FY 2008 Part 4 of 5

RNS Number : 3474O
Aviva PLC
05 March 2009
 



Part 4 of 5

Page 60

Contents

Appendix A – Capital management 61

A1 – Capital
61
A2 – Group capital structure
 67
A3 – Sensitivity analysis and capital management
72
Appendix B – Analysis of assets
77
B1 – Key highlights
77
B2 – Introduction
77
B3 – Total assets – Shareholder/Policyholder exposure to risk
77
B4 – Total assets – Valuation bases/fair value hierarchy
79
B5 – Analysis of asset quality
82
B6 – Pension fund assets
104
B7 – Available funds
104
B8 – Guarantees
105
Appendix C – Operational cost bases and cost savings
106
C1 – Analysis of operational cost base
106
C2 – Cost saving commitment targets announced since October 2007
107
Appendix D – IFRS additional disclosures
108
D1 – Consolidated income statement
108
D2 – Consolidated statement of recognised income and expense
109
D3 – Reconciliation of movements in consolidated shareholders’ equity
109
D4 – Consolidated balance sheet
110
D5 – Consolidated cash flow statement
111
D6 – Subsidiaries
112
D7 – Segmental information
119
D8 – Tax
128
D9 – Earnings per share
130
D10 – Dividends and appropriations
131
D11 – Insurance liabilities
132
D12 – Liability for investment contracts
 136
D13 – Reinsurance assets
137
D14 – Effect of changes in assumptions and estimates during the period
139
D15 – Unallocated divisible surplus
 140
D16 – Pension Schemes
140
D17 – Borrowings
 142
D19 – Risk management
143
D18 – Related parties
148

 

 

Page 61


A1 - Capital

Capital management objectives

Aviva's capital management philosophy is focused on capital efficiency and effective risk management to support a progressive dividend policy and earnings per share growth. Rigorous capital allocation is one of our primary strategic priorities and is ultimately governed by the Group Executive Committee.

Overall capital risk appetite is set and managed with reference to the requirements of a range of different stakeholders including shareholders, policyholders, regulators and rating agencies. In managing capital we seek to:

-    maintain sufficient, but not excessive, financial strength to support new business growth and satisfy the requirements of our regulators and other stakeholders and thus give both our customers and shareholders assurance of our financial strength;

-    optimise our overall debt to equity structure to enhance our returns to shareholders, subject to our capital risk appetite and balancing the requirements of the range of stakeholders;

-    retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit lines and access to a range of capital markets;

-    allocate capital rigorously across the group, to drive value adding growth in accordance with risk appetite; and

-    increase the dividend on a basis judged prudent, while retaining capital to support future business growth, using dividend cover on an IFRS operating earnings after tax basis in the 1.5 to 2.0 times range as a guide,

-    following a review by the Board of the operation of the current DRIP, the Company intends to propose a resolution at the forthcoming AGM to reintroduce a SCRIP dividend scheme ('SCRIP Scheme'). The Board has therefore decided to withdraw the DRIP and, subject to shareholder approval, will reintroduce the SCRIP Scheme commencing with the 2008 final dividend in order to provide shareholders with the opportunity to elect to receive their dividends in the form of new shares in the Company instead of in cash.

Capital resources

The primary sources of capital used by the group are equity shareholders' funds, preference shares, subordinated debt and borrowings. We also consider and, where efficient to do so, utilise alternative sources of capital such as reinsurance and securitisation in addition to the more traditional sources of funding. Targets are established in relation to regulatory solvency, ratings, liquidity and dividend capacity and are a key tool in managing capital in accordance with our risk appetite and the requirements of our various stakeholders. 

In February, the Standard & Poors (S&P) rating committee downgraded NU Life from AA to AA-, which is now aligned with the other 'core' group subsidiaries. At the same time S&P have changed the outlook on NU Life's ratings from 'negative' to 'stable'. There are no changes to any of the group's other ratings or outlooks. The Group's financial strength rating from Moody's is Aa3 ('excellent') with a stable outlook and A+ ('superior') with a stable outlook from AM Best.

Capital allocation

Capital allocation is undertaken based on a rigorous analysis of a range of financial, strategic, risk and capital factors to ensure that capital is allocated efficiently to value adding business opportunities. A clear management decision-making framework, incorporating ongoing operational and strategic performance review, periodic longer term strategic and financial planning and robust due diligence over capital allocation is in place, governed by the Group Executive Committee and Group Asset Committee. These processes incorporate various capital profitability metrics, including an assessment of return on capital employed and internal rates of return in relation to hurdle rates to ensure capital is allocated efficiently and that excess business unit capital is repatriated where appropriate.

Different measures of capital

In recognition of the requirements of different stakeholders, we measure capital on a number of different bases, all of which are taken into account when managing and allocating capital across the group. These include measures which comply with the regulatory regimes within which we operate and those which the directors consider appropriate for the management of the business. The primary measures are:

(i) Accounting bases

We report our results on both an IFRS and a Market Consistent Embedded Value (MCEV) basis. The directors consider that the MCEV principles provide a more meaningful measure of the long term underlying value of the capital employed in our life and related businesses. This basis allows for the impact of uncertainty in future investment returns more explicitly and is consistent with the way life business is priced and managed. Accordingly, in addition to IFRS, we analyse and measure the net asset value and total capital employed for the group on this basis. This is the basis on which group return on equity is measured.

(ii) Regulatory bases

Individual regulated subsidiaries measure and report solvency based on applicable local regulations, including in the UK the regulations established by the Financial Services Authority (FSA). These measures are also consolidated under the European Insurance Groups Directive (IGD) to calculate regulatory capital adequacy at an aggregate group level. We fully complied with these regulatory requirements during the year. 


Page 62


A1 - Capital continued

(iii) Rating agency bases

Agency ratings are an important indicator of financial strength and maintenance of these ratings is one of the key drivers of capital risk appetite. Certain rating agencies have proprietary capital models which they use to assess available capital resources against capital requirements as a component of their overall criteria for assigning ratings. In addition, rating agency measures and targets in respect of gearing and fixed charge cover are also important in evaluating the level of borrowings utilised by the group. While not mandatory external requirements, in practice rating agency capital measures tend to act as one of the primary drivers of capital requirements, reflecting the capital strength required in relation to our target ratings.

(iv) Economic bases

We also measure our capital using an economic capital model that takes into account a more realistic set of financial and non-financial assumptions. This model continues to be developed and is increasingly relevant in the internal management and external assessment of our capital resources. The economic capital model is used to assess capital strength in accordance with the Individual Capital Assessment (ICA) requirements established by the FSA. Further developments are planned to meet the emerging requirements of the Solvency II framework and external agencies.

Accounting basis and capital employed by segment

The table below shows how our capital, on an MCEV basis, is deployed by segment and how that capital is funded.

2008
£m

Restated
2007
£m

Long-term savings

19,250

22,397

General insurance and health

5,516

5,594

Fund management

340

355

Other business 

(326)

831

Corporate1

(30)

(31)

Total capital employed

24,750

29,146

Financed by



Equity shareholders' funds

12,912

19,998

Minority interests2

3,013

2,501

Direct capital instrument

990

990

Preference shares

200

200

Subordinated debt

4,606

3,054

External debt

919

1,257

Net internal debt

2,110

1,146

Total capital employed

24,750

29,146

1.    The 'corporate' net liabilities represent the element of the pension scheme deficit held centrally. 

2.    Minority interests have increased to £3,013 million (2007 restated: £2,501 million) due to foreign exchange movement.

At 31 December 2008 we had £24.8 billion (2007: £29.1 billion) of total capital employed in our trading operations, measured on an MCEV basis. 

Total capital employed is financed by a combination of equity shareholders' funds, preference capital, subordinated debt and borrowings. In addition to our external funding sources, we have certain internal borrowing arrangements in place which allow some of the assets that support technical liabilities to be invested in a pool of central assets for use across the group. These internal debt balances allow for the capital allocated to business operations to exceed the externally sourced capital resources of the group. Although intra-group in nature, they are included as part of the capital base for the purpose of capital management. These arrangements arise in relation to the following:

-    Certain subsidiaries, subject to continuing to satisfy standalone capital and liquidity requirements, loan funds to corporate and holding entities, these loans satisfy arms length criteria and all interest payments are made when due. 

-    Aviva International Insurance (AII) Ltd acts as both a UK general insurer and as the primary holding company for our foreign subsidiaries. Internal capital management mechanisms in place allocate a portion of the total capital of the company to the UK general insurance operations. These mechanisms also allow for some of the assets backing technical liabilities to be made available for use across the group. Balances in respect of these arrangements are also treated as internal debt for capital management purposes.


Page 63

A1 - Capital continued

Net internal debt represents the balance of the above amounts due from corporate and holding entities, less the tangible net assets held by these entities. 

On 13 May 2008 we issued £0.8 billion equivalent of Lower Tier 2 hybrid in a dual-tranche transaction (£400 million and €500 million). £0.6 billion of the proceeds was used to repay short-term commercial paper borrowings. On 8 August 2008 we issued a further £0.2 billion of lower tier 2 hybrid debt. These transactions have a positive impact on group IGD solvency and economic capital measures. 

Financial leverage, the ratio of external senior and subordinated debt to MCEV capital and reserves was 34.7% (2007: 19.2%). Fixed charge cover, which measures the extent to which external interest costs, including subordinated debt interest and preference dividends, are covered by MCEV operating profit was 9.2 times (2007: 9.2 times).

At 31 December 2008 the market value of our external debt, subordinated debt, preference shares (including both Aviva plc preference shares and General Accident plc preference shares of £250 million, within minority interest), and direct capital instrument was £4,911 million (2007: £5,774 million), with a weighted average cost of 8.8% (2007: 4.4%). The group WACC is 8.3% and has been calculated by reference to the cost of equity and the cost of debt at the relevant date. The cost of equity at 31 December 2008 was 8.1% based on a risk free rate of 3.0%, an equity risk premium of 4.0% and a market beta of 1.3.

Regulatory bases

Regulatory basis - Group: European Insurance Groups Directive (IGD)

 

UK life funds
£bn

Other business
£bn

2008
£bn

2007
£bn

Insurance Groups Directive (IGD) capital resources

5.7

9.8

15.5

16.2

Less: capital resource requirement

(5.7)

(7.8)

(13.5)

(13.3)

Insurance Group Directive (IGD) excess solvency

-

2.0

2.0

2.9

Cover over EU minimum (calculated excluding UK life funds)



1.3 times

1.5 times

We have a regulatory obligation to have positive solvency on a regulatory IGD basis at all times. Our risk management processes ensure adequate review of this measure. At 31 December 2008, the estimated excess regulatory capital was £2.0 billion (2007: £2.9 billion). This measure represents the excess of the aggregate value of regulatory capital employed in our business over the aggregate minimum solvency requirements imposed by local regulators, excluding the surplus held in the UK and Ireland with-profit life funds.

The minimum solvency requirement for our European businesses is based on the Solvency 1 Directive. In broad terms, for EU operations, this is set at 4% and 1% of non-linked and unit-linked life reserves respectively and for our general insurance portfolio of business is the higher of 18% of gross premiums or 26% of gross claims, in both cases adjusted to reflect the level of reinsurance recoveries. For our major non-European businesses (the US, Australia and Canada) a risk charge on assets and liabilities approach is used. The IGD is a pure aggregation test with no credit given for the considerable diversification benefits of Aviva. 

Our excess solvency of £2.0 billion reflects a net decrease of £0.9 billion since 31 December 2007 reflecting the prevailing challenging market and general insurance trading conditions offset by various capital initiatives undertaken during the year including the issue of hybrid debt. Following individual guidance from the FSA we now recognise surpluses in the non-profit funds of our UK life and pensions business which is available for transfer to shareholders of £0.4 billion, the benefit of which is offset by reserve strengthening elsewhere in the group.

The reconciliation below provides further analysis of differences between our capital resources and the amounts included in the capital statement made in accordance with FRS 27 and disclosed within our consolidated accounts. This reconciliation is given in the second table below. 

The Group Capital Adequacy Report is prepared in accordance with the FSA's valuation rules (Peak 1) and brings in capital in respect of the UK life funds equal to the UK Life Capital Resources Requirement. The FRS 27 disclosure brings in the realistic value of with-profit capital resources (Peak 2). As the two bases differ, the reconciliation below is presented by removing the restricted regulatory assets and then replacing them with the unrestricted realistic assets.


Page 64


A1 - Capital continued

2008
£bn

Total capital and reserves (IFRS basis)

14.4

Plus: Other qualifying capital

4.9

Plus: UK unallocated divisible surplus

2.8

Less: Goodwill, acquired AVIF and intangible assets

(8.2)

Add: Adjustments onto a regulatory basis

1.6

Group Capital Resources on regulatory basis

15.5

The Group Capital Resources can be analysed as follows:


Core Tier 1 Capital

13.3

Tier 1 waiver (implicit items)

0.2

Innovative Tier 1 Capital

1.0

Total Tier 1 Capital

14.5

Upper Tier 2 Capital

1.9

Lower Tier 2 Capital

3.5

Group Capital Resources Deductions

(4.4)

Group Capital Resources on regulatory basis (Tier 1 & Tier 2 Capital)

15.5

Less: UK life restricted regulatory assets

(7.0)

Add: UK life unrestricted realistic assets

5.5

Add: Overseas UDS - restricted asset 

(0.4)

Total FRS 27 capital

13.6

Regulatory basis - Long-term businesses

For our non-participating worldwide life assurance businesses, our capital requirements, expressed as a percentage of the EU minimum, are set for internal management and embedded value reporting purposes as the higher of: 

-    Target levels set by reference to internal risk assessment and internal objectives, taking account of the level of operational, demographic, market and currency risk.

-    Minimum capital level (i.e. level of solvency capital at which local regulator is empowered to take action). 

