%

Return on equity shareholders' funds


1,531

12,794

12.0%

1  The operating return is based upon Group adjusted operating profit, which is stated before impairment of goodwill, amortisation of intangibles, exceptional items and investment variances.

2  The 'Corporate' loss before tax of £436 million comprises costs of £138million, net finance charge on the main UK pension scheme of £46 million and interest on internal lending arrangements of £284 million offset by investment return
of £32 million. The corporate ROCE has been reported as 'n/a' as the opening capital is impacted by movements in the pension scheme, thereby making the percentage incomparable with the prior year.

 

 

 

Page 92

 

C2 - Capital performance continued

C2 iv - Analysis of MCEV basis return on equity

 


Operating return1



2012

Before Tax

£m

After tax

£m

Opening

shareholders'

funds

including non-

controlling

interests

£m

Return on

equity

%

Life assurance

2,206

1,630

14,148

11.5%

General insurance and health

858

633

5,875

10.8%

Fund management

24

17

184

9.2%

Other business

(186)

(130)

(1,102)

11.8%

Corporate2

(466)

(538)

508

n/a

Return on total capital employed (excluding Delta Lloyd and United States)

2,436

1,612

19,613

8.2%

Delta Lloyd

112

84

776

10.8%

United States

(378)

(244)

361

(67.6)%

Return on total capital employed (including Delta Lloyd and United States)

2,170

1,452

20,750

7.0%

Subordinated debt

(294)

(222)

(4,550)

4.9%

External debt

(23)

(17)

(705)

2.4%

Return on total equity

1,853

1,213

15,495

7.8%

Less: Non-controlling interests


(336)

(1,476)

22.8%

Direct capital instruments and fixed rate tier 1 notes


(55)

(990)

5.6%

Preference capital


(17)

(200)

8.5%

Return on equity shareholders' funds


805

12,829

6.3%

1  The operating return is based upon Group adjusted operating profit, which is stated before impairment of goodwill, amortisation of intangibles, exceptional items and investment variance.

2  The 'Corporate' loss before tax of £466 million comprises costs of £136 million, net finance charge on the main UK pension scheme of £35 million and interest on internal lending arrangements of £319 million offset by investment return
of £24 million. The corporate ROCE has been reported as 'n/a' as the opening capital is impacted by movements in the pension scheme, thereby making the percentage incomparable with the prior year.

 


Operating return1



2011

Before Tax

£m

After tax

£m

Opening

shareholders'

funds

including non-

controlling

interests

£m

Return on

equity

%

Life assurance

2,888

2,062

16,673

12.4%

General insurance and health

903

657

4,747

13.8%

Fund management

28

18

192

9.4%

Other business

(204)

(144)

(119)

121.0%

Corporate2

(436)

(391)

(232)

n/a

Return on total capital employed (excluding Delta Lloyd and United States)

3,179

2,202

21,261

10.4%

Delta Lloyd

444

331

3,892

8.5%

United States

242

158

1,118

14.1%

Return on total capital employed (including Delta Lloyd and United States)

3,865

2,691

26,271

10.2%

Subordinated debt

(302)

(222)

(4,572)

4.9%

External debt

(26)

(19)

(1,494)

1.3%

Return on total equity

3,537

2,450

20,205

12.1%

Less: Non-controlling interests


(253)

(3,977)

6.4%

Direct capital instruments and fixed rate tier 1 notes


(43)

(990)

4.3%

Preference capital


(17)

(200)

8.5%

Return on equity shareholders' funds


2,137

15,038

14.2%

1  The operating return is based upon Group adjusted operating profit, which is stated before impairment of goodwill, amortisation of intangibles, exceptional items and investment variance.

2  The 'Corporate' loss before tax of £436million comprises costs of £138million, net finance charge on the main UK pension scheme of £46 million and interest on internal lending arrangements of £284 million offset by investment return
of £32 million. The corporate ROCE has been reported as 'n/a' as the opening capital is impacted by movements in the pension scheme, thereby making the percentage incomparable with the prior year.

 

 

Page 93

 

C3 - Group capital structure

The table below shows how our capital, on an MCEV basis, is deployed by products and services segments and how that capital
is funded.

 


2012

£m

2011

£m

Long-term savings

16,337

14,148

General insurance and health

6,089

5,875

Fund management

225

184

Other business

(1,059)

(1,102)

Corporate1

(588)

508

Delta Lloyd

-

776

United States

365

361

Total capital employed

21,369

20,750

Financed by



Equity shareholders' funds

12,434

12,829

Non-controlling interests

2,214

1,476

Direct capital instruments and fixed rate tier 1 notes

1,382

990

Preference shares

200

200

Subordinated debt

4,337

4,550

External debt

802

705

Total capital employed

21,369

20,750

1  "Corporate" includes centrally held tangible net assets, the staff pension scheme surplus and also reflects internal lending arrangements. These internal lending arrangements, which net out on consolidation, arise in relation to the following:

     -                 Aviva Insurance Limited (AI) acts as both a UK general insurer and as the primary holding company for our foreign subsidiaries. Internal capital management mechanisms in place allocate a portion of the total capital of the company to the UK
    general insurance operations, giving rise to notional lending between the general insurance and holding company activities. These mechanisms also allow for some of the assets of the general insurance business to be made available for use
    across the Group.

     -                 Certain subsidiaries, subject to continuing to satisfy stand alone capital and liquidity requirements, loan funds to corporate and holding entities. These loans satisfy arm's-length criteria and all interest payments are made when due.

     -  Subsequent to the year end, the Group has taken action to improve its access to dividends from the Group's insurance and asset management businesses by undertaking a corporate restructure. This will see the Group's interest in the majority of its overseas        businesses move to Aviva Group Holdings Limited from Aviva Insurance Limited.

 

Total capital employed is financed by a combination of equity shareholders' funds, preference capital, subordinated debt
and borrowings. At FY12 we had £21.4 billion (FY11: £20.8 billion) of total capital employed in our trading operations measured on an MCEV basis.

      In May 2012 we issued US$650 million of Fixed Rate Tier 1 Notes. The Notes are perpetual and may be called from November 2017. The Notes qualify as Innovative Tier 1 capital under current regulatory rules and are expected to be treated as Fixed Rate Tier 1 capital under Solvency II transitional rules. The transaction had a positive impact on Group IGD solvency and Economic Capital measures. In June 2012 US$300 million of Lower Tier 2 floating rate notes were redeemed at first call.

      Financial leverage, the ratio of external senior and subordinated debt to MCEV capital and reserves, was 35.1% (FY11: 36.7%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by MCEV operating profit was 5.1 times (FY11: 8.9 times). The impact of the agreement to sell Aviva USA has meant that financial leverage under IFRS is higher at 52.6% (FY11: 37.1%).

      At FY12 the market value of our external debt, subordinated debt, preference shares (including both Aviva plc preference shares
of £200 million and General Accident plc preference shares, within non-controlling interest, of £250 million), and direct capital instruments and fixed rate tier 1 notes was £7,260 million (FY11: £5,782 million), with a weighted average cost, post tax, of 4.4% (FY11: 6.6%). The Group Weighted Average Cost of Capital (WACC) is 6.3% (FY11: 7.1%) and has been calculated by reference to the cost of equity and the cost of debt at the relevant date. The cost of equity at FY12 was 7.5% (FY11: 7.4%) based on a risk free rate of 1.9% (FY11: 2.0%), an equity risk premium of 4.0% (FY11: 4.0%) and a market beta of 1.4 (FY11: 1.3).

 

Page 94

 

C3 - Group capital structure continued

Shareholders' funds, including non-controlling interests

 




2012



2011


Closing shareholders' funds

Closing shareholders' funds


IFRS

net assets

£m

Internally

generated

AVIF

£m

Total

Equity

£m

IFRS

net assets

£m

Internally

generated

AVIF

£m

Total

Equity

£m

Life assurance







United Kingdom

4,905

1,595

6,500

4,794

1,421

6,215

Ireland

735

361

1,096

684

365

1,049

United Kingdom & Ireland

5,640

1,956

7,596

5,478

1,786

7,264

France

2,120

1,329

3,449

1,825

1,091

2,916

Spain

1,113

340

1,453

1,160

384

1,544

Italy

1,276

(317)

959

1,266

(1,405)

(139)

Other

54

13

67

238

(140)

98

Developed markets

10,203

3,321

13,524

9,967

1,716

11,683

Poland

336

1,442

1,778

263

1,063

1,326

Asia

784

28

812

865

58

923

Other

144

79

223

142

74

216

Higher Growth markets

1,264

1,549

2,813

1,270

1,195

2,465


11,467

4,870

16,337

11,237

2,911

14,148

General Insurance and health







United Kingdom

3,546

-

3,546

3,394

-

3,394

Ireland

355

-

355

408

-

408

United Kingdom & Ireland

3,901

-

3,901

3,802

-

3,802

France

562

-

562

480

-

480

Canada

1,039

-

1,039

1,034

-

1,034

Other

489

-

489

468

-

468

Developed markets

5,991

-

5,991

5,784

-

5,784

Higher Growth markets

98

-

98

91

-

91


6,089

-

6,089

5,875

-

5,875

Fund Management

225

-

225

184

-

184

Other business

(1,059)

-

(1,059)

(1,102)

-

(1,102)

Corporate

(588)

-

(588)

508

-

508

Total capital employed (excluding Delta Lloyd and United States)

16,134

4,870

21,004

16,702

2,911

19,613

Delta Lloyd

-

-

-

776

-

776

United States

365

-

365

3,140

(2,779)

361

Total capital employed

16,499

4,870

21,369

20,618

132

20,750

Subordinated debt

(4,337)

-

(4,337)

(4,550)

-

(4,550)

External debt

(802)

-

(802)

(705)

-

(705)

Total equity

11,360

4,870

16,230

15,363

132

15,495

Less:







Non-controlling interests



(2,214)



(1,476)

Direct capital instruments and fixed rate tier 1 notes



(1,382)



(990)

Preference capital



(200)



(200)

Equity shareholders' funds



12,434



12,829

Less: Goodwill and Intangibles1



(2,247)



(3,479)

Equity shareholders' funds excluding goodwill and intangibles



10,187



9,350

1  Goodwill and intangibles comprise £1,609 million (FY 2011: £2,640 million) of goodwill in subsidiaries, £921 million (FY 2011: £1,062 million) of intangibles in subsidiaries, £119 million (FY 2011: £131 million) of goodwill and intangibles in joint ventures and £nil (FY 2011: £115 million) of goodwill in associates, net of associated deferred tax liabilities of £(188)million (FY 2011: £(241) million) and the non controlling interests share of intangibles of £(214)million (FY 2011: £(228) million). The goodwill figure of £1,609 million includes a £94 million adjustment to impair goodwill which has been reflected in the additional value of in-force long-term business in the MCEV balance sheet.

