Analysis of assets
Total assets - Valuation bases/fair value hierarchy (continued)
Of the £8,445 million of UK Commercial loans, £7,845 million are held by Aviva UK Life to back annuity liabilities, and stated above on a fair value basis. The remaining £600 million of loans are held by Aviva UK General Insurance and stated on an amortised cost basis. The loan exposures for the 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. For the 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 average LIC is 1.3x. 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.
All loans in arrears have been assessed for impairment and specific provisions. Of the £332 million exposure in arrears, the interest amount in arrears is only £5.8 million. In addition to £29 million of specific provisions relating to defaults made in 2008, Aviva UK Life have provisioned for a further £3 million and Aviva UK General Insurance have made specific provisions of £16 million for defaults for the six month period to 30 June 2009. These are in addition to the general provisions made for longer term expectations of losses. Of the £4,988 million of loans with LTV above 100%, the amount of exposure uncovered by the underlying security is £805 million. The combined impact of increasing risk, as property values continue to fall, and rising long-term gilt yields have led to a reduction in risk adjusted loan values since year end 2008. This has resulted in LTVs increasing only modestly as the effect of falling property values has been offset by falling loan values. However, loan interest cover has remained stable due to low levels of material tenant defaults.
UK Healthcare
Of the total non-securitised mortgage loans of £12,303 million, £2,615 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 111%, 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 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 £1,243 million. These mortgages are all in the form of equity release, whereby 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 80%, 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 £430 million of commercial mortgages. However, of these, shareholders are exposed to only £19 million. The remaining assets are held in the Policyholder and Participating Funds of Delta Lloyd's German subsidiaries.
| 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 | 370 | 63 | 48 | 33 | 28 | 93 | 23 | 34 | 31 | 68 | 791 |
| Non-Government guaranteed residential | 560 | 148 | 135 | 121 | 404 | 370 | 372 | 374 | 407 | 592 | 3,483 |
| Total | 930 | 211 | 183 | 154 | 432 | 463 | 395 | 408 | 438 | 660 | 4,274 |
| Exposures by interest payment arrears | |||||||||||
| 0-3 months | 30 | 5 | 10 | 10 | 1 | 10 | 22 | 1 | 2 | 4 | 95 |
| 3-6 months | 2 | - | 1 | 2 | 4 | 4 | 1 | 2 | 6 | - | 22 |
| 6-12 months | - | - | - | - | - | - | - | - | - | - | - |
| > 12 months | - | - | - | - | 2 | 2 | 2 | 1 | 2 | 2 | 11 |
| Total | 32 | 5 | 11 | 12 | 7 | 16 | 25 | 4 | 10 | 6 | 128 |
The total exposure to non-securitised residential loans in the Netherlands is £4,274 million. However, of these, £791 million are Government guaranteed, and so present minimal risk to Aviva shareholders. Of the £4,274 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 €350,000 (this threshold was raised, from €265,000 at 31 December 2008, due to the impact of the financial crisis). 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 £128 million (down from £282 at 31 December 2008). However, the actual amount of missed payments is £6.8 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
| 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 |
|
| 30 June 2009 | 9 | 2 | 2 | 6 | 8 | 38 | 46 | 243 | 304 | 741 | 1,399 |
Aviva USA currently holds £1,399 million of commercial mortgages under Shareholder Assets. Of these, 53% (31 December 2008: 55%) still have LTV of below 70%, and 92% (31 December 2008: 94%) have LTVs of below 90%. However, the mortgage portfolio does currently have a total of £27 million (2% of portfolio) in principal balances where the LTV exceeds 100%. Although declining property prices have had a negative impact, the mortgages continue to perform well, reflective of:
- low underwriting LTVs (shall not exceed 80% at the time of issuance), and consequently a portfolio with an average LTV of 61% at 31 December 2008, and 65% at 30 June 2009;
- A highly diversified portfolio across USA, with strong volumes in many states with more stable economies and related real estate values, such as Washington, Texas and Minnesota; and
- Strong LIC ratios, with 96% of the loans having and LIC above 1.4xm, and less than 1% with LIC below 1.0x
As at 30 June 2009, only £1 million of loans was in arrears. Aviva USA holds mortgage loans at an amortised cost value, and conducts a regular impairment review process. As at 30 June 2009, there were no provisions applied to the Aviva USA's commercial mortgage portfolio.
