Aviva 2013 Annual Report Download - page 222

Aviva plc
Annual report and accounts 2013
220
Notes to the consolidated financial statements continued
58 – Risk management continued
Further information on the types and management of specific risk types is given in sections (b) – (j) below.
The risk management framework of a small number of our joint ventures and strategic equity holdings differs from the Aviva
framework outlined in this note. We work with these entities to understand how their risks are managed and to align them, where
possible, with Aviva’s framework.
(b) Credit risk
Credit risk is the risk of financial loss as a result of the default or failure of third parties to meet their payment obligations to Aviva,
or variations in market values as a result of changes in expectations related to these risks. Credit risk is an area where we can
provide the returns required to satisfy policyholder liabilities and to generate returns for our shareholders. In general we prefer to
take credit risk over equity and property risks, due to the better expected risk adjusted return, our credit risk analysis capability and
the structural investment advantages conferred to insurers with long-dated, relatively illiquid liabilities.
Our approach to managing credit risk recognises that there is a risk of adverse financial impact resulting from fluctuations in
credit quality of third parties including default, rating transition and credit spread movements. Our credit risks arise principally
through exposures to debt security investments, structured asset investments, bank deposits, derivative counterparties, mortgage
lending and reinsurance counterparties.
The Group manages its credit risk at business unit and Group level. All business units are required to implement credit risk
management processes (including limits frameworks), operate specific risk management committees, and ensure detailed reporting
and monitoring of their exposures against pre-established risk criteria. At Group level, we manage and monitor all exposures across
our business units on a consolidated basis, and operate a Group limit framework that must be adhered to by all.
A detailed breakdown of the Group’s current credit exposure by credit quality is shown below.
(i) Financial exposures by credit ratings
Financial assets are graded according to current external credit ratings issued. AAA is the highest possible rating. Investment grade
financial assets are classified within the range of AAA to BBB ratings. Financial assets which fall outside this range are classified as
sub-investment grade. The following table provides information regarding the aggregated credit risk exposure of the Group for
financial assets with external credit ratings, excluding assets ‘held for sale’. ‘Not rated’ assets capture assets not rated by external
ratings agencies.
As at 31 December 2013 AAA AA A BBB
Speculative
g
rade Not rated
Carrying
value
including
held for sale
£m
Less:
Amounts
classified as
held for sale
£m
Carrying
value
£m
Debt securities 13.0% 33.1% 20.8% 24.9% 2.8% 5.4% 126,805 (2,420) 124,385
Reinsurance assets 0.3% 53.6% 37.1% 1.1% 0.1% 7.8% 7,257 (37) 7,220
Other investments — 0.3% 0.7% 1.0% 0.1% 97.9% 31,451 (201) 31,250
Loans 3.8% 12.1% 1.2% — 0.3% 82.6% 23,879 — 23,879
Total 189,392 (2,658) 186,734
As at 31 December 2012 (Restated1) AAA AA A BBB
Speculative
grade Not rated
Carrying
value
including
held for sale
£m
Less:
Amounts
classified as
held for sale
£m
Carrying
value
£m
Debt securities 24.4% 16.9% 23.9% 25.4% 4.2% 5.2% 161,777 (33,617) 128,160
Reinsurance assets 0.4% 63.4% 30.1% 0.7% 0.1% 5.3% 7,567 (883) 6,684
Other investments 0.1% 0.2% 2.4% 2.1% 1.6% 93.6% 29,068 (1,550) 27,518
Loans 5.8% 8.2% 1.2% 0.1% 0.7% 84.0% 27,934 (3,397) 24,537
Total 226,346 (39,447) 186,899
1 Restated for the adoption of IFRS10. See note 1 for further details.
The Group's maximum exposure to credit risk of financial assets, without taking collateral into account, is represented by the
carrying value of the financial instruments in the statement of financial position. These comprise debt securities, reinsurance
assets, derivative assets, loans and receivables. The carrying values of these assets are disclosed in the relevant notes: financial
investments (note 27), reinsurance assets (note 44), loans (note 24) and receivables (note 28). The collateral in place for these credit
exposures is disclosed in note 60; Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and
similar agreements
Additional information in respect to collateral is provided in notes 24(c) and notes 27(d)(i).
To the extent that collateral held is greater than the amount receivable that it is securing, the table above shows only an
amount equal to the latter. In the event of default, any over-collateralised security would be returned to the relevant counterparty.
(ii) Financial exposures to peripheral European countries and worldwide banks
Included in our debt securities and other financial assets are exposures to peripheral European countries and worldwide banks. We
continued in 2013 to limit our direct shareholder and participating assets exposure to the governments (including local authorities
and agencies) and banks of Greece, Ireland, Portugal, Italy and Spain, which has been offset by an increase in market values.
Information on our exposures to peripheral European sovereigns and banks is provided in notes 27(e) and 27(f). We continue to
monitor closely the situation in the eurozone and have had additional restrictions on further investment in place since late 2009 as
well as taking actions to reduce exposure to higher risk assets. However, in the light of the improving economic situation in Ireland,
we plan to allow a modest increase in our exposure to Irish sovereign debt during 2014.