 

 

 

 

Page 95

 

 

C4 - Sources of Liquidity

In managing the Group's liquidity requirements, there are a number of external and internal sources of cash and liquid resources, including:

n external debt issuance;

n funds generated by the sale of businesses;

n liquidity generated by operating subsidiaries, associates and joint ventures;

n internal debt; and

n central assets of cash and securities.

 

The Group uses these sources of liquidity to fund internal investment, debt repayments and payment of dividends to shareholders.

      For Aviva plc the principal source of liquidity is dividends and liquid resources provided by its subsidiaries, associates and joint ventures. The level of dividends remitted is based on two primary factors: the financial performance of operating subsidiaries, associates and joint ventures, and the local solvency and capital requirements of individual entities.

      The table below shows liquid resources provided to Group Centre from operating companies, subsidiaries, associates and joint ventures in 2012:

 


2012

Amounts received

£m

UK life insurance

150

UK general insurance

150

Canada

136

France

217

Spain

68

Poland

70

Other operations

153


944

 

Subsequent to the year end, the Group has taken action to improve its access to dividends from the Group's insurance and asset management businesses by undertaking a corporate restructuring whereby Aviva Group Holdings ("AGH") has purchased from Aviva Insurance Limited ("AIL") its interest in the majority of its overseas businesses.

      Under UK company law, dividends can only be paid if a company has distributable reserves sufficient to cover the dividend. At 31 December 2012, Aviva plc itself had distributable reserves of £3,037 million, which would have covered three years of historic dividend payments to our shareholders. In UK Life, our largest operating subsidiary, distributable reserves, which could be paid to Aviva plc via its intermediate holding company, are created mainly by the statutory long-term business profit transfer to shareholders. While the UK insurance regulatory laws applicable to UK Life and our other UK subsidiaries impose no statutory restrictions on an insurer's ability to declare a dividend, the rules require maintenance of each insurance company's solvency margin, which might impact their ability to pay dividends to the parent company. Our other life and general insurance, and fund management subsidiaries' ability to pay dividends and make loans to the parent company is similarly restricted by local corporate or insurance laws and regulations. In all jurisdictions, when paying dividends, the relevant subsidiary must take into account its capital position and must set the level of dividend to maintain sufficient capital to meet minimum solvency requirements and any additional target capital expected by local regulators. These minimum solvency requirements, which are consolidated under the European Insurance Group Directive, are discussed later in this section under the heading 'Regulatory capital position'. We do not believe that the legal and regulatory restrictions constitute a material limitation on the ability of our businesses to meet their obligations or to pay dividends to the parent company, Aviva plc.

      The Group has received and expects to receive proceeds on completion of the disposals as disclosed in  - Note A3 - Subsidiaries.

      Aviva plc has established two main programmes for the issuance of external debt by Aviva plc. For short-term senior debt issuance we have a £2 billion commercial paper programme which allows debt to be issued in a range of currencies. At 31 December 2012, the outstanding debt issued under this programme was £603 million (FY11: £506 million excludes commercial paper issued by Delta Lloyd).

      For longer term debt we have established a Euro Medium Term Note (EMTN) programme. This programme has documentation readily available to allow quick issuance of long-term debt with a variety of terms and conditions. Debt issued under this programme may be senior debt or regulatory qualifying debt and may have a fixed or floating interest rate. At FY12, the outstanding debt issued under this programme was £2,076 million (FY11: £1,894 million).

 

 

Page 96

 

 

C5 - EEV equivalent embedded value

The embedded value of Aviva shown below is based on the projected future profits allowing for expected investment returns in excess of risk-free, and discounts those profits at a risk-discount rate. This result is deemed more comparable to other UK insurers who publish European Embedded Value (EEV) than market consistent embedded value.

      The expected release of future profits and required capital is shown in five-year groups. Projected cash flows are those used for Implied Discount Rate (IDR) calculations for in-force business. Held for sale operations have been stated at expected fair value, as represented by the expected sale proceeds, less cost to sell.

      The discount rate applied is 6.25% (FY11: 7.05%), based on a risk-free rate of 2.1%, a risk margin of 3.75% and an allowance for the time value of options and guarantees of 0.4%.

      The new business margin on continuing operations (net of tax and non-controlling interests) for business written during the period to 31 December 2012 is 2.9% (MCEV: 2.8%).

Segmental analysis of life and related business EEV equivalent embedded value

 


Net worth

VIF on traditional

embedded value

Embedded value


2012

£bn

2011

£bn

2012

£bn

2011

£bn

2012

£bn

2011

£bn

United Kingdom & Ireland

4.2

4.3

3.5

3.6

7.7

7.9

Developed markets excluding United Kingdom & Ireland

3.2

2.7

1.5

1.5

4.7

4.2

Developed markets

7.4

7.0

5.0

5.1

12.4

12.1

Higher Growth markets

0.8

0.7

1.5

1.3

2.3

2.0

Total covered business excluding United States

8.2

7.7

6.5

6.4

14.7

14.1

United States





1.1

2.7

Total Covered business





15.8

16.8

Non-covered business





(0.9)

1.7

Total Group EV





14.9

18.5

Less preference share capital, direct capital instruments and fixed
rate tier 1 notes





(1.6)

(1.2)

Equity attributable to ordinary shareholders on an EV basis





13.3

17.3

Maturity profile of undiscounted EEV equivalent embedded value cash flows

Total in-force business

To show the profile of the free surplus emergence implicit in the traditional embedded value calculation for in-force business, the cash flows have been split into five year tranches depending on the date when the profit is expected to emerge.

 



Release of future profits and required capital

Total net

2012

£bn

Free surplus

0-51

6-10

11-15

16-20

20+

of non-

controlling interest

United Kingdom & Ireland

1.3

2.5

2.3

2.5

2.1

4.5

13.9

Developed markets excluding United Kingdom & Ireland

0.1

2.6

1.6

1.2

1.0

2.7

9.1

Developed markets

1.4

5.1

3.9

3.7

3.1

7.2

23.0

Higher Growth markets

0.4

1.0

0.8

0.5

0.4

1.2

3.9

Total excluding United States

1.8

6.1

4.7

4.2

3.5

8.4

26.9

United States

0.3

0.8

-

-

-

-

0.8

Total

2.1

6.9

4.7

4.2

3.5

8.4

27.7

1 For held for sale operations, cash flow emergence is reported in the 0-5 column.

 



Release of future profits and required capital

Total net

2011

£bn

Free

surplus

0-5

6-10

11-15

16-20

20+

of non-

controlling interest

United Kingdom & Ireland

1.0

3.0

3.1

2.6

2.0

4.5

15.2

Developed markets excluding United Kingdom & Ireland

0.0

2.3

1.7

1.3

1.1

3.2

9.6

Developed markets

1.0

5.3

4.8

3.9

3.1

7.7

24.8

Higher Growth markets

0.3

1.0

0.6

0.4

0.4

1.1

3.5

Total excluding United States

1.3

6.3

5.4

4.3

3.5

8.8

28.3

United States

0.0

1.7

0.9

0.7

0.6

0.8

4.7

Total

1.3

8.0

6.3

5.0

4.1

9.6

33.0

 

 

 

 

Page 97

 

 

C6 - Regulatory capital

Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Financial Services Authority (FSA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate Group level, where Aviva has a regulatory obligation to have a positive position at all times. This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the UK and Ireland with-profit life funds. The minimum solvency requirement for our European businesses is based on the Solvency 1 Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level
of reinsurance recoveries. For our major non-European businesses (the US and Canada) a risk charge on assets and liabilities approach is used.

      Based on individual guidance from the FSA we recognise surpluses of £0.4 billion as at 31 December 2012 (FY 2011: £0.2 billion) in the non-profit funds of our UK Life and pensions businesses which is available for transfer to shareholders.

Regulatory capital - Group: European Insurance Groups Directive (IGD)

 


UK life
 funds
£bn

Other
business
£bn

Total
2012
£bn

Total
 2011
£bn

Insurance Groups Directive (IGD) capital resources

5.2

9.2

14.4

14.1

Less: capital resource requirement

(5.2)

(5.4)

(10.6)

(11.9)

Insurance Group Directive (IGD) excess solvency

-

3.8

3.8

2.2

Cover over EU minimum (calculated excluding UK life funds)


1.7 times

1.3 times

 

The EU Insurance Groups Directive (IGD) regulatory capital solvency surplus has increased by £1.6 billion since 31 December 2011
to £3.8 billion. The key movements over the period are set out in the following table:

 


£bn

IGD solvency surplus at 31 December 2011

2.2

Operating profits net of other income and expenses

0.9

Dividend and appropriations, net of shares issued in lieu of dividends

(0.7)

Market movements including foreign exchange1

1.3

Pension scheme funding

(0.2)

Movement in hybrid debt

0.2

UK reinsurance transactions

0.1

Increase in Capital Resources Requirement

(0.1)

Other regulatory adjustments

0.1

Estimated IGD solvency surplus at 31 December 2012

3.8

1  Market movements include the impact of equity, credit spread, interest rate and foreign exchange movements net of the effect of hedging instruments.

 

On a proforma basis the estimated IGD solvency surplus at 31 December 2012 is £3.9 billion. The proforma 31 December 2012 position includes the impact of the announced disposals of the Aviva US Life and annuities business and related asset management operations, Malaysia and Aseval held for sale in the Group IFRS balance sheet.

