Interim results - 6 months ended 30 June 2007
A 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 relevant 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 2007 £m | 31 December 2006 £m | |
|---|---|---|
| Long-term savings | 20,517 | 19,664 |
| General insurance and health | 5,460 | 5,175 |
| Other business | 758 | 1,059 |
| Corporate | (30) | (19) |
| Total capital employed | 26,705 | 25,879 |
| Financed by | ||
| Equity shareholders’ funds and minority interests | 21,545 | 19,668 |
| Direct capital instrument | 990 | 990 |
| Preference shares | 200 | 200 |
| Subordinated debt | 2,949 | 2,937 |
| External debt | 1,257 | 1,258 |
| Net internal debt | (236) | 826 |
| 26,705 | 25,879 |
At 30 June 2007 the Group had £26.7 billion (restated 31 December 2006: £25.9 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 the six months to 30 June 2007, the total capital employed increased by £0.8 billion reflecting growth in long-term saving operations; driven by operational results and the movement in equity markets over the period.
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 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. Net internal debt has moved to a net asset position due to the timing of dividend upstreaming from subsidiaries and the restructuring of internal loan agreements.
The ratio of the Group’s external debt plus subordinated debt to shareholders’ funds was 18.5% (31 December 2006: 20%). Fixed charged cover on an EEV basis, which measures the extent to which external interest costs are covered by EEV operating profit, was 10.6 times (31 December 2006: 10.3 times).
At 30 June 2007 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 £5,696 million (31 December 2006: £5,991 million), with a weighted average cost of 4.3% (31 December 2006: 3.9%). The Group WACC is 7.6% 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 2007 was 8.5%, based on a risk free rate of 5.5%, an equity market premium of 3% and a market beta of 1.03.
