Aviva 2001 Annual Report Download - page 76

21 – Securitised mortgages and related assets
Other financial investments include loans secured by mortgages, subject to non-recourse finance arrangements, in a UK long-term
business subsidiary and in a Dutch subsidiary. These balances are accounted for using a linked presentation in accordance with
Financial Reporting Standard 5 “Reporting the substance of transactions”. Details of the relevant transactions are as follows:
(a) In a United Kingdom long-term business subsidiary (“NUER”), the beneficial interest in a portfolio of equity release mortgages
was transferred during 2001 to a special purpose securitisation company, Equity Release Funding (No 1) plc (“ERF1”), in return for
initial consideration and, at later dates, deferred consideration. The deferred consideration represents receipts accrued within ERF1
after meeting all its obligations to the noteholders, loan providers and other third parties in the priority of payments. No gain or loss
was recognised on this transfer. The purchase of the mortgages was funded by the issue of fixed and floating rate notes by ERF1.
The ultimate effective holding company of ERF1 is Equity Release Funding Holdings Limited, whose shares are held on trust.
NUER does not own, directly or indirectly, any of the share capital of ERF1 or its parent company. NUER has purchased £12.5 million
of subordinated fixed rate notes, which are repayable in 2031. These are included in debt securities and other fixed income securities
within other financial investments in the consolidated balance sheet.
NUER receives payments from ERF1 in respect of fees for loan administration and cash handling purposes. NUER has no right to
repurchase the benefit of any of the securitised mortgage loans, other than in certain circumstances where NUER is in breach of
warranty or loans are substituted in order to effect a further advance.
Income of £1 million has been recognised by NUER relating to the securitisation of the mortgage portfolio.
(b) In a Dutch subsidiary (“DL”), the principal benefits of two portfolios of mortgage loans have been transferred to two special
purpose securitisation companies, Arena 2000-1 BV and Arena 2001-1 BV (“the Arena companies”), which were funded primarily
through the issue of fixed rate notes. No gains or losses were recognised on these transfers.
All the shares in the Arena companies are held by independent trustees, respectively Stichting Security Trustee Arena 2000-1 BV and
Stichting Security Trustee Arena 2001-1 BV. DL does not own, directly or indirectly, any of the share capital of the Arena companies
or their parent companies.
DL receives payments from the Arena companies in respect of fees for loan administration services, and also under the terms of
interest rate swaps written between DL and the Arena companies to hedge their respective exposures to movements in interest rates
arising from these transactions. In each case, the effect of the interest rate swaps is that the Arena companies swap all or part of the
interest flows receivable from customers in respect of the securitised mortgage loans into fixed interest flows which are designed
broadly to match the interest payable to the noteholders. DL has no right, nor any obligation, to repurchase the benefit of any of the
securitised mortgage loans, other than in certain circumstances where DL is in breach of warranty.
DL has purchased £18 million of the fixed rate notes in Arena 2000-1 BV, which are repayable in 2062, and £21 million of the fixed
rate notes in Arena 2001-1 BV, repayable in 2053. These are included in debt securities and other fixed income securities within other
financial investments in the consolidated balance sheet at their market value of £41 million.
Included in investment income is £36 million (2000: £nil) relating to the securitisation of these mortgage loan portfolios.
In all of the above transactions, CGNU Group and its subsidiaries are not obliged to support any losses that may be suffered by the
noteholders and do not intend to provide such support. Additionally, the notes were issued on the basis that noteholders are only
entitled to obtain payment, of both principal and interest, to the extent that the available resources of the respective special purpose
securitisation companies, including funds due from customers in respect of the securitised loans, are sufficient and that noteholders
have no recourse whatsoever to other companies in the CGNU Group.
74 CGNU plc Annual report + accounts 2001 Notes to the accounts continued