Aviva 2009 Annual Report Download - page 260

258
Aviva plc Notes to the consolidated financial statements continued
Annual Report and Accounts 2009
56 – Risk management continued
Other investments
Other investments include:
— £29, 944 million of unit trusts and other investment vehicles. The underlying credit ratings of these assets are not reflected in
this analysis.
— Derivative financial instruments of £2,078 million, representing positions to mitigate the impact of adverse market movements.
— Other assets of £2,804 million, which are primarily deposits with credit institutions and investments in hedge funds.
The Group loan portfolio principally comprises:
— Policy loans which are generally collateralised by a lien or charge over the underlying policy;
— Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions. These loans
are fully collateralised by other securities; and
— Mortgage loans collateralised by property assets.
Unit trusts and other investment vehicles
The credit quality of the underlying debt securities within these vehicles is managed by the safeguards built into the investment
mandates for these funds. We rely on our understanding that the trusts and their asset managers are only approved if they satisfy
certain selection criteria (including due diligence in the form of a questionnaire and/or research by dedicated teams). In addition,
the asset managers are mandated to make investments in line with the funds’ risk profiles as marketed to prospective customers
and policyholders. Accordingly, as part of reviewing the asset quality of unit trusts and other investment vehicles, we monitor
the assets within the funds and their performance to ensure they remain in line with the respective investment mandates for
these funds.
For certain of the unit trusts in our other investments, we apply minimum requirements affecting both the underlying
counterparties and the investments issued by those counterparties such as a minimum size for the counterparty’s programme,
a limit on the size of the overall exposure to the underlying counterparty and, where appropriate, explicit approval of the
counterparty by internal credit risk management teams is required. These criteria are indicators of the asset quality for these
investments, as they represent minimum criteria for liquidity and diversification.
A proportion of the assets underlying these investments are represented by equities and so credit ratings are not generally
applicable. Equity exposures are managed against agreed benchmarks that are set with reference to overall market risk appetite.
Derivatives
Derivative transactions must comply with Group guidance on the quality of counterparties used and the extent of collateralisation
required. The counterparty must have a minimum credit rating from rating agencies (S&P, Moody's and Fitch) and the collateral
process must meet certain minimum standards as set out by Group guidelines.
The largest shareholder notional positions are exchange traded, rather than over the counter (OTC), with the added protection
that provides (ie the credit risk is mitigated significantly through regular margining and protection offered by the exchange, and
is controlled by the Group’s local asset management operations).
Other assets
The vast majority (over 90%) of the investments in deposits and credit institutions is with an individual financial services
counterparty which benefits from both implicit and explicit backing of AAA rated governments as a function of its
ownership structure.