Aviva 2005 Annual Report Download - page 40

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Aviva plc 2005 Business review
Business review continued
Capital structure
We maintain an efficient capital structure using a combination of
equity shareholders’ funds, preference capital, subordinated debt
and borrowings. The structure is consistent with our risk profile
and the regulatory and market requirements of our business.
In managing our capital, we seek to:
– Match the profile of our assets and liabilities, taking into
account the risks inherent in each business
– Maintain financial strength to support new business growth
whilst still satisfying the requirements of policyholders,
regulators and rating agencies
– Retain financial flexibility by maintaining strong liquidity,
access to a range of capital markets and significant unutilised
committed credit lines
– Allocate capital efficiently to support growth and repatriate
excess capital where appropriate
– Manage exposures to movements in exchange rates by
aligning the deployment of capital by currency with our
capital requirements by currency.
Capital management principles
We set target risk-adjusted rates of return for individual business
units that are aligned to performance and incentive targets in order
to focus management on the creation of value for shareholders.
We have a number of sources of capital available to us and seek
to optimise our debt to equity structure so we can maximise returns
to shareholders. We consider alternative sources of capital such as
reinsurance and securitisation in addition to traditional sources of
capital funding. The selection of the source of capital funding is
appropriate to its deployment and usage.
Capital employed by segment
2005 2004
£m £m
Long-term savings 15,598 13,826
General insurance and health 5,581 5,005
Other business 1,876 838
Corporate (36) (372)
Total capital employed 23,019 19,297
Financed by
Equity shareholders’ funds and minority interests 16,356 12,821
Direct capital instrument 990 990
Preference shares 200 200
Subordinated debt 2,808 2,847
External debt 1,002 1,452
Net internal debt 1,663 987
23,019 19,297
At 31 December 2005 we had £23 billion (31 December 2004:
£19.3 billion) of total capital employed in our trading operations.
Total equity is efficiently financed by a combination of equity
shareholders’ funds, preference capital, direct capital instruments,
subordinated debt and internal and external borrowings.
Financial leverage
We aim to maintain financial leverage and fixed charge cover
ratios at a level consistent with our AA/Aa rating. Financial leverage,
the ratio of the Group’s external senior and subordinated debt to
EEV capital and reserves was 22% (2004: 31%). Fixed charge
cover, which measures the extent to which external interest costs,
including subordinated debt interest and preference dividends,
are covered by EEV operating profit was 9.6 times (2004: 8.7 times).
Other corporate information: Group capital structure
Financing of group capital
1 Equity
2 Direct capital instrument
3 Debt
72%
4%
24%
1
2
3