Aviva 2009 Annual Report Download - page 65

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Performance review
Aviva plc Capital management continued
Corporate responsibility
Annual Report and Accounts 2009
Investment mix
The aggregate investment mix of the assets in the three main
with-profit funds at 31 December 2009 was:
2009 2008
£m £m
Equity 21% 24%
Property 12% 12%
Fixed interest 59% 56%
Other 8% 8%
100% 100%
The equity backing ratios, including property, supporting with-
profit asset shares are 58%% in OWPSF and NWPSF, and 54%
in UKLAP.
Rating agency capital
Credit ratings are an important indicator of financial strength
and support access to debt markets as well as providing
assurance to business partners and policyholders over our ability
to service contractual obligations. In recognition of this we have
solicited relationships with a number of rating agencies. The
agencies generally assign ratings based on an assessment of a
range of financial factors (eg capital strength, gearing, liquidity
and fixed charge cover ratios) and non financial factors (eg
strategy, competitive position, and quality of management).
Certain rating agencies have proprietary capital models
which they use to assess available capital resources against
capital requirements as a component in their overall criteria
for assigning ratings. Managing our capital and liquidity
position in accordance with our target rating levels is a core
consideration in all material capital management and capital
allocation decisions.
The group’s overall financial strength is reflected in our
credit ratings. The group’s rating from Standard and Poor’s
is AA- (very strong) with a Negative outlook; Aa3 (excellent)
with a Negative outlook from Moody's; and A (“excellent”)
with a Stable outlook from A M Best . These ratings continue
to reflect our strong competitive position, positive strategic
management, strong and diversified underlying earnings profile
and robust liquidity position.
Economic capital
We use a risk-based capital model to assess economic capital
requirements and to aid in risk and capital management across
the group. The model is based on a framework for identifying
the risks to which business units, and the group as a whole, are
exposed. A mixture of scenario based approaches and stochastic
models are used to capture market risk, credit risk, insurance
risk and operational risk. Scenarios are specified centrally to
provide consistency across businesses and to achieve a minimum
standard. Where appropriate, businesses also supplement these
with additional risk models and stressed scenarios specific to
their own risk profile. When aggregating capital requirements
at business unit and group level, we allow for diversification
benefits between risks and between businesses, with restrictions
to allow for non-fungibility of capital when appropriate. This
means that the aggregate capital requirement is less than the
sum of capital required to cover all of the individual risks.
This model is used to support our Individual Capital
Assessments (ICA) which are reported to the FSA for all our UK
regulated insurance businesses. The FSA uses the results of our
ICA process when setting target levels of capital for our UK
regulated insurance businesses. In line with FSA requirements,
the ICA estimates the capital required to mitigate the risk of
insolvency to a 99.5% confidence level over a one-year time
Governance
Shareholder information
Financial statements IFRS
Financial statements MCEV
Other information
horizon (equivalent to events occurring in 1 out of 200 years)
against financial and non-financial tests.
The financial modelling techniques employed in economic
capital enhance our practice of risk and capital management.
They enable understanding of the impact of the interaction of
different risks allowing us to direct risk management activities
appropriately. These same techniques are employed to enhance
product pricing and capital allocation processes. Unlike more
traditional regulatory capital measures, economic capital also
recognises the value of longer-term profits emerging from in-
force and new business, allowing for consideration of longer-
term value emergence as well as shorter-term net worth
volatility in our risk and capital management processes. We
continue to develop our economic capital modelling capability
for all our businesses as part of our development programme
to increase the focus on economic capital management. In
addition we have initiated work on meeting the emerging
requirements of the Solvency II framework and external
agencies.
Solvency II
2009 has represented a significant step for Solvency II and
the insurance industry. Since the approval of the Solvency II
Directive in May 2009, the focus has been on the development
of the Level 2 implementing measures advice published by the
CEIOPS which fill in the detail under Level 1 and focused on
technical issues. Aviva has been actively participating in the
process by providing responses to the CEIOPS as well as
participating in the key European industry working groups who
provide the voice of industry in on-going negotiation in Brussels.
The formal CEIOPS consultation process has already closed
and the European Commission are now considering the
wording on the implementing measures that will be finalised by
the end of 2010. Full implementation of Solvency II will be
required in October 2012.
Performance review