The required capital across our life businesses varies between 100% and 325% of EU minimum or equivalent. The weighted average level of required capital for our non-participating life business, expressed as a percentage of the EU minimum (or equivalent) solvency margin has remained stable at 142% (2007: 141%).

These levels of required capital are used in the calculation of the group's embedded value to evaluate the cost of locked in capital. At 31 December 2008 the aggregate regulatory requirements based on the EU minimum test amounted to £6.0 billion (2007: £4.6 billion). At this date, the actual net worth held in our long-term business was £9.5 billion (2007: £9.4 billion) which represents 157% (2007: 205%) of these minimum requirements.

Regulatory basis - UK Life with-profit funds

The available capital of the with-profit funds is represented by the realistic inherited estate. The estate represents the assets of the long-term with-profit funds less the realistic liabilities for non-profit policies within the funds, less asset shares aggregated across the with-profit policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs, guarantees and promises. Realistic balance sheet information is shown below for the three main UK with-profit funds; CGNU Life, Commercial Union Life Assurance Company (CULAC) and Norwich Union Life & Pensions (NUL&P). These realistic liabilities have been included within the long-term business provision and the liability for insurance and investment contracts on the consolidated IFRS balance sheet at 31 December 2008 and 31 December 2007.


Page 65


A1 - Capital continued

Regulatory basis - UK life with-profit funds





2008


2007


Estimated realistic assets
£bn

Realistic liabilities1
£bn

Estimated realistic inherited estate2
£bn

Estimated risk capital margin3
£bn

Estimated excess
£bn


Estimated excess
£bn

CGNU Life

12.8

(12.1)

0.7

(0.4)

0.3


1.1

CULAC

12.4

(11.7)

0.7

(0.4)

0.3


0.8

NUL&P4

21.4

(20.2)

1.2

(0.7)

0.5


1.3

Aggregate

46.6

(44.0)

2.6

(1.5)

1.1


3.2

1.    These realistic liabilities include the shareholders' share of future bonuses of £0.8 billion (2007: £1.2 billion). Realistic liabilities adjusted to eliminate the shareholders' share of future bonuses are £43.2 billion (2007: £48.8 billion). 

    These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.4 billion, £1.5 billion and £4.1 billion for CGNU Life, CULAC and NUL&P respectively (2007: £0.7 billion, £0.8 billion and £3.0 billion for CGNU Life, CULAC and NUL&P respectively).

2.    Estimated realistic inherited estate at 31 December 2007 was £1.4 billion, £1.2 billion and £1.9 billion for CGNU Life, CULAC and NUL&P respectively.

3.    The risk capital margin (RCM) is 1.8 times covered by the inherited estate (2007: 3.5 times). 

4.    The NUL&P fund includes the Provident Mutual (PM) fund which has realistic assets and liabilities of £1.8 billion, and therefore does not impact the realistic inherited estate.

Investment mix

The aggregate investment mix of the assets in the three main with-profit funds at 31 December 2008 was:

2008

2007

Equity

24%

37%

Property

12%

13%

Fixed interest

56%

37%

Other

8%

13%

The equity backing ratios, including property, supporting with-profit asset shares are 57% in CGNU Life, CULAC and NUL&P. With-profit new business is mainly written through CGNU Life.

Proposed reattribution of inherited estate

In July 2008 following extensive discussions with the Policyholder Advocate, Norwich Union announced a £1 billion offer to one million eligible policy holders in return for giving up the right to the £2.1 billion inherited estate of CGNU Life Assurance Ltd and Commercial Union Life Assurance Company Ltd. Since then, investment market performance has caused the value of the estate to reduce to £1.4 billion meaning that the offer made in July no longer meets our criteria of being fair to both policyholders and shareholders. As a consequence, we are working closely with the Policyholder Advocate to see how we can restructure our offer and expect to be in a position to provide an update to policyholders in the next few months. These developments do not affect the entitlement to receive a £2.1 billion special distribution that we announced in early 2008.

Regulatory basis - Solvency II

Solvency II represents new EU legislation which totally redefines prudential supervision of EU insurers. It aims to establish a new economic risk sensitive approach to capital and solvency calculation and a new harmonized EU supervisory regime which places importance on effective internal governance and risk management practices. Aviva has already recognized that Solvency II offers a blueprint for industry best practice and is fully prepared to meet the challenge that offers. To that end, we are an active participant in the key European industry working groups who provide the voice of industry in ongoing negotiations in Brussels. 

It is possible that the first stage of the Solvency II project will reach conclusion by June 2009 if the EU Parliament, Council and Commission are able to reach agreement on the 'Level 1 Framework Directive'. If this happens, it is envisaged that full implementation of Solvency II requirements could be imposed on EU insurers in the first quarter of 2013.


Page 66


A1 - Capital continued

Rating agency bases

Agency ratings are important in supporting access to debt capital markets and in providing assurance to business partners and policyholders over the financial strength of the group and our ability to service contractual obligations. In recognition of this, we have solicited rating relationships with a number of rating agencies. Rating agencies generally assign ratings based on an assessment of a range of financial (e.g. capital strength, gearing and fixed charge cover ratios) and non financial (e.g. competitive position and quality of management) factors. Managing our capital and liquidity position in accordance with our target rating levels is a core consideration in all material capital management and capital allocation decisions.

Economic bases

We use a risk-based capital model to assess economic capital requirements and to aid in risk and capital management across the group. This model is also used to support our Individual Capital Assessments (ICA) which are reported to the FSA for all our UK regulated insurance businesses. The model is based on a framework for identifying the risks to which business units, and the group as a whole, are exposed. A mixture of scenario based approaches and stochastic models are used to capture market risk, credit risk, insurance risk and operational risk. Scenarios are specified centrally to provide consistency across businesses and to achieve a minimum standard. Where appropriate, businesses also supplement these with additional risk models specific to their own risk profile. When aggregating capital requirements at business unit and group level, we allow for diversification benefits between risks and between businesses, with restrictions to allow for non-fungibility of capital when appropriate. This means that the aggregate capital requirement is less than the sum of capital required to cover all of the individual risks.

For internal management purposes, our economic capital model is calibrated to our target capital adequacy rating. Financial modelling techniques enhance our practice of active risk and capital management, ensuring sufficient capital is available to protect against unforeseen events and adverse scenarios. Our aim continues to be the optimal usage of capital through appropriate allocation to our businesses. We continue to develop our economic capital modelling capability for all our businesses as part of our development programme to increase the focus on economic capital management. 

The FSA uses the results of our ICA process when setting target levels of capital for our UK regulated insurance businesses. In line with FSA requirements, the ICA estimates the capital required to mitigate the risk of insolvency to a 99.5% confidence level over a one year time horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial tests.


Page 67


A2 - Group capital structure

Deployment of equity shareholders' funds

In order to better reflect the risk to shareholder funds the following table 'looks through' unitised investments which are classified as 'other' within the IFRS balance sheet and makes adjustments for minority holdings that are fully consolidated on the balance sheet. In addition, we have explicitly shown the market risks within the staff pension schemes.






2008

Restated
2007


Equities
£m

Property 
£m

Cash, loans & debt securities
£m

Other investments
£m

Other net assets
£m

Total
£m

Total
£m

Total assets included in the statutory IFRS balance sheet

43,351

15,390

216,673

36,116

43,032

354,562

321,326

Goodwill1





(4,017)

(4,017)

(3,502)

Acquired value of in-force business and intangible assets





(4,216)

(4,216)

(3,379)

Liabilities of the long-term, general & other businesses 

(37,798)

(12,879)

(207,381)

(32,949)

(49,109)

(340,116)

(305,395)

Pension fund deficit





613

613

178

Debt





7,635

7,635

5,457

Liabilities of the long-term, general & other businesses excluding pension fund deficit and debt 

(37,798)

(12,879)

(207,381)

(32,949)

(40,861)

(331,868)

(299,760)

Minorities and other investments reclassification2

160

106

1,398

(2,457)

793

-

-

Shareholder funds

5,713

2,617

10,690

710

(5,269)

14,461

14,685

Pension fund

3,569

507

4,510

752

(9,951)

(613)

(178)

Adjusted shareholder funds

9,282

3,124

15,200

1,462

(15,220)

13,848

14,507

Goodwill1






4,017

3,502

Additional and acquired value of in-force long-term business and intangible assets






6,885

11,137

Assets backing total capital employed in continuing operations






24,750

29,146

Subordinated debt






(4,606)

(3,054)

External debt






(919)

(1,257)

Net internal debt3 

 





(2,110)

(1,146)







17,115

23,689

Minority interests






(3,013)

(2,501)

Direct capital instrument






(990)

(990)

Preference capital






(200)

(200)

Equity shareholders' funds






12,912

19,998

1.    Includes goodwill relating to the joint ventures and associates including amounts held for sale.

2.    Minority and other investments reclassification represent the reallocation of unit trusts to their constituent parts net of net asset value attributable to unitholders.

3.    Net internal debt represents the upstream of internal loans from business operations to corporate and holding entities net of tangible assets held by those entities.


Page 68


A2 - Group capital structure continued

Shareholders' funds, including minority interest

2008 
Closing shareholders' funds


Restated
2007 
Closing shareholders' funds


IFRS net asset
£m

Internally generated AVIF
£m

Total Equity
£m


IFRS net asset
£m

Internally generated AVIF
£m

Total Equity
£m

Life assurance








United Kingdom

3,649

1,420

5,069


3,670

3,484

7,154

France

1,854

970

2,824


1,447

1,323

2,770

Ireland

1,212

280

1,492


943

286

1,229

Italy

1,407

264

1,671


1,020

238

1,258

Netherlands (including Belgium and Germany)

2,979

(665)

2,314


2,994

950

3,944

Poland

310

1,105

1,415


276

926

1,202

Spain

1,373

682

2,055


1,122

624

1,746

Other Europe

369

(34)

335


346

(68)

278

Europe

9,504

2,602

12,106


8,148

4,279

12,427

North America

2,693

(1,599)

1,094


2,202

(227)

1,975

Asia Pacific

735

246

981


619

222

841


16,581

2,669

19,250


14,639

7,758

22,397

General insurance and health








United Kingdom

2,592

-

2,592


3,049

-

3,049

France

400

-

400


301

-

301

Ireland

545

-

545


435

-

435

Netherlands

705

-

705


756

-

756

Other Europe

377

-

377


295

-

295

Europe

2,027

-

2,027


1,787

-

1,787

North America

878

-

878


732

-

732

Asia Pacific 

19

-

19


26

-

26


5,516

-

5,516


5,594

-

5,594

Fund management

340

-

340


355

-

355

Other business 

(326)

-

(326)


831

-

831

Corporate

(30)

-

(30)


(31)

-

(31)

Subordinated debt

(4,606)

-

(4,606)


(3,054)

-

(3,054)

External debt

(919)

-

(919)


(1,257)

-

(1,257)

Internal debt

(2,110)

-

(2,110)


(1,146)

-

(1,146)


(7,651)

-

(7,651)


(4,302)

-

(4,302)

Shareholders' funds, including 
minority interests

14,446

2,669

17,115


15,931

7,758

23,689

Less:








Minority interests



(3,013)




(2,501)

Direct capital instruments



(990)




(990)

Preference capital



(200)




(200)

Equity shareholders' funds



12,912




19,998

Less: goodwill and intangibles1



(4,944)




(4,258)

Equity shareholders funds' excluding goodwill and intangibles



7,968




15,740

1. Goodwill and intangibles comprise £3,583 million (2007:£3,082 million) of goodwill and subsidiaries, £1,557million (2007: £1,407 million) of intangibles in subsidiaries, £163 million (2007: £162 million) of goodwill and intangibles in joint ventures and £335 million (2007: £310 million) of goodwill in associated, net of associated deferred tax liabilities of £423 million (2007: £419 million) and the minority share of intangibles of £271 million 
(2007: £284 million). 



Page 69


A2 - Group capital structure continued

Analysis of return on capital employed 

Return on capital at business level is calculated on shareholders' funds excluding goodwill and intangibles, with the impact of these items on group shareholders' funds shown separately. This allows for returns on capital at the operational level to be based on tangible capital employed (including value of in-force business), whilst retaining accountability at an aggregate group level for the requirement to generate returns on capital invested in goodwill and intangibles.





2008


Operating return2

 Restated opening shareholders' funds including minority interests
£m

Restated Opening Shareholders' funds (excluding goodwill and intangibles) £m

Return on capital
%


Before tax
£m

After tax
£m

Life assurance






United Kingdom

883

635

7,154

6,888

9.2%

France

692

455

2,770

2,770

16.4%

Ireland

78

67

1,229

1,091

6.1%

Italy

131

88

1,258

1,040

8.5%

Netherlands (including Belgium and Germany)

187

134

3,944

3,939

3.4%

Poland

241

196

1,202

1,197

16.4%

Spain

286

199

1,746

1,042

19.1%

Other Europe

 23

17

278

177

9.6%

Europe

1,638

1,156

12,427

11,256

10.3%

North America

201

132

1,975

1,206

10.9%

Asia Pacific

79

57

841

688

8.3%


2,801

1,980

22,397

20,038

9.9%

General insurance and health






United Kingdom

557

398

3,049

2,557

15.6%

France

107

70

301

301

23.3%

Ireland

68

59

435

353

16.7%

Netherlands

177

129

756

734

17.6%

Other Europe

45

31

295

187

16.6%

Europe

397

289

1,787

1,575

18.3%

North America

145

94

732

729

12.9%

Asia Pacific 

-

-

26

26

-


1,099

781

5,594

4,887

16.0%

Fund management

42

29

355

305

9.5%

Other business

(163)

(114)

831

(595)

19.2%

Corporate

(37)

118

(31)

(31)

(380.6)%

Subordinated debt

(229)

(164)

(3,054)

(3,054)

5.4%

External debt

(57)

(41)

(1,257)

(1,257)

3.3%

Net internal debt3

(98)

(70)

(1,146)

(1,146)

6.1%


3,358

2,519

23,689

19,147

13.2%

Less:    Minority interests


(257)

(2,501)

(2,217)

11.6%

        Direct capital instrument


(40)

(990)

(990)

4.0%

        Preference capital


(17)

(200)

(200)

8.5%

Operating return


2,205

19,998

15,740

14.0%

Goodwill and intangibles1




4,258


Operating return (including goodwill and intangibles) 


2,205

19,998

19,998

11.0%

1.    Goodwill and intangibles comprises £3,082 million of goodwill in subsidiaries, £1,407 million of intangibles in subsidiaries, £162 million goodwill and intangibles in joint ventures, and £310 million of goodwill in associates, net of associated deferred tax liabilities of £419 million and the minority share of intangibles of £284 million.