 

 

Page 98

 

 

C6 - Regulatory capital continued

Reconciliation of Group IGD capital resources to FRS 27 capital

The reconciliation below provides analysis of differences between our capital resources and the amounts included in the capital statement made in accordance with FRS 27 and disclosed within our consolidated accounts. The Group Capital Adequacy report is prepared in accordance with the FSA valuation rules and brings in capital in respect of the UK Life valued in accordance with FSA regulatory rules excluding surpluses in with-profit funds. The FRS 27 disclosure brings in the realistic value of UK Life capital resources. As the two bases differ greatly, the reconciliation below is presented by removing the restricted regulatory assets and then replacing them with the unrestricted realistic assets.

 


2012
£bn

Total capital and reserves (IFRS basis)

11.4

Plus: Other qualifying capital

4.4

Plus: UK unallocated divisible surplus

2.0

Less: Goodwill, acquired AVIF and intangible assets 1

(3.4)

Less: Adjustments onto a regulatory basis

-

Group Capital Resources on regulatory basis

14.4

The Group Capital Resources can be analysed as follows:


Core Tier 1 Capital

10.9

Innovative Tier 1 Capital

1.4

Total Tier 1 Capital

12.3

Upper Tier 2 Capital

1.7

Lower Tier 2 Capital

3.1

Group Capital Resources Deductions

(2.7)

Group Capital Resources on regulatory basis (Tier 1 and Tier 2 Capital)

14.4

Less: UK life restricted regulatory assets

(6.1)

Add: UK life unrestricted realistic assets

5.7

Add: Overseas UDS 2 and Shareholders' share of accrued bonus

5.0

Total FRS 27 capital

19.0

1  Goodwill and other intangibles includes goodwill of £132million in joint ventures and associates and amounts classified as held for sale.

2  Unallocated divisible surplus for overseas life operations is included gross of minority interest and amounts disclosed include balances classified as held for sale. 2012 includes a negative balance of £2 million in Italy.

Regulatory capital - UK Life with-profits funds

The available capital of the with-profit funds is represented by the realistic inherited estate. The estate represents the assets of the long-term with-profit funds less the realistic liabilities for non-profit policies within the funds, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs, guarantees and promises. Realistic balance sheet information is shown below for the three main UK with-profit funds: New With-Profit Sub Fund (NWPSF), Old With-Profit Sub Fund (OWPSF) and With-Profit Sub-Fund (WPSF). These realistic liabilities have been included within the long-term business provision and the liability for insurance and investment contracts on the Group's IFRS balance sheet at 31 December 2012 and 31 December 2011.

 


2012

2011


Estimated realistic assets
£bn

Estimated realistic

liabilities 1

£bn

Estimated realistic inherited

estate 2

£bn

Capital support

arrangement3

£bn

Estimated risk

capital

 margin

£bn

Estimated
excess available capital
£bn

Estimated excess available capital
£bn

NWPSF

17.3

(17.3)

-

0.7

(0.4)

0.3

0.7

OWPSF

2.9

(2.6)

0.3

-

(0.1)

0.2

0.2

WPSF4

18.3

(16.5)

1.8

-

(0.5)

1.3

1.0

Aggregate

38.5

(36.4)

2.1

0.7

(1.0)

1.8

1.9

1  These realistic liabilities include the shareholders' share of future bonuses of £0.3 billion (FY 2011: £0.3 billion). Realistic liabilities adjusted to eliminate the shareholders' share of future bonuses are £36.0 billion (FY 2011: £38.8 billion). These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.8 billion, £0.3 billion and £3.5 billion for NWPSF, OWPSF and WPSF respectively (FY 2011: £1.9 billion, £0.3 billion and £3.1 billion).

2  Estimated realistic inherited estate at 31 December 2011 was £nil, £0.3 billion and £1.6 billion for NWPSF, OWPSF and WPSF respectively.

3  The support arrangement represents the reattributed estate (RIEESA) of £0.7 billion at 31 December 2012 (FY 2011: £1.1 billion).

4  The WPSF fund includes the Provident Mutual (PM) fund which has realistic assets and realistic liabilities of £1.7 billion and therefore does not contribute to the realistic inherited estate.

Investment mix

The aggregate investment mix of the assets in the three main with-profit funds was:

 


2012
 %

2011
 %

Equity

23%

22%

Property

16%

17%

Fixed interest

51%

54%

Other

10%

7%

 

The equity backing ratios, including property, supporting with-profit asset shares are 71% in NWPSF and OWPSF, and 64% in WPSF.

 

 

 

Page 99

 

 

C7 - IFRS Sensitivity analysis

The Group uses a number of sensitivity test-based risk management tools to understand the volatility of earnings, the volatility of its capital requirements, and to manage its capital more efficiently. Primarily, MCEV, ICA, and scenario analysis are used. Sensitivities to economic and operating experience are regularly produced on all of the Group's financial performance measurements to inform the Group's decision making and planning processes, and as part of the framework for identifying and quantifying the risks that each of its business units, and the Group as a whole are exposed to.

      For long-term business in particular, sensitivities of MCEV performance indicators to changes in both economic and non-economic experience are continually used to manage the business and to inform the decision making process. More information on MCEV sensitivities can be found in the presentation of results on an MCEV basis in the supplementary section of this report.

Life insurance and investment contracts

The nature of long-term business is such that a number of assumptions are made in compiling these financial statements. Assumptions are made about investment returns, expenses, mortality rates, and persistency in connection with the in-force policies for each business unit. Assumptions are best estimates based on historic and expected experience of the business. A number of the key assumptions for the Group's central scenario are disclosed elsewhere in these statements for both IFRS reporting and reporting under the MCEV methodology.

General insurance and health business

General insurance and health claim liabilities are estimated by using standard actuarial claims projection techniques.

      These methods extrapolate the claims development for each accident year based on the observed development of earlier years.
In most cases, no explicit assumptions are made as projections are based on assumptions implicit in the historic claims.

Sensitivity test results

Illustrative results of sensitivity testing for long-term business, general insurance and health and fund management business and other operations are set out below. For each sensitivity test the impact of a reasonably possible change in a single factor is shown, with other assumptions left unchanged.

 

Sensitivity factor

Description of sensitivity factor applied

Interest rate and investment return

The impact of a change in market interest rates by a 1% increase or decrease. The test allows consistently for similar changes to investment returns and movements in the market value of backing fixed interest securities.

Credit Spreads

The impact of a 0.5% increase in credit spreads over risk-free interest rates on corporate bonds

and other non-sovereign credit assets. The test allows for any consequential impact on liability

valuations.

Equity/property market values

The impact of a change in equity/property market values by ± 10%.

Expenses

The impact of an increase in maintenance expenses by 10%.

Assurance mortality/morbidity (life insurance only)

The impact of an increase in mortality/morbidity rates for assurance contracts by 5%.

Annuitant mortality (life insurance only)

The impact of a reduction in mortality rates for annuity contracts by 5%.

Gross loss ratios (non-life insurance only)

The impact of an increase in gross loss ratios for general insurance and health business by 5%.

Long-term businesses

 

2012

Impact on profit before tax

£m

Interest

rates

+1%

Interest

rates

-1%

Credit

spreads

+0.5%

Equity/

property

+10%

Equity/

property

-10%

 

Expenses

+10%

Assurance

mortality

+5%

Annuitant

mortality

-5%

Insurance Participating

(45)

(15)

(110)

60

(95)

(25)

(5)

(50)

Insurance non-participating

(160)

130

(430)

-

-

(75)

(45)

(470)

Investment participating

(55)

45

-

5

(10)

(10)

-

-

Investment non-participating

(40)

35

(5)

10

(15)

(20)

-

-

Assets backing life shareholders' funds

10

(15)

(40)

45

(45)

-

-

-

Total excluding Delta Lloyd and United States

(290)

180

(585)

120

(165)

(130)

(50)

(520)

United States

880

(640)

495

-

-

-

-

-

590

(460)

(90)

120

(165)

(130)

(50)

(520)

 

2012

Impact on shareholders' equity before tax

£m

Interest

rates

+1%

Interest

rates

-1%

Credit

spreads

+0.5%

Equity/

property

+10%

Equity/

property

-10%

 

Expenses

+10%

Assurance

mortality

+5%

Annuitant

mortality

-5%

Insurance Participating

(45)

(15)

(110)

60

(95)

(25)

(5)

(50)

Insurance non-participating

(165)

125

(430)

-

-

(75)

(45)

(470)

Investment participating

(55)

45

-

5

(10)

(10)

-

-

Investment non-participating

(45)

40

-

10

(15)

(20)

-

-

Assets backing life shareholders' funds

(5)

-

(45)

50

(50)

-

-

-

Total excluding Delta Lloyd and United States

(315)

195

(585)

125

(170)

(130)

(50)

(520)

United States

-

-

-

-

-

-

-

-

(315)

195

(585)

125

(170)

(130)

(50)

(520)

 

 

 

Page 100

 

C7 - IFRS Sensitivity analysis continued

Long-term businesses continued

 

2011

Impact on profit before tax

£m

Interest

rates

+1%

Interest

rates

-1%

Credit

spreads

+0.5%

Equity/

property

+10%

Equity/

property

-10%

 

Expenses

+10%

Assurance

mortality

+5%

Annuitant

mortality

-5%

Insurance Participating

(45)

(155)

(20)

5

(95)

(45)

(10)

(50)

Insurance non-participating

(180)

130

(385)

30

(35)

(65)

(45)

(470)

Investment participating

(35)

40

(30)

50

(75)

(10)

-

-

Investment non-participating

(15)

20

(5)

15

(15)

(20)

-

-

Assets backing life shareholders' funds

135

(15)

(10)

10

(10)

-

-

-

Total excluding Delta Lloyd and United States

(140)

20

(450)

110

(230)

(140)

(55)

(520)

United States

45

(50)

10

50

(35)

(10)

(15)

-

(95)

(30)

(440)

160

(265)

(150)

(70)

(520)

 

2011

Impact on shareholders' equity before tax

£m

Interest

rates

+1%

Interest

rates

-1%

Credit

spreads

+0.5%

Equity/

property

+10%

Equity/

property

-10%

 

Expenses

+10%

Assurance

mortality

+5%

Annuitant

mortality

-5%

Insurance Participating

(45)

(155)

(25)

5

(95)

(45)

(10)

(50)

Insurance non-participating

(180)

130

(385)

30

(35)

(65)

(45)

(470)

Investment participating

(35)

40

(30)

50

(75)

(10)

-

-

Investment non-participating

(15)

20

(5)

15

(15)

(20)

-

-

Assets backing life shareholders' funds

125

-

(15)

15

(15)

-

-

-

Total excluding Delta Lloyd and United States

(150)

35

(460)

115

(235)

(140)

(55)

(520)

United States

(540)

455

(350)

50

(35)

(10)

(15)

-

(690)

490

(810)

165

(270)

(150)

(70)

(520)

 

Changes in sensitivities between 2012 and 2011 reflect movements in market interest rates, porfolio growth, changes to asset mix and the relative durations of assets and liabilities and asset liability managment actions. The sensitivities to economic movements (excluding the United States) relate mainly to business in the UK. In general, a fall in market interest rates has beneficial impact on non-participatng business, due to the increase in market value of fixed interest securities and the relative durations of assets and liabilities; smilarly a rise in interest rates has a negative impact. The mortality sensitivities also relate primarily to the UK.

