D3 Analysis of asset quality

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D3 – Analysis of asset quality

D3.1 – 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 include several bancassurance arrangements, which have resulted in £682 million of the total £3,381 million of goodwill and £832 million of the total £2,860 million of other intangible assets. These balances primarily represent the value of bancassurance distribution agreements acquired in these business combinations.

As at 31 December 2009, the group has assessed the value of these bancassurance related assets and has not identified a need to impair any of these amounts.

D3.2 – Investment property

	2009					2008
	Fair value hierarchy					Fair value hierarchy
Investment property – Total	Level 1 £m	Level 2 £m	Level 3 £m	Total £m		Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Lease to third parties under operating leases	—	11,750	—	11,750		—	13,764	—	13,764
Vacant investment property/held for capital appreciation	—	680	—	680		—	662	—	662
Total	—	12,430	—	12,430		—	14,426	—	14,426
Total %	—	100%	—	100%		—	100%	—	100%

	2009					2008
	Fair value hierarchy					Fair value hierarchy
Investment property – Policyholder assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m		Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Lease to third parties under operating leases	—	3,386	—	3,386		—	4,053	—	4,053
Vacant investment property/held for capital appreciation	—	555	—	555		—	73	—	73
Total	—	3,941	—	3,941		—	4,126	—	4,126
Total %	—	100%	—	100%		—	100%	—	100%

	2009					2008
	Fair value hierarchy					Fair value hierarchy
Investment property – Participating fund assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m		Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Lease to third parties under operating leases	—	6,321	—	6,321		—	7,026	—	7,026
Vacant investment property/held for capital appreciation	—	17	—	17		—	529	—	529
Total	—	6,338	—	6,338		—	7,555	—	7,555
Total %	—	100%	—	100%		—	100%	—	100%

	2009					2008
	Fair value hierarchy					Fair value hierarchy
Investment property – Shareholder assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m		Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Lease to third parties under operating leases	—	2,043	—	2,043		—	2,685	—	2,685
Vacant investment property/held for capital appreciation	—	108	—	108		—	60	—	60
Total	—	2,151	—	2,151		—	2,745	—	2,745
Total %	—	100%	—	100%		—	100%	—	100%

Some 83% (31 December 2008: 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.

Around 95% (31 December 2008: 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.

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