2.    The operating return is based upon group MCEV operating profit, which is stated before impairment of goodwill, amortisation of intangibles, exceptional items and investment variance.

3.    The net internal debt return loss before tax of £98 million comprises investment return of £99 million offset by group internal debt costs and other interest of £197 million.


Page 70


A2 - Group capital structure continued

Analysis of return on capital employed





Restated
2007


Operating return2

Opening shareholders' funds including goodwill and intangibles
£m

Opening shareholders' funds excluding goodwill and intangibles
£m

Return on capital
%


Before tax
£m

After tax
£m

Life assurance






United Kingdom

822

575

6,629

6,394

9.0%

France

568

373

2,355

2,355

15.8%

Ireland

85

74

1,103

977

7.6%

Italy

137

84

852

841

10.0%

Netherlands (including Belgium and Germany)

316

236

3,514

3,508

6.7%

Poland

181

147

946

946

15.5%

Spain

233

163

1,412

894

18.2%

Other Europe

(17)

(12)

132

132

(9.1)%

Europe

1,503

1,065

10,314

9,653

11.0%

North America

124

80

2,078

1,267

6.3%

Asia Pacific

95

70

575

511

13.7%


2,544

1,790

19,596

17,825

10.0%

General insurance and health






United Kingdom

294

206

2,984

2,487

8.3%

France

70

45

333

333

13.5%

Ireland

162

142

434

359

39.6%

Netherlands

169

123

684

682

18.0%

Other Europe

41

29

161

161

18.0%

Europe

442

339

1,612

1,535

22.1%

North America

154

101

670

667

15.1%

Asia Pacific 

4

3

22

22

13.6%


894

649

5,288

4,711

13.8%

Fund management

90

63

305

243

25.9%

Other business

(70)

(49)

874

(458)

10.7%

Corporate

(82)

(95)

(19)

(19)

500.0%

Subordinated debt

(179)

(125)

(2,937)

(2,937)

4.3%

External debt

(79)

(55)

(1,258)

(1,258)

4.4%

Net internal debt3

(53)

(37)

(1,406)

(1,406)

2.6%


3,065

2,141

20,443

16,701

12.8%

Less:    Minority interests


(265)

(1,817)

(1,808)

14.7%

        Direct capital instrument


(37)

(990)

(990)

3.7%

        Preference capital


(17)

(200)

(200)

8.5%

Operating return


1,822

17,436

13,703

13.3%

Goodwill and intangibles1 




3,733


Operating return (including goodwill and intangibles)


1,822

17,436

17,436

10.4%

1.    Goodwill and intangibles comprises £2,910 million of goodwill in subsidiaries, £830 million of intangibles in subsidiaries and £280 million of goodwill in associates, net of associated deferred tax liabilities of £278 million and the minority share of intangibles of £9 million.

2.    The operating return is based upon group MCEV operating profit, which is stated before impairment of goodwill, amortisation of intangibles, exceptional items and investment variance.

3.    The net internal debt return loss before tax of £53 million comprises investment return of £127 million offset by group internal debt costs and other interest of £180 million.


Page 71


A2 - Group capital structure continued

Capital Generation and Utilisation

As part of our capital management processes, we regularly review the generation and deployment of capital. The table below demonstrates the net capital generation of the group based on MCEV net worth before and after investment variances.

2008
£bn

Restated
2007
£bn

Operational capital generation:



Life in-force profits

2.4

1.8

New business strain

(0.8)

(0.6)

Non-life profits

0.8

0.5

Operational capital generated

2.4

1.7

Increase in capital requirements

(0.4)

(0.4)

Free operational capital generated

2.0

1.3

Interest cost

(0.3)

(0.2)

External dividend

(1.0)

(0.9)

Scrip dividend

0.2

0.3

Capital generation after financing 

0.9

0.5

Profit on disposals

-

0.1

Capital raising

1.0

-

Cost of acquisitions

(0.3)

(0.6)

Qualifying assets acquired net of capital requirements

0.1

0.1

Pension funding, restructuring costs and exceptional items 

(0.9)

(0.1)

Foreign exchange impact on surplus capital

0.2

0.3

Other

0.1

-

Net capital generated before investment return               and economic variances

1.1

0.3

Investment return variances and economic variances

(4.3)

0.1

Net capital (consumed)/generated after investment return               and economic variances

(3.2)

0.4

Free operational capital generated represents the net of the following:

-    Operating profits emerging in net worth for the life in-force business, net of new business strain, and IFRS operating profits earned by non-life businesses. 

-    The increase in capital requirements of ongoing businesses. Capital requirements represent target operating capital levels rather than regulatory minimum levels as this is considered a better reflection of capital utilised in the business. For the life businesses this is the capital used in the calculation of embedded value to evaluate the cost of locked in capital. For general insurance businesses we have calculated target capital based on two times the regulatory minimum. Where appropriate, the increase in capital requirements shown has been adjusted for the impact of foreign exchange movements and other one off changes to required capital.


Page 72


A3 - Sensitivity analysis and capital management

Sensitivity analysis

The sensitivity of the group's shareholders' funds on an MCEV basis and IFRS basis at 31 December 2008 to a 10% fall in global equity markets, a rise of 1% in global interest rates or a 0.5% increase in credit spreads is as follows:

MCEV basis



2008
£bn

Equities down 10%

Interest rates up 1%
£bn

0.5% increased credit spread
£bn

2007
£bn

Direct
£bn

Indirect
£bn

22.4


Long-term savings1

19.2

(0.3)

(0.5)

(0.3)

(1.7)

6.8


General insurance and other

4.4

(0.3)

-

(0.2)

0.3

(5.5)


Borrowings2

(6.5)

-

-

-

-

23.7


Shareholders' funds

17.1

(0.6)

(0.5)

(0.5)

(1.4)



IFRS basis







0.5% increased credit 
spread
£bn

2007
£bn




2008
£bn

Equities down 10%
£bn

Interest 
rates up 1%
£bn

14.6


Long-term savings


16.5

(0.3)

(0.4)

(0.3)

6.8


General insurance and other


4.4

(0.3)

(0.2)

0.3

(5.5)


Borrowings


(6.5)

-

-

-

15.9


Shareholders' funds


14.4

(0.6)

(0.6)

-

1.    Assumes MCEV assumptions adjusted to reflect revised bond yields.

2.    Comprising internal, external and subordinated debt, net of corporate tangible net assets.

These sensitivities assume a full tax charge/credit on market value assumptions.

The tables above incorporates the effect on the value of the pension scheme assets and liabilities of a 10% decrease in equity markets, a 1% increase in fixed income bond yields and a 0.5% increase in credit spreads. The interest rate sensitivity also assumes an equivalent movement in both inflation and discount rate (i.e. no change to real interest rates) and therefore, incorporates the offsetting effects of these items on the pension scheme liabilities. A 1% increase in the real interest rate only has the effect of reducing the pension scheme liability by £1.4 billion thereby enhancing shareholders' funds by £1.0 billion (after deducting tax).

Group IGD

The sensitivity of the group's IGD surplus reflects the impact of the hedges we have put in place as part of our long-term strategy to protect the group from extreme market movements. At 31 December 2008 the sensitivity to a 10% fall in global equity markets or a rise of 1% in global interest rates is as follows:

2008
£bn

Equities down 10%
£bn

Interest 
rates up 1%
£bn

IGD Group surplus

2.0

(0.2)

(0.1)

We continue to actively manage our equity risk exposures. The sensitivity of the group's IGD surplus to falls in the global equity markets since 31 December 2008 is as follows:


£bn

Equities down 10%

(0.2)

Equities down 20%

(0.3)

Equities down 30%

(0.6)

Equities down 40%

(0.8)


Page 73


A3 - Sensitivity analysis and capital management continued

Risk management - Equity hedging

Our risk management processes ensure close and on-going monitoring of all our capital measures. The following table shows the material equity derivatives within the group's shareholder funds at 31 December 2008 that are used as part of a long-term strategy to manage equity risk. It excludes derivatives used for portfolio management purposes:

Derivative

Notional
£bn1

Market fall below protection level
£bn2,4

Market fall required before protection starts
£bn3,4

Outstanding 

duration

(a)

0.5

13%

-

< 3 months

(b)

1.6

17%

-

 3-11 months

(c)

1.9

-

17%

12 months

1.    The notional represents the notional amount of hedging as at 31 December 2008.         

2.    The 'Market fall below protection level' shows the percentage the market has fallen below the protection level as at 31 December 2008. Both derivative (a) and (b) are therefore in the money at this date.        

3.    The 'Market fall required before protection starts' shows the percentage the market would have to fall from the 31 December 2008 positions before the derivative moves into the money.        

4.    Derivatives (a), (b) and (c) each represent a collection of derivatives with different strike prices. The strike prices used in the above calculations are the weighted average strikes of the derivatives in each bucket        

The group uses a number of sensitivity test-based risk management tools to understand the volatility of earnings, the volatility of its capital requirements, and to manage its capital more efficiently. Primarily MCEV, Financial Condition Reporting (a medium term projection of the financial health of the business under a variety of economic and operating scenarios), and increasingly Individual Capital Assessment (ICA) are used. Sensitivities to economic and operating experience are regularly produced on all of our financial performance measurements as part of our decision making and planning process, and as part of the framework for identifying and quantifying the risks that each of its business units, and the group as a whole are exposed to.

For long-term business in particular, sensitivities of MCEV performance indicators to changes in both economic and non-economic experience are continually used to manage the business and to inform the decision making process. More information on MCEV sensitivities can be found in the presentation of results in the MCEV section of this announcement.

Life insurance and investment contracts

The nature of long-term business is such that a number of assumptions are made in compiling the financial statements. Assumptions are made about investment returns, expenses, mortality rates, and persistency in connection with the in-force policies for each business unit. Assumptions are best estimates based on historic and expected experience of the business. 

General insurance and health business

General insurance and health claim liabilities are estimated by using standard actuarial claims projection techniques. These methods extrapolate the claims development for each accident year based on the observed development of earlier years. In most cases, no explicit assumptions are made as projections are based on assumptions implicit in the historic claims development on which the projections are based. As such, in the analysis below, the sensitivity of general insurance claim liabilities is primarily based on the financial impact of changes to the reported loss ratio.

Some results of sensitivity testing for long-term business and general insurance and health business are set out below. For each sensitivity test the impact of a change in a single factor is shown, with other assumptions left unchanged.

Sensitivity Factor

Description of sensitivity factor applied

Interest rate & investment return

The impact of a change in market interest rates by a 1% increase or decrease. The test allows consistently for similar changes to investment returns and movements in the market value of backing fixed interest securities.

Equity / property market values

The impact of a change in equity/property market values by ± 10%

Expenses

The impact of an increase in maintenance expenses by 10%

Assurance mortality/morbidity 
(life insurance only)

The impact of an increase in mortality/morbidity rates for assurance contracts by 5%

Annuitant mortality 
(life insurance only)

The impact of a reduction in mortality rates for annuity contracts by 5%

Gross loss ratios 
(non-life insurance only)

The impact of an increase in gross loss ratios for general insurance and health business by 5%


Page 74


A3 - Sensitivity analysis and capital management continued

Long-term businesses







2008

Impact on profit before tax
£m

Interest rates
+1%

Interest rates
-1%

Equity/ property
+10%

Equity/ property
-10%

Expenses
+10%

Assurance mortality
+5%

Annuitant mortality
+5%

Insurance participating

(10)

(165)

85

(90)

(20)

(5)

(10)

Insurance non-participating

(25)

135

90

(90)

(20)

(25)

(310)

Investment participating

(35)

(55)

25

(20)

-

-

-

Investment non-participating

(10)

10

20

(20)

(5)

-

-

Assets backing life shareholders' funds

(20)

30

180

(180)

-

-

-

Total

(100)

(45)

400

(400)

(45)

(30)

(320)









2008

Impact on shareholders' equity before tax
£m

Interest rates
+1%

Interest rates
-1%

Equity/ property
+10%

Equity/ property
-10%

Expenses
+10%

Assurance mortality
+5%

Annuitant mortality
+5%

Insurance participating

(30)

(135)

85

(90)

(20)

(5)

(10)

Insurance non-participating

(185)

270

110

(105)

(20)

(25)

(310)

Investment participating

(50)

(40)

30

(25)

-

-

-

Investment non-participating

(210)

230

20

(20)

(5)

-

-

Assets backing life shareholders' funds

(80)

95

190

(190)

-

-

-

Total

(555)

420

435

(430)

(45)

(30)

(320)









2007

Impact on profit before tax
£m

Interest rates
+1%

Interest rates
-1%

Equity/ property
+10%

Equity/ property
-10%

Expenses
+10%

Assurance mortality
+5%

Annuitantmortality
+5%

Insurance participating

15

(10)

-

-

(5)

-

-

Insurance non-participating

(205)

165

45

(35)

(5)

(20)

(295)

Investment participating

(5)

(25)

-

-

(5)

-

-

Investment non-participating

(35)

40

65

(60)

-

-

-

Assets backing life shareholders' funds

(115)

140

180

(175)

-

-

-

Total

(345)

310

290

(270)

(15)

(20)

(295)

            







2007

Impact on shareholders' equity before tax
£m

Interest rates
+1%

Interest rates
-1%

Equity/ property
+10%

Equity/ property
-10%

Expenses
+10%

Assurance mortality
+5%

Annuitantmortality
+5%

Insurance participating

(5)

20

-

-

(5)

-

-

Insurance non-participating

(320)

275

105

(95)

(5)

(20)

(295)

Investment participating

(5)

(25)

-

-

(5)

-

-

Investment non-participating

(170)

190

65

(60)

-

-

-

Assets backing life shareholders' funds

(165)

190

460

(455)

-

-

-

Total

(665)

650

630

(610)

(15)

(20)

(295)


Page 75


A3 - Sensitivity analysis and capital management continued

The impact on the group's results from sensitivity to these assumptions can also be found in the MCEV sensitivities included in the alternative method of reporting long-term business profits section.