     In the Unites States, most debt securities are classified as AFS for which movements in unrealised gains or losses are taken directly to shareholders' equity. This limited the overall sensitivity of IFRS profit to interest rate and credit spread movements. Following the classification of the business as held for sale in 2012 it was remeasured to fair value less costs to sell. It has been assumed that economic movements would not materially impact the fair value less costs to sell and the impact on shareholders' equity is therefore reported as £nil. As a result, were eceonomic movements to occur, the correseponding movements in AFS assets which would be taken directly to shareholders' equity, are reversed out through profit before tax in order to maintain the remeasurement value of the US at fair value less costs to sell.

 

 

Page 101

 

 

C7 - IFRS Sensitivity analysis continued

General insurance and health businesses

 

2012

Impact on profit before tax

£m

Interest

rates

+1%

Interest

rates

-1%

Credit

spreads

+0.5%

Equity/

property

+10%

Equity/

property

-10%

 

Expenses

+10%

Gross loss

ratios

+5%

Gross of reinsurance excluding Delta Lloyd

(260)

235

(125)

45

(50)

(120)

(300)









Net of reinsurance excluding Delta Lloyd

(300)

285

(125)

45

(50)

(120)

(285)

 

2012

Impact on shareholders' equity before tax

£m

Interest

rates

+1%

Interest

rates

-1%

Credit

spreads

+0.5%

Equity/

property

+10%

Equity/

property

-10%

 

Expenses

+10%

Gross loss

ratios

+5%

Gross of reinsurance excluding Delta Lloyd

(260)

235

(125)

50

(50)

(25)

(300)









Net of reinsurance excluding Delta Lloyd

(300)

285

(125)

50

(50)

(25)

(285)

 

2011

Impact on profit before tax

£m

Interest

rates

+1%

Interest

rates

-1%

Credit

spreads

+0.5%

Equity/

property

+10%

Equity/

property

-10%

 

Expenses

+10%

Gross loss

ratios

+5%

Gross of reinsurance excluding Delta Lloyd

(205)

180

(125)

50

(55)

(130)

(300)









Net of reinsurance excluding Delta Lloyd

(275)

275

(125)

50

(55)

(130)

(290)

 

2011

Impact on shareholders' equity before tax

£m

Interest

rates

+1%

Interest

rates

-1%

Credit

spreads

+0.5%

Equity/

property

+10%

Equity/

property

-10%

 

Expenses

+10%

Gross loss

ratios

+5%

Gross of reinsurance excluding Delta Lloyd

(205)

180

(125)

50

(55)

(30)

(300)









Net of reinsurance excluding Delta Lloyd

(275)

275

(125)

50

(55)

(30)

(290)

 

For general insurance, the impact of the expense sensitivity on profit also includes the increase in ongoing administration expenses,
in addition to the increase in the claims handling expense provision.

Fund management and other operations businesses 1

 

2012

Impact on profit before tax

£m

Interest

rates

+1%

Interest

rates

-1%

Credit

spreads

+0.5%

Equity/

property

+10%

Equity/

property

-10%

Total excluding Delta Lloyd

(5)

-

30

(90)

10

 

2012

Impact on shareholders' equity before tax

£m

Interest

rates

+1%

Interest

rates

-1%

Credit

spreads

+0.5%

Equity/

property

+10%

Equity/

property

-10%

Total excluding Delta Lloyd

(5)

-

30

(90)

10

 

2011

Impact on profit before tax

£m

Interest

rates

+1%

Interest

rates

-1%

Credit

spreads

+0.5%

Equity/

property

+10%

Equity/

property

-10%

Total excluding Delta Lloyd

(10)

10

-

(40)

75

 

2011

Impact on shareholders' equity before tax

£m

Interest

rates

+1%

Interest

rates

-1%

Credit

spreads

+0.5%

Equity/

property

+10%

Equity/

property

-10%

Total excluding Delta Lloyd

(10)

10

-

(40)

75

1 The Fund management and other operations are not shown excluding the United States as their sensitivities are immaterial to the group.

 

 

Page 102

 

 

C7 - IFRS Sensitivity analysis continued

Delta Lloyd

The full-year 2012 sensitivities contained in the above tables exclude any contribution from Delta Lloyd following deconsolidation
of this business.

Limitations of sensitivity analysis

The previous tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.

      The sensitivity analyses do not take into consideration that the Group's assets and liabilities are actively managed. Additionally,
the financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group's financial risk management strategy aims to manage the exposure to market fluctuations.

      As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation, adjusting bonuses credited to policyholders, and taking other protective action.

      A number of the business units use passive assumptions to calculate their long-term business liabilities. Consequently, a change
in the underlying assumptions may not have any impact on the liabilities, whereas assets held at market value in the statement of financial position will be affected. In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in shareholders' equity. Similarly, for general insurance liabilities, the interest rate sensitivities only affect profit and equity where explicit assumptions are made regarding interest (discount) rates or future inflation.

      Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Group's view of possible near-term market changes that cannot be predicted with any certainty, and the assumption that all interest rates move in an identical fashion.

 

 

 

 


 

Page 103

 

Analysis of assets

 

 

In this section


Page

D1    Total assets


104

D2    Total assets - Valuation bases/fair
value hierarchy


105

D3    Analysis of asset quality


107

         D3.1 Goodwill, acquired value of in-force business and intangible assets


107

         D3.2 Investment property


108

         D3.3 Loans


109

         D3.4 Financial investments


113

D4    Pension fund assets


127

D5    Available funds


128

D6    Guarantees


128

 

 

 

 


Page 104

 

 

D1 - Total assets

As an insurance business, Aviva Group holds a variety of assets to match the characteristics and duration of its insurance liabilities. Appropriate and effective asset liability matching (on an economic basis) is the principal way in which Aviva manages its investments.
In addition, to support this, Aviva also uses a variety of hedging and other risk management strategies to diversify away residual mis-match risk that is outside of the Group's risk appetite.

 

31 December 2012

Policyholder assets

£m

Participating fund assets

£m

Shareholder assets

 £m

Total assets analysed

£m

Less

assets of operations classified as held for sale

£m

Statement of financial position

total

 £m

Goodwill and acquired value of in-force business and intangible assets

-

-

3,278

3,278

(674)

2,604

Interests in joint ventures and associates

116

1,239

479

1,834

(126)

1,708

Property and equipment

25

183

185

393

(2)

391

Investment property

4,172

6,079

582

10,833

(18)

10,815

Loans

605

5,562

21,767

27,934

(3,397)

24,537

Financial investments







Debt securities

16,472

83,497

61,654

161,623

(33,617)

128,006

Equity securities

22,500

9,854

1,423

33,777

(1,248)

32,529

Other investments

23,704

4,258

2,131

30,093

(1,550)

28,543

Reinsurance assets

1,576

542

5,449

7,567

(883)

6,684

Deferred tax assets

-

-

220

220

(32)

188

Current tax assets

-

-

68

68

(1)

67

Receivables and other financial assets

354

2,686

4,990

8,030

(413)

7,617

Deferred acquisition costs and other assets

-

498

4,856

5,354

(1,555)

3,799

Prepayments and accrued income

141

1,242

1,721

3,104

(403)

2,701

Cash and cash equivalents

4,305

10,466

9,043

23,814

(917)

22,897

Additional impairment to write down the disposal group to fair
value less costs to sell

-

-

(2,233)

(2,233)

2,233

-

Assets of operations classified as held for sale

-

-

-

-

42,603

42,603

Total

73,970

126,106

115,613

315,689

-

315,689

Total %

23.4%

39.9%

36.7%

100.0%

0.0%

100.0%

FY11 as reported

70,367

124,631

117,378

312,376

-

312,376

FY11 Total %

22.5%

39.9%

37.6%

100.0%

0.0%

100.0%

 

As at 31 December 2012, 36.7% of Aviva's total asset base was shareholder assets, 39.9% participating assets where Aviva shareholders have partial exposure, and 23.4% policyholder assets where Aviva shareholders have no exposure. Of the total assets (excluding assets held for sale), investment property, loans and financial investments comprised £224.4 billion, compared to £255.8 billion at 31 December 2011.

 

 

Page 105

 

D2 - Total assets - Valuation bases/fair value hierarchy

 

Total assets - 2012

Fair value

£m

Amortised cost

£m

Equity accounted/ tax assets1

£m

Total

£m

Goodwill and acquired value of in-force business and intangible assets

-

3,278

-

3,278

Interests in joint ventures and associates

-

-

1,834

1,834

Property and equipment

244

149

-

393

Investment property

10,833

-

-

10,833

Loans

18,973

8,961

-

27,934

Financial investments





Debt securities

161,623

-

-

161,623

Equity securities

33,777

-

-

33,777

Other investments

30,093

-

-

30,093

Reinsurance assets

-

7,567

-

7,567

Deferred tax assets

-

-

220

220

Current tax assets

-

-

68

68

Receivables and other financial assets

-

8,030

-

8,030

Deferred acquisition costs and other assets

-

5,354

-

5,354

Prepayments and accrued income

-

3,104

-

3,104

Cash and cash equivalents

23,814

-

-

23,814

Additional impairment to write down the disposal group to fair value less costs to sell

-

(2,233)

-

(2,233)

Total

279,357

34,210

2,122

315,689

Total %

88.5%

10.8%

0.7%

100.0%

Assets of operations classified as held for sale

37,957

4,518

128

42,603

Total (excluding assets held for sale)

241,400

29,692

1,994

273,086

Total % (excluding assets held for sale)

88.4%

10.9%

0.7%

100.0%

FY11 Total 

269,812

39,356

3,208

312,376

FY11 Total %

86.4%

12.6%

1.0%

100.0%

1  Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted within the analysis of the Group's assets.

