Preliminary results year ended 31 December 2008
05 March 2009
Appendix B – Analysis of assets
B5 – Analysis of asset quality
The following sections analyse the quality of various group assets. The table below provides an overview of where additional information is provided.
| Reference | Further analysis £m |
No further analysis £m |
Total £m | |
|---|---|---|---|---|
| Assets | ||||
| Goodwill and Acquired value of in-force business and intangible assets | 5.1 | 7,630 | – | 7,630 |
| Interests in joint ventures and associates | 5.2 | 2,983 | – | 2,983 |
| Property and equipment | – | – | 1,066 | 1,066 |
| Investment property | 5.3 | 14,426 | – | 14,426 |
| Loans | 5.4 | 42,237 | – | 42,237 |
| Financial investments | 5.5 | |||
| Debt securities | 5.5.1 | 150,591 | – | 150,591 |
| Equity securities | 5.5.2 | 43,411 | – | 43,411 |
| Other investments | 5.5.3 | 36,116 | – | 36,116 |
| Reinsurance assets | 5.6 | 7,894 | – | 7,894 |
| Deferred tax assets | – | – | 2,642 | 2,642 |
| Current tax assets | – | – | 622 | 622 |
| Receivables and other financial assets | 5.7 | 10,202 | – | 10,202 |
| Deferred acquisition costs and other assets | – | – | 6,148 | 6,148 |
| Prepayments and accrued income | – | – | 3,920 | 3,920 |
| Cash and cash equivalents | 5.8 | 24,674 | – | 24,674 |
| Assets of operations classified as held for sale | – | – | – | – |
| Total | 340,164 | 14,398 | 354,562 | |
| Total % | 95.9% | 4.1% | ||
| FY 2007 | 311,848 | 9,478 | 321,326 | |
| FY 2007 % | 97.1% | 2.9% |
As can be seen from the table, the analysis covers 96% of the group’s total assets. The remaining assets are not discussed further in the context of this disclosure on the basis that their value and quality will typically not fluctuate based on movements in the credit markets.
Fair Value Hierarchy
To provide further information on the valuation techniques used to measure assets carried at fair value, this disclosure categorises the measurement basis for assets carried at fair value into a ‘fair value hierarchy’ as follows:
Quoted market prices in active markets – (‘Level 1’)
Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets. An active market is a market in which transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Examples are listed equities in active markets, listed debt securities in active markets and quoted unit trusts in active markets.
Valued using models with significant observable market parameters – (‘Level 2’)
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. Level 2 inputs include the following:
- Quoted prices for similar (ie not identical) assets in active markets;
- Quoted prices for identical or similar assets in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly;
- Inputs other than quoted prices that are observable for the asset (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates); and
- Inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market-corroborated inputs).
Examples are securities measured using discounted cash flow models based on market observable swap yields, investment property measured using market observable information and listed debt or equity securities in a market that is inactive.
Valued using models with significant unobservable market parameters – (‘Level 3’)
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 business unit's own assumptions about the inputs that market participants would use in pricing the asset.
Examples are certain private equity investments and private placements.
5.1. 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 have included several bancassurance transactions which have resulted in £764 million of the total £3,578 million of goodwill and £942 million of the total £4,038 million of other intangible assets which primarily represent the value of bancassurance distribution agreements acquired in these business combinations.
As at 31 December 2008, the group has assessed the value of these bancassurance related assets and has not identified a need to impair any of these amounts.
5.2. Interests in Joint Ventures and Associates
Investments in Joint Ventures and Associates are accounted for using the equity method. Under this method, the cost of the investment in a given associate or joint venture, together with the group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in the consolidated balance sheet. The carrying value of both joint ventures and associates includes goodwill identified on their acquisition and any loans that group companies have advanced to them.
Some 79% of the carrying value of joint ventures comprises interests in property limited partnerships (PLPs) which are held in the UK and certain European long-term business policyholder and participating funds as part of their investment strategy. These funds have invested in a number of PLPs, either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a group subsidiary. Accounting for the PUTs and PLPs as subsidiaries, joint ventures or other financial investments depends on the shareholdings in the GPs and the terms of each partnership agreement. Where the group exerts control over a PLP, it has been treated as a subsidiary and its assets and liabilities have been consolidated within the appropriate balance sheet headings. Where the partnership is managed by a contractual agreement such that no party exerts control, notwithstanding that the group’s partnership share in the PLP (including its indirect stake via the relevant PUT and GP) may be greater than 50%, such PUTs and PLPs have been classified as joint ventures and accounted for using the equity method described above. Where the group holds minority stakes in PLPs, with no disproportionate influence, the relevant investments are carried at fair value through profit and loss within financial investments. The underlying assets of these PLPs are almost entirely investment property which are valued on the same basis as those held directly and shown in section 5.3 of this disclosure.
The group’s principal associates are two bancassurance investments with Royal Bank of Scotland Group (RBSG). Their assets are held for the benefit of their policyholders and, as described above, the group equity accounts for its share of net assets and any goodwill on acquisition. The group’s investments in the RBSG companies have been tested for impairment by comparing their carrying values with their recoverable amounts, based on value in use calculations. The recoverable amounts exceed the carrying values of these investments, and a reasonably possible change to the key underlying assumptions will not cause the carrying values of the investments to exceed their recoverable amounts.
5.3 Investment Property
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Investment property – Total | ||||
| Leased to third parties under operating leases | – | 13,764 | – | 13,764 |
| Vacant investment property/held for capital appreciation | – | 662 | – | 662 |
| Total | – | 14,426 | – | 14,426 |
| Total % | – | 100.0% | – | |
| FY 2007 | – | 15,391 | – | 15,391 |
| FY 2007 % | – | 100.0% | – | |
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Investment property – Policyholder assets | ||||
| Leased to third parties under operating leases | – | 4,053 | – | 4,053 |
| Vacant investment property/held for capital appreciation | – | 73 | – | 73 |
| Total | – | 4,126 | – | 4,126 |
| Total % | – | 100.0% | – | |
| FY 2007 | – | 5,699 | – | 5,699 |
| FY 2007 % | – | 100.0% | – | |
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Investment property – Participating fund assets | ||||
| Leased to third parties under operating leases | – | 7,026 | – | 7,026 |
| Vacant investment property/held for capital appreciation | – | 529 | – | 529 |
| Total | – | 7,555 | – | 7,555 |
| Total % | – | 100.0% | – | |
| FY 2007 | – | 7,818 | – | 7,818 |
| FY 2007 % | – | 100.0% | – | |
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Investment property – Shareholder assets | ||||
| Leased to third parties under operating leases | – | 2,685 | – | 2,685 |
| Vacant investment property/held for capital appreciation | – | 60 | – | 60 |
| Total | – | 2,745 | – | 2,745 |
| Total % | – | 100.0% | – | |
| FY 2007 | – | 1,874 | – | 1,874 |
| FY 2007 % | – | 100.0% | – | |
Some 81% of investment properties by value are held in unit-linked or participating funds. Investment properties are stated at their market values as assessed by qualified external 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, assuming no future growth in rental income. 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.
Over 95% of investment properties by value are leased to third parties under operating leases, with the remainder either being vacant or held for capital appreciation.
