Interim results for 6 months ended 30 June 2006
Appendix: Group capital structure
The Group maintains an efficient capital structure from a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings, consistent with the Group’s risk profile and the regulatory and market requirements of its business. The European Embedded Value basis provides a more accurate reflection of the performance of the Group’s life operations year on year than results under IFRS. Accordingly, the Group’s capital structure is analysed on this basis.
The Group’s capital, from all funding sources, has been allocated such that the capital employed by trading operations is greater than the capital provided by its shareholders and its subordinated debt holders. As a result, the Group is able to enhance the returns earned on its equity capital.
Capital employed by segment
| 30 June 2006 £m |
31 December 2005 £m |
|
|---|---|---|
| Long-term savings | 16,232 | 15,598 |
| General insurance and health | 5,572 | 5,581 |
| Other business | 1,744 | 1,876 |
| Corporate | (26) | (36) |
| Total capital employed | 23,522 | 23,019 |
| Financed by | ||
| Equity shareholders’ funds and minority interests | 17,275 | 16,356 |
| Direct capital instrument | 990 | 990 |
| Preference shares | 200 | 200 |
| Subordinated debt | 2,811 | 2,808 |
| External debt | 815 | 1,002 |
| Net internal debt | 1,431 | 1,663 |
| 23,522 | 23,019 |
At 30 June 2006 the Group had £23.5 billion (31 December 2005: £23.0 billion) of total capital employed in our trading operations which is efficiently financed by a combination of equity shareholders’ funds, preference capital, direct capital instruments, subordinated debt and internal and external borrowings.
In addition to its external funding sources, the Group has a number of internal debt arrangements in place. These have allowed the assets supporting technical liabilities to be invested into the pool of central assets for use across the Group. They have also enabled the shareholders to deploy cash from some parts of the business to others in order to fund growth. Although intra-group loans in nature, they are counted as part of the capital base for the purpose of capital management. All internal loans satisfy arms length criteria and all interest payments have been made when due.
The presentation of internal debt depicts a net debt position which represents the upstream of internal loans from business operations to corporate and holding entities net of tangible assets held by these entities. The corporate net liabilities represent the element of the pension scheme deficit held centrally.
The ratio of the Group’s external debt plus subordinated debt to shareholders’ funds was 20% (31 December 2005: 22%). Fixed charge cover on an EEV basis, which measures the extent to which external interest costs are covered by EEV operating profit, was 13.0 times (31 December 2005: 9.6 times).
At 30 June 2006 the market value of the Group’s external debt, subordinated debt, preference shares, including both the Aviva plc preference shares and the General Accident plc preference shares of £250 million, within minority interests, and direct capital instrument was £5,413 million (31 December 2005: £5,868 million), with a weighted average cost of 4% (31 December 2005: 3.8%). The Group WACC is 7.1% and has been calculated by reference to the cost of equity and cost of debt at the relevant date. The cost of equity at 30 June 2006 was 8.0%, based on a risk free rate of 4.7%, an equity market premium of 3% and a market beta of 1.1.