 

Total assets - Policyholder assets 2012

Fair value

£m

Amortised cost

£m

Equity accounted/ tax assets1

£m

Total

£m

Goodwill and acquired value of in-force business and intangible assets

-

-

-

-

Interests in joint ventures and associates

-

-

116

116

Property and equipment

-

25

-

25

Investment property

4,172

-

-

4,172

Loans

-

605

-

605

Financial investments





Debt securities

16,472

-

-

16,472

Equity securities

22,500

-

-

22,500

Other investments

23,704

-

-

23,704

Reinsurance assets

-

1,576

-

1,576

Deferred tax assets

-

-

-

-

Current tax assets

-

-

-

-

Receivables and other financial assets

-

354

-

354

Deferred acquisition costs and other assets

-

-

-

-

Prepayments and accrued income

-

141

-

141

Cash and cash equivalents

4,305

-

-

4,305

Total

71,153

2,701

116

73,970

Total %

96.2%

3.7%

0.1%

100.0%

Assets of operations classified as held for sale

3,021

27

-

3,048

Total (excluding assets held for sale)

68,132

2,674

116

70,922

Total % (excluding assets held for sale)

96.1%

3.8%

0.1%

100.0%

FY11 Total 

67,310

2,804

253

70,367

FY11 Total %

95.6%

4.0%

0.4%

100.0%

1  Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted within the analysis of the Group's assets.

 

 

 

Page 106

 

D2 - Total assets - Valuation bases/fair value hierarchy continued

 

Total assets - Participating fund assets 2012

Fair value

£m

Amortised cost

£m

Equity accounted/ tax assets1

£m

Total

£m

Goodwill and acquired value of in-force business and intangible assets

-

-

-

-

Interests in joint ventures and associates

-

-

1,239

1,239

Property and equipment

132

51

-

183

Investment property

6,079

-

-

6,079

Loans

978

4,584

-

5,562

Financial investments





Debt securities

83,497

-

-

83,497

Equity securities

9,854

-

-

9,854

Other investments

4,258

-

-

4,258

Reinsurance assets

-

542

-

542

Deferred tax assets

-

-

-

-

Current tax assets

-

-

-

-

Receivables and other financial assets

-

2,686

-

2,686

Deferred acquisition costs and other assets

-

498

-

498

Prepayments and accrued income

-

1,242

-

1,242

Cash and cash equivalents

10,466

-

-

10,466

Total

115,264

9,603

1,239

126,106

Total %

91.4%

7.6%

1.0%

100.0%

Assets of operations classified as held for sale

2,788

333

-

3,121

Total (excluding assets held for sale)

112,476

9,270

1,239

122,985

Total % (excluding assets held for sale)

91.5%

7.5%

1.0%

100.0%

FY11 Total 

113,287

9,884

1,460

124,631

FY11 Total %

90.9%

7.9%

1.2%

100.0%

1  Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted within the analysis of the Group's assets.

 

Total assets - Shareholders assets 2012

Fair value

£m

Amortised cost

£m

Equity accounted/ tax assets1

£m

Total

£m

Goodwill and acquired value of in-force business and intangible assets

-

3,278

-

3,278

Interests in joint ventures and associates

-

-

479

479

Property and equipment

112

73

-

185

Investment property

582

-

-

582

Loans

17,995

3,772

-

21,767

Financial investments





Debt securities

61,654

-

-

61,654

Equity securities

1,423

-

-

1,423

Other investments

2,131

-

-

2,131

Reinsurance assets

-

5,449

-

5,449

Deferred tax assets

-

-

220

220

Current tax assets

-

-

68

68

Receivables and other financial assets

-

4,990

-

4,990

Deferred acquisition costs and other assets

-

4,856

-

4,856

Prepayments and accrued income

-

1,721

-

1,721

Cash and cash equivalents

9,043

-

-

9,043

Additional impairment to write down the disposal group to fair value less costs to sell

-

(2,233)

-

(2,233)

Total

92,940

21,906

767

115,613

Total %

80.4%

18.9%

0.7%

100.0%

Assets of operations classified as held for sale

32,148

4,158

128

36,434

Total (excluding assets held for sale)

60,792

17,748

639

79,179

Total % (excluding assets held for sale)

76.8%

22.4%

0.8%

100.0%

FY11 Total 

89,215

26,668

1,495

117,378

FY11 Total %

76.0%

22.7%

1.3%

100.0%

1  Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted within the analysis of the Group's assets.

 

 

 

Page 107

 

D2 - Total assets - Valuation bases/fair value hierarchy continued

Financial instruments (including derivatives and loans) 

The Group classifies its investments as either financial assets at fair value through profit or loss (FV) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management
at initial recognition. The FV category has two subcategories - those that meet the definition as being held for trading and those the Group chooses to designate as FV (referred to in this section as 'other than trading').

      In general, the FV category is used as, in most cases, our investment or risk management strategy is to manage our financial investments on a fair value basis. All securities in the FV category are classified as other than trading, except for non-hedge derivatives and a small amount of debt and equity securities, bought with the intention to resell in the short term, which are classified as trading. The AFS category is used where the relevant long-term business liability (including shareholders' funds) is passively managed.

      Loans are carried at amortised cost, except for certain mortgage loans, where we have taken advantage of the 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. We believe this presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these four items.

Fair value hierarchy

To provide further information on the valuation techniques we use to measure assets carried at fair value, we have categorised the measurement basis for assets carried at fair value into a 'fair value hierarchy' in accordance with the valuation inputs and consistent with IFRS7 Financial Instruments: Disclosures.

n Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets.

n Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly. If the asset has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset.

n Inputs to Level 3 fair values are unobservable inputs for the asset. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any,
market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such, unobservable inputs reflect the assumptions the business unit considers that market participants would use in pricing the asset. Examples are certain private equity investments and private placements.

 

Fair values sourced from internal models are Level 2 only if substantially all the inputs are market observable. Otherwise fair values sourced from internal models are classified as Level 3.

 


Fair value hierarchy




Total assets

2012

Level 1

£m

Level 2

£m

Level 3

£m

Sub-total

fair value

£m

Amortised cost

£m

Less:

Assets of operations classified as held for sale

£m

Statement of financial position

total

£m

Investment property

-

10,833

-

10,833

-

(18)

10,815

Loans

-

18,973

-

18,973

8,961

(3,397)

24,537

Debt securities

107,953

43,588

10,082

161,623

-

(33,617)

128,006

Equity securities

33,074

230

473

33,777

-

(1,248)

32,529

Other investments (including derivatives)

21,704

5,510

2,879

30,093

-

(1,550)

28,543

Assets of operations classified as held for sale

-

-

-

-

-

39,830

39,830

Total

162,731

79,134

13,434

255,299

8,961

-

264,260

Total %

61.6%

29.9%

5.1%

96.6%

3.4%


100.0%

Assets of operations classified as held for sale

2,993

32,979

516

36,488

3,342

-

39,830

Total (excluding assets held for sale)

159,738

46,155

12,918

218,811

5,619

-

224,430

Total % (excluding assets held for sale)

71.2%

20.6%

5.8%

97.6%

2.4%


100.0%

FY11 Total 

156,641

78,520

11,368

246,529

9,630

(347)

255,812

FY11 Total %

61.1%

30.7%

4.4%

96.2%

3.8%


100.0%

 

At 31 December 2012, the proportion of total financial investments, loans and investment properties classified as Level 1 in the fair value hierarchy has remained stable at 61.6% (FY11: 61.1%). Level 2 and Level 3 financial investments, loans and investment properties have also remained relatively stable at 29.9% (FY11: 30.7%) and 5.1% (FY11: 4.4%), respectively.  Excluding assets classified as held for sale, the proportion of Level 1 assets at 31 December 2012 increases to 71.2% with Level 2 assets reducing to 20.6% reflecting the impact of the higher proportion of Level 2 debt securities within the US business (see D3.4.1).   

D3 - Analysis of asset quality

D3.1 - Goodwill, Acquired value of in-force business and intangible assets

The Group's goodwill, acquired value of in-force business and the majority of other intangible assets have arisen from the Group's business combinations. These business combinations include several bancassurance arrangements, which have resulted in £512 million of the total £1,703 million of goodwill and £691 million of the total £1,575 million of AVIF and other intangible assets. These balances primarily represent the value of bancassurance distribution agreements acquired in these business combinations and are before the deduction of goodwill and other intangibles held for sale. The Group's total goodwill and intangible balances at FY12 noted above are after impairments recognised during the year.