5.4. Loans
The group loan portfolio is principally made up of:
- Policy loans which are generally collateralised by a lien or charge over the underlying policy
- 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;
- Mortgage loans collateralised by property assets; and
- Other loans which include loans and advances to customers of our banking business and brokers/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 revised 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.
The group reviews the carrying value of loans at least at each reporting date. If the carrying value of a loan is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. Impairment is measured based on the present value of expected future cash flows discounted at the effective rate of interest of the loan, subject to the fair value of the underlying collateral. Reversals of impairments are only recognised where the decrease in the impairment can be objectively related to an event occurring after the write-down (such as an improvement in the debtor’s credit rating).
Total Assets
| UK £m |
Delta Lloyd £m |
North America £m |
Europe (Ex DL) £m |
Asia £m |
Total £m |
|
|---|---|---|---|---|---|---|
| Policy Loans | 49 | 432 | 490 | 1,119 | 36 | 2,126 |
| Loans and Advances to Banks | 4,572 | 1,843 | – | – | – | 6,415 |
| Mortgages | 16,330 | 12,815 | 1,566 | 5 | 15 | 30,731 |
| Other Loans | 38 | 2,830 | 74 | 18 | 5 | 2,965 |
| Total | 20,989 | 17,920 | 2,130 | 1,142 | 56 | 42,237 |
Policyholder Assets
| UK £m |
Delta Lloyd £m |
North America £m |
Europe (Ex DL) £m |
Asia £m |
Total £m |
|
|---|---|---|---|---|---|---|
| Policy Loans | – | – | – | – | – | – |
| Loans and Advances to Banks | – | – | – | – | – | – |
| Mortgages | 136 | 1,663 | – | – | – | 1,799 |
| Other Loans | – | – | – | – | – | – |
| Total | 136 | 1,663 | – | – | – | 1,799 |
Participating Fund Assets
| UK £m |
Delta Lloyd £m |
North America £m |
Europe (Ex DL) £m |
Asia £m |
Total £m |
|
|---|---|---|---|---|---|---|
| Policy Loans | 49 | 44 | 255 | 1,104 | 23 | 1,475 |
| Loans and Advances to Banks | 3,697 | 1,630 | – | – | – | 5,327 |
| Mortgages | 1,157 | 725 | – | 4 | – | 1,886 |
| Other Loans | – | – | – | 14 | – | 14 |
| Total | 4,903 | 2,399 | 255 | 1,122 | 23 | 8,702 |
Shareholder Assets
| UK £m |
Delta Lloyd £m |
North America £m |
Europe (Ex DL) £m |
Asia £m |
Total £m |
|
|---|---|---|---|---|---|---|
| Policy Loans | – | 388 | 235 | 15 | 13 | 651 |
| Loans and Advances to Banks1 | 875 | 213 | – | – | – | 1,088 |
| Mortgages | 15,037 | 10,427 | 1,566 | 1 | 15 | 27,046 |
| Other Loans | 38 | 2,830 | 74 | 4 | 5 | 2,951 |
| Total | 15,950 | 13,858 | 1,875 | 20 | 33 | 31,736 |
Note:
- Shareholder Assets Loans and Advances to Banks comprises of:
- £875m in the UK relating to cash collateral held on stock lending activity. This is offset by a corresponding Collateral Payment Obligation reported under "Other Financial Liabilities"
- £213m in the Netherlands relating to loans and advances to a range of banks globally.
Mortgage loans
Of the group’s total loan portfolio (including Policyholder, Participating Fund and Shareholder assets), 72% is invested in mortgage loans. Market developments over the past two years have led to an increased focus on this asset class. The group’s mortgage loan portfolio spans several business units, primarily UK, USA and Delta Lloyd, and across various sectors, including residential loans, commercial loans and government supported healthcare loans.
Aviva shareholders are exposed predominantly to mortgage loans under Aviva’s shareholder balance sheet. These exposures are complex with several levels of protection for the shareholder. This section focuses on explaining the residual shareholder risk within these exposures.
Mortgage Loans – Shareholder Assets
| UK £m |
Delta Lloyd £m |
North America £m |
Europe (Ex DL) £m |
Asia £m |
Total £m |
|
|---|---|---|---|---|---|---|
| Total securitised mortgage loans | 1,861 | 6,045 | – | – | – | 7,906 |
| Non-securitised mortgage loans – residential | – | 4,361 | – | 1 | – | 4,362 |
| Non-securitised mortgage loans – equity release | 1,409 | – | – | – | – | 1,409 |
| Non-securitised mortgage loans – commercial | 9,112 | 21 | 1,566 | – | 15 | 10,714 |
| Non-securitised mortgage loans – healthcare | 2,655 | – | – | – | – | 2,655 |
| Total non-securitised mortgage loans | 13,176 | 4,382 | 1,566 | 1 | 15 | 19,140 |
| Total mortgage loans | 15,037 | 10,427 | 1,566 | 1 | 15 | 27,046 |
Securitised mortgage loans comprise 29% of total Shareholder mortgage loan assets. They are secured through non-recourse borrowings in our UK Life and Dutch businesses, and comprise primarily of residential assets, including equity release in the UK.
Shareholder exposure to non-securitised mortgage loans is predominantly to commercial, rather than residential, mortgages. These are typically held to back annuity liabilities. Historical data has shown the portfolio to be of very high quality, with minimal realised losses incurred on the large UK portfolio in the last 15 years. With the economic climate deteriorating significantly over the last year, the level of specific bad debt provision has risen modestly and is expected to continue to rise, albeit within risk appetite.
In addition to commercial mortgages of £10,714 million (predominantly held in the UK and US), Aviva also holds £2,655 million of mortgage loans made to healthcare related businesses, which receive significant support from the National Health Service ("NHS").
Of a total of £27,046 million of shareholder asset gross mortgage loan exposure (including securitised), a combined 99% is based within the UK, Delta Lloyd and USA business units. The analysis following therefore focuses on these three business units only.
Securitised Mortgage Loans (UK, Delta Lloyd, Shareholder assets only)
Of a total of £7,906 million of securitised residential mortgages, approximately £1 billion of securities are still held by Aviva. The remaining securities have been sold to third parties, and therefore present no credit risk to Aviva.
Securitised residential mortgages held are predominantly issued through vehicles in the Netherlands and in the UK.
