Capital management
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 withprofit 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, Australia and Canada) a risk charge on assets and liabilities approach is used.
Regulatory capital – Group: European Insurance Groups Directive (IGD)
| UK life funds £bn |
Other business £bn |
30 June 2009 £bn |
31 December 2008 £bn |
|
|---|---|---|---|---|
| Insurance Groups Directive (IGD) capital resources | 3.6 | 10.2 | 13.8 | 15.5 |
| Less: capital resource requirement | (3.6) | (7.0) | (10.6) | (13.5) |
| Insurance Group Directive (IGD) excess solvency | – | 3.2 | 3.2 | 2.0 |
| Cover over EU minimum (calculated excluding UK life funds) | 1.5 times | 1.3 times |
The EU Insurance Groups Directive (IGD) regulatory capital solvency surplus has increased by £1.2 billion since 31 December 2008 to £3.2 billion. This increase reflects a combination of operating and market performance as well as the benefit of a number of capital management initiatives, which demonstrate the considerable levers available to the group to manage the IGD position. Following individual guidance from the FSA we now recognise surpluses in the non-profit funds of our UK life and pensions business which is available for transfer to shareholders of £0.4 billion (31 December 2008 £0.4 billion). The IGD is a pure aggregation test with no credit given for the considerable diversification benefits of Aviva.
The key movements over the period are set out in the following table:
| £bn | |
|---|---|
| IGD solvency surplus at 31 December 2008 | 2.0 |
| Operating profit and other income | 0.5 |
| Market movements | 0.2 |
| 2008 final dividend net of scrip | (0.3) |
| Hybrid debt | 0.2 |
| Issuance of hybrid debt in the Netherlands | 0.4 |
| Sale of Dutch healthcare business | 0.1 |
| Recognition of non-regulated entities | 0.5 |
| Loss of implicit items | (0.1) |
| Increase in CRR | (0.1) |
| Other | (0.2) |
| Estimated IGD solvency surplus at 30 June 2009 | 3.2 |
Initiatives in the period include the issue of £0.2 billion of hybrid capital, issuance of hybrid debt in the Netherlands of £0.4 billion and a £0.1 billion benefit from the disposal of the Dutch healthcare business. The change in the value of non-regulated entities includes the recognition of intellectual property rights and movements in the value of distribution companies. The introduction of the scrip scheme with the 2008 full year dividend, allowing investors the option of receiving dividends in the form of new Aviva shares, also provided a capital benefit of nearly £0.2 billion with a take up rate of 35%. While not reflected in the half year numbers, the recently announced sale of the Australian Life business will deliver a £0.4 billion IGD contribution on completion.
IGD Levers
As outlined in March this year, and as demonstrated above, the group has a number of ongoing options available to increase the IGD surplus. These include underlying operational levers and various innovative capital raising options. Driving increased capital generation from underlying earnings improvements through, for example, productivity and cost saving initiatives is a primary focus. We also manage growth driven capital consumption through absolute volume levels and product mix decisions, where we are able to direct growth to the most capital efficient products. Asset liability management and hedging strategies are used to manage volatility, and there is scope to further increase protection through additional hedging activity should this be required. Reinsurance is another mechanism available through which risk exposures and capital requirements can be managed. The value represented by the life in-force book continues to represent a significant source of value against which further securitisation transactions could be undertaken.
Regulatory capital – Long-term businesses
For our non-participating worldwide life assurance businesses, our capital requirements, expressed as a percentage of the EU minimum, are set for each business unit as the higher of:
- The level of capital at which the local regulator is empowered to take action;
- The capital requirement of the business unit under the group’s economic capital requirements; and,
- The target capital level of the business unit.
The required capital across our life businesses varies between 100% and 325% of EU minimum or equivalent. The weighted average level of required capital for our non-participating life business, expressed as a percentage of the EU minimum (or equivalent) solvency margin has decreased to 133% (31 December 2008: 142%).
These levels of required capital are used in the calculation of the group’s embedded value to evaluate the cost of locked in capital. At 30 June 2009 the aggregate regulatory requirements based on the EU minimum test amounted to £5.7 billion (31 December 2008: £6.0 billion). At this date, the actual net worth held in our long-term business was £9.4 billion (31 December 2008: £9.5 billion) which represents 165% (31 December 2008: 157%) of these minimum requirements.
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 longterm with-profit funds less the realistic liabilities for non-profit policies within the funds, less asset shares aggregated across the withprofit 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: CGNU Life, Commercial Union Life Assurance Company (CULAC) and Aviva Life & Pensions (UKL&P) (formerly known as (Norwich Union Life & Pensions (NUL&P)). These realistic liabilities have been included within the long-term business provision and the liability for insurance and investment contracts on the consolidated IFRS balance sheet at 30 June 2009 and 31 December 2008.
| 30 June 2009 | 31 December 2008 | |||||
|---|---|---|---|---|---|---|
| Estimated realistic assets £bn | Realistic liabilities1 £bn | Estimated realistic inherited estate2 £bn | Estimated risk capital margin3 £bn | Estimated excess £bn | Estimated excess £bn | |
| CGNU Life | 11.9 | (11.4) | 0.5 | (0.3) | 0.2 | 0.3 |
| CULAC | 11.8 | (11.1) | 0.7 | (0.3) | 0.4 | 0.3 |
| UKL&P4 | 19.4 | (18.0) | 1.4 | (0.4) | 1.0 | 0.5 |
| Aggregate | 43.1 | (40.5) | 2.6 | (1.0) | 1.6 | 1.1 |
- These realistic liabilities include the shareholders’ share of future bonuses of £0.5 billion (31 December 2008: £0.8 billion). Realistic liabilities adjusted to eliminate the shareholders’ share of future bonuses are £40.0 billion (31 December 2008: £43.2 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 £1.4 billion, £1.5 billion and £3.5 billion for CGNU Life, CULAC and UKL&P respectively (31 December 2008: £1.4 billion, £1.5 billion and £4.1 billion).
- Estimated realistic inherited estate at 31 December 2008 was £0.7 billion, £0.7 billion and £1.2 billion for CGNU Life, CULAC and UKL&P respectively.
- The risk capital margin (RCM) is 2.6 times covered by the inherited estate (31 December 2008: 1.8 times).
- The UKL&P fund includes the Provident Mutual (PM) fund which has realistic assets and liabilities of £1.6 billion, and therefore does not impact the realistic inherited estate.
Investment mix
The aggregate investment mix of the assets in the three main with-profit funds was:
| 30 June 2009 % | 31 December 2008 % | |
|---|---|---|
| Equity | 14% | 24% |
| Property | 10% | 12% |
| Fixed interest | 66% | 56% |
| Other | 10% | 8% |
The equity backing ratios, including property, supporting with-profit asset shares are 50% in CGNU Life, CULAC and 43% in UKL&P. With-profit new business is mainly written through CGNU Life.