 

Page 108

 

 

D3 - Analysis of asset quality continued

D3.2 - Investment property

 





2012




2011


Fair value hierarchy


Fair value hierarchy


Investment property - Total

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

Lease to third parties under operating leases

-

10,822

-

10,822

-

11,552

-

11,552

Vacant investment property/held for capital appreciation

-

11

-

11

-

86

-

86

Total

-

10,833

-

10,833

-

11,638

-

11,638

-

100.0%

-

100.0%

-

100.0%

-

100.0%

Assets of operations classified as held for sale

-

18

-

18

-

-

-

-

Total (excluding assets held for sale)

-

10,815

-

10,815

-

11,638

-

11,638

Total % (excluding assets held for sale)

-

100.0%

-

100.0%

-

100.0%

-

100.0%

 





2012




2011


Fair value hierarchy


Fair value hierarchy


Investment property - Policyholder assets

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

Lease to third parties under operating leases

-

4,172

-

4,172

-

4,164

-

4,164

Vacant investment property/held for capital appreciation

-

-

-

-

-

4

-

4

Total

-

4,172

-

4,172

-

4,168

-

4,168

-

100.0%

-

100.0%

-

100.0%

-

100.0%

Assets of operations classified as held for sale

-

12

-

12

-

-

-

-

Total (excluding assets held for sale)

-

4,160

-

4,160

-

4,168

-

4,168

Total % (excluding assets held for sale)

-

100.0%

-

100.0%

-

100.0%

-

100.0%

 





2012




2011


Fair value hierarchy


Fair value hierarchy


Investment property - Participating fund assets

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

Lease to third parties under operating leases

-

6,078

-

6,078

-

6,312

-

6,312

Vacant investment property/held for capital appreciation

-

1

-

1

-

72

-

72

Total

-

6,079

-

6,079

-

6,384

-

6,384

-

100.0%

-

100.0%

-

100.0%

-

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

-

-

-

Total (excluding assets held for sale)

-

6,079

-

6,079

-

6,384

-

6,384

Total % (excluding assets held for sale)

-

100.0%

-

100.0%

-

100.0%

-

100.0%

 





2012




2011


Fair value hierarchy


Fair value hierarchy


Investment property - Shareholder assets

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

Lease to third parties under operating leases

-

572

-

572

-

1,076

-

1,076

Vacant investment property/held for capital appreciation

-

10

-

10

-

10

-

10

Total

-

582

-

582

-

1,086

-

1,086

-

100.0%

-

100.0%

-

100.0%

-

100.0%

Assets of operations classified as held for sale

-

6

-

6

-

-

-

-

Total (excluding assets held for sale)

-

576

-

576

-

1,086

-

1,086

Total % (excluding assets held for sale)

-

100.0%

-

100.0%

-

100.0%

-

100.0%

 

95% (FY11: 91%) of total investment properties by value are held in unit-linked or participating funds.  Shareholder exposure to investment properties is principally through investments in Property Limited Partnerships (PLPs). Depending on the Group's interest in these PLPs, its investments are classified as either interests in joint ventures, unit trusts or consolidated as a subsidiary, in which case the underlying investment properties held by the PLP are included on the balance sheet. The decrease in shareholder exposure to investment properties is mainly a result of disposals and declines in property values at 31 December 2012 compared to 31 December 2011, partly offset by new acquisitions.

      Investment properties are stated at their market values as assessed by qualified external independent valuers or by local qualified staff of the Group in overseas operations, all with recent relevant experience. Values are calculated using a discounted cash flow approach and are based on current rental income plus anticipated uplifts at the next rent review, lease expiry or break option taking into consideration lease incentives, assuming no future growth in the estimated rental value of the property. This uplift and the discount rate are derived from rates implied by recent market transactions on similar properties. The basis of valuation therefore naturally falls to be classified as Level 2. Valuations are typically undertaken on a quarterly (and in some cases monthly) basis.

99.9%(FY11: 99.3%) of total investment properties by value are leased to third parties under operating leases, with the remainder either being vacant or held for capital appreciation.

 

Page 109

 

D3 - Analysis of asset quality continued

D3.3 - Loans

The Group loan portfolio is principally made up of:

n Policy loans which are generally collateralised by a lien or charge over the underlying policy;

n Loans and advances to banks, which primarily relate to loans of cash collateral received in stock lending transactions.
These loans are fully collateralised by other securities;

n Mortgage loans collateralised by property assets; and

n Other loans, which include loans to brokers and intermediaries.

 

Loans with fixed maturities, including policy loans, mortgage loans (at amortised cost) and loans and advances to banks, are recognised when cash is advanced to borrowers. These loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method.

      For certain mortgage loans, the Group has taken advantage of the 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. Due to the illiquid nature of these assets, where fair value accounting is applied, it is done so on a Level 2 basis.

 

Loans - Total

2012

United Kingdom &

Ireland

£m

France

£m

United

States

£m

Canada

£m

Italy, Spain and Other

£m

Higher growth markets

£m

Total

£m

Policy loans

28

839

402

-

12

30

1,311

Loans and advances to banks

4,250

-

-

-

-

-

4,250

Mortgage loans

19,187

1

2,994

-

-

-

22,182

Other loans

95

8

1

83

2

2

191

Total

23,560

848

3,397

83

14

32

27,934

Total %

84.3%

3.0%

12.2%

0.3%

0.1%

0.1%

100.0%

Assets of operations classified as held for sale

-

-

3,397

-

-

-

3,397

Total (excluding assets held for sale)

23,560

848

-

83

14

32

24,537

Total % (excluding assets held for sale)

96.0%

3.5%

0.0%

0.3%

0.1%

0.1%

100.0%

FY11 Total 

23,964

949

3,067

80

16

40

28,116

FY11 Total %

85.2%

3.4%

10.9%

0.3%

0.1%

0.1%

100.0%

 

Loans - Policyholders assets

2012

United Kingdom & Ireland

£m

France

£m

United

States

£m

Canada

£m

Italy, Spain and Other

£m

Higher growth markets

£m

Total

£m

Policy loans

-

-

-

-

-

-

-

Loans and advances to banks

604

-

-

-

-

-

604

Mortgage loans

-

-

-

-

-

-

-

Other loans

-

-

-

-

-

1

1

Total

604

-

-

-

-

1

605

Total %

99.8%

0.0%

0.0%

0.0%

0.0%

0.2%

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

-

-

Total (excluding assets held for sale)

604

-

-

-

-

1

605

Total % (excluding assets held for sale)

99.8%

0.0%

0.0%

0.0%

0.0%

0.2%

100.0%

FY11 Total 

917

-

-

-

-

-

917

FY11 Total %

100.0%

0.0%

0.0%

0.0%

0.0%

0.0%

100.0%

 

Loans - Participating fund assets

2012

United Kingdom & Ireland

£m

France

£m

United

States

£m

Canada

£m

Italy, Spain and Other

£m

Higher growth markets

£m

Total

£m

Policy loans

20

839

181

-

-

-

1,040

Loans and advances to banks

3,402

-

-

-

-

-

3,402

Mortgage loans

976

1

135

-

-

-

1,112

Other loans

-

8

-

-

-

-

8

Total

4,398

848

316

-

-

-

5,562

Total %

79.1%

15.2%

5.7%

0.0%

0.0%

0.0%

100.0%

Assets of operations classified as held for sale

-

-

316

-

-

-

316

Total (excluding assets held for sale)

4,398

848

-

-

-

-

5,246

Total % (excluding assets held for sale)

83.8%

16.2%

0.0%

0.0%

0.0%

0.0%

100.0%

FY11 Total 

5,197

948

325

-

-

1

6,471

FY11 Total %

80.3%

14.7%

5.0%

0.0%

0.0%

0.0%

100.0%

 

 

 

 

Page 110

 

 

D3 - Analysis of asset quality continued

D3.3 - Loans continued

 

Loans - Shareholder assets

2012

United Kingdom & Ireland

£m

France

£m

United

States

£m

Canada

£m

Italy, Spain and Other

£m

Higher growth markets

£m

Total

£m

Policy loans

8

-

221

-

12

30

271

Loans and advances to banks

244

-

-

-

-

-

244

Mortgage loans

18,211

-

2,859

-

-

-

21,070

Other loans

95

-

1

83

2

1

182

Total

18,558

-

3,081

83

14

31

21,767

Total %

85.2%

0.0%

14.2%

0.4%

0.1%

0.1%

100.0%

Assets of operations classified as held for sale

-

-

3,081

-

-

-

3,081

Total (excluding assets held for sale)

18,558

-

-

83

14

31

18,686

Total % (excluding assets held for sale)

99.3%

0.0%

0.0%

0.4%

0.1%

0.2%

100.0%

FY11 Total 

17,849

1

2,743

80

16

39

20,728

FY11 Total %

86.1%

0.0%

13.2%

0.4%

0.1%

0.2%

100.0%

 

The value of the Group's loan portfolio (including Policyholder, Participating Fund and Shareholder assets), at 31 December 2012 stood at £27.9 billion (FY11: £28.1 billion), a decrease of £0.2 billion. Excluding assets held for sale, the Group's loan portfolio amounts to £24.5 billion.

      The total shareholder exposure to loans increased to £21.8 billion (FY11: £20.7 billion), and represented 78% of the total loan portfolio, with the remaining 22% split between participating funds (£5.6 billion) and policyholder assets (£0.6 billion).

      Of the Group's total loan portfolio (including Policyholder, Participating Fund and Shareholder assets), 79% (FY11: 76%) is invested in mortgage loans.

Mortgage loans - Shareholder assets

 

2012

United Kingdom & Ireland

£m

United

States

£m

Total

£m

Non-securitised mortgage loans




- Residential (Equity release)

3,172

-

3,172

- Commercial

8,720

2,859

11,579

- Healthcare

4,101

-

4,101


15,993

2,859

18,852

Securitised mortgage loans

2,218

-

2,218

Total

18,211

2,859

21,070

Assets of operations classified as held for sale

-

2,859

2,859

Total (excluding assets held for sale)

18,211

-

18,211

FY11 Total

17,668

2,507

20,175

 

The Group's mortgage loan portfolio spans several business units, primarily in the UK and USA, and across various sectors, including residential loans, commercial loans and government supported healthcare loans. Aviva's shareholder exposure to mortgage loans accounts for 96.8% of total shareholder asset loans. This section focuses on explaining the shareholder risk within these exposures.

United Kingdom & Ireland

(Non-securitised mortgage loans)

Residential

The UK non-securitised residential mortgage portfolio has a total current value of £3.2 billion (FY11: £2.7 billion). The increase from the prior year is primarily due to £570 million of new loans and accrued interest and £52 million of fair value gains, partly offset by £107 million of redemptions. These mortgages are all in the form of equity release, whereby homeowners mortgage their property to release cash equity. Due to the low relative levels of equity released in each property, they predominantly have a Loan to Value ("LTV") of below 70%, and the average LTV across the portfolio is approximately 29.6% (FY11: 27.5%).

Healthcare

Primary Healthcare & PFI businesses loans included within shareholder assets are £4.1 billion (FY11: £3.7 billion)and are secured against General Practitioner premises, other primary health related premises or other emergency services related premises. For all such loans, government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not Government guaranteed, the nature of these businesses and premises provides considerable comfort of an ongoing business model and low risk of default.

