Aviva 2014 Annual Report Download - page 156

Aviva plc Annual report and accounts 2014
Notes to the consolidated financial statements continued
152
8 – Finance costs
This note analyses the interest costs on our borrowings (which are described in note 50) and similar charges.
Finance costs comprise:
Continuing operations
2014
£m
2013
£m
Interest expense on core structural borrowings
Subordinated debt 289 305
Long term senior debt 19 21
Commercial paper 22
310 328
Interest expense on operational borrowings
Amounts owed to financial institutions 48 70
Securitised mortgage loan notes at fair value 87 89
135 159
Interest on collateral received 18 20
Net finance charge on pension schemes 13 20
Unwind of discount on GI reserves 65
Other similar charges 58 77
Total finance costs from continuing operations 540 609
Total finance costs from discontinued operations
—
16
Total finance costs 540 625
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:
Long-term business
2014
£m
2013
£m
Investment variances and economic assumptions
–
continuing operations 72 (49)
Investment variances and economic assumptions
–
discontinued operations
—
452
Investment variances and economic assumptions 72 403
For continuing operations, investment variances were £72 million positive (2013: £49 million negative) mainly driven by lower risk
free rates and narrowing credit spreads on government and corporate bonds in Italy and Spain. Adverse variances in the UK were
due to the adverse impact of falling reinvestment yields net of improved underlying property values on commercial mortgages
partly offset by a change to the model used to value certain equity release assets and the consequential impact on the liabilities
that they back.
In 2013, for continuing operations, positive variances from narrowing spreads in Italy and Spain were offset by an increase in
allowance for credit defaults in the UK.
Discontinued operations represent the US business disposed of in 2013, which benefitted from favourable equity market
performance on embedded derivatives in 2013.
(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.
152 | Aviva plc Annual report and accounts 2014