Non-securitised Mortgage Loans (Shareholder assets only)
UK Commercial
Gross Exposures by Loan to Value and Arrears (£m)
| Loan to Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| >120% | 115– 120% |
110– 115% |
105– 110% |
100– 105% |
95– 100% |
90– 95% |
80– 90% |
70– 80% |
<70% | Total | |
| Neither past due nor impaired | 900 | 701 | 700 | 1,765 | 1,214 | 1,012 | 405 | 729 | 638 | 402 | 8,466 |
| 0 – 3 months | 6 | – | 1 | – | – | – | – | – | – | 2 | 9 |
| 3 – 6 months | – | 636 | – | 1 | – | – | – | – | – | – | 637 |
| 6 – 12 months | – | – | – | – | – | – | – | – | – | – | – |
| > 12 months | – | – | – | – | – | – | – | – | – | – | – |
| Total | 906 | 1,337 | 701 | 1,766 | 1,214 | 1,012 | 405 | 729 | 638 | 404 | 9,112 |
Gross Exposures by Loan to Value and Loan Interest Cover Bands (£m)
| Loan to Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| >120% | 115– 120% |
110– 115% |
105– 110% |
100– 105% |
95– 100% |
90– 95% |
80– 90% |
70– 80% |
<70% | Total | |
| Loan Interest Cover Bands | |||||||||||
| <1.0x | 3 | – | – | – | – | 1 | – | – | – | 2 | 6 |
| 1.0x – 1.1x | 624 | 442 | 310 | 829 | 471 | 90 | 4 | 26 | 7 | 69 | 2,872 |
| 1.1x – 1.2x | 169 | 520 | 97 | 216 | 115 | 130 | 75 | 2 | 2 | 9 | 1,335 |
| 1.2x – 1.3x | 25 | 332 | 155 | 289 | 187 | 43 | 13 | 23 | 9 | 11 | 1,087 |
| 1.3x – 1.4x | 75 | 33 | 69 | 339 | 218 | 617 | 15 | 38 | 60 | 16 | 1,480 |
| 1.4x | 10 | 10 | 70 | 93 | 223 | 131 | 298 | 640 | 560 | 297 | 2,332 |
| Total | 906 | 1,337 | 701 | 1,766 | 1,214 | 1,012 | 405 | 729 | 638 | 404 | 9,112 |
Gross Exposures by Loan to Value and Sector (£m).
| Loan to Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| >120% | 115– 120% |
110– 115% |
105– 110% |
100– 105% |
95– 100% |
90– 95% |
80– 90% |
70– 80% |
<70% | Total | |
| Retail | 347 | 690 | 354 | 833 | 722 | 758 | 213 | 166 | 163 | 160 | 4,406 |
| Offices | 194 | 370 | 134 | 335 | 231 | 137 | 123 | 444 | 316 | 171 | 2,455 |
| Industrial | 200 | 186 | 150 | 269 | 97 | 21 | 33 | 48 | 87 | 51 | 1,142 |
| Leisure | 125 | 78 | 37 | 186 | 35 | 63 | 28 | 20 | 55 | 8 | 635 |
| Other | 40 | 13 | 26 | 143 | 129 | 33 | 8 | 51 | 17 | 14 | 474 |
| Total | 906 | 1,337 | 701 | 1,766 | 1,214 | 1,012 | 405 | 729 | 638 | 404 | 9,112 |
Of the £5,924 million of loans with LTV above 100%, the amount of exposure uncovered by the underlying security is £700 million.
Of the £9,112 million of UK Commercial loans, £8,465 million are held by the Norwich Union UK Life business to back annuity liabilities, and stated above on a fair value basis. The remaining £647 million of loans are held by Norwich Union UK General Insurance business and stated on an amortised cost basis. The loan exposures for the Norwich Union 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. These consider all the future possible cash flow scenarios for the mortgages, weighting them by their probabilities, and such cash flows are discounted at a risk free rate. For the Norwich Union UK General Insurance business, mortgages are held at amortised cost, and subject to impairment review, using a fair value methodology calibrated to the UK Life approach, adjusted for specific portfolio characteristics.
The UK portfolio is well diversified in terms of property type, location and tenants as well as the spread of loans written over time. The UK portfolio has had an excellent track record with minimal defaults in the last 15 years, although the recent economic climate is expected to result in some losses. The risks in commercial mortgages are addressed through several layers of protection. The mortgages risk profile is primarily driven by the ability of the underlying tenant rental income to cover loan interest and amortisation (where applicable). 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. Loan interest cover ("LIC") is defined as the annual net rental income (including rental deposits and less ground rent) divided by the annual loan interest service. The table above shows that the relative amount of loans below an LIC of 1.0x is minimal, and the portfolio is fairly evenly distributed across LIC bands. Where there are multiple loans to a single borrower further protection may be achieved through cross-charging and loans to a single borrower may be pooled so that any single loan is also supported by payments on the other pool loans. Additionally, there may be support provided by the borrower of the loan itself and further loss mitigation from the general floating charges held over other 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.
The £637 million exposure that is 3-6 months in arrears relates primarily to Aviva’s exposure to Dawnay Day, which was put into administration in 2008. There is currently only one quarters loan payment in arrears for the Dawnay Day loan, which is gradually being reduced from excess rent and asset sale proceeds. Aviva has finalised a restructuring of this loan with negligible shareholder loss. The amount of loans in arrears, excluding the £637 million that is 3-6 months in arrears, is negligible compared to the total portfolio size.
In 2008 Aviva made specific provisions of £29 million in relation to mortgages in arrears, and also an additional provision equivalent to approximately £250 million for the Norwich Union UK Life business and £26 million for the Norwich Union UK General Insurance business. This is based on an additional annual charge of 120bps over the next three years (in addition to the 50bps allowance already held) and factors the combination of a further 20% fall in property values and an increase in tenant defaults, to the levels experienced during the previous financial crisis in the 1990s. Such provisions have been estimated based on experience during the financial period and our current view on future market falls and tenant defaults.
UK Healthcare
Of the total non-securitised mortgage loans of £13,176 million, £2,655 million relate to healthcare businesses and are secured against General Practitioner premises or other health related premises leased to NHS trusts or Primary Care Trusts. For all such loans, Government support is provided through 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 105%, although as explained above, we do not consider this to be a key risk driver. Income support from the National Health Service and stability of the sector provide sustained income stability. Aviva therefore considers these loans to be particularly low risk and uncorrelated with the strength of the UK or global economy.
UK Residential
The UK Non-securitised residential mortgage portfolio has a total current value of £1,409 million. These mortgages are all in the form of equity release, whereby elderly homeowners that usually own a fully paid up property will mortgage it to release cash equity. Due to the low relative levels of equity released in each property, they all currently have LTV of below 70%, and the average LTV across the portfolio is approximately 30-35%. We therefore consider these mortgages to be low risk.
Delta Lloyd Commercial
Delta Lloyd currently holds a total of £623 million of commercial mortgages. However, of these, shareholders’ are exposed to only £20 million. The remaining assets are held in the Policyholder and Participating Funds of Delta Lloyd’s German subsidiaries.
Delta Lloyd Residential
| Loan to Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| >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 |
|
| Exposures by mortgage type | |||||||||||
| Government guaranteed residential | 252 | 87 | 54 | 44 | 45 | 38 | 30 | 50 | 37 | 150 | 787 |
| Non-government guaranteed residential | 235 | 268 | 189 | 316 | 257 | 512 | 388 | 406 | 431 | 572 | 3,574 |
| Exposures by interest payment arrears | |||||||||||
| Neither past due nor impaired | 472 | 330 | 232 | 340 | 276 | 508 | 381 | 433 | 433 | 674 | 4,079 |
| 0 – 3 months | 15 | 23 | 10 | 17 | 20 | 35 | 30 | 19 | 28 | 40 | 237 |
| 3 – 6 months | – | – | 1 | 1 | – | 1 | 3 | 1 | 7 | 7 | 21 |
| 6 – 12 months | – | 1 | – | – | 6 | 2 | 2 | 2 | – | 1 | 14 |
| > 12 months | – | 1 | – | 2 | – | 4 | 2 | 1 | – | – | 10 |
| Total | 487 | 355 | 243 | 360 | 302 | 550 | 418 | 456 | 468 | 722 | 4,361 |
The total exposure to non-securitised residential loans in the Netherlands is £4,361 million. However, of these, £787 million are Government guaranteed, and so present minimal risk to Aviva shareholders. Of the £4,361 million of residential loans, £3,645 million are measured on a fair value basis, and the remaining on amortised cost basis.