General insurance and health businesses






2008

Impact on profit before tax
£m

Interest 
rates
+1%

Interest 
rates
-1%

Equity/ property
+10%

Equity/ property
-10%

Expenses
+10%

Gross loss ratios
+5%

Net of reinsurance

(360)

360

90

(90)

(170)

(425)








2008

Impact on shareholders' equity before tax
£m

Interest 
rates
+1%

Interest 
rates
-1%

Equity/ property
+10%

Equity/ property
-10%

Expenses
+10%

Gross loss ratios
+5%

Net of reinsurance

(360)

360

90

(90)

(40)

(425)








2007

Impact on profit before tax
£m

Interest 
rates
+1%

Interest 
rates
-1%

Equity/ property
+10%

Equity/ property
-10%

Expenses
+10%

Gross loss ratios
+5%

Net of reinsurance

(255)

290

110

(110)

(150)

(365)








2007

Impact on shareholders' equity before tax
£m

Interest 
rates
+1%

Interest 
rates
-1%

Equity/ property
+10%

Equity/ property
-10%

Expenses
+10%

Gross loss ratios
+5%

Net of reinsurance

(255)

290

110

(110)

(35)

(365)

For general insurance, the impact of the expense sensitivity on profit also includes the increase in ongoing administration expenses, in addition to the increase in the claims handling expense provision.

Fund management and non-insurance businesses




2008

Impact on profit before tax
£m

Interest 
rates
+1%

Interest 
rates
-1%

Equity/ property
+10%

Equity/ property
-10%

Total

15

(20)

50

(50)






2008

Impact on shareholders' equity before tax
£m

Interest 
rates
+1%

Interest 
rates
-1%

Equity/ property
+10%

Equity/ property
-10%

Total

-

(10)

130

(130)



  Page 76


A3 - Sensitivity analysis and capital management continued




2007

Impact on profit before tax
£m

Interest 
rates
+1%

Interest 
rates
-1%

Equity/ property
+10%

Equity/ property
-10%

Total

(35)

35

55

(55)






2007

Impact on shareholders' equity before tax
£m

Interest 
rates
+1%

Interest 
rates
-1%

Equity/ property
+10%

Equity/ property
-10%

Total

(35)

35

55

(55)

Limitations of sensitivity analysis

The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.

The sensitivity analyses do not take into consideration that the group's assets and liabilities are actively managed. Additionally, the financial position of the group may vary at the time that any actual market movement occurs. For example, our financial risk management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation, adjusting bonuses credited to policyholders, and taking other protective action. 

A number of the business units use passive assumptions to calculate their long-term business liabilities. Consequently, the actual impact of a change in the assumptions may not have any impact on the liabilities, whereas assets are held at market value on the balance sheet. In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in shareholder equity. Similarly, for general insurance liabilities, the interest rate sensitivities only affect profit and equity where explicit assumptions are made regarding interest (discount) rates or future inflation. 

Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the group's view of possible near-term market changes that cannot be predicted with any certainty; and the assumption that all interest rates move in an identical fashion.


Page 77

Appendix B - Analysis of assets


B1 - Key highlights

-    The quality of Aviva's balance sheet asset base continues to be strong, despite challenging economic and market conditions.

-    Balance sheet assets have been appropriately valued with 82% of assets (including 100% of financial investments) measured at fair value.

-    Except for tax asset and interests in joint ventures and associates (which are equity accounted) the remaining assets are recognised at cost/amortised cost and tested for impairment.

-    The principal asset classes are Debt Securities (£151 billion), Equities (£43 billion), Other Financial Investments (£36 billion) and Loans (£42 billion).

-    The majority (95%) of debt securities are investment grade (with 1.5% below investment grade and 3.8% not rated).

-    The group has very limited exposure to RMBS (Sub prime, Alt A), ABS, Wrapped Credit, CDOs and CLOs; with these investments representing less than 1.0% of total balance sheet assets.

-    Of the group's total asset base of £340 billion analysed in detail in detail in this disclosure, investments (investment property, loans and financial investments) amount to £287 billion. Shareholders are only directly exposed to market and credit risk on £95 billion of these investments.

-    Of this, £51 billion (54%) are debt securities, 91% of which are investment grade.

-    Only 6% of shareholder assets are held in equities and other financial investments - equities and other financial investments are principally held to back Policyholder liabilities (in unit-linked and participating funds) and as such reflect policyholder investment mandates.

-    £31.7 billion of shareholder assets are loans. 

-    £7.9 billion of these loans are secured through non-recourse borrowings in our UK Life and Dutch business whereby the risk is passed to the note holders.

- 56% of non-securitised mortgages are commercial loans rather than residential mortgages; which are typically held to back annuity liabilities and a further 14% of non-securitised mortgages are to government supported healthcare.

- All our USA loan portfolio is commercial loans.

-    The group's loan portfolio continues to perform well with 95% of the portfolio neither past due nor impaired. 

However, the fall in property values has led to a deterioration in loan to value (LTV) ratios so that now £9 billion loans have an LTV greater than 100%.

B2 - Introduction

With the continued volatility and uncertainty in the credit and equity markets, we are again presenting extensive and transparent disclosure of the quality of the assets recognised on the group's balance sheet.

This disclosure evidences the quality of the Aviva group's balance sheet assets by providing:

-    an analysis of assets to reflect whether the shareholder or policyholder ultimately bears the underlying credit and market risk;

-    details of the valuation bases used, specifically showing the portion of balance sheet assets carried at fair value thereby reflecting the full impact of changes in market conditions;

-    a breakdown of debt securities held by product type and credit ratings to demonstrate the risk exposure associated with these investments; and,

-    details of the exposure to mortgage loans with loan to value and arrears information.

B3 - Total assets - Shareholder/Policyholder exposure to risk

Within this disclosure, the group's total assets have been segmented based on where the market and credit risks are held, according to the following guidelines.

Policyholder Assets

The group writes unit-linked business in a number of long-term business operations. In unit-linked business, the policyholder bears the investment risk on the assets in the unit-linked funds, as the policy benefits are directly linked to the value of the assets in the funds. These assets are managed according to the investment mandates of the funds which are consistent with the expectations of the policyholders. By definition, there is a precise match between the investment assets and the policyholder liabilities, and so the market risk and credit risk lie with policyholders. The shareholders' exposure on this business is limited to the extent that income arising from asset management charges is based on the value of assets in the funds.


Page 78


B3 - Total assets - Shareholder/Policyholder exposure to risk continued

Participating Fund Assets

Some insurance and investment contracts in our long-term businesses contain a discretionary participating feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts. The market risk and credit risk in relation to assets held within Participating Funds (including 'with-profit' funds) are shared between policyholders and shareholders in differing proportions. In general, the risks and rewards of participating funds rest primarily with the policyholders.

The assets within Participating Funds cover liabilities for participating insurance contracts and participating investment contracts in addition to other liabilities within the participating funds.

Shareholder Assets

Assets held within long-term businesses that are not backing unit-linked liabilities or participating funds, directly expose the shareholders of Aviva plc to market and credit risks. Likewise, assets held within General Insurance & Health, Fund Management and non-insurance businesses also expose our shareholders to market and credit risks. The group has established comprehensive risk management policies to monitor and mitigate these risks.

Policyholder assets 
£m

Participating fund assets
£m

Shareholder assets
£m

Total assets analysed
£m

Less assets of operations classified as held for sale
£m

Balance 
sheet total
£m

Assets







Goodwill and Acquired value of in-force business and intangible assets

-

-

7,630

7,630

(14)

7,616

Interests in joint ventures and associates 

194

950

1,839

2,983

-

2,983

Property and equipment

38

93

935

1,066

(102)

964

Investment property

4,126

7,555

2,745

14,426

-

14,426

Loans

1,799

8,702

31,736

42,237

-

42,237

Financial investments







    Debt securities

19,588

79,566

51,437

150,591

(336)

150,255

    Equity securities

23,840

13,817

5,754

43,411

(60)

43,351

    Other investments

23,527

 9,443

3,146

36,116

-

36,116

Reinsurance assets

1,704

803

5,387

7,894

-

7,894

Deferred tax assets

-

-

2,642

2,642

-

2,642

Current tax assets

-

-

622

622

-

622

Receivables and other financial assets

470

2,038

7,694

10,202

(386)

 9,816

Deferred acquisition costs and other assets

233

1,011

4,904

6,148

(1)

6,147

Prepayments and accrued income

249

1,355

2,316

3,920

(158)

3,762

Cash and cash equivalents

4,125

9,332

11,217

24,674

(493)

24,181

Assets of operations classified as held for sale

-

-

-

-

1,550

1,550

Total

79,893

134,665

140,004

354,562

-

354,562

Total %

22.5%

38.0%

39.5%




FY 2007

83,841

123,697

113,788

321,326

-

321,326

FY 2007 %

26.1%

38.5%

35.4%





As can be seen from the table above, 40% of assets can be directly attributed to shareholders where the apportionment of assets is predominantly weighted towards debt securities and loans. In comparison policyholder and participating funds contain a greater proportion of investment property, equities and other investments (e.g. unite trusts), reflecting the underlying investment mandates.

Note, the remainder of this disclosure is prepared based on gross assets prior to the adjustment for assets of operations classified as held for sale.


Page 79


B4 - Total assets - Valuation bases/fair value hierarchy

Valuation Bases

The valuation of the group's assets can be categorised into the following major categories:

(i)    Fair Value - Fair value is the amount for which an asset can be exchanged between knowledgeable, willing parties in an arm's length transaction;

(ii)    Cost/Amortised Cost - The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition less principal repayments, plus or minus the cumulative amortisation (using the effective interest method) of any difference between the initial amount and the maturity amount, and less any reduction for impairment or uncollectibility. The cost/amortised cost of a non-financial asset is the amount at which the asset is initially recognised less any cumulative amortisation/depreciation (if applicable), and less any reduction for impairment.

(iii)    Equity Accounted and tax assets - Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the group's share of that entity's post-acquisition changes to shareholders' funds, is included as an asset in the consolidated balance sheet. The group's share of their post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. Distributions received from the investee reduce the group's carrying amount of the investment; and 

    Within the group's balance sheet, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with Equity Accounted within the analysis of the group's assets in the table below.

Fair value 
£m

Amortised 
cost
£m

Equity accounted/ tax assets
£m

Total
£m

Assets





Goodwill and Acquired value of in-force business and intangible assets

-

7,630

-

7,630

Interests in joint ventures and associates 

-

-

2,983

2,983

Property and equipment

566

500

-

1,066

Investment property

14,426

-

-

14,426

Loans

21,468

20,769

-

42,237

Financial investments





    Debt securities

150,591

-

-

150,591

    Equity securities

43,411

-

-

43,411

    Other investments

36,116

-

-

36,116


Reinsurance assets

-

7,894

-

7,894

Deferred tax assets

-

-

2,642

2,642

Current tax assets

-

-

622

622

Receivables and other financial assets

-

10,202

-

10,202

Deferred acquisition costs and other assets

-

6,148

-

6,148

Prepayments and accrued income

-

3,920

-

3,920

Cash and cash equivalents

24,674

-

-

24,674

Total

291,252

57,063

6,247

354,562

Total %

82.1%

16.1%

1.8%


FY 2007 

267,124

49,438

4,764

321,326

FY 2007 %

83.1%

15.4%

1.5%


As shown in the above table, 82% of the group's total assets are carried at fair value (inclusive of cash and cash equivalents).

With such a significant portion of the group's total assets carried at fair value, the impact of market risks and credit risks of these assets has been fully reflected within the group's reported 31 December 2008 financial position. Furthermore, all other assets have been tested for impairment and, in the case of financial assets carried at amortised cost, this has included a specific analysis of the recoverability of the assets by reference to the credit risk of the counterparty.

The carrying values of assets on the different valuation bases are analysed in the tables below between Policyholder, Participating Fund and Shareholder Assets respectively.


