Professional Documents
Culture Documents
John Lister J h Li t
Gives confidence in the resilience of our balance sheet total IFRS earnings and OCG capabilities sheet,
UK Life WP funds
53bn in-force participating business at UKL
ASSET SHARE & COG Estate
WPSF (21.4bn) ASSET SHARE
AS + COG AS + COG
Estate PM (1.9bn)
COG RIEESA
NWPSF (25.6bn)
3 x WP 90:10 funds with a total of 27 billion of liabilities IFRS earnings are 10% of total WP bonus (c.30 (c 30 million p a ) p.a.) Shareholders are exposed to the risk of: Lower bonus rates Burn through risk from CoGs Burn through risks are minimal
Post reattribution fund with 24.3 billion of policyholder liabilities The reattributed estate (RIEESA) of 1.3 1 3 billion and assets backing guarantees of 2.3 billion are now owned by shareholders Shareholders are directly exposed to risks in CoG and RIEESA The RIEESA is recognised as a shareholder asset on the balance sheet
Key: AS Asset share CoG Cost of Guarantees RIEESA Reattributed inherited estate external support account
Source: IFRS as at HY10
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Annuities
Reattribution deal
A good deal for policyholders and for shareholders
RIEESA 1.3bn Cost of guarantee 2.3bn 2 3bn
Shareholders paid 471 million for the estate worth 1.1 billion and CoG of 2.3 billion at E-day Have the right to write new non-profit business in the RIEESA subject to certain restrictions
E pect to use 650 million o er 5 years, Expect se over ears enabling profit from the existing non-profit book to be used to support dividends rather than being reinvested in new business Generates recurring IFRS operating earnings of 120 million p.a. from Expected earnings on RIEESA assets Unwind of time value of CoG
Policyholder owned
Shareholder owned
Expect further non-recurring profits as a result of policyholder actions and unhedged asset risk
With profits Annuities
NWPSF
RIEESA COG
RIEESA COG
Traditionally, the estate and CoG were invested in the same way as assets backing asset share Without hedging, the exposure to CoG risks would reduce the value of the RIEESA on asset fall This would restrict new business capacity and make the level of expected IFRS operating earnings more volatile S we manage th C G risks b d So the CoG i k by dynamically h d i th C G i ll hedging the CoG
With profits Annuities
CoG CoG
Hedge p y pay off
CoG
Hedge pay off
CoG
Hedge pay off
Before fall
After fall
Before rise
After rise
The hedge covers equity, property and credit but not equity volatility The hedge operates such that: When asset shares fall in value and the CoG increases there is an equal and opposite positive payoff from the hedge When asset shares rise in value and the CoG decreases there is an equal and opposite negative payoff from the hedge The RIEESA is therefore stable and earnings from it and the CoG are predictable An example is given in the appendix
With profits Annuities
12.5 12.0 11.5 Target return assets 11.0 10.5 10.0 Mar Apr May Jun Jul Aug Sept Oct Actual return assets
The dynamic hedge is monitored daily to ensure it continues to provide the appropriate level of protection The hedge is adjusted if the asset holdings fall outside of the 250bps tolerance (it is 97.5% effective) It is fully recalibrated at every month end Profits/losses due to non-daily adjustments are minimal (profit over period of 21 million on 13 billion of return assets)
With profits Annuities
2008 2010
73% reduction
Equity
Property
Credit
Interest rates
Equity Volatility
Demographic
Total diversified
Equity, property, credit and interest risks reduced through de-risking and dynamic hedge Equity volatility remains - this is monitored closely to assess whether hedging is necessary but we expect this to mean revert over time Demographic risks of longevity and persistency are monitored/managed Low interest environment not significant due to duration matching and regular re-balancing g g g g
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Annuities
With-profits summary
Active management of risks in a post-reattribution world creates significant shareholder opportunity for predictable IFRS earnings
Reattribution has changed the shareholders risk/reward profile Avivas dynamic hedge strategy has reduced market risks Ensuring the RIEESA can be used to write new non profit business (expect to write non-profit 650 million over 5 years in the RIEESA) Enabling profits from the existing back book to be used for paying dividends Provides recurring, p g predictable IFRS operating earnings of c.120 million p and further p g g p.a. upside/downside potential from policyholder actions and un-hedged assets
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Annuities
UK annuity business
Large annuity back book and significant new business growth potential
bn
Annuity Liability cashflow Annual liability cashflow
21 billion annuity book with 750k customers Growth in annuity book of 5 billion over the last 3 years Growth is as a result of: Competitive pricing, supported by: Asset sourcing Longevity expertise Pricing strategies High retention of maturing pensions business (c.70%) Strong brand in the at retirement market Market growth expected to continue due to number of people reaching retirement age
2011 2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066
aged 65
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Annuities
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UK annuity risks
UK annuity business generates stable IFRS operating earnings
UKA Profit Drivers
m
140 120 100 80 60 40 20 (20) (40) (60)
H109 H209
Acquisition expenses New business margin Spread margin Expected return Admin expenses
H110
UKA generates stable IFRS operating profits with minimal non-operating variances Profits mainly arise up-front as new business margin with on-going profits from spread margin margin, and expected return on excess assets, offset by expenses The growth in new business margin (and acquisition costs) reflects our competitive advantage achieved through our asset and pricing strategy
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Annuities
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Credit
Longevity Interest
Property
Deflation
Expense
Other
