Aviva 2013 Annual Report Download - page 281

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
279
Risk and capital management continued
The equity backing ratios, including property, supporting with-
profit asset shares are 70% in NWPSF and OWPSF, and 73%
in WPSF.
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. 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 where appropriate. This
means that the aggregate capital requirement is less than the
sum of capital required to cover all of the individual risks. The
capital requirement reflects the cost of mitigating the risk of
insolvency to a 99.5% confidence level over a one year time
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 and
meeting the emerging requirements of the Solvency II
framework and external agencies.
Solvency II
Following the provisional agreement between the European
Parliament, European Council and European Commission in
November 2013 on the Omnibus II Directive, there is now a
widespread expectation that Solvency II will come into effect on
1 January 2016, based on the European Commission’s Directive
– also in November 2013 – that postpones the implementation
to that date.
Aviva continues to actively participate in the development
of the Level 2 and Level 3 text that will establish the technical
requirements governing the practical application of Solvency II
through the key European industry working groups, and by
engaging with the PRA and HM Treasury throughout. This
includes consideration of the role of transitional arrangements
once Solvency II comes into effect.
Rating agency
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 (e.g. capital strength, leverage, liquidity and fixed
charge cover ratios) and non-financial factors (e.g. 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 A+
(strong) with a Stable outlook; A1 (good) with a Stable outlook
from Moody’s; and A (excellent) with a Stable outlook from
A.M. Best.
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 £1.3 billion, the majority of which was held within
Aviva Group Holdings Limited at the 2013 year end, the Group
also has access to unutilised committed credit facilities of £1.5
billion provided by a range of leading international banks.
Capital generation and utilisation
The active management of the generation and utilisation of
capital is a primary Group focus, with the balancing of new
business investment and shareholder distribution with operating
capital generation a key financial priority.
For continuing operations excluding US and Delta Lloyd,
operating capital generation for 2013 was £1.8 billion (2012:
£1.9 billion). In-force life business generated £1.5 billion of
capital (2012: £1.7 billion), with a further £0.6 billion (2012:
£0.5 billion) generated by the general insurance and fund
management businesses and other operations. The £0.3 billion
(2012: £0.3 billion) of capital investment is primarily in life
new business.
2013
£bn
2012
£bn
Operating capital generation:
Life in-force profits1 1.5 1.7
General insurance, fund management and
non-insurance profits 0.6 0.5
Operating capital generation before investment
in new business – continuing operations (excluding
Delta Lloyd) 2.1 2.2
Capital invested in new business (0.3) (0.3)
Operating capital generation after investment
in new business – continuing operations
(excluding Delta Lloyd) 1.8 1.9
United States and Delta Lloyd 0.2 0.1
Group (as reported) 2.0 2.0
1 The Life in-force profits in 2012 exclude the negative impact of a true up relating to a prior estimate of
required capital, which is included in the MCEV Free Surplus Emergence, as this does not impact the actual
capital generated in 2012.
Operating capital generation comprises the following components:
– Operating Free surplus emergence, including release of required capital, for the life in-force business (net of tax
and non-controlling interests);
– Operating profits for the general insurance and non-life businesses (net of tax and non-controlling interests) from
non-covered business only, where non-covered business is that which is outside the scope of life MCEV
methodology;
– Capital invested in new business. For life business this is the impact of initial and required capital on free surplus.
For general insurance business this reflects the movement in required capital, which has been assumed to equal
the regulatory minimum multiplied by the local management target level. Where appropriate movements in
capital requirements exclude the impact of foreign exchange and other movements deemed to be non-
operating in nature.
– Post deconsolidation on 6 May 2011, all Delta Lloyd business (including its life, general insurance, fund
management and non-insurance segments) has been included in OCG on an IFRS basis (net of taxation and
non-controlling interests).
– Post classification as held for sale in Q4 2012, US Life was no longer managed on a MCEV basis so it has been
included in OCG on an IFRS basis (net of taxation).
The amount of operating capital remitted to Group is dependent upon a number of factors including non-operating
items and local regulatory requirements.
As well as financing new business investment, the operating
capital generated is used to finance corporate costs, service the
Group’s debt capital and to finance shareholder dividend
distributions. After taking these items into account the net
operating capital generated after financing is £0.8 billion (2012:
£0.6 billion).
2013
£bn
2012
£bn
Operating capital generation after investment
in new business 2.0 2.0
Interest, corporate and other costs (0.6) (0.7)
External dividend net of scrip (0.6) (0.7)
Net operating capital generation after financing 0.8 0.6