The Government guarantees were introduced in the Netherlands to encourage homeownership, and apply to home mortgages of up to €265,000. The guarantees are implemented through the National Mortgage Guarantee Scheme, and ensure that, should the homeowner be forced to sell, and cannot make the repayment on the mortgage, then the residual will be provided for by the Homeownership Guarantee Fund, which in turn is funded by the Government and municipalities through agreements for interest free loans.
In addition to government guarantees, the Dutch residential mortgage market also benefits from the ability for borrowers to deduct mortgage interest payments for tax purpose, thereby helping to reduce arrears or default.
The total amount of loans for which interest payments are past due is £282 million. However, the actual amount of missed payments is £5 million. Delta Lloyd has currently not made any additional provisions for these loans as it does not consider the amount of potential loss to be significant.
U.S. Commercial
Gross Exposures by Loan to Value and Arrears
| Loan to Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| >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 | 8 | – | 1 | 2 | 17 | 35 | 50 | 308 | 290 | 855 | 1,566 |
| 0 – 3 months | – | – | – | – | – | – | – | – | – | – | – |
| 3 – 6 months | – | – | – | – | – | – | – | – | – | – | – |
| 6 – 12 months | – | – | – | – | – | – | – | – | – | – | – |
| > 12 months | – | – | – | – | – | – | – | – | – | – | – |
| Total | 8 | – | 1 | 2 | 17 | 35 | 50 | 308 | 290 | 855 | 1,566 |
Gross Exposures by Loan to Value and Loan Interest Cover Bands
| Loan to Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| >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 |
|
| Loan Interest Cover Bands | |||||||||||
| <1.0x | 5 | – | – | – | – | – | – | – | – | 2 | 7 |
| 1.0x – 1.1x | – | – | – | – | – | – | – | – | – | – | – |
| 1.1x – 1.2x | – | – | – | – | – | – | – | – | – | – | – |
| 1.2x – 1.3x | 3 | – | 1 | – | – | – | – | – | – | – | 4 |
| 1.3x – 1.4x | – | – | – | – | 4 | 6 | – | – | – | 8 | 18 |
| >1.4x | – | – | – | 2 | 13 | 29 | 50 | 308 | 290 | 845 | 1,537 |
| Total | 8 | – | 1 | 2 | 17 | 35 | 50 | 308 | 290 | 855 | 1,566 |
Aviva USA currently holds only commercial mortgages under Shareholder Assets. Of a total of £1,566 million of commercial mortgages, 55% have LTV of below 70%, and 93% have LTV of below 90%. The high quality of Aviva USA’s mortgage portfolio is reflective of:
- low underwriting LTVs (shall not exceed 80% at the time of issuance);
- a highly diversified portfolio across USA, with strong volumes in many states with more stable economies such as Washington, Texas and Minnesota; and
- the decline in the US real estate market has been most pronounced for residential, and commercial properties have not yet seen as dramatic a fall.
As at 31 December 2008, there had been no loans that were past due or impaired. Aviva USA holds mortgage loans at an amortised cost value, and conducts a regular impairment review process. As at 31 December 2008, there were no provisions applied to the Aviva USA’s commercial mortgage portfolio.
5.5. Financial investments
Financial investments are an integral element of an insurance business.
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 boost 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 significant quantities of equities. Many of these are held in participating funds or unit linked 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 and the staff pension schemes, where the holdings are designed to maximise long-term returns with an acceptable level of risk. The vast majority of equity investments are valued at quoted market prices.
The group’s credit risk policy restricts the exposure to individual counterparties across all types of risk.
The fair values of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Securities, for which fair values cannot be measured reliably, are recognised at cost less impairment.
Where it is determined that the market in which a price is quoted has become inactive, the quoted price is assessed against either independent valuations or internally modelled valuations which take into account other market observable information. Where the quoted price differs sufficiently from these reassessed prices, the fair value recognised on the balance sheet is based on this adjusted valuation. However, if these reassessed prices confirm that the quoted price remains appropriate, then the fair value recognised on the balance sheet continues to be the quoted price.
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. In general, the FV category is used as, in most cases, the group’s investment or risk management strategy is to manage its financial investments on a fair value basis. The AFS category is used where the relevant long-term business liability (including shareholders funds) is passively managed.
Investments classified as FV and AFS are subsequently carried at fair value. Changes in the fair value of FV investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS, except for impairment losses, are recorded in a separate investment valuation reserve in equity. Where investments classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve to the income statement.
To test for impairment, the group reviews the carrying value of its investments on a regular basis. If the carrying value of an investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment.
For listed investments classified as AFS, the group performs an objective review of the current financial position and prospects of the issuer on a regular basis, to identify whether any impairment provision is required. This review takes into account the likelihood of the current market price recovering to former levels. For unlisted investments classified as AFS, the group considers the current financial position of the issuer and the future prospects in identifying the requirement for an impairment provision. For both listed and unlisted AFS securities identified as being impaired, the cumulative unrealised net loss previously recognised within the AFS reserve is transferred to realised losses for the year.
Cost, unrealised gains and fair value
The following is a summary of the cost/amortised cost, gross unrealised gains and losses and fair value of financial investments:
| 2008 | ||||
|---|---|---|---|---|
| Cost/amortised cost £m |
Unrealised gains £m |
Impairment and unrealised losses £m |
Fair value £m |
|
| Debt securities | 156,097 | 7,634 | (13,140) | 150,591 |
| Equity securities | 54,518 | 2,685 | (13,792) | 43,411 |
| Other investments | 34,692 | 4,243 | (2,819) | 36,116 |
| 245,307 | 14,562 | (29,751) | 230,118 | |
| 2007 | ||||
|---|---|---|---|---|
| Cost/amortised cost £m |
Unrealised gains £m |
Impairment and unrealised losses £m |
Fair value £m |
|
| Debt securities | 121,973 | 1,970 | (2,551) | 121,392 |
| Equity securities | 50,635 | 9,052 | (622) | 59,065 |
| Other investments | 31,746 | 4,964 | (441) | 36,269 |
| 204,354 | 15,986 | (3,614) | 216,726 | |
Only 1.2% of financial investments (less than 1% of total assets recorded at fair value) are fair valued using models with significant unobservable market parameters. 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. Whilst such valuations are sensitive to estimates it is believed that changing one or more of the assumptions for reasonably possible alternative assumptions would not change the fair value significantly.
The majority of the debt instruments held by our North American businesses are valued by independent pricing firms in accordance with usual market practice. Given the reductions in liquidity in debt markets over 2008, and in accordance with market consensus in North America, we believe that the fair value valuation approach adopted for these securities is best characterised as Level 2. This classification accounts for the majority of the change in fair value hierarchy over 2008.