Page 80


B4 - Total assets - Valuation bases/fair value hierarchy continued

Fair value 
£m

Amortised 
cost
£m

Equity accounted/ tax assets
£m

Total
£m

Assets - Policyholder assets





Goodwill and Acquired value of in-force business and intangible assets

-

-

-

-

Interests in joint ventures and associates 

-

-

194

194

Property and equipment

38

-

-

38

Investment property

4,126

-

-

4,126

Loans

147

1,652

-

1,799

Financial investments





    Debt securities

19,588

-

-

19,588

    Equity securities

23,840

-

-

23,840

    Other investments

23,527

-

-

23,527

Reinsurance assets

-

1,704

-

1,704

Deferred tax assets

-

-

-

-

Current tax assets

-

-

-

-

Receivables and other financial assets

-

470

-

470

Deferred acquisition costs and other assets

-

233

-

233

Prepayments and accrued income

-

249

-

249

Cash and cash equivalents

4,125

-

-

4,125

Total

75,391

4,308

194

79,893

Total %

94.4%

5.4%

0.2%


FY 2007

80,187

2,905

749

83,841

FY 2007 %  

95.6%

3.5%

0.9%




Fair value
£m 

Amortised cost
£m

Equity accounted/ tax assets
£m

Total
£m

Assets - Participating fund assets





Goodwill and Acquired value of in-force business and intangible assets

-

-

-

-

Interests in joint ventures and associates 

-

-

950

950

Property and equipment

65

28

-

93

Investment property

7,555

-

-

7,555

Loans

1,167

7,535

-

8,702

Financial investments





    Debt securities

79,566

-

-

79,566

    Equity securities

13,817

-

-

13,817

    Other investments

 9,443

-

-

 9,443

Reinsurance assets

-

803

-

803

Deferred tax assets

-

-

-

-

Current tax assets

-

-

-

-

Receivables and other financial assets

-

2,038

-

2,038

Deferred acquisition costs and other assets

-

1,011

-

1,011

Prepayments and accrued income

-

1,355

-

1,355

Cash and cash equivalents

9,332

-

-

9,332

Total

120,945

12,770

950

134,665

Total %

89.8%

9.5%

0.7%


FY 2007

109,109

12,913

1,675

123,697

FY 2007 %

88.2%

10.4%

1.4%



Page 81


B4 - Total assets - Valuation bases/fair value hierarchy continued

Fair value
£m 

Amortised cost
£m

Equity accounted/ tax assets
£m

Total
£m

Assets - Shareholder assets





Goodwill and Acquired value of in-force business and intangible assets

-

7,630

-

7,630

Interests in joint ventures and associates 

-

-

1,839

1,839

Property and equipment

463

472

-

935

Investment property

2,745

-

-

2,745

Loans

20,154

11,582

-

31,736

Financial investments





    Debt securities

51,437

-

-

51,437

    Equity securities

5,754

-

-

5,754

    Other investments

3,146

-

-

3,146

Reinsurance assets

-

5,387

-

5,387

Deferred tax assets

-

-

2,642

2,642

Current tax assets

-

-

622

622

Receivables and other financial assets

-

7,694

-

7,694

Deferred acquisition costs and other assets

-

4,904

-

4,904

Prepayments and accrued income

-

2,316

-

2,316

Cash and cash equivalents

11,217

-

-

11,217

Total

94,916

39,985

5,103

140,004

Total %

67.8%

28.6%

3.6%


FY 2007

77,828

33,620

2,340

113,788

FY 2007 %  

68.4%

29.5%

2.1%


68% of shareholder assets are measured at fair value (inclusive of cash and cash equivalents). The remaining assets include goodwill, loans, reinsurance assets and receivables; all carried at amortised cost and are subject to regular impairment reviews.


Page 82

B5 - Analysis of asset quality

The following sections analyse the quality of various group assets. The table below provides an overview of where additional information is provided.

Reference

Further analysis 
£m

No further analysis
£m

Total
£m

Assets 





Goodwill and Acquired value of in-force business and intangible assets

5.1

7,630

-

7,630

Interests in joint ventures and associates 

5.2

2,983

-

2,983

Property and equipment

-

-

1,066

1,066

Investment property

5.3

14,426

-

14,426

Loans

5.4

42,237

-

42,237

Financial investments

5.5




    Debt securities

5.5.1

150,591

-

150,591

    Equity securities

5.5.2

43,411

-

43,411

    Other investments

5.5.3

36,116

-

36,116

Reinsurance assets

5.6

7,894

-

7,894

Deferred tax assets

-

-

2,642

2,642

Current tax assets

-

-

622

622

Receivables and other financial assets

5.7

10,202

-

10,202

Deferred acquisition costs and other assets

-

-

6,148

6,148

Prepayments and accrued income

-

-

3,920

3,920

Cash and cash equivalents

5.8

24,674

-

24,674

Assets of operations classified as held for sale

-

-

-

-

Total


340,164

14,398

354,562

Total %


95.9%

4.1%


FY 2007


311,848

9,478

321,326

FY 2007 % 


97.1%

2.9%


As can be seen from the table, the analysis covers 96% of the group's total assets. The remaining assets are not discussed further in the context of this disclosure on the basis that their value and quality will typically not fluctuate based on movements in the credit markets.

Fair Value Hierarchy

To provide further information on the valuation techniques used to measure assets carried at fair value, this disclosure categorises the measurement basis for assets carried at fair value into a 'fair value hierarchy' as follows:

Quoted market prices in active markets - ('Level 1')

Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets. An active market is a market in which transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. 

Examples are listed equities in active markets, listed debt securities in active markets and quoted unit trusts in active markets.  

Valued using models with significant observable market parameters - ('Level 2')

Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly. If the asset has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset. Level 2 inputs include the following:

-    Quoted prices for similar (i.e. not identical) assets in active markets;

-    Quoted prices for identical or similar assets in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly;

-    Inputs other than quoted prices that are observable for the asset (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates); and

-    Inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market-corroborated inputs).


Page 83


B5 - Analysis of asset quality continued

Examples are securities measured using discounted cash flow models based on market observable swap yields, investment property measured using market observable information and listed debt or equity securities in a market that is inactive. 

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. 

5.1.    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 have included several bancassurance transactions which have resulted in £764 million of the total £3,578 million of goodwill and £942 million of the total £4,038 million of other intangible assets which primarily represent the value of bancassurance distribution agreements acquired in these business combinations. 

As at 31 December 2008, the group has assessed the value of these bancassurance related assets and has not identified a need to impair any of these amounts. 

5.2.    Interests in Joint Ventures and Associates 

Investments in Joint Ventures and Associates are accounted for using the equity method. Under this method, the cost of the investment in a given associate or joint venture, together with the group's share of that entity's post-acquisition changes to shareholders' funds, is included as an asset in the consolidated balance sheet. The carrying value of both joint ventures and associates includes goodwill identified on their acquisition and any loans that group companies have advanced to them. 

Some 79% of the carrying value of joint ventures comprises interests in property limited partnerships (PLPs) which are held in the UK and certain European long-term business policyholder and participating funds as part of their investment strategy. These funds have invested in a number of PLPs, either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a group subsidiary. Accounting for the PUTs and PLPs as subsidiaries, joint ventures or other financial investments depends on the shareholdings in the GPs and the terms of each partnership agreement. Where the group exerts control over a PLP, it has been treated as a subsidiary and its assets and liabilities have been consolidated within the appropriate balance sheet headings. Where the partnership is managed by a contractual agreement such that no party exerts control, notwithstanding that the group's partnership share in the PLP (including its indirect stake via the relevant PUT and GP) may be greater than 50%, such PUTs and PLPs have been classified as joint ventures and accounted for using the equity method described above. Where the group holds minority stakes in PLPs, with no disproportionate influence, the relevant investments are carried at fair value through profit and loss within financial investments. The underlying assets of these PLPs are almost entirely investment property which are valued on the same basis as those held directly and shown in section 5.3 of this disclosure. 

The group's principal associates are two bancassurance investments with Royal Bank of Scotland Group (RBSG). Their assets are held for the benefit of their policyholders and, as described above, the group equity accounts for its share of net assets and any goodwill on acquisition. The group's investments in the RBSG companies have been tested for impairment by comparing their carrying values with their recoverable amounts, based on value in use calculations. The recoverable amounts exceed the carrying values of these investments, and a reasonably possible change to the key underlying assumptions will not cause the carrying values of the investments to exceed their recoverable amounts.


Page 84


B5 - Analysis of asset quality continued 

5.3.    Investment Property

Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Investment property - Total 





Leased to third parties under operating leases

-

13,764

-

13,764

Vacant investment property/ held for capital appreciation

-

662

-

662

Total 

-

14,426

-

14,426

Total %

-

100.0%

-


FY 2007

-

15,391

-

15,391

FY 2007 % 

-

100.0%

-




Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Investment property - Policyholder assets





Leased to third parties under operating leases

-

4,053

-

4,053

Vacant investment property/held for capital appreciation

-

73

-

73

Total 

-

4,126

-

4,126

Total %

-

100.0%

-


FY 2007

-

5,699

-

5,699

FY 2007 %

-

100.0%

-


        

Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Investment property - Participating fund assets





Leased to third parties under operating leases

-

7,026

-

7,026

Vacant investment property/ held for capital appreciation

-

529

-

529

Total 

-

7,555

-

7,555

Total %

-

100.0%

-


FY 2007

-

7,818

-

7,818

FY 2007 %

-

100.0%

-




Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Investment property - Shareholder assets





Leased to third parties under operating leases

-

2,685

-

2,685

Vacant investment property/ held for capital appreciation

-

60

-

60

Total 

-

2,745

-

2,745

Total %

-

100.0%

-


FY 2007

-

1,874

-

1,874

FY 2007 %  

-

100.0%

-



Page 85


B5 - Analysis of asset quality continued 

5.3.    Investment Property continued

Some 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.

Over 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. 

5.4. Loans

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/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. 

The group reviews the carrying value of loans at least at each reporting date. If the carrying value of a loan is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. Impairment is measured based on the present value of expected future cash flows discounted at the effective rate of interest of the loan, subject to the fair value of the underlying collateral. Reversals of impairments are only recognised where the decrease in the impairment can be objectively related to an event occurring after the write-down (such as an improvement in the debtor's credit rating). 

Total Assets

UK

£m

Delta Lloyd

£m

North 
America

£m

Europe
(Ex DL)

£m

Asia

£m

Total

£m

Policy Loans

49

432

490

1,119

36

2,126

Loans and Advances to Banks

4,572

1,843

-

-

-

6,415

Mortgages

16,330

12,815

1,566

5

15

30,731

Other Loans

38

2,830

74

18

5

2,965

Total

20,989

17,920

2,130

1,142

56

42,237

Policyholder Assets

UK

£m

Delta Lloyd

£m

North 
America

£m

Europe
(Ex DL)

£m

Asia

£m

Total

£m

Policy Loans

-

-

-

-

-

-

Loans and Advances to Banks

-

-

-

-

-

-

Mortgages

136

1,663

-

-

-

1,799

Other Loans

-

-

-

-

-

-

Total

136

1,663

-

-

-

1,799


Page 86


B5 - Analysis of asset quality continued

5.4. Loans continued

Participating Fund Assets

UK

£m

Delta Lloyd

£m

North 
America

£m

Europe
(Ex DL)

£m

Asia 

£m

Total

£m

Policy Loans

49

44

255

1,104

23

1,475

Loans and Advances to Banks

3,697

1,630

-

-

-

5,327

Mortgages

1,157

725

-

4

-

1,886

Other Loans

-

-

-

14

-

14

Total

4,903

2,399

255

1,122

23

8,702

Shareholder Assets

UK

£m

Delta Lloyd

£m

North 
America

£m

Europe
(Ex DL)

£m

Asia

£m

Total

£m

Policy Loans

-

388

235

15

13

651

Loans and Advances to Banks1

875

213

-

-

-

1,088

Mortgages

15,037

10,427

1,566

1

15

27,046

Other Loans

38

2,830 

74 

4

5

2,951

Total

15,950

13,858

1,875

20

33

31,736

NOTE:

1    Shareholder Assets Loans and Advances to Banks comprises of:

-    £875m in the UK relating to cash collateral held on stock lending activity. This is off set by a corresponding Collateral Payment Obligation reported under 'Other Financial Liabilities'

-    £213m in the Netherlands relating to loans and advances to a range of banks globally 

Mortgage loans

Of the group's total loan portfolio (including Policyholder, Participating Fund and Shareholder assets), 72% 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, USA and Delta Lloyd, and across various sectors, including residential loans, commercial loans and government supported healthcare loans.

Aviva shareholders are exposed predominantly to mortgage loans under Aviva's shareholder balance sheet. 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
(Ex DL)

£m

Asia

£m

Total

£m

Total securitised mortgage loans

1,861

6,045

-

-

-

7,906








Non-securitised mortgage loans - residential

-

4,361

-

1

-

4,362

Non-securitised mortgage loans - equity release

1,409

-

-

-

-

1,409

Non-securitised mortgage loans - commercial

9,112

21

1,566

-

15

10,714

Non-securitised mortgage loans - healthcare

2,655

-

-

-

-

2,655

Total non-securitised mortgage loans

13,176

4,382

1,566

1

15

19,140

Total mortgage loans

15,037

10,427

1,566

1

15

27,046

Securitised mortgage loans comprise 29% 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, albeit within risk appetite.


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5.4. Loans continued

In addition to commercial mortgages of £10,714 million (predominantly held in the UK and US), Aviva also holds £2,655 million of mortgage loans made to healthcare related businesses, which receive significant support from the National Health Service ('NHS').

Of a total of £27,046 million of shareholder asset gross mortgage loan exposure (including securitised), a combined 99% 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 £7,906 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 Netherlands 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

900

701

700

1,765

1,214

1,012

405

729

638

402

8,466

0 - 3 months

6

-

1

-

-

-

-

-

-

2

9

3 - 6 months

-

636

-

1

-

-

-

-

-

-

637

6 - 12 months

-

-

-

-

-

-

-

-

-

-

-

> 12 months

-

-

-

-

-

-

-

-

-

-

-

Total 

906

1,337

701

1,766

1,214

1,012

405

729

638

404

9,112

Gross Exposures by Loan to Value and Loan Interest Cover Bands (£m)

Loan to Value


>120%

115-120%

110-115%

105-110%

100-105%

95-100%

90-95%

80-90%

70-80%

<70%

Total

Loan Interest Cover Bands












<1.0x

3

-

-

-

-

1

-

-

-

2

6

1.0x - 1.1x

624

442

310

829

471

90

4

26

7

69

2,872

1.1x - 1.2x

169

520

97

216

115

130

75

2

2

9

1,335

1.2x - 1.3x

25

332

155

289

187

43

13

23

9

11

1,087

1.3x - 1.4x

75

33

69

339

218

617

15

38

60

16

1,480

>1.4x

10

10

70

93

223

131

298

640

560

297

2,332

Total

906

1,337

701

1,766

1,214

1,012

405

729

638

404

9,112

Gross Exposures by Loan to Value and Sector (£m)

Loan to Value


>120%

115-120%

110-115%

105-110%

100-105%

95-100%

90-95%

80-90%

70-80%

<70%

Total

Retail

347

690

354

833

722

758

213

166

163

160

4,406

Offices

194

370

134

335

231

137

123

444

316

171

2,455

Industrial

200

186

150

269

97

21

33

48

87

51

1,142

Leisure

125

78

37

186

35

63

28

20

55

8

635

Other

40

13

26

143

129

33

8

51

17

14

474

Total

906

1,337

701

1,766

1,214

1,012

405

729

638

404

9,112

Of the £5,924 million of loans with LTV above 100%, the amount of exposure uncovered by the underlying security is £700 million. 

