Aviva 2009 Annual Report Download - page 64

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Aviva plc Capital management continued
Annual Report and Accounts 2009
Regulatory bases
Individual regulated subsidiaries measure and report solvency
based on applicable local regulations, including in the UK the
regulations established by the Financial Services Authority (FSA).
These measures are also consolidated under the European
Insurance Groups Directive (IGD) to calculate regulatory capital
adequacy at an aggregate group level, where we have a
regulatory obligation to have a positive position at all times.
This measure represents the excess of the aggregate value of
regulatory capital employed in our business over the aggregate
minimum solvency requirements imposed by local regulators,
excluding the surplus held in the UK and Ireland with-profit life
funds. The minimum solvency requirement for our European
businesses is based on the Solvency 1 Directive. In broad terms,
for EU operations, this is set at 4% and 1% of non-linked
and unit-linked life reserves respectively and for our general
insurance portfolio of business is the higher of 18% of gross
premiums or 26% of gross claims, in both cases adjusted to
reflect the level of reinsurance recoveries. For our major non-
European businesses (the US, and Canada) a risk charge on
assets and liabilities approach is used.
Regulatory bases – group
European Insurance Groups Directive
UK Life
funds
£bn
Other
business
£bn
2009
£bn
2008
£bn
Insurance Groups Directive (IGD)
capital resources 4.9 10.8 15.7 15.5
Less: capital resource requirement (4.9) (6.3) (11.2) (13.5)
Insurance Groups Directive (IGD)
excess solvency — 4.5 4.5 2.0
Cover of EU minimum (calculated
excluding UK Life funds) 1.7 times 1.3 times
The EU Insurance Groups Directive (IGD) regulatory capital
solvency surplus has increased by £2.5 billion since
31 December 2008 to £4.5 billion. This increase reflects a
combination of operating and market performance as well as
the benefit of a number of strategic initiatives. Following
individual guidance from the FSA in 2008 we now recognise
surpluses in the non-profit funds of our UK life and pensions
business which is available for transfer to shareholders of
£0.2 billion (
31 December 2008 £0.4 billion ). The IGD is a pure
aggregation test with no credit given for the considerable
diversification benefits of Aviva.
As outlined above, a number of strategic initiatives
impacting the IGD solvency position were completed during the
year. The Delta Lloyd IPO and Australian Life disposal benefited
solvency by £0.5 billion and £0.4 billion respectively, while the
policyholder incentive payment paid as part of the inherited
estate reattribution reduced solvency by £0.5 billion. Other
material initiatives included a £0.4 billion benefit from central
and Delta Lloyd hybrid issues and £0.1 billion from the disposal
of the Dutch healthcare business. The IGD position also
benefited from the change in value of non-regulated entities,
which includes the recognition of intellectual property rights
and movements in the value of distribution companies. The
reintroduction of the scrip scheme, allowing investors the option
of receiving dividends in the form of new Aviva shares, also
delivered a capital benefit of £0.3 billion over the year.
Regulatory basis – Long-term businesses
For our non-participating worldwide life assurance businesses,
our capital requirements, expressed as a percentage of the EU
minimum, are set for each business unit as the higher of:
— The level of capital at which the local regulator is empowered
to take action.
— The capital requirement of the business unit under the
group’s economic capital requirements; and,
— The target capital level of the business unit.
The required capital across our life businesses varies between
100% and 325% of EU minimum or equivalent. The weighted
average level of required capital for our non-participating life
business, expressed as a percentage of the EU minimum (or
equivalent) solvency margin has decreased to 130%
(
31 December 2008: 142%).
These levels of required capital are used in the calculation
of the group’s embedded value to evaluate the cost of locked in
capital. At 31 December 2009 the aggregate regulatory
requirements based on the EU minimum test amounted to
£6.1 billion
(31 December 2008: £6.0 billion) . At this date, the
actual net worth held in our long-term business was £9.8 billion
(
31 December 2008: £9.5 billion ) which represents 159%
(
31 December 2008: 157%) of these minimum requirements.
Regulatory basis – UK Life with-profit funds
The available capital of the with-profit funds is represented by
the realistic inherited estate. The estate represents the assets of
the long-term with-profit funds less the realistic liabilities for
non-profit policies within the funds, less asset shares
aggregated across the with-profit policies and any additional
amounts expected at the valuation date to be paid to in-force
policyholders in the future in respect of smoothing costs,
guarantees and promises. Realistic balance sheet information is
shown below for the three main UK with-profit funds: Old
With-Profit Sub-Fund (OWPSF), New With-Profit Sub-Fund
(NWPSF) and UK Life and Pensions (UKLAP). These realistic
liabilities have been included within the long-term business
provision and the liability for insurance and investment contracts
on the consolidated IFRS balance sheet at 31 December 2009
and 31 December 2008.
Estimated Estimated
Estimated Estimate realistic Support risk 2
2008
realistic realistic inherited arrange- capital Estimated E
Estim ated
assets liabilities1 estate2 ment5 margin3 excess e
excess
£bn £bn £bn £bn £bn £bn £
£bn
CGNU Life — — — — — — 0.3
CULAC — — — — — — 0.3
OWPSF 3.0 (2.8) 0.2 — (0.1) 0.1 —
NWPSF 21.2 (21.2) — 1.1 (0.5) 0.6 —
UKLAP4 20.3 (18.7) 1.6 — (0.2) 1.4 0.5
Aggregate 44.5 (42.7) 1.8 1.1 (0.8) 2.1 1.1
1. These realistic liabilities include the shareholders’ share of future bonuses of £0.6 billion
(31 December 2008: £0.8 billion) . Realistic liabilities adjusted to eliminate the shareholders’
share of future bonuses are £42.1 billion
(31 December 2008: £43.2 billion) . 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
(31 December 2008:
£1.4 billion, £1.5 billion and £4.1 billion)
.
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 UKLAP respectively.
3. The risk capital margin (RCM) is 3.6 times covered by the inherited estate and support
arrangement
(31 December 2008: 1.8 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.