Analysis of assets
Total assets - Valuation bases/fair value hierarchy (continued)
| 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 | 1,212 | - | - | - | - | - | 1,212 |
| UK local authorities | 3 | 9 | - | - | - | - | 12 |
| Non-UK Government | 7,399 | 2,409 | 2,310 | 47 | 58 | 601 | 12,824 |
| 8,614 | 2,418 | 2,310 | 47 | 58 | 601 | 14,048 | |
| Corporate | |||||||
| Public utilities | 105 | 132 | 1,308 | 755 | 59 | 39 | 2,398 |
| Convertibles and bonds with warrants | - | 21 | 110 | 124 | 27 | 1 | 283 |
| Other corporate bonds | 1,938 | 3,200 | 9,603 | 6,265 | 1,091 | 1,783 | 23,880 |
| 2,043 | 3,353 | 11,021 | 7,144 | 1,177 | 1,823 | 26,561 | |
| Certificates of deposits | 191 | 4 | - | 1 | - | 11 | 207 |
| Structured | |||||||
| RMBS non-agency sub-prime | 2 | - | 1 | 2 | 1 | - | 6 |
| RMBS non-agency ALT A | 129 | 4 | - | - | 12 | - | 145 |
| RMBS non-agency prime | 279 | 12 | 24 | 28 | 1 | 277 | 621 |
| RMBS agency | 2,458 | - | - | - | - | - | 2,458 |
| 2,868 | 16 | 25 | 30 | 14 | 277 | 3,230 | |
| CMBS | 1,368 | 59 | 30 | 36 | 14 | - | 1,507 |
| ABS | 856 | 121 | 164 | 86 | 5 | 271 | 1,503 |
| CDO (including CLO) | 77 | 10 | 68 | 8 | 18 | 50 | 231 |
| ABCP | 175 | - | - | - | - | - | 175 |
| ABFRN | 1 | - | - | 1 | - | - | 2 |
| 2,477 | 190 | 262 | 131 | 37 | 321 | 3,418 | |
| Wrapped credit | 141 | 51 | 95 | 79 | - | 6 | 372 |
| Other | 75 | 7 | 305 | 42 | 5 | 241 | 675 |
| Total | 16,409 | 6,039 | 14,018 | 7,474 | 1,291 | 3,280 | 48,511 |
| Total % | 33.8% | 12.4% | 28.9% | 15.4% | 2.7% | 6.8% | |
| FY 2008 | 19,021 | 7,414 | 13,608 | 6,536 | 1,185 | 3,673 | 51,437 |
| FY 2008 % | 37.0% | 14.4% | 26.5% | 12.7% | 2.3% | 7.1% | |
The overall quality of the book is strong and has been maintained, despite the continuing downgrade activity by the major rating agencies during the first half of 2009, by taking opportunities to move into higher quality assets. Nearly 30% of shareholder exposure to debt security holdings is in government bonds. A further 55% of holdings are in corporate bonds with an average rating of A.
The majority of the Residential Mortgage-Backed Securities (RMBS) are US investments and over 75% of the shareholder 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 10% of debt securities to which the shareholder has exposure.
The vast majority of the corporate bonds that are not rated represent private placements. The private placements are US investments which are not rated by the major rating agencies but which are rated an average equivalent of between A and BBB 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 by the NAIC, the exposure that is not rated by a major rating agency reduces to less than 4% of debt securities to which the shareholder has exposure.
1.2.2 Equity securities
Fair Value measurement
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Equity securities - Shareholder assets | ||||
| Public utilities | 86 | - | - | 86 |
| Banks, trusts and insurance companies | 405 | 135 | 637 | 1,177 |
| Industrial miscellaneous and all other | 2,022 | 1,621 | 223 | 3,866 |
| Non-redeemable preferred shares | 103 | 86 | 4 | 193 |
| Total | 2,616 | 1,842 | 864 | 5,322 |
| Total % | 49.2% | 34.6% | 16.2% | |
| FY 2008 | 2,700 | 2,131 | 923 | 5,754 |
| FY 2008 % | 46.9% | 37.1% | 16.0% | |
Almost 50% of shareholder exposure to equity securities is based on quoted prices in an active market. Similar to the fixed income markets, continuing reduced liquidity in equity markets during the first half of 2009 means that there continues to be a proportion of equities that is based on quoted prices in markets that are not active or where the prices are less current, although this position is improving slightly. Also subject to Level 2 valuation are unlisted securities.
Shareholder investments include a strategic holding in Unicredito and other Italian banks of £979 million (£791 million net of minority interest share).
1.2.3. Other investments
Fair Value measurement
| Fair value hierarchy | ||||
|---|---|---|---|---|
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total £m |
|
| Other investments - Shareholder assets | ||||
| Unit trusts and other investment vehicles | 500 | 56 | 4 | 560 |
| Derivative financial instruments | 41 | 999 | 25 | 1,065 |
| Deposits and credit institutions | 29 | 395 | - | 424 |
| Minority holdings in property management undertakings | - | 51 | - | 51 |
| Other | 12 | 63 | 4 | 79 |
| Total | 582 | 1,564 | 33 | 2,179 |
| Total % | 26.7% | 71.8% | 1.5% | |
| FY 2008 | 626 | 2,491 | 29 | 3,146 |
| FY 2008 % | 19.9% | 79.2% | 0.9% | |
The majority of other investments is 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 with a smaller portion being invested in Debt Securities.
Pension fund assets
In addition to the assets recognised directly on the group's balance sheet outlined in the disclosures above, the group is also exposed to the "Plan assets" that are shown net of the present value of scheme liabilities within the IAS 19 net pension deficit. The net pension deficit is recognised within provisions on the group's statement of financial position.
Plan assets include investments in group-managed funds of £139 million in the UK scheme, and insurance policies of £157 million and £1,217 million in the UK and Dutch schemes respectively. Where the investment and insurance policies are in segregated funds with specific asset allocations, they are included in the appropriate lines in the table below, otherwise they appear in "Other". The Dutch insurance policies are considered non-transferable under the terms of IAS 19 and so have been excluded as assets of the relevant scheme in this table.
