Aviva 2007 Annual Report Download - page 228
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Please find page 228 of the 2007 Aviva annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.55 – Risk management continued
Credit ratings
Financial assets are graded according to current credit ratings issued. AAA is the highest possible rating. Investment grade
financial assets are classified within the range of AAA to BBB ratings. Financial assets which fall outside this range are
classified as speculative grade. Credit limits for each counterparty are set based on default probabilities that are in turn
based on the rating of the counterparty concerned.
The following table provides information regarding the aggregated credit risk exposure, for financial assets with external
credit ratings, of the Group at 31 December 2007.
Credit rating
Carrying value
in the
Speculative balance sheet
AAA AA A BBB grade Not-rated £m
Debt securities 46.0% 19.6% 20.7% 8.3% 1.1% 4.3% 118,937
Reinsurance assets 14.7% 67.8% 7.4% 0.4% 1.2% 8.5% 8,109
Other investments 1.5% 2.1% 2.1% 2.1% – 92.2% 40,413
Loans 3.4% 17.6% 1.0% 0.7% 1.3% 76.0% 36,193
As at 31 December 2006
Credit rating
Restated
Carrying value
in the
balance sheet
Speculative Restated
AAA AA A BBB grade Not-rated £m
Debt securities 48.6% 17.2% 19.7% 7.7% 0.8% 6.0% 114,466
Reinsurance assets 14.5% 66.9% 5.1% 0.9% – 12.6% 7,825
Other investments 3.1% 2.2% 2.8% 0.7% – 91.2% 33,050
Loans 8.8% 2.9% 1.0% 0.5% 1.4% 92.3% 28,574
The carrying amount of assets included on the balance sheet represents the maximum credit exposure.
Credit concentration risk
The long-term businesses and general insurance businesses are generally not individually exposed to significant
concentrations of credit risk due to the regulations, applicable in most markets, limiting investments in individual assets
and asset classes. In cases where the business is particularly exposed to credit risk (e.g. in respect of defaults on mortgages
or debt matching annuity liabilities) this risk is translated into a more conservative discount rate used to value the liabilities,
creating a greater capital requirement, and this credit risk is actively managed. The impact of aggregation of credit risk is
monitored as described above. With the exception of Government bonds the largest aggregated counterparty exposure is
approximately 0.5% of the Group’s total assets.
Reinsurance credit exposures
The Group is exposed to concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and
the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its
reinsurance counterparty exposures, by limiting the reinsurers that may be used, and the impact from reinsurer default is
measured regularly, in particular through the ICA tests, and is managed accordingly. Both the Group Credit Committee
and Group Reinsurance Security Committee have a monitoring role over this risk.
The Group’s largest reinsurance counterparty is National Indemnity Corporation, a member of the Berkshire Hathaway
Group. At 31 December 2007 the reinsurance asset recoverable from National Indemnity Corporation was £1.1 billion.
This exposure is monitored on a regular basis with the forecast to completion monitored for any shortfall in the claims
history to verify that the contract is progressing as expected and that no further exposure for the Group will arise.
In the event of a catastrophic event, the counterparty exposure to a single reinsurer is estimated not to exceed 1.1% of
shareholders’ equity.
Aviva plc
Annual Report and
Accounts 2007
224
Financial
statements
Notes to the consolidated financial statements continued