Aviva 2009 Annual Report Download - page 254

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Aviva plc Notes to the consolidated financial statements continued
Annual Report and Accounts 2009
55 – Capital statement continued
As the total available capital of £17.1 billion is arrived at on the basis of local regulatory guidance, which evaluates assets and
liabilities prudently, it understates the economic capital of the business which is considerably higher. This is a limitation of the
Group Capital Statement which, to be more meaningful, needs to evaluate available capital on an economic basis and compare
it with the risk capital required for each individual operation, after allowing for the considerable diversification benefits that exist
in our Group.
Within the Aviva Group there exist intra-group arrangements to provide capital to particular business units. Included in these
arrangements is a subordinated loan of £200 million from Aviva Life Holdings UK Limited to the Aviva Annuity Limited to provide
capital to support the writing of new business.
The available capital of the Group’s with-profit funds is determined in accordance with the “Realistic balance sheet” regime
prescribed by the FSA’s regulations, under which liabilities to policyholders include both declared bonuses and the constructive
obligation for future bonuses not yet declared. The available capital resources include an estimate of the value of their respective
estates, included as part of the unallocated divisible surplus. The estate represents the surplus in the fund that is in excess of any
constructive obligation to policyholders. It represents capital resources of the individual with-profit fund to which it relates and is
available to meet regulatory and other solvency requirements of the fund and, in certain circumstances, additional liabilities may
arise.
The liabilities included in the balance sheet for the with-profit funds do not include the amount representing the shareholders’
portion of future bonuses. However, the shareholders’ portion is treated as a deduction from capital that is available to meet
regulatory requirements and is therefore shown as a separate adjustment in the capital statement.
In accordance with the FSA’s regulatory rules under its realistic capital regime, the Group is required to hold sufficient capital
in its UK life with-profit funds to meet the FSA capital requirements, based on the risk capital margin (RCM). The determination
of the RCM depends on various actuarial and other assumptions about potential changes in market prices, and the actions
management would take in the event of particular adverse changes in market conditions.
31 31
December December
31 December 2009 2008 2007
Estimated Estimated
Estimated realistic Estimated Capital excess
realistic Realistic inherited risk capital support available
assets liabilities*1 estate2 margin3 arrangement5 capital Excess Excess
£bn £bn £bn £bn £bn £bn £bn £bn
NWPSF 21.2 (21.2) — (0.5) 1.1 0.6 0.3 1.1
OWPSF 3.0 (2.8) 0.2 (0.1) — 0.1 0.3 0.8
Existing UKLAP WP4 20.3 (18.7) 1.6 (0.2) — 1.4 0.5 1.3
Aggregate 44.5 (42.7) 1.8 (0.8) 1.1 2.1 1.1 3.2
* These realistic liabilities include the shareholders' share of future bonuses of £0.6 billion
(2008: £0.8 billion, 2007: £1.2 billion) . Realistic liabilities adjusted to eliminate the shareholders' share
of future bonuses are £42.1 billion (2008: £43.2 billion, 2007: £48.8 billion).
1. These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £0.3 billion,
£2.2 billion and £3.1 billion for OWPSF, NWPSF and UKLAP respectively
(2008: £1.4 billion, £1.5 billion and £4.1 billion, 2007: £0.7 billion, £0.8 billion and £0.3 billion respectively) .
2. Estimated realistic inherited estate at 31 December 2008 was £0.7 billion, £0.7 billion and £1.2 billion for CGNU Life, CULAC and NUL&P respectively
(2007: £1.4 billion, £1.2 billion,
£1.9 billion respectively)
.
3. The risk capital margin (RCM) is 3.6 times covered by the inherited estate and capital support arrangement
(2008: 1.8 times, 2007: 3.5 times) .
4. The UKLAP fund includes the Provident Mutual (PM) fund, which has realistic assets and liabilities of £1.7 billion and therefore does not impact the realistic inherited estate.
5. This represents the reattributed estate of £1.1 billion at 31 December 2009 held within the non-profit fund with UKLAP included within other UK life operations.
Under the FSA regulatory regime, UK life with-profit business is required to hold capital equivalent to the greater of the regulatory
requirement based on EU Directives (‘regulatory peak’) and the FSA realistic bases (‘realistic peak’) described above.
For UK non-participating business, the relevant capital requirement is the minimum solvency requirement determined in
accordance with FSA regulations. The available capital reflects the excess of regulatory basis assets over liabilities before deduction
of capital resources requirement.
For UK general insurance businesses, the relevant capital requirement is the minimum solvency requirement determined
in accordance with the FSA requirements.
For overseas businesses in the EEA, US, Canada, Hong Kong and Singapore, the available capital and the minimum
requirement are calculated under the locally applicable regulatory regimes. The businesses outside these territories are subject
to the FSA rules for the purposes of calculation of available capital and capital resource requirement.
For fund management and other businesses, the relevant capital requirement is the minimum solvency requirement
determined in accordance with the local regulator’s requirements for the specific class of business.
All businesses hold sufficient available capital to meet their capital resource requirement.