5.5.1. Debt instruments
Fair Value measurement
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Debt securities – Total | ||||
| UK government | 18,867 | 4 | – | 18,871 |
| Non-UK government | 34,210 | 6,344 | 228 | 40,782 |
| Corporate bonds – Public utilities | 3,389 | 2,056 | 88 | 5,533 |
| Corporate convertible bonds | 339 | 516 | – | 855 |
| Other Corporate bonds | 44,269 | 26,038 | 898 | 71,205 |
| Other | 6,869 | 5,840 | 636 | 13,345 |
| Total | 107,943 | 40,798 | 1,850 | 150,591 |
| Total % | 71.7% | 27.1% | 1.2% | |
| FY 2007 | 101,342 | 18,710 | 1,260 | 121,312 |
| FY 2007 % | 83.5% | 15.4% | 1.1% | |
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Debt securities – Policyholder assets | ||||
| UK government | 5,065 | 4 | – | 5,069 |
| Non-UK government | 3,009 | 919 | – | 3,928 |
| Corporate bonds – Public Utilities | 39 | 2 | – | 41 |
| Corporate convertible bonds | 3 | – | – | 3 |
| Other Corporate bonds | 7,414 | 1,714 | 27 | 9,155 |
| Other | 1,264 | 122 | 6 | 1,392 |
| Total | 16,794 | 2,761 | 33 | 19,588 |
| Total % | 85.7% | 14.1% | 0.2% | |
| FY 2007 | 13,808 | 3,540 | 12 | 17,360 |
| FY 2007 % | 79.5% | 20.4% | 0.1% | |
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Debt securities – Participating fund assets | ||||
| UK government | 12,125 | – | – | 12,125 |
| Non-UK government | 19,172 | 2,972 | 101 | 22,245 |
| Corporate bonds – Public Utilities | 2,181 | 839 | 88 | 3,108 |
| Corporate convertible bonds | 331 | 178 | – | 509 |
| Other Corporate bonds | 28,598 | 9,276 | 581 | 38,455 |
| Other | 2,608 | 303 | 213 | 3,124 |
| Total | 65,015 | 13,568 | 983 | 79,566 |
| Total % | 81.7% | 17.1% | 1.2% | |
| FY 2007 | 51,866 | 8,486 | 1,197 | 61,549 |
| FY 2007 % | 84.3% | 13.8% | 1.9% | |
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Debt securities – Shareholder assets | ||||
| UK government | 1,677 | – | – | 1,677 |
| Non-UK government | 12,029 | 2,453 | 127 | 14,609 |
| Corporate bonds – Public Utilities | 1,169 | 1,215 | – | 2,384 |
| Corporate convertible bonds | 5 | 338 | – | 343 |
| Other Corporate bonds | 8,257 | 15,048 | 290 | 23,595 |
| Other | 2,997 | 5,415 | 417 | 8,829 |
| Total | 26,134 | 24,469 | 834 | 51,437 |
| Total % | 50.8% | 47.6% | 1.6% | |
| FY 2007 | 35,668 | 6,684 | 51 | 42,403 |
| FY 2007 % | 84.1% | 15.8% | 0.1% | |
51% of shareholder exposure to debt securities is based on quoted prices in an active market. The observed reduction in liquidity during 2008 due to the ongoing uncertainty in the international financial markets has resulted in a higher proportion of debt securities that is based on quoted prices in markets that are not active or where the prices are less current, compared with one year ago.
Ratings / Products
The overall quality of the book is strong and has been maintained, despite the increase in downgrade activity by the major rating agencies during 2008, by taking opportunities to move into higher quality assets. 40% of total debt security holdings are in government bonds. A further 52% of holdings are in corporate bonds with an average rating between AA and A.
‘Wrapped credit’ is credit exposure that has been insured with monoline insurers to achieve a better credit rating. The monoline insurers suffered downgrades during 2008 and this is reflected in the analysis that follows. The exposure is diversified across several monolines and the underlying bonds are diversified across many different counterparties. In general, we are a long term holder of this debt, although investments continue to be reviewed with reference to the underlying quality and prospects.
The majority of the Residential Mortgage-Backed Securities (RMBS) are US investments and almost 70% of the total exposure is backed by one of the US Government Sponsored Entities (GSEs) including Fannie Mae and Freddie Mac which, under the conservatorship arrangements implemented in September 2008, are now backed by the full faith and credit of the US Government. The majority of the remaining US RMBS is backed by fixed rate loans originated in 2005 or before.
The group has extremely limited exposure to ‘Sub-prime’ debt securities and also limited exposure to CDOs and CLOs. Investments in structured assets, excluding agency RMBS which is backed by GSEs, represent less than 6% of total debt securities.
The vast majority of the corporate bonds that are not rated represents private placements and corporate bond investments made via unit trusts, where a ‘look-through’ to the underlying securities has been performed. The private placements are US investments which are not rated by the major rating agencies but which are rated an average equivalent of A- by the Securities Valuation Office of the National Association of Insurance Commissioners (NAIC), a US national regulatory agency.
Excluding the private placements that are rated an average A- by the NAIC, the exposure that is not rated by a major rating agency reduces to less than 3% of total debt securities.
| Ratings | |||||||
|---|---|---|---|---|---|---|---|
| AAA £m |
AA £m |
A £m |
BBB £m |
Less than BBB £m |
Non-rated £m |
Total £m |
|
| Debt securities – Total Government | |||||||
| UK government | 18,776 | 19 | 59 | – | – | – | 18,854 |
| UK local authorities | – | 17 | – | – | – | – | 17 |
| Non-UK government | 21,660 | 8,114 | 9,147 | 401 | 274 | 1,186 | 40,782 |
| 40,436 | 8,150 | 9,206 | 401 | 274 | 1,186 | 59,653 | |
| Corporate | |||||||
| Public Utilities | 2,092 | 432 | 1,996 | 890 | 84 | 39 | 5,533 |
| Convertibles and bonds with warrants | 12 | 65 | 419 | 209 | 78 | 71 | 854 |
| Other corporate bonds | 14,813 | 14,596 | 26,189 | 10,829 | 1,727 | 3,052 | 71,206 |
| 16,917 | 15,093 | 28,604 | 11,928 | 1,889 | 3,162 | 77,593 | |
| Certificates of deposits | 363 | 519 | 404 | 3 | – | 10 | 1,299 |
| Structured | |||||||
| RMBS non-agency sub-prime | 22 | 12 | 1 | 3 | 1 | – | 39 |
| RMBS non-agency ALT A |
190 | – | – | – | 13 | 5 | 208 |
| RMBS non-agency prime | 1,150 | 53 | 31 | 24 | – | 140 | 1,398 |
| RMBS agency | 3,059 | – | – | – | – | – | 3,059 |
| 4,421 | 65 | 32 | 27 | 14 | 145 | 4,704 | |
| CMBS | 1,427 | 148 | 61 | 31 | 8 | – | 1,675 |
| ABS | 1,025 | 202 | 323 | 240 | 3 | 307 | 2,100 |
