Aviva 2006 Annual Report Download - page 56

Aviva plc
Annual Report and Accounts 2006 52
Finance continued
Capital
Capital structure
We maintain an efficient capital structure using a combination of
equity shareholders’ funds, preference capital, subordinated debt
and borrowings. This structure is consistent with our risk profile
and the regulatory and market requirements of our business.
We believe that the European Embedded Value (EEV) provides
amore meaningful view of our life operations than IFRS;
accordingly, our capital structure is analysed on an EEV basis.
In managing our capital, we seek to:
–Match the profile of our assets and liabilities, taking into account
the risks inherent in each business
–Maintain financial strength to support new business growth
while still satisfying the requirements of policyholders, regulators
and rating agencies
–Retain financial flexibility by maintaining strong liquidity,
access to a range of capital markets and significant unutilised
committed credit lines
–Allocate capital efficiently to support growth and repatriate
excess capital whereappropriate
–Manage exposures to movements in exchange rates by
aligning the deployment of capital by currency with our capital
requirements by currency.
Capital management principles
An important aspect of our capital management process is the
setting of target rates of return for individual business units.
The targets are adjusted to make allowance for risks faced by
those business units. Management remuneration is partly based
on performance against these targets, therefore encouraging
focus on creation of value for the shareholder.
We have a number of sources of capital available to us and seek to
optimise our debt to equity structureso we can maximise returns to
our shareholders. We consider alternative sources of capital such as
reinsurance and securitisation in addition to more traditional sources
of funding. Weselect capital funding that is appropriate to its
deployment and usage.
Capital employed by segment
The table below shows how our capital is deployed by segment
and how that capital is funded:
2006 2005
£m £m
Long-term savings 19,663 15,598
General insurance and health 5,344 5,581
Other business 1,425 1,876
Corporate (19) (36)
Total capital employed 26,413 23,019
Financed by:
Equity shareholders’ funds and minority interests 19,668 16,356
Direct capital instrument 990 990
Preference shares 200 200
Subordinated debt 2,937 2,808
External debt 1,258 1,002
Net internal debt 1,360 1,663
26,413 23,019
At 31 December 2006, we had £26.4 billion (31 December 2005:
£23.0 billion) of total capital employed in our trading operations.
In 2006, the total capital employed increased by £3.4 billion
reflecting growth in our long-term savings operations; these
increased by £4.0 billion driven by the acquisitions of AmerUs,
operational results and movements in equity markets in the year.
In addition to our external funding sources, we have internal debt
arrangements in place. These arrangements have allowed the assets
that support technical liabilities to be invested in a pool of central
assets for use across the group. They have also allowed the
redeployment of cash between parts of the business to fund
growth. Although these arrangements are intra-group loans, they
areincluded as part of the capital base for the purpose of capital
management. Our intra-group loans satisfy arms length criteria and
all interest payments have been made when due.
Net internal debt represents the upstream of internal loans from
business operations to corporate and holding entities net of
tangible assets held by these entities.
The corporate net liabilities represent the element of the pension
scheme deficit held centrally.
Financial leverage
Financial leverage, the ratio of the group’s external senior
and subordinated debt to EEV capital and reserves was 20%
(2005: 22%).Fixed charge cover, which measures the extent to
which external interest costs, including subordinated debt interest
and preference dividends, arecovered by EEV operating profit
was 10.3 times (2005: 9.6 times).
We are subject to a number of regulatory capital tests and employ
realistic scenario tests to allocate capital and manage risk. Overall,
the group and its subsidiaries satisfy all existing requirements and,
as reported below, has significant resources and capital strength.
The ratings of the group’s main operating subsidiaries are
AA/AA- (very strong) with a stable outlook from Standard &
Poor’sand Aa3 (excellent) with a stable outlook from Moody’s.
These ratings reflect our strong liquidity, competitive position,
capital base, increasing underlying earnings and positive strategic
management.
Business review continued