      On a market value basis, we estimate the average LTV of these mortgages to be 96%, although as explained above, we do not consider this to be a key risk indicator. Income support from the Government bodies and the social need for these premises provide sustained income stability. Aviva therefore considers these loans to be low risk and uncorrelated with the strength of the UK or global economy.

 

 

Page 111

 

D3 - Analysis of asset quality continued

D3.3 - Loans continued

Commercial

Gross exposure by loan to value and arrears

Shareholder assets

 

2012

>120%

£m

115-120%

£m

110-115%

£m

105-110%

£m

100-105%

£m

95-100%

£m

90-95%

£m

80-90%

£m

70-80%

£m

<70%

£m

Total

£m

Not in arrears

341

704

939

843

754

1,233

439

1,290

414

1,317

8,274

0 - 3 months

-

1

36

-

51

9

21

-

3

-

121

3 - 6 months

-

-

-

-

-

55

2

-

-

-

57

6 - 12 months

-

-

-

-

-

47

2

-

-

-

49

> 12 months

-

-

-

-

-

204

15

-

-

-

219

Total

341

705

975

843

805

1,548

479

1,290

417

1,317

8,720

 

Of the total £8.7 billion of UK non-securitised commercial mortgage loan in the shareholder fund, £8.4 billion are held by our UK
Life business, of which £7.7 billion back annuity liabilities, and are stated on a fair value basis. The loan exposures for our UK Life business are calculated on a discounted cash flow basis, and include a risk adjustment through the use of Credit Risk Adjusted Value ("CRAV") methods.

      Aviva UK General Insurance hold the remaining £0.3 billion of loans which are stated on an amortised cost basis and are subject to impairment review, using a fair value methodology calibrated to the UK Life approach, adjusted for specific portfolio characteristics.

      For the commercial mortgages held by the UK Life and UK General Insurance business, loan service collection ratios, a key indicator of mortgage portfolio performance, remained high during the period. Loan Interest Cover ("LIC"), which is defined as the annual net rental income (including rental deposits and less ground rent) divided by the annual loan interest service, increased to 1.40x (FY11: 1.32x) due to new business being completed with strong cover. Mortgage LTVs decreased during the year from 102% to 95% largely due to new business completing with low LTVs  (property values have fallen c3.2% between 2011 and 2012).

      All loans in arrears have been assessed for impairment. Of the £446 million (FY11: £418 million)value of loans in arrears included within our shareholder assets, the interest and capital amount in arrears is only £2.4 million.

The valuation allowance (including supplementary allowances) made in the UK Life for corporate bonds and mortgages, including healthcare mortgages, held by Aviva Annuity UK Limited and carried at fair value equates to 56 bps and 89 bps respectively at 31 December 2012 (FY11: 60 bps and 69 bps respectively). The total valuation allowance held by Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including healthcare mortgages, was £1.8 billion (FY11: £1.6 billion)over the remaining term of the UK Life corporate bond and mortgage portfolio. The increase is driven by an increase in the commercial mortgage allowances to reflect up-to-date market information and growth in the corporate bond portfolio.

      In addition, we hold £118 million (FY11: £84 million) of impairment provisions in our UK General Insurance mortgage portfolio, which is carried at amortised cost.

      The UK portfolio remains well diversified in terms of property type, location and tenants as well as the spread of loans written over time. The risks in commercial mortgages are addressed through several layers of protection with the mortgage risk profile being primarily driven by the ability of the underlying tenant rental income to cover loan interest and amortisation. Should any single tenant default on their rental payment, rental from other tenants backing the same loan often ensures the loan interest cover does not fall below 1.0x. Where there are multiple loans to a single borrower further protection may be achieved through cross-charging (or pooling) such that any single loan is also supported by rents received within other pool loans. Additionally, there may be support provided by the borrower of the loan itself and further loss mitigation from any general floating charge held over assets within the borrower companies.

      If the LIC cover falls below 1.0x and the borrower defaults then Aviva still retains the option of selling the security or restructuring the loans and benefiting from the protection of the collateral. A combination of these benefits and the high recovery levels afforded by property collateral (compared to corporate debt or other uncollateralised credit exposures) results in the economic exposure being significantly lower than the gross exposure reported above.

Securitised mortgage loans

Of the total securitised residential mortgages (£2.2 billion), approximately £260 million of securities are still held by Aviva shareholder funds. The remaining securities have been sold to third parties, and therefore present little credit risk to Aviva. Securitised residential mortgages held are predominantly issued through vehicles in the UK.

 

Page 112

 

 

 

D3 - Analysis of asset quality continued

D3.3 - Loans continued

United States

(Non-securitised mortgage loans)

Commercial

Gross exposure by loan to value and arrears

Shareholder assets

 

2012

>120%

£m

115-120%

£m

110-115%

£m

105-110%

£m

100-105%

£m

95-100%

£m

90-95%

£m

80-90%

£m

70-80%

£m

<70%

£m

Total

£m

Neither past due nor impaired

14

-

2

1

14

23

19

131

516

2,137

2,857

0 - 3 months

-

-

-

-

2

-

-

-

-

-

2

3 - 6 months

-

-

-

-

-

-

-

-

-

-

-

6 - 12 months

-

-

-

-

-

-

-

-

-

-

-

> 12 months

-

-

-

-

-

-

-

-

-

-

-

Total

14

-

2

1

16

23

19

131

516

2,137

2,859

 

Aviva USA currently holds £2.9 billion (FY11: £2.5 billion) of commercial mortgages included within shareholder assets. These mortgages continue to perform well, reflecting:

n Low underwriting LTVs (shall not exceed 80% at the time of issuance), and consequently a portfolio with an average LTV
of 61%
(FY11: 64%);

n A highly diversified portfolio, with strong volumes in many states with more stable economies and related real estate values; and

n Strong LIC ratios, with 98% of the loans having an LIC above 1.0x, and 2.0% with LIC below 1.0x.

 

As at 31 December 2012, the actual amount of interest payment in arrears was £0.03 million.

 

 

Page 113

 

 

D3 - Analysis of asset quality continued

D3.4 - Financial investments

 





2012




2011

Total assets

Cost/ amortised

cost

£m

Unrealised

gains

£m

Impairment

and

unrealised

losses

£m

Fair value

£m

Cost/ amortised

cost

£m

Unrealised

gains

£m

Impairment

and

unrealised

losses

£m

Fair value

£m

Debt securities

147,220

16,433

(2,030)

161,623

147,537

12,395

(6,587)

153,345

Equity securities

30,898

5,043

(2,164)

33,777

33,055

3,637

(4,009)

32,683

Other investments

28,939

2,308

(1,154)

30,093

30,362

553

(538)

30,377

Total

207,057

23,784

(5,348)

225,493

210,954

16,585

(11,134)

216,405

Assets of operations classified as held for sale

32,834

3,762

(181)

36,415

403

4

(60)

347

Total (excluding assets held for sale)

174,223

20,022

(5,167)

189,078

210,551

16,581

(11,074)

216,058

 

Aviva holds large quantities of high quality bonds, primarily to match our liability to make guaranteed payments to policyholders. Some credit risk is taken, partly to increase returns to policyholders and partly to optimise the risk/return profile for shareholders.
The risks are consistent with the products we offer and the related investment mandates, and are in line with our risk appetite.

      The Group also holds equities, the majority of which are held in participating funds and policyholder funds, where they form an integral part of the investment expectations of policyholders and follow well-defined investment mandates. Some equities are also held in shareholder funds. The vast majority of equity investments are valued at quoted market prices.

D3.4.1 - Debt securities

 


Fair value hierarchy


Debt securities - Total

2012

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

UK Government

18,208

158

-

18,366

Non-UK Government

39,385

5,234

1,757

46,376

Europe

35,950

1,115

1,756

38,821

North America

787

3,779

-

4,566

Asia Pacific & Other

2,648

340

1

2,989

Corporate bonds - Public utilities

5,789

3,299

52

9,140

Corporate convertible bonds

182

107

182

471

Other corporate bonds

39,383

29,028

7,980

76,391

Other

5,006

5,762

111

10,879

Total

107,953

43,588

10,082

161,623

Total %

66.8%

27.0%

6.2%

100.0%

Assets of operations classified as held for sale

1,480

32,017

120

33,617

Total (excluding assets held for sale)

106,473

11,571

9,962

128,006

Total % (excluding assets held for sale)

83.2%

9.0%

7.8%

100.0%

FY11

103,183

42,222

7,940

153,345

FY11 %

67.3%

27.5%

5.2%

100.0%

 


Fair value hierarchy


Debt securities - Policyholders assets

2012

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

UK Government

4,180

-

-

4,180

Non-UK Government

2,607

60

1

2,668

Europe

1,846

59

1

1,906

North America

149

-

-

149

Asia Pacific & Other

612

1

-

613

Corporate bonds - Public utilities

284

-

1

285

Corporate convertible bonds

4

-

-

4

Other corporate bonds

5,136

1,922

158

7,216

Other

1,829

285

5

2,119

Total

14,040

2,267

165

16,472

Total %

85.2%

13.8%

1.0%

100.0%

Assets of operations classified as held for sale

190

1,148

-

1,338

Total (excluding assets held for sale)

13,850

1,119

165

15,134

Total % (excluding assets held for sale)

91.5%

7.4%

1.1%

100.0%

FY11

12,492

2,717

86

15,295

FY11 %

81.6%

17.8%

0.6%

100.0%

 

 

Page 114

 

 

D3 - Analysis of asset quality continued

D3.4 - Financial investments continued

D3.4.1 - Debt securities continued

 


Fair value hierarchy


Debt securities - Participating fund assets

2012

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

UK Government

10,643

10

-

10,653

Non-UK Government

29,260

620

1,720

31,600

Europe

27,378

560

1,720

29,658

North America

199

36

-

235

Asia Pacific & Other

1,683

24

-

1,707

Corporate bonds - Public utilities

2,585

254

33

2,872

Corporate convertible bonds

177

25

126

328

Other corporate bonds

24,761

2,310

7,506

34,577

Other

1,494

1,868

105

3,467

Total

68,920

5,087

9,490

83,497

Total %

82.5%

6.1%

11.4%

100.0%

Assets of operations classified as held for sale

633

2,082

-

2,715

Total (excluding assets held for sale)

68,287

3,005

9,490

80,782

Total % (excluding assets held for sale)

84.5%

3.7%

11.8%

100.0%

FY11

67,653

4,504

7,293

79,450

FY11 %

85.2%

5.7%

9.1%

100.0%

 


Fair value hierarchy


Debt securities - Shareholder assets

2012

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

UK Government

3,385

148

-

3,533

Non-UK Government

7,518

4,554

36

12,108

Europe

6,726

496

35

7,257

North America

439

3,743

-

4,182

Asia Pacific & Other

353

315

1

669

Corporate bonds - Public utilities

2,920

3,045

18

5,983

Corporate convertible bonds

1

82

56

139

Other corporate bonds

9,486

24,796

316

34,598

Other

1,683

3,609

1

5,293

Total

24,993

36,234

427

61,654

Total %

40.5%

58.8%

0.7%

100.0%

Assets of operations classified as held for sale

657

28,787

120

29,564

Total (excluding assets held for sale)

24,336

7,447

307

32,090

Total % (excluding assets held for sale)

75.8%

23.2%

1.0%

100.0%

FY11

23,038

35,001

561

58,600

FY11 %

39.3%

59.7%

1.0%

100.0%

 

0.7%(FY11: 1.0%) of shareholder exposure to debt securities and 1.0% excluding assets held for sale is fair valued using models
with significant unobservable market parameters (classified as Fair Value Level 3). Where estimates are used, these are based on a combination of independent third party evidence and internally developed models, calibrated to market observable data where possible.

