Aviva 2002 Annual Report Download - page 88

23 – 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 FRS 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 two portfolios of equity release mortgages has
been transferred to two special purpose securitisation companies, Equity Release Funding (No 1) plc (“ERF1”) and Equity Release Funding
(No 2) plc (“ERF2”) (together “the ERF companies”), in return for initial consideration and, at later dates, deferred consideration. The
deferred consideration represents receipts accrued within the ERF companies after meeting all their obligations to the noteholders, loan
providers and other third parties in the priority of payments. No gain or loss was recognised on the transfer to ERF1, and a gain of
£5.2 million was recognised on the transfer to ERF2. The purchases of the mortgages were funded by the issue of fixed and floating rate
notes by the ERF companies.
The ultimate effective holding company of both the ERF companies 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 the ERF companies or their parent company. 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.
NUER has indemnified the ERF companies for any losses they may suffer should its customers set off any shortfall in their annuities
purchased from another Aviva Group company against amounts they owe to the ERF companies, and any shortfall due to negative
equity not insured elsewhere. NUER’s liability under these indemnities, estimated as £5 million, is included in other creditors in the
consolidated balance sheet, whilst the linked liabilities figure has been reduced by the same amount to show the Group’s net interest in
these securitisations.
NUER has purchased £12.5 million of subordinated fixed rate notes in ERF1, 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 the ERF companies in respect of fees for loan administration and cash handling purposes. Income of
£2 million (2001: £1 million) has been included in investment income, relating to the securitisation of the mortgage portfolios.
(b) In a Dutch subsidiary (“DL”), the principal benefits of three portfolios of mortgage loans have been transferred to three special
purpose securitisation companies, Arena 2000-1 BV, Arena 2001-1 BV and Arena 2002-1 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,
Stichting Security Trustee Arena 2001-1 BV and Stichting Security Trustee Arena 2002-1 BV. DL does not own, directly or indirectly, any
of the share capital of the Arena companies or their parent companies. 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 £5 million (2001: £41 million).
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. Included in investment income is £71 million (2001: £36 million) relating to the
securitisation of these mortgage loan portfolios.
In all of the above transactions, Aviva 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 Aviva Group.
Notes to the accounts continued
74 Aviva plc
Annual report + accounts 2002