Capital allocation

The rigorous allocation of capital for growth and value is vitally important. To grow and generate value it is crucial that we invest our capital in the right markets and at the right time.

Using capital to maximise value for shareholders

History of disciplined use of equity to fund acquisitions.

Capital management

We maintain an efficient capital structure using a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. This structure is consistent with our risk profile and the regulatory and market requirements of our business. We are subject to regulatory capital tests and we also employ realistic scenario tests to allocate capital and manage risk. Overall, the group and its subsidiaries satisfy all existing requirements.

In managing our capital we seek to:

• Match the profile of our assets and liabilities, taking into account the risks inherent in each business
• Maintain financial strength to support new business growth while still satisfying the requirements of policyholders, regulators and rating agencies
• Retain financial flexibility by maintaining strong liquidity, access to a range of capital markets and significant unutilised committed credit lines
• Allocate capital efficiently to support growth and repatriate excess capital where appropriate
• Manage exposures to movements in exchange rates by aligning the deployment of capital by currency with our capital requirements by currency

Setting target rates of return for individual business units is an important aspect of our capital management process. The targets are adjusted to make allowance for risk.

We have a number of sources of capital available to us and seek to optimise our debt to equity structure so we can maximise returns to our shareholders.

We consider alternative sources of capital such as reinsurance and securitisation in addition to more traditional sources of funding. We select capital funding that is appropriate to its deployment and usage.

October 2007 Investor day presentations:

• Capital management (Philip Scott) PDF (0.31Mb)

Our priorities

• Continue to optimise our capital base and capital efficiency amidst the evolving regulatory background
• Investigate the benefits of securitising part of our insurance portfolios
• Optimise our financial risk structure
• Maintain effective capital management processes and a prudent level of capital resources

As part of the One Aviva agenda we will be realising more capital from existing businesses, not only through a focus on securitisation, but also through:

• Potential Inherited estate reattribution
• Maximising diversification benefits in the Solvency II world

In undertaking work to continue optimising our capital base, we recognise the requirements of a range of stakeholders including shareholders, regulators and rating agencies. The overall risk appetite is managed by reference to capital constraints imposed by targets in relation to solvency (including IGD and ICA), ratings, borrowing and liquidity and dividend capacity.

Inherited estate

Detailed information can be found in the Reattribution and fund transfer section.