In writing annuity business shareholders are exposed to risks from: Interest and inflation Longevity Credit defaults and spreads Credit risk is the single largest risk exposure this is managed via high quality asset selection Longevity risk is managed based on appetite I t Interest and inflation risks are mitigated th t d i fl ti i k iti t d through d ti matching h duration t hi
* Economic capital is based on internal assessment and capital management policies. It does not imply capital required by regulators or other third parties
With profits
Annuities
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Duration matching
Interest and inflation risks managed through duration matching
UKA Matching asset backing FSA pillar 1 reserves
m
1750 1500 1250 1000 750 500 250 0 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065
Assets backing FSA Pillar 1 reserves and solvency capital are kept duration matched via asset mix and swap overlays Excess assets above solvency capital are held in interest rate insensitive assets This investment approach leaves the fund exposed to a stand alone stress of interest rate rises on a Pillar 2 ICA basis as the liability duration becomes 9.5 years But this does not lead to a significant increase in capital due to the interaction of this risk with the longevity risk in the fund
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Annuities
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Asset strategy
Unique ability to source diverse and high quality assets
Access to commercial mortgages and equity release through internal companies creates pricing and profit advantages High quality corporate bond portfolio Our asset sourcing strategy provides good diversification benefits which are recognised in an economic capital world Economic Capital benefits allow more competitive pricing and superior returns for shareholders
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Annuities
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Corporate bonds
7 billion Corporate bond portfolio of consistent asset quality
Share of corporate bond portfolio
60% 50% 40% FY08 30% 20% 10% 0% AAA AA A BBB FY09 HY10
Portfolio stable at A rating Defaults and impairments over the last 3 years amount to 25 million on the 7 billion portfolio (equating to11bps p.a.) Compared with our long term default assumption of 31bps and additional short term provision of 24bps (overall reserve of c.0.5 billion) Th There is no impact on IFRS operating profits but, IFRS total profits benefit as experience is positive i i t ti fit b t t t l fit b fit i i iti
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15
The portfolio comprises commercial property loans and NHS Healthcare & PFI loans c.50% of the book is backed by investment grade tenants including the Government The NHS Healthcare & PFI loans are quasi Government Go ernment so are lo risk low Primarily a long term fixed rate book designed to match long term fixed rate liabilities Prudent underwriting philosophy involving: First legal charge over properties No high risk lending such as: g g interest only loans with high LTVs, or mezzanine, quasi-equity or speculative development finance
Lending to investment companies to fund surgeries with GPs as tenants. Building Schools for the Future
With profits Annuities
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Sector Diversity y
Well diversified portfolio by Property sector and geography Tenant (c.4,700) Borrower (c.600) Diverse tenant base with only 8 exposures paying >1% of total portfolio rent The portfolio is underweight in the most volatile property sectors Average remaining lease term is 12 years which supports the long-term nature of the loans c 60% of the portfolio benefits c.60% from cross-charging
2%
1%
10% 0% Industrial dust a 14% 15%
Ot e Other
30%
Geographical Diversity
UKA - CPF IPD Industry Benchmark (April 2009)
20%
25.1 %
30%
20%
13.8 14.8 % % 4.6 %
18 %
10%
10.2 10.5 % %
36 %
13.7 %
3.2% 1.0%
3.1%
10%
29 % 22 24 % % 15 15 11 % % % 8% 6% 6% 5%
0%
< 1 1-3 3-5 5-10 10-15 15-20 20-25 25-30 30-35 >35 Year Years Years Years Years Years Years Years Years Years
0%
3% 2%
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0%
2011 2012 2013 2014 2015- 2018- 2021- 2024- 2027- 2030- 2033- 2036+ 2017 2020 2023 2026 2029 2032 2035
A Average LTV across the portfolio is 98% th tf li i Loans with shorter terms have lower LTVs on average Loan covenants, when available, mean we can step in and take action to secure our interests c.30% of the capital outstanding amortises over the lif of the l 30% f h i l di i h life f h loans
With profits Annuities
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30 m 20 10 0
2000 - 2007
2008
2009
mid 2010
The realised and expected losses over the last 3 years are c 25bps p a compared with our long term c.25bps p.a. assumption of 50bps and additional short term provision of 55bps (overall reserve of c.0.7 billion) Interest service cover ratios remain resilient at 1.30x and loan service cover at 1.16x Arrears are only 1.7% of annual interest receivable and 7 day collection ratios remain strong at 99% Impairment of the portfolio is significantly lower than the industry average (3.3% for the portfolio versus an estimated 9.5% for the total industry - Source: De Montfort University survey)
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Annuities
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Annuities summary
Active management of risks creates stable IFRS earnings and capital benefits
Large back book and growing new business franchise written on attractive terms (IRR 15+%) Managed from an ALM perspective to ensure shareholders have minimal interest rate risk High quality and diversified credit portfolio Generating stable IFRS earnings and a resilient balance sheet
With profits
Annuities
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Gives confidence in the resilience of our Balance Sheet, total IFRS earnings and OCG capabilities Sheet
21
Appendix
22
Cash 50
Asset share 100
Hedge allocation g
Cash 10
Cash 40
Net 20 Equities (20)
Equities 70
Actual assets held
Equities 90
Assets allocated to Asset share Assets allocated to CoG
COG 22
Asset share 91
Equities 63
Actual assets held
Hedge allocation
Equities 81
Assets allocated to Asset share Assets allocated to CoG
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