Of the £9,112 million of UK Commercial loans, £8,465 million are held by the Norwich Union UK Life business to back annuity liabilities, and stated above on a fair value basis. The remaining £647 million of loans are held by Norwich Union UK General Insurance business and stated on an amortised cost basis. The loan exposures for the Norwich Union 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. These consider all the future possible cash flow scenarios for the mortgages, weighting them by their probabilities, and such cash flows are discounted at a risk free rate. For the Norwich Union UK General Insurance business, mortgages are held at amortised cost, and 


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5.4. Loans continued

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 table above shows that the relative amount of loans below an LIC of 1.0x is minimal, and the portfolio is fairly evenly distributed across LIC bands 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. 

The £637 million exposure that is 3-6 months in arrears relates primarily to Aviva's exposure to Dawnay Day, which was put into administration in 2008. There is currently only one quarters loan payment in arrears for the Dawnay Day loan, which is gradually being reduced from excess rent and asset sale proceeds. Aviva has finalised a restructuring of this loan with negligible shareholder loss. The amount of loans in arrears, excluding the £637 million that is 3-6 months in arrears, is negligible compared to the total portfolio size.

In 2008 Aviva made specific provisions of £29 million in relation to mortgages in arrears, and also an additional provision equivalent to approximately £250 million for the Norwich Union UK Life business and £26 million for the Norwich Union UK General Insurance business. This is based on an additional annual charge of 120bps over the next three years (in addition to the 50bps allowance already held) and factors the combination of a further 20% fall in property values and an increase in tenant defaults, to the levels experienced during the previous financial crisis in the 1990s. Such provisions have been estimated based on experience during the financial period and our current view on future market falls and tenant defaults.

UK Healthcare

Of the total non-securitised mortgage loans of £13,176 million, £2,655 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 105%, 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 particularly 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 £1,409 million. These mortgages are all in the form of equity release, whereby elderly 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 70%, 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 £623 million of commercial mortgages. However, of these, shareholder's are exposed to only £20 million. The remaining assets are held in the Policyholder and Participating Funds of Delta Lloyd's German subsidiaries.


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B5 - Analysis of asset quality continued

5.4. Loans continued

Delta Lloyd Residential

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

 252 

 87 

 54 

 44 

 45 

 38 

 30 

 50

 37 

 150 

 787 

Non-government guaranteed residential

 235 

 268 

 189 

 316 

 257 

 512 

 388 

 406 

 431 

 572 

 3,574 













Exposures by interest payment arrears












Neither past due nor impaired

 472 

 330 

 232 

 340 

 276 

 508 

 381 

 433 

 433 

 674 

 4,079 

0 - 3 months

 15 

 23 

 10 

 17 

 20 

 35 

 30 

 19 

 28 

 40 

 237 

3 - 6 months

 -

 - 

 1 

 1 

 - 

 1 

 3 

 1 

 7 

 7 

 21 

6 - 12 months

 -  

 1 

 - 

 - 

 6 

 2 

 2 

 2 

 - 

 1 

 14 

> 12 months

 -  

 1 

 - 

 2 

 - 

 4 

 2 

 1 

 - 

 - 

 10 

Total 

 487

 355

 243 

 360 

 302 

 550 

 418 

 456 

 468 

 722 

 4,361 

The total exposure to non-securitised residential loans in the Netherlands is £4,361 million. However, of these, £787 million are Government guaranteed, and so present minimal risk to Aviva shareholders. Of the £4,361 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 €265,000. 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 £282 million. However, the actual amount of missed payments is £5 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

Gross Exposures by Loan to Value and Arrears

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

Neither past due nor impaired

8

-

1

2

17

35

50

308

290

855

1,566

0 - 3 months

-

-

-

-

-

-

-

-

-

-

-

3 - 6 months

-

-

-

-

-

-

-

-

-

-

-

6 - 12 months

-

-

-

-

-

-

-

-

-

-

-

> 12 months

-

-

-

-

-

-

-

-

-

-

-

Total 

8

-

1

2

17

35

50

308

290

855

1,566


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B5 - Analysis of asset quality continued

5.4. Loans continued

Gross Exposures by Loan to Value and Loan Interest Cover Bands

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

Loan Interest Cover Bands












<1.0x

5

-

-

-

-

-

-

-

-

2

7

1.0x - 1.1x

-

-

-

-

-

-

-

-

-

-

-

1.1x - 1.2x

-

-

-

-

-

-

-

-

-

-

-

1.2x - 1.3x

3

-

1

-

-

-

-

-

-

-

4

1.3x - 1.4x

-

-

-

-

4

6

-

-

-

8

18

>1.4x

-

-

-

2

13

29

50

308

290

845

1,537

Total

8

-

1

2

17

35

50

308

290

855

1,566

Aviva USA currently holds only commercial mortgages under Shareholder Assets. Of a total of £1,566 million of commercial mortgages, 55% have LTV of below 70%, and 93% have LTV of below 90%. The high quality of Aviva USA's mortgage portfolio is reflective of:

-    low underwriting LTVs (shall not exceed 80% at the time of issuance);

-    A highly diversified portfolio across USA, with strong volumes in many states with more stable economies 
such as Washington, Texas and Minnesota; and

-    The decline in the US real estate market has been most pronounced for residential, and commercial 
properties have not yet seen as dramatic a fall.

As at 31 December 2008, there had been no loans that were past due or impaired. Aviva USA holds mortgage loans at an amortised cost value, and conducts a regular impairment review process. As at 31 December 2008, there were no provisions applied to the Aviva USA's commercial mortgage portfolio.

5.5.    Financial investments

Financial investments are an integral element of an insurance business. 

Aviva holds large quantities of high quality bonds, primarily to match our liability to make guaranteed payments to policyholders. Some credit risk is taken, partly to boost returns to policyholders and partly to optimise the risk/return profile for shareholders. The risks are consistent with the products we offer and the related investment mandates, and are in line with our risk appetite.

The group also holds significant quantities of equities. Many of these are held in participating funds or unit linked funds, where they form an integral part of the investment expectations of policyholders and follow well-defined investment mandates. Some equities are also held in shareholder funds and the staff pension schemes, where the holdings are designed to maximise long-term returns with an acceptable level of risk. The vast majority of equity investments are valued at quoted market prices. 

The group's credit risk policy restricts the exposure to individual counterparties across all types of risk. 

The fair values of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Securities, for which fair values cannot be measured reliably, are recognised at cost less impairment. 

Where it is determined that the market in which a price is quoted has become inactive, the quoted price is assessed against either independent valuations or internally modelled valuations which take into account other market observable information. Where the quoted price differs sufficiently from these reassessed prices, the fair value recognised on the balance sheet is based on this adjusted valuation. However, if these reassessed prices confirm that the quoted price remains appropriate, then the fair value recognised on the balance sheet continues to be the quoted price.

The group classifies its investments as either financial assets at fair value through profit or loss (FV) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. In general, the FV category is used as, in most cases, the group's investment or risk management strategy is to manage its financial investments on a fair value basis. The AFS category is used where the relevant long-term business liability (including shareholders funds) is passively managed. 


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5.5.    Financial investments continued

Investments classified as FV and AFS are subsequently carried at fair value. Changes in the fair value of FV investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS, except for impairment losses, are recorded in a separate investment valuation reserve in equity. Where investments classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve to the income statement. 

To test for impairment, the group reviews the carrying value of its investments on a regular basis. If the carrying value of an investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. 

For listed investments classified as AFS, the group performs an objective review of the current financial position and prospects of the issuer on a regular basis, to identify whether any impairment provision is required. This review takes into account the likelihood of the current market price recovering to former levels. For unlisted investments classified as AFS, the group considers the current financial position of the issuer and the future prospects in identifying the requirement for an impairment provision. For both listed and unlisted AFS securities identified as being impaired, the cumulative unrealised net loss previously recognised within the AFS reserve is transferred to realised losses for the year. 

Cost, unrealised gains and fair value

The following is a summary of the cost/amortised cost, gross unrealised gains and losses and fair value of financial investments:        




2008


Cost/ 
amortised 
cost
£m

Unrealised
 gains
£m

Impairment
and 

unrealised 
losses 
£m

Fair 
value 
£m

Debt securities 

156,097

7,634

(13,140)

150,591

Equity securities 

54,518

2,685

(13,792)

43,411

Other investments 

34,692

4,243

(2,819)

36,116


245,307

14,562

(29,751)

230,118






2007


Cost/ amortised 
cost
£m

Unrealised gains
£m

Impairment 

and 

Unrealised 

losses 
£m

Fair value
Restated 
£m

Debt securities

121,973

1,970

 (2,551)

121,392

Equity securities

50,635

9,052

 (622)

 59,065

Other investments

31,746

4,964

(441)

36,269


204,354

15,986

(3,614)

216,726


Only 1.2% of financial investments (less than 1% of total assets recorded at fair value) are fair valued using models with significant unobservable market parameters. Where estimates are used these are based on a combination of independent third party evidence and internally developed models, calibrated to market observable data where possible. Whilst such valuations are sensitive to estimates it is believed that changing one or more of the assumptions for reasonably possible alternative assumptions would not change the fair value significantly. 

The majority of the debt instruments held by our North American businesses are valued by independent pricing firms in accordance with usual market practice. Given the reductions in liquidity in debt markets over 2008, and in accordance with market consensus in North America, we believe that the fair value valuation approach adopted for these securities is best characterised as Level 2. This classification accounts for the majority of the change in fair value hierarchy over 2008.


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B5 - Analysis of asset quality continued

5.5.1. Debt instruments

Fair Value measurement

Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Debt securities - Total 





UK government

18,867

4

-

18,871

Non-UK government

34,210

6,344

228

40,782

Corporate bonds - Public utilities

3,389

2,056

88

5,533

Corporate convertible bonds

339

516

-

855

Other Corporate bonds

44,269

26,038

898

71,205

Other

6,869

5,840

636

13,345

Total

107,943

40,798

1,850

150,591

Total %

71.7%

27.1%

1.2%


FY 2007

101,342

18,710

1,260

121,312

FY 2007 %  

83.5%

15.4%

1.1%




Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Debt securities - Policyholder assets 





UK government

5,065

4

-

5,069

Non-UK government

3,009

919

-

3,928

Corporate bonds - Public Utilities

39

2

-

41

Corporate convertible bonds

3

-

-

3

Other Corporate bonds

7,414

1,714

27

9,155

Other

1,264

122

6

1,392

Total

16,794

2,761

33

19,588

Total %

85.7%

14.1%

0.2%


FY 2007

13,808

3,540

12

17,360

FY 2007 %

79.5%

20.4%

0.1%




Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Debt securities - Participating fund assets





UK government

12,125

-

-

12,125

Non-UK government

19,172

2,972

101

22,245

Corporate bonds - Public Utilities

2,181

839

88

3,108

Corporate convertible bonds

331

178

-

509

Other Corporate bonds

28,598

9,276

581

38,455

Other

2,608

303

213

3,124

Total

65,015

13,568

983

79,566

Total %

81.7%

17.1%

1.2%


FY 2007

51,866

8,486

1,197

61,549

FY 2007 %

84.3%

13.8%

1.9%




Page 93


B5 - Analysis of asset quality continued

5.5.    Financial investments continued

5.5.1. Debt instruments continued

Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Debt securities - Shareholder assets





UK government

1,677

-

-

1,677

Non-UK government

12,029

2,453

127

14,609

Corporate bonds - Public Utilities

1,169

1,215

-

2,384

Corporate convertible bonds

5

338

-

343

Other Corporate bonds

8,257

15,048

290

23,595

Other

2,997

5,415

417

8,829

Total

26,134

24,469

834

51,437

Total %

50.8%

47.6%

1.6%


FY 2007

35,668

6,684

51

42,403

FY 2007 %

84.1%

15.8%

0.1%


51% of shareholder exposure to debt securities is based on quoted prices in an active market. The observed reduction in liquidity during 2008 due to the ongoing uncertainty in the international financial markets has resulted in a higher proportion of debt securities that is based on quoted prices in markets that are not active or where the prices are less current, compared with one year ago.

Ratings / Products

The overall quality of the book is strong and has been maintained, despite the increase in downgrade activity by the major rating agencies during 2008, by taking opportunities to move into higher quality assets. 40% of total debt security holdings are in government bonds. A further 52% of holdings are in corporate bonds with an average rating between AA and A. 

'Wrapped credit' is credit exposure that has been insured with monoline insurers to achieve a better credit rating. The monoline insurers suffered downgrades during 2008 and this is reflected in the analysis that follows. The exposure is diversified across several monolines and the underlying bonds are diversified across many different counterparties. In general, we are a long term holder of this debt, although investments continue to be reviewed with reference to the underlying quality and prospects.

The majority of the Residential Mortgage-Backed Securities (RMBS) are US investments and almost 70% of the total 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 6% of total debt securities. 

The vast majority of the corporate bonds that are not rated represents private placements and corporate bond investments made via unit trusts, where a 'look-through' to the underlying securities has been performed. The private placements are US investments which are not rated by the major rating agencies but which are rated an average equivalent of A- 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 an average A- by the NAIC, the exposure that is not rated by a major rating agency reduces to less than 3% of total debt securities.


