Aviva 2013 Annual Report Download - page 169

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Aviva plc
Annual report and accounts 2013
167
Notes to the consolidated financial statements continued
23 – Fair value methodology continued
Transfer to/from Level 3
Transfers out of Level 3 mainly relate to improvements in the market liquidity of certain debt securities held by our business in
France (£1.9 billion), which were transferred to Level 2, as observable prices became available.
The transfers into Level 3 (shown below) primarily relate to UK mortgage loans (£14.6 billion) and investment property (£9.5
billion) as follows:
 £9.9 billion of UK commercial mortgage loans. Following a reassessment of inputs management has deemed the illiquidity
premium used to value these mortgage loans to be a significant, unobservable input.
 £2.6 billion of UK equity release mortgage loans. During 2013, the discounted cash flow model used to value certain equity
release mortgage loans has been revised, incorporating a greater number of inputs relevant to calculating a fair value of these
mortgages. Within this model, credit risk assumptions are derived from market data with adjustments applied to ensure they
are relevant to the mortgage portfolio, but these are not fully market observable. As a result, these assets have been classified
as Level 3 and transferred from Level 2.
 £2.1 billion of UK securitised mortgage loans and certain non-securitised equity release mortgage loans. Market transactions
used in the valuation of these loans are infrequent and, as a result, prices are no longer classified as market observable. In the
absence of any additional market transactions the mortgage loans have been reclassified from Level 2 to Level 3.
 £9.5 billion investment property. Following the adoption of IFRS 13, investment property is now included within the fair value
hierarchy. Due to the irregularity of similar transactions, management has concluded that significant inputs into the valuation
methodology are non-market observable, and classified investment property within Level 3. We have also transferred £0.5
billion of property funds into Level 3 to reflect the valuation of underlying property assets.
Also included within transfers into Level 3 loans are £0.8 billion of non-recourse loans held by the UK business that were
reclassified from Level 2 to Level 3. This was due to the enhancement of the valuation model to include an illiquidity premium
which is deemed to be an unobservable input.
For the year to 31 December 2013, transfers of financial liabilities between fair value hierarchies included the reclassification of
£0.5 billion (2012: £nil) of securitised mortgage loan notes from Level 2 to Level 3 in line with the reclassification of the related
securitised mortgage loans referred to above.
f) Further information on Level 3 assets and liabilities:
The table below shows movement in the Level 3 assets and liabilities measured at fair value:
Assets Liabilities
2013
Investment
Property
£m
Loans
£m
Debt
securities
£m
Equity
securities
£m
Other
investments
(including
derivatives)
£m
Financial
assets of
operations
classified as
held for sale
£m
Non-
participating
investment
contracts
£m
Derivative
liabilities
£m
Borrowings
£m
Opening balance at 1 January 2013 — — 9,962 473 2,489 516 (443) (58) —
Total net (losses)/gains recognised in the
income statement — — (36) (39) 179 4 — (13) —
Total net gains recognised in other
comprehensive income — — — — 1 19 — — —
Purchases — — 1,983 11 832 187 — (50) —
Issuances — — — — — — (11) — —
Disposals1 — — (1,527) (11) (897) (737) 270 58 —
Transfers into Level 3 9,482 15,362 301 — 545 — — — (482)
Transfers out of Level 3 — — (2,089) — (119) — 184 — —
Reclassification to held for sale — — — (3) (159) 162 — — —
Foreign exchange movements (31) — 285 10 19 (3) — — —
Balance at 31 December 2013 9,451 15,362 8,879 441 2,890 148 — (63) (482)
1 Disposals include the disposal of the US business in 2013 (£609 million assets and £270 million liabilities).
2012 (Restated)1,2
Debt
securities
£m
Equity
securities
£m
Other
investments
(including
derivatives)
£m
Financial
Investments
Total
£m
Financial
liabilities
Total
£m
Opening balance at 1 January 2012 7,940 483 2,945 11,368 (292)
Total net gains recognised in the income statement 934 7 18 959 4
Total net gains recognised in other comprehensive income 113 — 17 130 —
Purchases 1,826 27 646 2,499 (18)
Issuances — — 1 1 (23)
Disposals (767) (29) (755) (1,551) —
Transfers into Level 3 443 2 56 501 (184)
Transfers out of Level 3 (149) (3) (12) (164) —
Impact of IFRS10 restatement — — 6 6 —
Foreign exchange rate movements (258) (14) (37) (309) 12
Balance at 31 December 2012 10,082 473 2,885 13,440 (501)
Less: Amounts classified as held for sale (120) — (396) (516) —
9,962 473 2,489 12,924 (501)
1 Restated for the impact of the adoption of IFRS 10. Refer to note 1 for further details.
2 This table was prepared in accordance with IFRS 7.