      40.5% (FY11: 39.3%) of shareholder exposure to debt securities is based on quoted prices in an active market and are therefore classified as Fair Value Level 1. The majority of the debt instruments in Level 2 are held by our US and Canadian businesses. These debt instruments are valued by independent pricing firms in accordance with usual market practice in that region and consistent with other companies operating in the region are classified as Level 2 in the Fair Value hierarchy. Excluding our US and Canadian businesses, the proportion of shareholder debt securities classified as Level 1 in the Fair Value hierarchy would be 78.9% (FY11: 84.1%); while excluding assets held for sale (including our US business) 75.8% of shareholder debt securities are classified as Level 1.

 

 

 

Page 115

 

D3 - Analysis of asset quality continued

D3.4 - Financial investments continued

D3.4.1 - Debt securities continued

 


External ratings



Debt securities - Total

2012

AAA

£m

AA

£m

A

£m

BBB

£m

Less than BBB

£m

Non-rated

£m

Total

£m

Government








UK Government

18,025

88

32

-

-

203

18,348

UK local authorities

13

-

-

-

-

5

18

Non-UK Government

11,925

16,693

3,671

12,914

1,071

102

46,376


29,963

16,781

3,703

12,914

1,071

310

64,742

Corporate








Public utilities

47

296

5,661

2,879

80

177

9,140

Convertibles and bonds with warrants

6

-

40

397

6

22

471

Other corporate bonds

5,503

8,839

27,179

23,876

3,357

7,637

76,391


5,556

9,135

32,880

27,152

3,443

7,836

86,002

Certificates of deposits

-

388

517

87

1,054

4

2,050

Structured








RMBS1 non-agency prime

169

23

4

-

-

-

196

RMBS1 agency

907

-

-

-

-

-

907


1,076

23

4

-

-

-

1,103

CMBS2

1,617

369

196

137

120

1

2,440

ABS3

595

198

277

53

95

10

1,228

CDO (including CLO)4

-

-

-

-

1

5

6

ABCP5

58

27

-

-

-

-

85


2,270

594

473

190

216

16

3,759

Wrapped credit

1

269

94

104

42

47

557

Other

648

193

860

639

917

153

3,410

Total

39,514

27,383

38,531

41,086

6,743

8,366

161,623

Total %

24.4%

16.9%

23.8%

25.4%

4.2%

5.3%

100.0%

Assets of operations classified as held for sale

3,478

3,638

9,424

12,726

1,920

2,431

33,617

Total (excluding assets held for sale)

36,036

23,745

29,107

28,360

4,823

5,935

128,006

Total % (excluding assets held for sale)

28.2%

18.5%

22.7%

22.2%

3.8%

4.6%

100.0%

FY11

49,759

20,167

45,819

24,988

4,252

8,360

153,345

FY11 %

32.3%

13.2%

29.9%

16.3%

2.8%

5.5%

100.0%

1 RMBS - Residential Mortgage Backed Security.

2 CMBS - Commercial Mortgage Backed Security.

3 ABS - Asset Backed Security.

4 CDO - Collateralised Debt Obligation, CLO - Collateralised Loan Obligation.

5 ABCP - Asset Backed Commercial Paper.

 

 

Page 116

 

D3 - Analysis of asset quality continued

D3.4 - Financial investments continued

D3.4.1 - Debt securities continued

 


External ratings



Debt securities - Policyholders assets

2012

AAA

£m

AA

£m

A

£m

BBB

£m

Less than BBB

£m

Non-rated

£m

Total

£m

Government








UK Government

4,177

3

-

-

-

-

4,180

UK local authorities

-

-

-

-

-

-

-

Non-UK Government

564

306

786

772

198

42

2,668


4,741

309

786

772

198

42

6,848

Corporate








Public utilities

2

18

152

91

15

7

285

Convertibles and bonds with warrants

-

-

-

1

-

3

4

Other corporate bonds

273

741

3,027

2,568

224

383

7,216


275

759

3,179

2,660

239

393

7,505

Certificates of deposits

-

239

417

54

275

1

986

Structured








RMBS1 non-agency prime

-

-

2

-

-

-

2

RMBS1 agency

-

-

-

-

-

-

-


-

-

2

-

-

-

2

CMBS2

6

1

-

-

-

-

7

ABS3

6

4

39

-

-

-

49

CDO (including CLO)4

-

-

-

-

-

-

-

ABCP5

-

-

-

-

-

-

-


12

5

39

-

-

-

56

Wrapped credit

-

11

1

2

2

1

17

Other

201

60

267

198

284

48

1,058

Total

5,229

1,383

4,691

3,686

998

485

16,472

Total %

31.7%

8.4%

28.5%

22.4%

6.1%

2.9%

100.0%

Assets of operations classified as held for sale

48

49

-

1,170

67

4

1,338

Total (excluding assets held for sale)

5,181

1,334

4,691

2,516

931

481

15,134

Total % (excluding assets held for sale)

34.2%

8.8%

31.0%

16.6%

6.2%

3.2%

100.0%

FY11

6,208

1,132

3,912

3,101

371

571

15,295

FY11 %

40.6%

7.4%

25.6%

20.3%

2.4%

3.7%

100.0%

 

 

 

Page 117

 

 

D3 - Analysis of asset quality continued

D3.4 - Financial investments continued

D3.4.1 - Debt securities continued

 


External ratings



Debt securities - Participating fund assets

2012

AAA

£m

AA

£m

A

£m

BBB

£m

Less than BBB

£m

Non-rated

£m

Total

£m

Government








UK Government

10,610

4

28

-

-

11

10,653

UK local authorities

-

-

-

-

-

-

-

Non-UK Government

6,779

11,830

1,677

10,471

833

10

31,600


17,389

11,834

1,705

10,471

833

21

42,253

Corporate








Public utilities

18

93

1,712

1,012

20

17

2,872

Convertibles and bonds with warrants

-

-

21

284

4

19

328

Other corporate bonds

3,881

4,955

11,902

9,731

1,739

2,369

34,577


3,899

5,048

13,635

11,027

1,763

2,405

37,777

Certificates of deposits

-

6

42

12

614

-

674

Structured








RMBS1 non-agency prime

68

-

2

-

-

-

70

RMBS1 agency

20

-

-

-

-

-

20


88

-

2

-

-

-

90

CMBS2

152

28

10

25

1

1

217

ABS3

50

30

120

22

38

-

260

CDO (including CLO)4

-

-

-

-

-

-

-

ABCP5

17

-

-

-

-

-

17


219

58

130

47

39

1

494

Wrapped credit

-

57

12

22

2

-

93

Other

402

120

534

397

570

93

2,116

Total

21,997

17,123

16,060

21,976

3,821

2,520

83,497

Total %

26.3%

20.5%

19.2%

26.3%

4.6%

3.1%

100.0%

Assets of operations classified as held for sale

95

198

666

1,156

534

66

2,715

Total (excluding assets held for sale)

21,902

16,925

15,394

20,820

3,287

2,454

80,782

Total % (excluding assets held for sale)

27.1%

21.0%

19.1%

25.8%

4.0%

3.0%

100.0%

FY11

30,540

11,204

24,004

9,786

1,465

2,451

79,450

FY11 %

38.4%

14.1%

30.2%

12.3%

1.8%

3.2%

100.0%

 

 

 

 

Page 118

 

D3 - Analysis of asset quality continued

D3.4 - Financial investments continued

D3.4.1 - Debt securities continued

 


External ratings



Debt securities - Shareholder assets

2012

AAA

£m

AA

£m

A

£m

BBB

£m

Less than BBB

£m

Non-rated

£m

Total

£m

Government








UK Government

3,238

81

4

-

-

192

3,515

UK local authorities

13

-

-

-

-

5

18

Non-UK Government

4,582

4,557

1,208

1,671

40

50

12,108


7,833

4,638

1,212

1,671

40

247

15,641

Corporate








Public utilities

27

185

3,797

1,776

45

153

5,983

Convertibles and bonds with warrants

6

-

19

112

2

-

139

Other corporate bonds

1,349

3,143

12,250

11,577

1,394

4,885

34,598


1,382

3,328

16,066

13,465

1,441

5,038

40,720

Certificates of deposits

-

143

58

21

165

3

390

Structured








RMBS1 non-agency prime

101

23

-

-

-

-

124

RMBS1 agency

887

-

-

-

-

-

887


988

23

-

-

-

-

1,011

CMBS2

1,459

340

186

112

119

-

2,216

ABS3

539

164

118

31

57

10

919

CDO (including CLO)4

-

-

-

-

1

5

6

ABCP5

41

27

-

-

-

-

68


2,039

531

304

143

177

15

3,209

Wrapped credit

1

201

81

80

38

46

447

Other

45

13

59

44

63

12

236

Total