Aviva 2013 Annual Report Download - page 280

Aviva plc
Annual report and accounts 2013
278
Risk and capital management continued
performance metric used across the Group. This is embedded
in the Group’s business planning process and other primary
internal performance and management information processes.
Capital is measured and managed on a number of different
bases. These are discussed further in the following sections.
Accounting basis:
Capital employed by segment and financing of capital
The table below shows how our capital, on an IFRS basis,
is deployed by segment and how that capital is funded.
2013
£m
2012
£m
Long-term savings 11,224 11,429
General insurance and health 5,986 5,949
Fund management 237 225
Corporate and Other business1 (1,305) (1,471)
United States — 367
Total capital employed 16,142 16,499
Financed by:
Equity shareholders’ funds 7,964 8,204
Non-controlling interests 1,471 1,574
Direct capital instruments and fixed rate tier 1 notes 1,382 1,382
Preference shares 200 200
Subordinated debt 4,370 4,337
External debt 755 802
Total capital employed 16,142 16,499
1. Corporate and other business includes centrally held tangible net assets, the main UK staff pension scheme
surplus and also reflects internal lending arrangements. These internal lending arrangements, which net out on
consolidation include the formal loan arrangement between Aviva Group Holdings Limited and Aviva Insurance
Limited (AIL).
2 Internal capital management mechanisms in place allocated a majority of the total capital of AIL to the UK
general insurance operations with the remaining capital deemed to be supporting residual (non-operational)
Pillar II ICA risks.
3 Certain subsidiaries, subject to satisfying standalone 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.
Total capital employed is financed by a combination of equity
shareholders’ funds, preference capital, subordinated debt and
borrowings.
At 2013 we had £16.1 billion (2012: £16.5 billion) of total
capital employed in our trading operations measured on an IFRS
basis.
In July 2013 we issued €650 million of Lower Tier 2
subordinated debt callable in 2023. This was used to repay a
€650 million Lower Tier 2 subordinated debt instrument at its
first call date, in October 2013. On a net basis, these
transactions did not impact on Group IGD Solvency and
Economic Capital measures.
Regulatory capital – overview
Individual regulated subsidiaries measure and report solvency
based on applicable local regulations, including in the UK the
regulations established by the Prudential Regulatory Authority
(PRA). 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 business in
Canada a risk charge on assets and liabilities approach is used.
Regulatory capital – Group
European Insurance Groups Directive
UK life
funds
£bn
Other
business
£bn
2013
£bn
2012
£bn
Insurance Groups Directive (IGD)
capital resources 5.8 8.6 14.4 14.4
Less: capital resources requirement (5.8) (5.0) (10.8) (10.6)
Insurance Group Directive (IGD)
excess solvency — 3.6 3.6 3.8
Cover over EU minimum
(calculated excluding UK life
funds) 1.7 times 1.7 times
The EU Insurance Groups Directive (IGD) regulatory capital
solvency surplus has decreased by £0.2 billion since 31
December 2012 to £3.6 billion. The key movements over the
period are set out in the following table:
£bn
IGD solvency surplus at 31 December 2012 3.8
Operating profits net of other income and expenses 1.2
Dividends and appropriations (0.5)
Market movements including foreign exchange1 (0.4)
Pension scheme funding (0.1)
Disposals 0.2
Poland pension legislative changes (0.3)
Increase in capital resources requirement (0.1)
Other regulatory adjustments (0.2)
Estimated IGD solvency surplus at 31 December 2013 3.6
1 Market movements include the impact of equity, credit spread, interest rate and foreign exchange movements
net of the effect of hedging instruments.
Regulatory capital – UK Life with-profits fund
The available capital of the with-profits funds is represented by the
realistic inherited estate. The estate represents the assets of the
long-term with-profits funds less the realistic liabilities for non-profit
policies within the funds, less asset shares aggregated across the
with-profits 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 With-Profit Sub-Fund (WPSF). These
realistic liabilities have been included within the long-term business
provision and the liability for insurance and investment contracts on
the consolidated IFRS statement of financial position at 31
December 2013 and 31 December 2012.
2013 2012
Estimated
realistic
assets
£bn
Estimated
realistic
liabilities1
£bn
Estimated
realistic
inherited
estate2
£bn
Capital
support
arrange-
ment3
£bn
Estimated
risk
capital
margin
£bn
Estimated
excess
available
capital
£bn
Estimated
excess
available
capital
£bn
NWPSF 15.6 (15.6) — 1.1 (0.2) 0.9 0.3
OWPSF 2.8 (2.4) 0.4 — (0.1) 0.3 0.2
WPSF4 16.9 (15.4) 1.5 — (0.3) 1.2 1.3
Aggregate 35.3 (33.4) 1.9 1.1 (0.6) 2.4 1.8
1 These realistic liabilities include the shareholders’ share of accrued bonuses of £0.1 billion (31 December 2012:
£0.3 billion). Realistic liabilities adjusted to eliminate the shareholders’ share of accrued bonuses are £33.4
billion (31 December 2012: £36.0 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
£1.4 billion, £0.2 billion and £2.5 billion for NWPSF, OWPSF and WPSF respectively (31 December 2012: £1.8
billion, £0.3 billion and £3.5 billion for NWPSF, OWPSF and WPSF respectively).
2 Estimated realistic inherited estate at 31 December 2012 was £nil, £0.3 billion and £1.8 billion for NWPSF,
OWPSF and WPSF respectively.
3 This support arrangement represents the reattributed estate (RIEESA) of £1.1 billion at 31 December 2013
(31 December 2012: £0.7 billion) held within NPSF1 (a non-profit fund within UKLAP included within other UK
life operations).
4 The WPSF fund includes the Provident Mutual (PM) fund, which has realistic assets and liabilities of £1.5 billion
and therefore does not impact the realistic inherited estate.
Investment mix
The aggregate investment mix of the assets in the three main
with-profits funds at 31 December 2013 was:
2013
%
2012
%
Equity 29% 23%
Property 12% 16%
Fixed interest 49% 51%
Other 10% 10%