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B5 - Analysis of asset quality continued

5.5.    Financial investments continued

5.5.1. Debt instruments continued





Ratings




AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Non-rated
£m

Total
£m

Debt securities - Total 








Government








UK government 

18,776

19

59

-

-

-

18,854

UK local authorities 

-

17

-

-

-

-

17

Non-UK government 

21,660

8,114

9,147

401

274

1,186

40,782


40,436

8,150

9,206

401

274

1,186

59,653

Corporate








Public Utilities 

2,092

432

1,996

890

84

39

5,533

Convertibles and bonds with warrants 

12

65

419

209

78

71

854

Other corporate bonds 

14,813

14,596

26,189

10,829

1,727

3,052

71,206


16,917

15,093

28,604

11,928

1,889

3,162

77,593

Certificates of deposits

363

519

404

3

-

10

1,299

Structured








RMBS non-agency sub-prime

22

12

1

3

1

-

39

RMBS non-agency ALT A

190

-

-

-

13

5

208

RMBS non-agency prime

1,150

53

31

24

-

140

1,398

RMBS agency

3,059

-

-

-

-

-

3,059


4,421

65

32

27

14

145

4,704

CMBS

1,427

148

61

31

8

-

1,675

ABS

1,025

202

323

240

3

307

2,100

CDO (including CLO)

120

27

56

11

3

53

270

ABCP

1,009

-

-

-

-

-

1,009

ABFRN

17

1

-

14

-

-

32


3,598

378

440

296

14

360

5,086

Wrapped credit

231

156

164

67

-

-

618

Other

247

54

450

28

6

853

1,638

Total

66,213

24,415

39,300

12,750

2,197

5,716

150,591

Total %

44.0%

16.2%

26.1%

8.4%

1.5%

3.8%


FY 2007

54,699

23,297

27,110

9,831

1,269

5,106

121,312

FY 2007 %

45.1%

19.2%

22.3%

8.1%

1.0%

4.2%



Page 95


B5 - Analysis of asset quality continued

5.5    Financial investments continued

5.5.1. Debt instruments continued





Ratings




AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Non-rated
£m

Total
£m

Debt securities - Policyholders assets








Government








UK government 

5,050

19

-

-

-

-

5,069

UK local authorities 

-

-

-

-

-

-

-

Non-UK government 

1,412

887

1,286

99

7

237

3,928


6,462

906

1,286

99

7

237

8,997

Corporate








Public Utilities 

8

7

18

7

1

1

42

Convertibles and bonds with warrants 

-

-

-

2

1

-

3

Other corporate bonds 

990

2,114

4,536

768

14

732

9,154


998

2,121

4,554

777

16

733

9,199

Certificates of deposits

106

148

7

-

-

-

261

Structured








RMBS non-agency sub-prime

9

1

-

-

-

-

10

RMBS non-agency ALT A

-

-

-

-

-

-

-

RMBS non-agency prime

274

19

3

1

-

3

300

RMBS agency

20

-

-

-

-

-

20


303

20

3

1

-

3

330

CMBS

25

22

7

-

-

-

54

ABS

33

4

28

10

-

7

82

CDO (including CLO)

5

3

1

-

-

1

10

ABCP

482

-

-

-

-

-

482

ABFRN

12

1

-

11

-

-

24


557

30

36

21

-

8

652

Wrapped credit

6

10

10

-

-

-

26

Other

102

-

2

6

3

10

123

Total

8,534

3,235

5,898

904

26

991

19,588

Total %

43.6%

16.5%

30.1%

4.6%

0.1%

5.1%


FY 2007

7,188

3,279

5,462

540

74

817

17,360

FY 2007 %

41.4%

18.9%

31.5%

3.1%

0.4%

4.7%




Page 96


B5 - Analysis of asset quality continued

5.5    Financial investments continued

5.5.1. Debt instruments continued





Ratings




AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Non-rated
£m

Total
£m

Debt securities - 
Participating fund assets








Government








UK government 

12,068

-

57

-

-

-

12,125

UK local authorities 

-

-

-

-

-

-

-

Non-UK government 

12,504

3,910

5,311

254

199

67

22,245


24,572

3,910

5,368

254

199

67

34,370

Corporate








Public Utilities 

1,967

284

677

168

9

2

3,107

Convertibles and bonds with warrants 

12

43

285

74

72

24

510

Other corporate bonds 

10,808

9,012

12,905

4,667

706

357

38,455


12,787

9,339

13,867

4,909

787

383

42,072

Certificates of deposits

70

337

390

-

-

-

797

Structured








RMBS non-agency sub-prime

7

11

-

-

-

-

18

RMBS non-agency ALT A

5

-

-

-

-

-

5

RMBS non-agency prime

404

15

5

-

-

-

424

RMBS agency

133

-

-

-

-

-

133


549

26

5

-

-

-

580

CMBS

126

55

17

-

-

-

198

ABS

172

55

113

112

-

-

452

CDO (including CLO)

4

-

3

-

-

-

7

ABCP

286

-

-

-

-

-

286

ABFRN

3

-

-

2

-

-

5


591

110

133

114

-

-

948

Wrapped credit

39

37

23

32

-

-

131

Other

50

7

8

1

-

602

668

Total

38,658

13,766

19,794

5,310

986

1,052

79,566

Total %

48.6%

17.3%

24.9%

6.7%

1.2%

1.3%


Certificates of deposits

30,939

12,289

13,032

3,968

227

1,094

61,549

Less: assets not recognised as debt securities

50.3%

20.0%

21.2%

6.4%

0.4%

1.8%



Page 97


B5 - Analysis of asset quality continued

5.5    Financial investments continued

5.5.1. Debt instruments 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 

1,658

-

2

-

-

-

1,660

UK local authorities 

-

17

-

-

-

-

17

Non-UK government 

7,744

3,317

2,550

48

68

882

14,609


9,402

3,334

2,552

48

68

882

16,286

Corporate








Public Utilities 

117

141

1,301

715

74

36

2,384

Convertibles and bonds with warrants 

-

22

134

133

5

47

341

Other corporate bonds 

3,015

3,470

8,748

5,394

1,007

1,963

23,597


3,132

3,633

10,183

6,242

1,086

2,046

26,322

Certificates of Deposits

187

34

7

3

-

10

241

Structured








RMBS non-agency sub-prime

6

-

1

3

1

-

11

RMBS non-agency ALT A 

185

-

-

-

13

5

203

RMBS non-agency prime

472

19

23

23

-

137

674

RMBS agency

2,906

-

-

-

-

-

2,906


3,569

19

24

26

14

142

3,794

CMBS

1,276

71

37

31

8

-

1,423

ABS

820

143

182

118

3

300

1,566

CDO (including CLO)

111

24

52

11

3

52

253

ABCP

241

-

-

-

-

-

241

ABFRN

2

-

-

1

-

-

3


2,450

238

271

161

14

352

3,486

Wrapped credit

186

109

131

35

-

-

461

Other

95

47

440

21

3

241

847

Total

19,021

7,414

13,608

6,536

1,185

3,673

51,437

Total %

37.0%

14.4%

26.5%

12.7%

2.3%

7.1%


FY 2007  

16,572

7,729

8,616

5,323

968

3,195

42,403

FY 2007 %

39.1%

18.2%

20.3%

12.6%

2.3%

7.5%




Page 98


B5 - Analysis of asset quality continued

5.5.    Financial investments continued

5.5.2 Equity securities

47% of shareholder exposure to equity securities is based on quoted prices in an active market. Similar to the fixed income markets, reduced liquidity in equity markets during 2008 has resulted in a higher proportion of equities that is based on quoted prices in markets that are not active or where the prices are less current, compared with one year ago. Also subject to level 2 valuation are unlisted securities.

Fair Value measurement

Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Equity securities - Total





Public Utilities

3,917

17

-

3,934

Banks, trusts and insurance companies

6,224

1,038

596

7,858

Industrial miscellaneous and all other

26,131

4,716

332

31,179

Non-redeemable preferred shares

336

100

4

440

Total

36,608

5,871

932

43,411

Total %

84.3%

13.5%

2.2%


FY 2007 

53,888

4,309

632

58,829

FY 2007 %

91.6%

7.3%

1.1%




Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Equity securities - Policyholder assets





Public Utilities

1,829

-

-

1,829

Banks, trusts and insurance companies

3,397

597

-

3,994

Industrial miscellaneous and all other

14,911

3,008

-

17,919

Non-redeemable preferred shares

98

-

-

98

Total

20,235

3,605

-

23,840

Total %

91.4%

15.1%

0.0%


FY 2007 

27,711

2,607

-

30,318

FY 2007 %

91.4%

8.6%

0.0%




Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Equity securities - Participating fund assets 





Public Utilities

2,062

3

-

2,065

Banks, trusts and insurance companies

1,915

13

9

1,937

Industrial miscellaneous and all other

9,522

119

-

9,641

Non-redeemable preferred shares

174

-

-

174

Total

13,673

135

9

13,817

Total %

98.9%

1.0%

0.1%


FY 2007 

22,377

401

48

22,826

FY 2007 %

98.0%

1.8%

0.2%



Page 99


B5 - Analysis of asset quality continued

5.5.    Financial investments continued

5.5.2 Equity securities continued

Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Equity securities - Shareholder assets





Public Utilities

26

14

-

40

Banks, trusts and insurance companies

912

428

587

1,927

Industrial miscellaneous and all other

1,698

1,589

332

3,619

Non-redeemable preferred shares

64

100

4

168

Total

2,700

2,131

923

5,754

Total %

46.9%

37.1%

16.0%


FY 2007 

3,800

1,301

584

5,685

FY 2007 %

66.8%

22.9%

10.3%


Shareholder investment includes a strategic holding in Unicredito of £339 million and holdings in other Italian banks of £348 million, the latter being unquoted and subject to level 3 valuation. These equities have certain guarantees that provide protection to their value.

5.5.3. Other investments

Fair Value measurement

Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Other investments - Total





Unit trusts and other investment vehicles

23,515

5,470

5

28,990

Derivative financial instruments

359

2,532

20

2,911

Deposits and credit institutions

40

510

-

550

Minority holdings in property management undertakings

-

969

-

969

Other

348

2,308

40

2,696

Total

24,262

11,789

65

36,116

Total %

67.2%

32.6%

0.2%


FY 2007 

26,806

9,144

319

36,269

FY 2007 %

73.9%

25.2%

0.9%




Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Other investments - Policyholder assets





Unit trusts and other investment vehicles

20,222

2,606

-

22,828

Derivative financial instruments

9

18

-

27

Deposits and credit institutions

-

-

-

-

Minority holdings in property management undertakings

-

148

-

148

Other

322

202

-

524

Total

20,553

2,974

-

23,527

Total %

87.4%

12.6%

0.0%


FY 2007 

18,637

3,487

16

22,140

FY 2007 %

84.2%

15.7%

0.1%



Page 100


B5 - Analysis of asset quality continued

5.5.    Financial investments continued

5.5.3 Other investments continued

Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m

Other investments - Participating fund 





Unit trusts and other investment vehicles

2,817

2,546

-

5,363

Derivative financial instruments

256

961

-

1,217

Deposits and credit institutions

8

-

-

8

Minority holdings in property management undertakings

-

759

-

759

Other

2

2,058

36

2,096

Total

3,083

6,324

36

9,443

Total %

32.6%

67.0%

0.4%


FY 2007 

7,455

3,654

253

11,362

FY 2007 %

65.6%

32.2%

2.2%




Fair value hierarchy



Level 1 
£m

Level 2
£m

Level 3
£m

Total
£m






Other investments - Shareholder assets





Unit trusts and other investment vehicles

476

318

5

799

Derivative financial instruments

94

1,553

20

1,667

Deposits and credit institutions

32

510

-

542

Minority holdings in property management undertakings

-

62

-

62

Other

24

48

4

76

Total

626

2,491

29

3,146

Total %

19.9%

79.2%

0.9%


FY 2007 

714

2,003

50

2,767

FY 2007 %

25.8%

72.4%

1.8%


Other Investments primarily represents unit trusts and other investment vehicles. Almost all other investments are 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 in the UK and overseas, with a smaller portion being invested in Debt Securities. 

Against the backdrop of volatile investment markets the value of derivative financial instruments has appreciated strongly during the year, reflecting gains on positions that include equity hedges, which are in place specifically to mitigate the impact of adverse market movements on the balance sheet. 

5.5.4    Summary of investments

A summary of investments according to fair value hierarchy is given below:

Fair value hierarchy

Amortised cost
£m

Less: Assets of operations classified as held for sale
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Sub-total fair value
£m

Investment properties

-

14,426

-

14,426

-

-

14,426

Loans

-

21,468

-

21,468

20,769

-

42,237

Debt securities

107,943

40,798

1,850

150,591

-

(336)

150,255

Equity securities

36,608

5,871

932

43,411

-

(60)

43,351

Other investments

24,262

11,789

65

36,116

-

-

36,116

Total

168,813

94,352

2,847

266,012

20,769

(396)

286,385


Page 101


B5 - Analysis of asset quality continued 

5.5.    Financial investments continued

5.5.4    Analysis of investments continued

The tables below show movements in the assets measured at fair value based on valuation techniques for which any significant input is not based on observable market data (Level 3 only). Total funds are then further analysed between policyholder funds, participating funds and shareholder funds.