| CDO (including CLO) | 120 | 27 | 56 | 11 | 3 | 53 | 270 |
| ABCP | 1,009 | – | – | – | – | – | 1,009 |
| ABFRN | 17 | 1 | – | 14 | – | – | 32 |
| 3,598 | 378 | 440 | 296 | 14 | 360 | 5,086 | |
| Wrapped credit | 231 | 156 | 164 | 67 | – | – | 618 |
| Other | 247 | 54 | 450 | 28 | 6 | 853 | 1,638 |
| Total | 66,213 | 24,415 | 39,300 | 12,750 | 2,197 | 5,716 | 150,591 |
| Total % | 44.0% | 16.2% | 26.1% | 8.4% | 1.5% | 3.8% | |
| FY 2007 | 54,699 | 23,297 | 27,110 | 9,831 | 1,269 | 5,106 | 121,312 |
| FY 2007 % | 45.1% | 19.2% | 22.3% | 8.1% | 1.0% | 4.2% | |
| Ratings | |||||||
|---|---|---|---|---|---|---|---|
| AAA £m |
AA £m |
A £m |
BBB £m |
Less than BBB £m |
Non-rated £m |
Total £m |
|
| Debt securities – Policyholders assets | |||||||
| Government | |||||||
| UK government | 5,050 | 19 | – | – | – | – | 5,069 |
| UK local authorities | – | – | – | – | – | – | – |
| Non-UK government | 1,412 | 887 | 1,286 | 99 | 7 | 237 | 3,928 |
| 6,462 | 906 | 1,286 | 99 | 7 | 237 | 8,997 | |
| Corporate | |||||||
| Public Utilities | 8 | 7 | 18 | 7 | 1 | 1 | 42 |
| Convertibles and bonds with warrants | – | – | – | 2 | 1 | – | 3 |
| Other corporate bonds | 990 | 2,114 | 4,536 | 768 | 14 | 732 | 9,154 |
| 998 | 2,121 | 4,554 | 777 | 16 | 733 | 9,199 | |
| Certificates of deposits | 106 | 148 | 7 | – | – | – | 261 |
| Structured | |||||||
| RMBS non-agency sub-prime | 9 | 1 | – | – | – | – | 10 |
| RMBS non-agency ALT A |
– | – | – | – | – | – | – |
| RMBS non-agency prime | 274 | 19 | 3 | 1 | – | 3 | 300 |
| RMBS agency | 20 | – | – | – | – | – | 20 |
| 303 | 20 | 3 | 1 | – | 3 | 330 | |
| CMBS | 25 | 22 | 7 | – | – | – | 54 |
| ABS | 33 | 4 | 28 | 10 | – | 7 | 82 |
| CDO (including CLO) | 5 | 3 | 1 | – | – | 1 | 10 |
| ABCP | 482 | – | – | – | – | – | 482 |
| ABFRN | 12 | 1 | – | 11 | – | – | 24 |
| 557 | 30 | 36 | 21 | – | 8 | 652 | |
| Wrapped credit | 6 | 10 | 10 | – | – | – | 26 |
| Other | 102 | – | 2 | 6 | 3 | 10 | 123 |
| Total | 8,534 | 3,235 | 5,898 | 904 | 26 | 991 | 19,588 |
| Total % | 43.6% | 16.5% | 30.1% | 4.6% | 0.1% | 5.1% | |
| FY 2007 | 7,188 | 3,279 | 5,462 | 540 | 74 | 817 | 17,360 |
| FY 2007 % | 41.4% | 18.9% | 31.5% | 3.1% | 0.4% | 4.7% | |
| Ratings | |||||||
|---|---|---|---|---|---|---|---|
| AAA £m |
AA £m |
A £m |
BBB £m |
Less than BBB £m |
Non-rated £m |
Total £m |
|
| Debt securities – Participating fund assets | |||||||
| Government | |||||||
| UK government | 12,068 | – | 57 | – | – | – | 12,125 |
| UK local authorities | – | – | – | – | – | – | – |
| Non-UK government | 12,504 | 3,910 | 5,311 | 254 | 199 | 67 | 22,245 |
| 24,572 | 3,910 | 5,368 | 254 | 199 | 67 | 34,370 | |
| Corporate | |||||||
| Public Utilities | 1,967 | 284 | 677 | 168 | 9 | 2 | 3,107 |
| Convertibles and bonds with warrants | 12 | 43 | 285 | 74 | 72 | 24 | 510 |
| Other corporate bonds | 10,808 | 9,012 | 12,905 | 4,667 | 706 | 357 | 38,455 |
| 12,787 | 9,339 | 13,867 | 4,909 | 787 | 383 | 42,072 | |
| Certificates of deposits | 70 | 337 | 390 | – | – | – | 797 |
| Structured | |||||||
| RMBS non-agency sub-prime | 7 | 11 | – | – | – | – | 18 |
| RMBS non-agency ALT A | 5 | – | – | – | – | – | 5 |
| RMBS non-agency prime | 404 | 15 | 5 | – | – | – | 424 |
| RMBS agency | 133 | – | – | – | – | – | 133 |
| 549 | 26 | 5 | – | – | – | 580 | |
| CMBS | 126 | 55 | 17 | – | – | – | 198 |
| ABS | 172 | 55 | 113 | 112 | – | – | 452 |
| CDO (including CLO) | 4 | – | 3 | – | – | – | 7 |
| ABCP | 286 | – | – | – | – | – | 286 |
| ABFRN | 3 | – | – | 2 | – | – | 5 |
| 591 | 110 | 133 | 114 | – | – | 948 | |
| Wrapped credit | 39 | 37 | 23 | 32 | – | – | 131 |
| Other | 50 | 7 | 8 | 1 | – | 602 | 668 |
| Total | 38,658 | 13,766 | 19,794 | 5,310 | 986 | 1,052 | 79,566 |
| Total % | 48.6% | 17.3% | 24.9% | 6.7% | 1.2% | 1.3% | |
| Certificates of deposits | 30,939 | 12,289 | 13,032 | 3,968 | 227 | 1,094 | 61,549 |
| Less: assets not recognised as debt securities | 50.3% | 20.0% | 21.2% | 6.4% | 0.4% | 1.8% | |
| Ratings | |||||||
|---|---|---|---|---|---|---|---|
| AAA £m |
AA £m |
A £m |
BBB £m |
Less than BBB £m |
Non-rated £m |
Total £m |
|
| Debt securities – Shareholder assets | |||||||
| Government | |||||||
| UK government | 1,658 | – | 2 | – | – | – | 1,660 |
| UK local authorities | – | 17 | – | – | – | – | 17 |
| Non-UK government | 7,744 | 3,317 | 2,550 | 48 | 68 | 882 | 14,609 |
| 9,402 | 3,334 | 2,552 | 48 | 68 | 882 | 16,286 | |
| Corporate | |||||||
| Public Utilities | 117 | 141 | 1,301 | 715 | 74 | 36 | 2,384 |
| Convertibles and bonds with warrants | – | 22 | 134 | 133 | 5 | 47 | 341 |
| Other corporate bonds | 3,015 | 3,470 | 8,748 | 5,394 | 1,007 | 1,963 | 23,597 |
| 3,132 | 3,633 | 10,183 | 6,242 | 1,086 | 2,046 | 26,322 | |
| Certificates of Deposits | 187 | 34 | 7 | 3 | – | 10 | 241 |
| Structured | |||||||
| RMBS non-agency sub-prime | 6 | – | 1 | 3 | 1 | – | 11 |
| RMBS non-agency ALT A | 185 | – | – | – | 13 | 5 | 203 |
| RMBS non-agency prime | 472 | 19 | 23 | 23 | – | 137 | 674 |
| RMBS agency | 2,906 | – | – | – | – | – | 2,906 |
| 3,569 | 19 | 24 | 26 | 14 | 142 | 3,794 | |
| CMBS | 1,276 | 71 | 37 | 31 | 8 | 1,423 | |
| ABS | 820 | 143 | 182 | 118 | 3 | 300 | 1,566 |
| CDO (including CLO) | 111 | 24 | 52 | 11 | 3 | 52 | 253 |
| ABCP | 241 | – | – | – | – | – | 241 |
| ABFRN | 2 | – | – | 1 | – | – | 3 |
| 2,450 | 238 | 271 | 161 | 14 | 352 | 3,486 | |
| Wrapped credit | 186 | 109 | 131 | 35 | – | – | 461 |
| Other | 95 | 47 | 440 | 21 | 3 | 241 | 847 |
| Total | 19,021 | 7,414 | 13,608 | 6,536 | 1,185 | 3,673 | 51,437 |
| Total % | 37.0% | 14.4% | 26.5% | 12.7% | 2.3% | 7.1% | |
| FY 2007 | 16,572 | 7,729 | 8,616 | 5,323 | 968 | 3,195 | 42,403 |
| FY 2007 % | 39.1% | 18.2% | 20.3% | 12.6% | 2.3% | 7.5% | |
5.5.2 Equity securities
47% of shareholder exposure to equity securities is based on quoted prices in an active market. Similar to the fixed income markets, reduced liquidity in equity markets during 2008 has resulted in a higher proportion of equities that is based on quoted prices in markets that are not active or where the prices are less current, compared with one year ago. Also subject to level 2 valuation are unlisted securities.