Deployment of equity shareholders' funds
| 30 June 2006 |
31 December 2005 |
||||||
|---|---|---|---|---|---|---|---|
| Equities £m |
Fixed income securities £m |
Other investments £m |
Other net assets £m |
Total £m |
Total £m |
||
| Assets | |||||||
| Long-term savings | 863 | 3,888 | 1,309 | 2,356 | 8,416 | 7,874 | |
| General insurance, health, and other business | 3,852 | 1,281 | 1,908 | (1,837) | 5,204 | 5,397 | |
| 4,715 | 5,169 | 3,217 | 519 | 13,620 | 13,271 | ||
| Goodwill | 2,553 | 2,491 | |||||
| Additional and acquired value of in-force long-term business and intangible assets | 7,349 | 7,257 | |||||
| Assets backing total capital employed | 23,522 | 23,019 | |||||
| External debt | (815) | (1,002) | |||||
| Net internal debt | (1,431) | (1,663) | |||||
| Subordinated debt | (2,811) | (2,808) | |||||
| 18,465 | 17,546 | ||||||
| Minority interests | (1,743) | (1,457) | |||||
| Direct capital Instrument | (990) | (990) | |||||
| Preference capital | (200) | (200) | |||||
| Equity shareholders' funds | 15,532 | 14,899 | |||||
Return on capital employed
| 30 June 2006 |
31
December 2005 |
||||
|---|---|---|---|---|---|
| Normalised after-tax return £m |
Opening equity capital £m |
Return on capital % |
Return on capital % |
||
| Long-term savings | 706 | 15,598 | 9.3% | 9.0% | |
| General insurance and health | 571 | 5,581 | 21.5% | 20.0% | |
| Other business | (21) | 1,876 | (2.2)% | 9.3% | |
| Corporate | (24) | (36) | 177.8% | 30.6% | |
| 1,232 | 23,019 | 11.0% | 11.5% | ||
| Borrowings | (106) | (5,473) | 3.9% | 4.5% | |
| 1,126 | 17,546 | 13.2% | 14.1% | ||
| Minority interests | (106) | (1,457) | 15.1% | 16.1% | |
| Direct capital instrument | - | (990) | - | 2.9% | |
| Preference capital | (9) | (200) | 8.5% | 8.5% | |
| Equity shareholders' funds | 1,011 | 14,899 | 14.0% | 15.0% | |
The return on capital is calculated as the after-tax return on opening equity capital, based on Group operating profit, including Life EEV operating return.
Sensitivity analysis
The sensitivity of the Group’s shareholders’ funds on an EEV basis at 30 June 2006 to a 10% fall in global equity markets or a rise of 1% in global interest rates is as follows:
| 31 December 2005 £bn |
30 June 2006 £bn |
Equities down 10% £bn |
Interest rates up 1% £bn |
|
|---|---|---|---|---|
| 15.6 | Long-term savings1 | 16.2 | 15.3 | 15.7 |
| 7.4 | General insurance and other | 7.3 | 6.9 | 7.1 |
| (5.5) | Borrowings2 | (5.0) | (5.0) | (5.0) |
| 17.5 | Shareholders’ funds | 18.5 | 17.2 | 17.8 |
These sensitivities assume a full tax charge/credit on market value assumptions.
- Assumes EEV assumptions adjusted to reflect revised bond yields.
- Comprising internal, external and subordinated debt, net of corporate tangible net assets.
The table above incorporates the effect on the value of the pension scheme assets of a 10% decrease in equity and a 1% increase in fixed income bond yields. The latter sensitivity also assumes an equivalent movement in both inflation and discount rate (i.e. no change to real interest rates) and, therefore, incorporates the offsetting effects of these items on the pension scheme liabilities. A 1% increase in the discount rate only has the effect of reducing the pension scheme liability by £1.6 billion thereby enhancing shareholders’ funds by £1.1 billion (after deducting tax).
Shareholders' funds, including minority interests
| Note | 30 June 2006 Closing shareholders' funds |
31 December 2005 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 | 1 | |||||||
| France | 1,195 | 985 | 2,180 | 1,177 | 890 | 2,067 | ||
| Ireland | 993 | 78 | 1,071 | 410 | 72 | 482 | ||
| Italy | 658 | 118 | 776 | 639 | 88 | 727 | ||
| Netherlands (including Belgium, Germany and Luxembourg) | 2,359 | 903 | 3,262 | 2,229 | 826 | 3,055 | ||
