Aviva 2013 Annual Report Download - page 150

Aviva plc
Annual report and accounts 2013
148
Notes to the consolidated financial statements continued
8 – Finance costs
This note analyses the interest costs on our borrowings (which are described in note 50) and similar charges.
Continuin
g
operations
2013
£m
Restated1
2012
£m
Interest expense on core structural borrowings
Subordinated debt 305 294
Long term senior debt 21 19
Commercial paper 2 4
328 317
Interest expense on operational borrowings
Amounts owed to financial institutions 70 94
Securitised mortgage loan notes at fair value 89 90
159 184
Interest on collateral received 20 27
Net finance charge on pension schemes 20 19
Unwind of discount on GI reserves 5 21
Other similar charges 77 85
Total finance costs from continuing operations 609 653
Total finance costs from discontinued operations 16 21
Total finance costs 625 674
1 Restated for the adoption of revised IAS19 and IFRS10. See note 1 for further details.
9 – Long-term business economic volatility
The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal
performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses
instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business,
as described below.
(a) Definitions
Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and
policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities.
Operating profit includes the effect of variance in experience for non-economic items, such as mortality, persistency and expenses,
and the effect of changes in non-economic assumptions, where not treated as exceptional. Changes due to economic items, such
as market value movements and interest rate changes, which give rise to variances between actual and expected investment
returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
(b) Economic volatility
The investment variances and economic assumption changes excluded from the long-term business operating profit are as follows:
Lon
g
-term business
2013
£m
2012
£m
Investment variances and economic assumptions
–
continuing operations (49) (620)
Investment variances and economic assumptions
–
discontinued operations 452 342
Investment variances and economic assumptions 403 (278)
For continuing operations, investment variances were £49 million negative (2012: £620 million negative). Negative variances in the
UK resulting from increasing the allowance for credit defaults on commercial mortgages were partially offset by the positive effect
of narrowing spreads on government and corporate bonds in Italy and Spain together with reduction in cost of guarantees in
France. In 2012, for continuing operations, negative investment variances of £620 million mainly related to the UK. The total for
the UK included increasing the allowance for credit risk defaults on UK commercial mortgages together with some adverse
experience on the portfolio and the cost of de-risking activities. Positive variances in Spain and France were offset by a negative
variance in Italy.
The positive variance of £452 million (2012: £342 million) for discontinued operations relates to the US business disposed of in
2013, driven by the impact of favourable equity market performance on embedded derivatives.
(c) Methodology
The expected investment returns and corresponding expected movements in long-term business liabilities are calculated separately
for each principal long-term business unit.
The expected return on investments for both policyholders’ and shareholders’ funds is based on opening economic assumptions
applied to the expected funds under management over the reporting period. Expected investment return assumptions are derived
actively, based on market yields on risk-free fixed interest assets at the end of each financial year. The same margins are applied on
a consistent basis across the Group to gross risk-free yields, to obtain investment return assumptions for equities and properties.
Expected funds under management are equal to the opening value of funds under management, adjusted for sales and purchases
during the period arising from expected operating experience.
The actual investment return is affected by differences between the actual and expected funds under management and
changes in asset mix, as well as movements in interest rates. To the extent that these differences arise from the operating
experience of the long-term business, or management decisions to change asset mix, the effect is included in the operating profit.
The residual difference between actual and expected investment return is included in investment variances, outside operating profit
but included in profit before tax.