Fair Value measurement
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Equity securities – Total | ||||
| Public Utilities | 3,917 | 17 | – | 3,934 |
| Banks, trusts and insurance companies | 6,224 | 1,038 | 596 | 7,858 |
| Industrial miscellaneous and all other | 26,131 | 4,716 | 332 | 31,179 |
| Non-redeemable preferred shares | 336 | 100 | 4 | 440 |
| Total | 36,608 | 5,871 | 932 | 43,411 |
| Total % | 84.3% | 13.5% | 2.2% | |
| FY 2007 | 53,888 | 4,309 | 632 | 58,829 |
| FY 2007 % | 91.6% | 7.3% | 1.1% | |
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Equity securities – Policyholder assets | ||||
| Public Utilities | 1,829 | – | – | 1,829 |
| Banks, trusts and insurance companies | 3,397 | 597 | – | 3,994 |
| Industrial miscellaneous and all other | 14,911 | 3,008 | – | 17,919 |
| Non-redeemable preferred shares | 98 | – | – | 98 |
| Total | 20,235 | 3,605 | – | 23,840 |
| Total % | 91.4% | 15.1% | 0.0% | |
| FY 2007 | 27,711 | 2,607 | – | 30,318 |
| FY 2007 % | 91.4% | 8.6% | 0.0% | |
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Equity securities – Participating fund assets | ||||
| Public Utilities | 2,062 | 3 | – | 2,065 |
| Banks, trusts and insurance companies | 1,915 | 13 | 9 | 1,937 |
| Industrial miscellaneous and all other | 9,522 | 119 | – | 9,641 |
| Non-redeemable preferred shares | 174 | – | – | 174 |
| Total | 13,673 | 135 | 9 | 13,817 |
| Total % | 98.9% | 1.0% | 0.1% | |
| FY 2007 | 22,377 | 401 | 48 | 22,826 |
| FY 2007 % | 98.0% | 1.8% | 0.2% | |
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Equity securities – Shareholder assets | ||||
| Public Utilities | 26 | 14 | – | 40 |
| Banks, trusts and insurance companies | 912 | 428 | 587 | 1,927 |
| Industrial miscellaneous and all other | 1,698 | 1,589 | 332 | 3,619 |
| Non-redeemable preferred shares | 64 | 100 | 4 | 168 |
| Total | 2,700 | 2,131 | 923 | 5,754 |
| Total % | 46.9% | 37.1% | 16.0% | |
| FY 2007 | 3,800 | 1,301 | 584 | 5,685 |
| FY 2007 % | 66.8% | 22.9% | 10.3% | |
Shareholder investment includes a strategic holding in Unicredito of £339 million and holdings in other Italian banks of £348 million, the latter being unquoted and subject to level 3 valuation. These equities have certain guarantees that provide protection to their value.
5.5.3. Other investments
Fair Value measurement
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Other investments – Total | ||||
| Unit trusts and other investment vehicles | 23,515 | 5,470 | 5 | 28,990 |
| Derivative financial instruments | 359 | 2,532 | 20 | 2,911 |
| Deposits and credit institutions | 40 | 510 | – | 550 |
| Minority holdings in property management undertakings | – | 969 | – | 969 |
| Other | 348 | 2,308 | 40 | 2,696 |
| Total | 24,262 | 11,789 | 65 | 36,116 |
| Total % | 67.2% | 32.6% | 0.2% | |
| FY 2007 | 26,806 | 9,144 | 319 | 36,269 |
| FY 2007 % | 73.9% | 25.2% | 0.9% | |
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Other investments – Policyholder assets | ||||
| Unit trusts and other investment vehicles | 20,222 | 2,606 | – | 22,828 |
| Derivative financial instruments | 9 | 18 | – | 27 |
| Deposits and credit institutions | – | – | – | – |
| Minority holdings in property management undertakings | – | 148 | – | 148 |
| Other | 322 | 202 | – | 524 |
| Total | 20,553 | 2,974 | – | 23,527 |
| Total % | 87.4% | 12.6% | 0.0% | |
| FY 2007 | 18,637 | 3,487 | 16 | 22,140 |
| FY 2007 % | 84.2% | 15.7% | 0.1% | |
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Other investments – Participating fund | ||||
| Unit trusts and other investment vehicles | 2,817 | 2,546 | – | 5,363 |
| Derivative financial instruments | 256 | 961 | – | 1,217 |
| Deposits and credit institutions | 8 | – | – | 8 |
| Minority holdings in property management undertakings | – | 759 | – | 759 |
| Other | 2 | 2,058 | 36 | 2,096 |
| Total | 3,083 | 6,324 | 36 | 9,443 |
| Total % | 32.6% | 67.0% | 0.4% | |
| FY 2007 | 7,455 | 3,654 | 253 | 11,362 |
| FY 2007 % | 65.6% | 32.2% | 2.2% | |
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Other investments – Shareholder assets | ||||
| Unit trusts and other investment vehicles | 476 | 318 | 5 | 799 |
| Derivative financial instruments | 94 | 1,553 | 20 | 1,667 |
| Deposits and credit institutions | 32 | 510 | – | 542 |
| Minority holdings in property management undertakings | – | 62 | – | 62 |
| Other | 24 | 48 | 4 | 76 |
| Total | 626 | 2,491 | 29 | 3,146 |
| Total % | 19.9% | 79.2% | 0.9% | |
| FY 2007 | 714 | 2,003 | 50 | 2,767 |
| FY 2007 % | 25.8% | 72.4% | 1.8% | |
Other Investments primarily represents unit trusts and other investment vehicles. Almost all other investments are fair valued with reference to quoted prices in an active market or using market observable information. The unit trusts and other investment vehicles invest in a variety of assets with the majority of the value being invested in Property and Equity securities in the UK and overseas, with a smaller portion being invested in Debt Securities.