| Poland | 149 | 450 | 599 | 193 | 465 | 658 | ||
| Spain | 801 | 455 | 1,256 | 790 | 438 | 1,228 | ||
| Other Europe | 58 | 99 | 157 | 56 | 102 | 158 | ||
| Rest of the World | 641 | 107 | 748 | 702 | 60 | 762 | ||
| United Kingdom | 3,033 | 3,150 | 6,183 | 2,948 | 3,513 | 6,461 | ||
| 9,887 | 6,345 | 16,232 | 9,144 | 6,454 | 15,598 | |||
| General insurance and health | 1,2 | |||||||
| France | 308 | - | 308 | 362 | - | 362 | ||
| Ireland | 474 | - | 474 | 545 | - | 545 | ||
| Netherlands | 530 | - | 530 | 553 | - | 553 | ||
| Other Europe | 284 | - | 284 | 302 | - | 302 | ||
| Canada | 691 | - | 691 | 848 | - | 848 | ||
| Rest of the World | 244 | - | 244 | 246 | - | 246 | ||
| United Kingdom | 3,041 | - | 3,041 | 2,725 | - | 2,725 | ||
| 5,572 | - | 5,572 | 5,581 | - | 5,581 | |||
| Other business | 1,2 | 1,744 | - | 1,744 | 1,876 | - | 1,876 | |
| Corporate | (26) | - | (26) | (36) | - | (36) | ||
| External debt | (815) | - | (815) | (1,002) | - | (1,002) | ||
| Internal debt | (1,431) | - | (1,431) | (1,663) | - | (1,663) | ||
| Subordinated debt | (2,811) | - | (2,811) | (2,808) | - | (2,808) | ||
| (3,339) | - | (3,339) | (3,633) | - | (3,633) | |||
| Shareholders' funds, including minority interests | 12,120 | 6,345 | 18,465 | 11,092 | 6,454 | 17,546 | ||
| Comprising | ||||||||
| Equities | 4,715 | - | 4,715 | 4,503 | - | 4,503 | ||
| Debt and fixed income securities | 5,169 | - | 5,169 | 6,130 | - | 6,130 | ||
| Property | 1,415 | - | 1,415 | 957 | - | 957 | ||
| Deposits and other investments | 1,802 | - | 1,802 | 1,190 | - | 1,190 | ||
| Intangible assets | 3 | 3,557 | 6,345 | 9,902 | 3,294 | 6,454 | 9,748 | |
| Other net assets | 519 | - | 519 | 491 | - | 491 | ||
| Borrowings | (5,057) | - | (5,057) | (5,473) | - | (5,473) | ||
| 12,120 | 6,345 | 18,465 | 11,092 | 6,454 | 17,546 | |||
Notes
Germany has been reclassified from Other Europe to the Netherlands, Lithuania
has been reclassified from Other Europe to Poland and Norwich
Union’s Dublin-based
offshore life and savings business has been reclassified from
Other Europe to the United Kingdom.
IFRS net assets shown above
include the allocation of tax assets and liabilities and hence
differ from segmental
net assets.
- Goodwill of £2,553 million (31 December 2005: £2,491 million) has been allocated as follows: life assurance £878 million (31 December 2005: £848 million); general insurance and health £400 million (31 December 2005: £398 million); other businesses £1,275 million (31 December 2005: £1,245 million).
- Intangibles of £414 million (31 December 2005: £379 million) have been allocated as follows: life assurance £45 million (31 December 2005: nil); general insurance and health £259 million (31 December 2005: £265 million); other businesses £110 million (31 December 2005: £114 million).
- Total intangible assets of £9,902 million (31 December 2005: £9,748 million) comprise goodwill of £2,553 million (31 December 2005: £2,491 million); acquired value of in-force long-term business and intangibles of £1,004 million (31 December 2005: £803 million) and additional value of in-force long-term business of £6,345 million (31 December 2005: £6,454 million). The associated deferred tax liability on the intangibles of £118 million (31 December 2005: £123 million) is included within other net assets.
- The post-tax pension fund deficit of £540 million (31 December 2005: £989 million) has been allocated as follows: life operations £213 million (31 December 2005: £363 million), general insurance and health: £283 million (31 December 2005: £532 million), other business £18 million (31 December 2005: £58 million) and corporate of £26 million (31 December 2005: £36 million).
