Analysis of assets
Total assets - Valuation bases/fair value hierarchy (continued)
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.
1.1. Loans
The value of the group's loan portfolio at 30 June 2009 stood at £39,734 million compared to £42,237 million at year end 2008, representing a total decrease of £2,503 million. Policyholder and participating fund assets experienced only slight movements, and the primary source of this decline was from shareholder assets, due to the dominance of mortgage loans in the portfolio, which decreased by £2,383 million to £29,353 million. Within shareholder assets, the mortgage loan portfolio decreased from a year end 2008 position of £27,046 million to a half year 2009 position of £25,147 million.
The key drivers for these reductions were a combination of increased risks due to falling property values, increasing gilt yields and exchange rate movements for the USD and EUR currencies. However, most of these reductions are offset through corresponding reductions in the liability valuations, thereby resulting in minimal impact on the net balance sheet or income.
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 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 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.
| Shareholder assets | ||||||
|---|---|---|---|---|---|---|
| UK £m |
Delta Lloyd £m |
North America £m |
Europe (excl. DL) £m |
Asia £m |
Total £m |
|
| Policy loans | - | 270 | 209 | 12 | 12 | 503 |
| Loans and advances to banks | 846 | 275 | - | - | - | 1,121 |
| Mortgages | 14,059 | 9,675 | 1,399 | 1 | 13 | 25,147 |
| Other loans | 33 | 2,460 | 82 | 3 | 4 | 2,582 |
| Total | 14,938 | 12,680 | 1,690 | 16 | 29 | 29,353 |
Mortgage loans
Of the group's total loan portfolio (including Policyholder, Participating Fund and Shareholder assets), 71% is invested in mortgage loans. Market developments over the past 2 years have led to an increased focus on this asset class. The group's mortgage loan portfolio spans several business units, primarily UK, Delta Lloyd and USA, and across various sectors, including residential loans, commercial loans and government supported healthcare loans.
Aviva shareholders are exposed predominantly to mortgage loans. 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 (excl. DL) £m |
Asia £m |
Total £m |
|
| Total securitised mortgage loans | 1,756 | 5,381 | - | - | - | 7,137 |
| Non-securitised mortgage loans - residential | - | 4,274 | - | 1 | - | 4,275 |
| Non-securitised mortgage loans - equity release | 1,243 | - | - | - | - | 1,243 |
| Non-securitised mortgage loans - commercial | 8,445 | 20 | 1,399 | - | 13 | 9,877 |
| Non-securitised mortgage loans – healthcare | 2,615 | - | - | - | - | 2,615 |
| Total non-securitised mortgage loans | 12,303 | 4,294 | 1,399 | 1 | 13 | 18,010 |
| Total mortgage loans | 14,059 | 9,675 | 1,399 | 1 | 13 | 25,147 |
Securitised mortgage loans comprise 28% 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, although general provisions have already been established to cover these.
In addition to commercial mortgages of £9,877 million (predominantly held in the UK and US), Aviva also holds £2,615 million of mortgage loans made to UK healthcare related businesses, which receive significant support from the National Health Service ("NHS"). Of a total of £25,147 million of shareholder asset gross mortgage loan exposure (including securitised), a combined 99.9% 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 £7,137 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 Delta Lloyd 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 | 1,138 | 507 | 699 | 1,607 | 743 | 946 | 1,049 | 599 | 492 | 333 | 8,113 |
| 0-3 months | 291 | - | - | - | - | 13 | - | - | - | - | 304 |
| 3-6 months | - | 3 | - | - | - | 20 | - | - | - | - | 23 |
| 6-12 months | - | - | - | - | - | 5 | - | - | - | - | 5 |
| > 12 months | - | - | - | - | - | - | - | - | - | - | - |
| Total | 1,429 | 510 | 699 | 1,607 | 743 | 984 | 1,049 | 599 | 492 | 333 | 8,445 |