Against the backdrop of volatile investment markets the value of derivative financial instruments has appreciated strongly during the year, reflecting gains on positions that include equity hedges, which are in place specifically to mitigate the impact of adverse market movements on the balance sheet.
5.5.4 Summary of investments
A summary of investments according to fair value hierarchy is given below:
| Fair value hierarchy | |||||||
|---|---|---|---|---|---|---|---|
| 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 |
Total £m |
|
| Investment properties | – | 14,426 | – | 14,426 | – | – | 14,426 |
| Loans | – | 21,468 | – | 21,468 | 20,769 | – | 42,237 |
| Debt securities | 107,943 | 40,798 | 1,850 | 150,591 | – | (336) | 150,255 |
| Equity securities | 36,608 | 5,871 | 932 | 43,411 | – | (60) | 43,351 |
| Other investments | 24,262 | 11,789 | 65 | 36,116 | – | – | 36,116 |
| Total | 168,813 | 94,352 | 2,847 | 266,012 | 20,769 | (396) | 286,385 |
The tables below show movements in the assets measured at fair value based on valuation techniques for which any significant input is not based on observable market data (Level 3 only). Total funds are then further analysed between policyholder funds, participating funds and shareholder funds.
| Total £m |
|
|---|---|
| Total investments – Total | |
| Balance as at 1 January 2008 | 2,211 |
| Total gains or losses | |
| Recognised in the income statement | (97) |
| Recognised in the statement of recognised gains and losses | – |
| Purchases, issues, disposals and settlements (net) | 270 |
| Transfers into and/or (out) of Level 3 | (209) |
| Currency translation | 672 |
| Balance as at 31 December 2008 | 2,847 |
| Total £m |
|
|---|---|
| Total investments – Policyholder assets | |
| Balance as at 1 January 2008 | 28 |
| Total gains or losses | |
| Recognised in the income statement | – |
| Recognised in the statement of recognised gains and losses | – |
| Purchases, issues, disposals and settlements (net) | 13 |
| Transfers into and/or (out) of Level 3 | (8) |
| Currency translation | 6 |
| Balance as at 31 December 2008 | 39 |
| Total £m |
|
|---|---|
| Total investments – Participating fund assets | |
| Balance as at 1 January 2008 | 1,498 |
| Total gains or losses | |
| Recognised in the income statement | (18) |
| Recognised in the statement of recognised gains and losses | – |
| Purchases, issues, disposals and settlements (net) | 166 |
| Transfers into and/or (out) of Level 3 | (858) |
| Currency translation | 240 |
| Balance as at 31 December 2008 | 1,028 |
| Total £m |
|
|---|---|
| Total investments – Shareholder assets | |
| Balance as at 1 January 2008 | 685 |
| Total gains or losses | |
| Recognised in the income statement | (79) |
| Recognised in the statement of recognised gains and losses | – |
| Purchases, issues, disposals and settlements (net) | 91 |
| Transfers into and/or (out) of Level 3 | 657 |
| Currency translation | 426 |
| Balance as at 31 December 2008 | 1,780 |
5.6. Reinsurance assets
The group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract.
If a reinsurance asset is impaired, the group reduces the carrying amount accordingly and recognises that impairment loss in the income statement. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the group will receive from the reinsurer.
Arrears
| Financial assets that are past due but not impaired | Financial assets that have been impaired £m |
Total £m |
|||||
|---|---|---|---|---|---|---|---|
| Neither past due nor impaired £m |
0 – 3 months £m |
3 – 6 months £m |
6 months – 1 year £m |
Greater than 1 year £m |
|||
| Policyholders assets | 1,704 | – | – | – | – | – | 1,704 |
| Participating Fund assets | 803 | – | – | – | – | – | 803 |
| Shareholder assets | 5,360 | 25 | – | – | – | 2 | 5,387 |
| Total reinsurance assets | 7,867 | 25 | – | – | – | 2 | 7,894 |
| Total % | 99.7% | 0.3% | 0.0% | 0.0% | 0.0% | 0.0% | |
| FY 2007 | 8,052 | – | – | – | – | 2 | 8,054 |
| FY 2007 % | 100.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | |
Ratings
| Ratings | Non-rated £m |
Total £m |
|||||
|---|---|---|---|---|---|---|---|
| AAA £m |
AA £m |
A £m |
BBB £m |
Less than BBB £m |
|||
| Policyholders assets | – | 1,254 | 182 | – | – | 268 | 1,704 |
| Participating Fund assets | – | 425 | 2 | – | 1 | 375 | 803 |
| Shareholder assets | 1,018 | 3,847 | 455 | 32 | 15 | 20 | 5,387 |
| Total reinsurance assets | 1,018 | 5,526 | 639 | 32 | 16 | 663 | 7,894 |
| Total % | 12.9% | 70.0% | 8.1% | 0.4% | 0.2% | 8.4% | |
| FY 2007 | 1,184 | 5,460 | 596 | 32 | 97 | 685 | 8,054 |
| FY 2007 % | 14.7% | 67.8% | 7.4% | 0.4% | 1.2% | 8.5% | |
5.7. Receivables and other financial assets
| Financial assets that are past due but not impaired | Financial assets that have been impaired £m |
Total £m |
|||||
|---|---|---|---|---|---|---|---|
| Neither past due nor impaired £m | 0 – 3 months £m | 3 – 6 months £m | 6 month – 1 year £m | Greater than 1 year £m | |||
| Policyholder assets | 453 | 17 | – | – | – | – | 470 |
| Participating fund assets | 2,033 | 4 | 1 | – | – | – | 2,038 |
| Shareholder assets | 6,796 | 539 | 304 | 35 | 6 | 14 | 7,694 |
| Total Receivables and other financial assets | 9,282 | 560 | 305 | 35 | 6 | 14 | 10,202 |
| Total % | 91.0% | 5.5% | 3.0% | 0.3% | 0.1% | 0.1% | |
| FY 2007 | 8,901 | 200 | 21 | 13 | 2 | 46 | 9,183 |
| FY 2007 % | 96.9% | 2.3% | 0.2% | 0.1% | 0.0% | 0.5% | |
Credit terms vary from subsidiary to subsidiary, and from country to country, and are set locally within overall credit limits prescribed by the Group Credit Committee, and within the framework of the Group Risk Credit Policy.
The credit quality of receivables and other financial assets is managed at the local business unit level. Where assets classed as "past due and impaired" exceed local credit limits, and are also deemed at sufficiently high risk of default, an analysis of the asset is performed and a decision is made whether to seek sufficient collateral from the counterparty or to write down the value of the asset as impaired.
The group reviews the carrying value of its receivables at each reporting period. If the carrying value of a receivable or other financial asset is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment.
5.8. Cash and cash equivalents
Cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three months maturity from the date of acquisition, and include certificates of deposit.
Cash and cash equivalents are carried at their face value which by their nature is essentially equal to their fair value.
The Group’s Credit Risk Policy includes specific requirements in relation to aggregate counterparty exposures and money market exposure limits which cover assets reported as cash and cash equivalents in the group’s balance sheet. The responsibility for monitoring of these limits falls with the Group Credit Committee and the Business Unit Credit Committee. The aggregate counterparty exposure limits are determined based on the credit rating of the counterparty. The money market exposure limits are determined based on the credit rating of the counterparty and the term of the intended exposure.