Geographical analysis of return on capital employed
For the six months ended 30 June 2006
| Note | Operating return (Note 1) | Opening shareholders' funds including minority interests | Annualised return on capital | ||||
|---|---|---|---|---|---|---|---|
| Before tax £m |
After tax £m |
£m | % | ||||
| Life assurance | |||||||
| France | 196 | 128 | 2,067 | 12.8% | |||
| Ireland | 8 | 7 | 482 | 2.9% | |||
| Italy | 53 | 33 | 727 | 9.3% | |||
| Netherlands (including Belgium, Germany and Luxembourg) | 185 | 129 | 3,055 | 8.6% | |||
| Poland | 66 | 54 | 658 | 16.9% | |||
| Spain | 112 | 73 | 1,228 | 12.2% | |||
| Other Europe | (3) | (2) | 158 | (2.8)% | |||
| Rest of the World | 54 | 39 | 762 | 10.5% | |||
| United Kingdom | 350 | 245 | 6,461 | 7.7% | |||
| 1,021 | 706 | 15,598 | 9.3% | ||||
| General insurance and health | |||||||
| France | 27 | 18 | 362 | 10.2% | |||
| Ireland | 88 | 77 | 545 | 30.3% | |||
| Netherlands | 80 | 56 | 553 | 21.3% | |||
| Other Europe | 19 | 13 | 302 | 8.8% | |||
| Canada | 85 | 55 | 848 | 13.4% | |||
| Other Rest of the World | 12 | 8 | 246 | 6.6% | |||
| United Kingdom | 492 | 344 | 2,725 | 26.9% | |||
| 803 | 571 | 5,581 | 21.5% | ||||
| Other business | 62 | (21) | 1,876 | (2.2)% | |||
| Corporate | (35) | (24) | (36) | 177.8% | |||
| External debt | (25) | (17) | (1,002) | 3.4% | |||
| Net internal debt | 2 | (43) | (30) | (1,663) | 3.6% | ||
| Subordinated debt | (84) | (59) | (2,808) | 4.2% | |||
| 1,699 | 1,126 | 17,546 | 13.2% | ||||
Notes
Germany has been reclassified from Other Europe to the Netherlands, Lithuania has been reclassified from Other Europe to Poland and Norwich Union's Dublin-based offshore life and savings business has been reclassified from Other Europe to the United Kingdom.
- The operating return is based upon Group operating profit, which is stated before impairment of goodwill, amortisation of additional value of in-force business, exceptional items and tax including policyholder tax, adjusted for the short-term fluctuation in investment return.
- The return before tax of £(43) million comprises investment return of £63 million and unallocated interest of £(106) million.
For the year ended 31 December 2005
| Note | Operating return (Note 1) | Opening shareholders' funds including minority interests | Annualised return on capital | ||||
|---|---|---|---|---|---|---|---|
| Before tax £m |
After tax £m |
£m | % | ||||
| Life assurance | |||||||
| France | 321 | 209 | 1,819 | 11.5% | |||
| Ireland | 20 | 17 | 651 | 2.6% | |||
| Italy | 96 | 60 | 550 | 10.9% | |||
| Netherlands (including Belgium, Germany and Luxembourg) | 348 | 236 | 2,485 | 9.5% | |||
| Poland | 132 | 107 | 557 | 19.2% | |||
| Spain | 214 | 139 | 1,040 | 13.4% | |||
| Other Europe | (5) | (4) | 196 | (2.0)% | |||
| Rest of the World | 99 | 71 | 646 | 11.0% | |||
| United Kingdom | 589 | 413 | 5,882 | 7.0% | |||
| 1,814 | 1,248 | 13,826 | 9.0% | ||||
| General insurance and health | |||||||
| France | 35 | 23 | 416 | 5.5% | |||
| Ireland | 171 | 150 | 498 | 30.1% | |||
| Netherlands | 137 | 94 | 461 | 20.4% | |||
| Other Europe | 47 | 32 | 162 | 19.8% | |||
| Canada | 147 | 95 | 687 | 13.8% | |||
| Other Rest of the World | 40 | 28 | 277 | 10.1% | |||
| United Kingdom | 827 | 580 | 2,504 | 23.2% | |||
| 1,404 | 1,002 | 5,005 | 20.0% | ||||
| Other business | 111 | 78 | 838 | 9.3% | |||
| Corporate | (104) | (114) | (372) | 30.6% | |||
| External debt | (79) | (67) | (1,452) | 4.6% | |||
| Net internal debt | 2 | (73) | (52) | (987) | 5.3% | ||
| Subordinated debt | (169) | (118) | (2,847) | 4.1% | |||
| 2,904 | 1,977 | 14,011 | 14.1% | ||||
Notes
Germany has been reclassified from Other Europe to the Netherlands, Lithuania has been reclassified from Other Europe to Poland and Norwich Union’s Dublin-based offshore life and savings business has been reclassified from Other Europe to the United Kingdom.
- The operating return is based upon Group operating profit, which is stated before impairment of goodwill, amortisation of additional value of in-force business, exceptional items and tax including policyholder tax, adjusted for the short-term fluctuation in investment return.
- The return before tax of £(73) million comprises investment return of £147 million and unallocated interest of £(220) million.