Total
£m

Total investments - Total


Balance as at 1 January 2008

2,211

Total gains or losses


  Recognised in the income statement

(97)

  Recognised in the statement of recognised gains and losses

-

Purchases, issues, disposals and settlements (net)

270

Transfers into and/or (out) of Level 3

(209)

Currency translation

672

Balance as at 31 December 2008

2,847



Total
£m

Total investments - Policyholder assets


Balance as at 1 January 2008

28

Total gains or losses


  Recognised in the income statement

-

  Recognised in the statement of recognised gains and losses

-

Purchases, issues, disposals and settlements (net)

13

Transfers into and/or (out) of Level 3

(8)

Currency translation

6

Balance as at 31 December 2008

39



Total
£m

Total investments - Participating fund assets


Balance as at 1 January 2008

1,498

Total gains or losses


  Recognised in the income statement

(18)

  Recognised in the statement of recognised gains and losses

-

Purchases, issues, disposals and settlements (net)

166

Transfers into and/or (out) of Level 3

(858)

Currency translation

240

Balance as at 31 December 2008

1,028


Page 102


B5 - Analysis of asset quality continued 

5.5.    Financial investments continued

5.5.4    Analysis of investments continued

Total
£m





Total investments - Shareholder assets


Balance as at 1 January 2008

685

Total gains or losses


  Recognised in the income statement

(79)

  Recognised in the statement of recognised gains and losses

-

Purchases, issues, disposals and settlements (net)

91

Transfers into and/or (out) of Level 3

657

Currency translation

426

Balance as at 31 December 2008

1,780

5.6.    Reinsurance assets

The group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract. 

If a reinsurance asset is impaired, the group reduces the carrying amount accordingly and recognises that impairment loss in the income statement. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the group will receive from the reinsurer.

Arrears


Financial assets that are past due but not impaired














Neither past due nor impaired
£m

0 - 3 months
£m

3 - 6 months
£m

6 month - 
1 year
£m

Greater
 than 
1 year
£m

Financial assets that have been impaired
£m

Total
£m

Policyholders assets

1,704

-

-

-

-

-

1,704

Participating Fund assets

803

-

-

-

-

-

803

Shareholder assets

5,360

25

-

-

-

2

5,387

Total reinsurance assets  

7,867

25

-

-

-

2

7,894

Total %  

99.7%

0.3%

0.0%

0.0%

0.0%

0.0%


FY 2007  

8,052

-

-

-

-

2

8,054

FY 2007 %

100.0%

0.0%

0.0%

0.0%

0.0%

0.0%


Ratings

Ratings




AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Non-rated
£m

Total
£m

Policyholders assets

-

1,254

182

-

-

268

1,704

Participating Fund assets

-

425

2

-

1

375

803

Shareholder assets

1,018

3,847

455

32

15

20

5,387

Total reinsurance assets

1,018

5,526

639

32

16

663

7,894

Total %  

12.9%

70.0%

8.1%

0.4%

0.2%

8.4%


FY 2007

1,184

5,460

596

32

97

685

8,054

FY 2007 %

14.7%

67.8%

7.4%

0.4%

1.2%

8.5%



Page 103


5.7.    Receivables and other financial assets


Financial assets that are past due but not impaired




Neither past due nor impaired
£m

0 - 3 months
£m

3 - 6 months
£m

6 month - 
1 year
£m

Greater
 than 
1 year
£m

Financial assets that have been impaired
£m

Total
£m









Policyholder assets

453

17

-

-

-

-

470

Participating fund assets

2,033

4

1

-

-

-

2,038

Shareholder assets

6,796

539

304

35

6

14

7,694

Total Receivables and other financial assets 

9,282

560

305

35

6

14

10,202

Total %

91.0%

5.5%

3.0%

0.3%

0.1%

0.1%


FY 2007 

8,901

200

21

13

2

46

9,183

FY 2007 %

96.9%

2.3%

0.2%

0.1%

0.0%

0.5%


Credit terms vary from subsidiary to subsidiary, and from country to country, and are set locally within overall credit limits prescribed by the Group Credit Committee, and within the framework of the Group Risk Credit Policy. 

The credit quality of receivables and other financial assets is managed at the local business unit level. Where assets classed as 'past due and impaired' exceed local credit limits, and are also deemed at sufficiently high risk of default, an analysis of the asset is performed and a decision is made whether to seek sufficient collateral from the counterparty or to write down the value of the asset as impaired.

The group reviews the carrying value of its receivables at each reporting period. If the carrying value of a receivable or other financial asset is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. 

5.8.    Cash and cash equivalents

Cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three months maturity from the date of acquisition, and include certificates of deposit.

Cash and cash equivalents are carried at their face value which by their nature is essentially equal to their fair value. 

The Group's Credit Risk Policy includes specific requirements in relation to aggregate counterparty exposures and money market exposure limits which cover assets reported as cash and cash equivalents in the group's balance sheet. The responsibility for monitoring of these limits falls with the Group Credit Committee and the Business Unit Credit Committee. The aggregate counterparty exposure limits are determined based on the credit rating of the counterparty. The money market exposure limits are determined based on the credit rating of the counterparty and the term of the intended exposure. 


Page 104


B6 - 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 balance sheet. 

Plan Assets include investments in group-managed funds in the consolidated balance sheet of £99 million in the UK scheme, and insurance policies of £150 million and £1,402 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.

The total strict IAS 19 assets (i.e. excluding the non-transferable insurance policies) of the schemes are analysed as follows:

United Kingdom
£m

Netherlands
£m

Canada
£m

Ireland
£m

Total
£m

Equities

3,002

-

93

182

3,277

Bonds

3,395

-

86

172

3,653

Property

405

-

-

26

431

Other

485

7

3

80

575

Total fair value of assets

7,287

7

182

460

7,936

Risk management and asset allocation strategy

The long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes. To meet these objectives, each scheme's assets are invested in a diversified portfolio, consisting primarily of equity and debt securities. These reflect the current long-term asset allocation ranges chosen, having regard to the structure of liabilities within the schemes.

Main UK scheme

Both the group and the trustees regularly review the asset/liability management of the main UK scheme. It is fully understood that, whilst the current asset mix is designed to produce appropriate long-term returns, this introduces a material risk of volatility in the scheme's surplus or deficit of assets compared with its liabilities. The principal asset risks to which the scheme is exposed are:

-    Equity market risk - the effect of equity market falls on the value of plan assets,

-    Inflation risk - the effect of inflation rising faster than expected on the value of the plan liabilities.

-    Interest rate risk - falling interest rates leading to an increase in liabilities significantly exceeding the increase in the value of assets.

There is also an exposure to currency risk where assets are not denominated in the same currency as the liabilities. The majority of this exposure has been removed by the use of hedging instruments.  

During 2008, there has been a reduction in the proportion of assets invested in equities, thereby mitigating the equity risk. In addition, the trustees have taken measures to partially mitigate inflation and interest rate risks, including entering into inflation and interest rate swaps.

Other schemes

The other schemes are considerably less material but their risks are managed in a similar way to those in the main UK scheme.

B7 - Available funds

To ensure access to liquidity as and when needed, the group maintains over £2 billion of undrawn committed central borrowing facilities with various highly rated banks. £1 billion of this is allocated to support the credit rating of Aviva plc's £2 billion commercial paper programme. The expiry profile of the undrawn committed central borrowing facilities is as follows: 

£m

Expiring in one year

815

Expiring beyond one year

1,285


2,100



Page 105

B8 - Guarantees

As a normal part of their operating activities, various group companies have given guarantees and options, including investment return guarantees, in respect of certain long term insurance and fund management products.

For the UK Life with-profit business, provisions in respect of these guarantees and options are calculated on a market consistent basis, in which stochastic models are used to evaluate the level of risk (and additional cost) under a number of economic scenarios, which allow for the impact of volatility in both interest rates and equity prices. For UK Life non-profit business, provisions do not materially differ from those determined on a market consistent basis.

In all other Businesses, provisions for guarantees and options are calculated on a local basis with sensitivity analysis undertaken where appropriate to assess the impact on provisioning levels of a movement in interest rates and equity levels (typically a 1% increase in interest rates and 10% decline in equity markets). Refer to section A2 for further details.


Page 106    


C1 - Analysis of operational cost base

The Aviva operating cost base is calculated from total IFRS expenses - with all charges relating to claims (excluding claims handling), commissions, provisions and liabilities, financing, amortisation and impairments, and foreign exchange, removed as set out in the table below:


2008
£m

Restated
2007
£m

Total reported expenses

21,731

38,659

Less:



    Claims, commissions and changes in provisions and liabilities

(12,885)

(32,115)

    IFRS adjustments and amortisation

(1,549)

(332)

    Finance costs

(1,547)

(1,217)

Operating cost base

5,750

4,995

During 2008, the operating cost base increased by 15% to £5,750 million (2007: £4,995 million). The table and notes below set out and explain the methodology and inherent assumptions used for the calculation of the like-for-like adjustments and different components which have caused the increase in the operating cost base. These adjustments account for the impact of foreign exchange, impact of businesses acquired/disposed of during the year and adjustments to eliminate the impact of one-off restructuring and integration spend from the cost base in both years. After adjustments, the 2008 operating cost base increased by 2.4% to £5,368 million compared with a 2007 like-for-like cost base of £5,242 million.

Movement in operating costs base

£m

Total operating cost base 2007

4,995

Less: restructuring and integration spend 2007

(153)

Impact of acquisitions and disposals1

32

Costs relating to RAC non-insurance2

33

Foreign exchange

335

2007 like-for-like operating cost base

5,242

Inflation3

191

Organic growth4

84

Investment in business5

201

Realised cost savings6

(373)

Other7

23

2008 like-for-like operating cost base

5,368

Restructuring and integration spend 2008

382

Total operating cost base 2008

5,750

1 - Impact of acquisitions & disposals - Represents acquisitions in the European Region and Canada offset by the restructure of Turkey Life as a Joint Venture.

2 - Costs relating to RAC non insurance - These represent the costs of windscreens and other materials relating to the Auto Windscreen business that are a cost of sale and therefore excluded from the operating cost base comparison.

3 - Inflation - Notional level of Inflation that would have impacted the operating cost base during the year. This is calculated using the Consumer Price Index for individual countries, applied to operating expenditure i.e. excluding restructuring & integration costs (but including adjustments for acquisitions & disposals). The overall weighted average is calculated at 3.6%

4 - Organic growth - Increase in the cost base implied by the growth of the organisation in revenue terms (GWP used as proxy for the GI businesses; a combination of PVNBP, business volumes and VIF movements excluding investment variances used for the Life businesses). The growth proxies, adjusted for any acquisitions / disposals, are then applied to operating expenditure i.e. excluding restructuring & integration costs (but including adjustments for acquisitions & disposals).

5 - Investment in business - This represents a net investment in the business and is calculated as the difference between the growth in the cost base implied by the organic growth calculation and the actual change that has taken place. In 2008 this includes investment in regional offices as well as other initiatives and projects across the group.  

6 - Realised savings from cost initiatives - Cost savings realised in the year, and attributable to specific initiatives (equivalent run-rate savings may be different). This total saving of £373 million (comprising £64 million for Norwich Union Life, £265 million for Norwich Union Insurance and £44 million for Europe) includes £309 million, being the in year impact of the £340 million annualised savings delivered in 2008 (set out in C2), together with £64 million of savings (£25 million in Norwich Union Life, £39 million in Norwich Union Insurance) arising from actions taken as part of previous cost and efficiency reviews commenced prior to October 2007

7 - Other - Movements in the Operating Cost Base which are specifically identifiable and one-off in nature.


Page 107

C2 - Cost savings commitments for targets announced since October 2007

This note provides details of the group's published commitments to deliver cost savings, and represents an update on the information provided at full year 2007. 

Movement in Cost Savings target 
(recurring, annualised savings)

Cost Savings targets b/fwd
£m

New targets announced in year
£m

Less: Cost savings achieved
£m

Changes to the phasing of saving 
£m

Savings over/ (under) delivered
£m

Impact of economic changes on targets c/fwd
£m

Cost Savings targets c/fwd
£m

Savings expected to be 
achieved in:








Year ended 31 December 2008

290

11

(340)

22

13

4

-

Year ended 31 December 2009

60

78

-

(11)

20

5

152

Year ended 31 December 2010

-

61

-

(11)

5

-

55

Savings to be achieved  

350

150

(340)

-

38

9

207

Savings achieved in prior years:

-






340

Total savings 

350






547

Targets brought forward include £200m for Norwich Union Insurance, £100m for Norwich Union Life and £50 million for Europe. The new target announced in the current year reflects £150m for Norwich Union Insurance.

Movement in initial costs to deliver 
Cost Savings targets 
(total expenses incurred)

Costs to deliver b/fwd
£m

Cost of delivery of new targets in year
£m

Less: Costs incurred in year
£m

Changes to the phasing of costs 
£m

Decrease
in costs of delivery
£m

Impact of economic changes on targets c/fwd
£m

Costs to deliver c/fwd
£m

Savings expected to be 
achieved in:








Year ended 31 December 2008

178

195

(287)

(79)

(6)

7

8

Year ended 31 December 2009

70

85

-

53

-

3

211

Year ended 31 December 2010

-

10

-

26

(3)

-

33

Costs to be incurred

248

290

(287)

-

(9)

10

252

Costs incurred in prior years:

82






369

Total costs

330






621


All £287 million of costs incurred in the year were classified as restructuring costs in the Income Statement.

1. Cost savings initiatives included in this note are supported by detailed operational implementation plans, which identify the activities, timeframe and expected costs of delivering the planned initiatives.

 2. Cost Savings targets brought forward represent commitments made in prior years that are due to be delivered in 2008 or future years. Cost Savings targets brought forward and announced in the year were measured at the value of the relevant recurring costs in the year ended 31 December 2007. All cost saving targets carried forward have been restated to the value of the relevant recurring costs in the year ended 31 December 2008. For 2008 this reflects the effect of exchange rates on European targets.

3. Cost savings 'achieved' are the annualised, recurring costs eliminated in the year ended 31 December 2008. 

4. 'Initial costs to deliver Cost Savings targets' are the total one-off, initial costs that will be required to complete and deliver announced cost savings programmes. They are measured at the real value of the initial costs expected to be incurred.

End of part 4 of 5




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