Aviva 2009 Annual Report Download - page 63

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Performance review
Aviva plc
Corporate responsibility
Governance
Capital management
Annual Report and Accounts 2009
Capital management
Capital management objectives
Aviva’s capital management philosophy is focused on capital
efficiency and effective risk management to support the
dividend policy and earnings per share growth. Overall capital
risk appetite is set and managed with reference to the
requirements of a range of different stakeholders including
shareholders, policyholders, regulators and rating agencies.
In managing capital we seek to:
— maintain sufficient, but not excessive, financial strength to
support new business growth and satisfy the requirements
of our regulators and other stakeholders thus giving both
our customers and shareholders assurance of our financial
strength:
— optimise our overall debt to equity structure to enhance our
returns to shareholders, subject to our capital risk appetite
and balancing the requirements of the range of stakeholders;
— retain financial flexibility by maintaining strong liquidity,
including significant unutilised committed credit facilities and
access to a range of capital markets;
— allocate capital rigorously across the group, to drive value
adding growth in accordance with risk appetite; and
— declare dividends on a basis judged prudent, while retaining
capital to support future business growth, using dividend
cover on an IFRS operating earnings after tax basis in the
1.5 to 2.0 times range as a guide.
Targets are established in relation to regulatory solvency,
ratings, liquidity and dividend capacity and are a key tool in
managing capital in accordance with our risk appetite and the
requirements of our various stakeholders.
Strategic capital allocation initiatives
A number of key strategic initiatives have been delivered in the
last quarter of 2009 which have significantly enhanced the
Group’s capital position and financial flexibility.
On 1 October 2009 Aviva announced the completion of
the sale of its Australian life business and wealth management
platform. The total proceeds of the Australian sale were
£0.4 billion (A$0.9 billion). The sale of the business benefited
group IGD by £0.4 billion.
On 3 November 2009 Aviva announced the completion
of the Delta Lloyd initial public offering (IPO) and the shares
commenced trading on the Euronext Amsterdam. The IPO
raised gross proceeds of £1.00 billion (€1.09 billion), including
the 10% over-allotment option, and generated an IGD benefit
of £0.5 billion.
Following High Court and FSA approval in September, the
deal to complete the reattribution of our inherited estate was
concluded on 1 October with 87% of policyholders voting and
96% of these voting in favour of the offer. The total value of
the inherited estate for the reattribution was £1.25 billion, with
£0.5 billion paid from shareholder funds to policyholders. The
impact of the policyholder incentive payment reduced Group
IGD by £0.5 billion.
Shareholder information
Financial statements IFRS
Financial statements MCEV
Other information
Accounting basis and capital employed by segment
The table below shows how our capital, on an MCEV basis,
is deployed by segment and how that capital is funded.
Restated
2009 2008
£m £m
Long-term savings 20,693 19,440
General insurance and health 4,562 5,516
Fund management 269 340
Other business (246) (199)
Corporate1 (34) (30)
Total capital employed 25,244 25,067
Financed by:
Equity shareholders’ funds 13,035 13,162
Minority interest 4,237 3,080
Direct capital instruments 990 990
Preference shares 200 200
Subordinated debt 4,637 4,606
External debt 852 919
Net internal debt2 1,293 2,110
25,244 25,067
1. The “corporate” net liabilities represent the element of the pension scheme deficit
held centrally.
2. In addition to our external funding sources, we have certain internal borrowing arrangements
in place which allow some of the assets that support technical liabilities to be invested in a
pool of central assets for use across the group. These internal debt balances allow for the
capital allocated to business operations to exceed the externally sourced capital resources of
the group. Net internal debt represents the balance of the amounts due from corporate and
holding entities, less the tangible net assets held by these entities. Although intra-group in
nature, they are included as part of the capital base for the purpose of capital management.
These arrangements arise in relation to the following:
– Certain subsidiaries, subject to continuing to satisfy stand alone capital and liquidity
requirements, loan funds to corporate and holding entities. These loans satisfy arm’s length
criteria and all interest payments are made when due.
– Aviva International Insurance (AII) Ltd acts as both a UK general insurer and as the primary
holding company for our foreign subsidiaries. Internal capital management mechanisms in
place allocate a portion of the total capital of the company to the UK general insurance
operations. These mechanisms also allow for some of the assets backing technical liabilities
to be made available for use across the group. Balances in respect of these arrangements
are also treated as internal debt for capital management purposes.
Total capital employed is financed by a combination of equity
shareholders’ funds, preference capital, subordinated debt and
borrowings (including internal borrowings as described in
footnote 2 above).
At 31 December 2009 we had £25.2 billion (
31 December
2008: £25.1 billion
) of total capital employed in our trading
operations, measured on an MCEV basis. Over the period the
benefit of operating profits and investment gains have been
offset by foreign exchange losses and actuarial losses on staff
pension schemes.
In April 2009 we issued a private placement of £245 million
equivalent of Lower Tier 2 hybrid in a dual tranche transaction
(£200 million on 1 April 2009 and a further €50 million on
30 April 2009). These transactions had a positive impact on
group IGD solvency and economic capital measures.
Financial leverage, the ratio of external senior and
subordinated debt to MCEV capital and reserves, was 31.8%
(
31 December 2008: 34.0% ). Fixed charge cover, which
measures the extent to which external interest costs, including
subordinated debt interest and preference dividends, are
covered by MCEV operating profit was 8.5 times (
31 December
2008: 9.2 times
).
Financial flexibility
The group’s borrowings are comprised primarily of long dated
hybrid instruments with maturities spread over many years,
minimising refinancing risk. In addition to central liquid asset
holdings of £2.2 billion, the group also has access to unutilised
committed credit facilities of £2.1 billion provided by a range of
leading international banks.
Performance review