Aviva 2013 Annual Report Download - page 301

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
299
Shareholder information continued
Risks relating to our business
You should carefully review the following risk factors
together with other information contained in this
Annual Report before making an investment decision
relating to our ordinary shares or ADSs. Our business,
financial position, results of our operations and cash
flow could be materially affected by any of these risks,
the trading price of our ordinary shares or ADSs could
decline due to any of these risks and investors may
lose part or all of their investment.
Ongoing difficult conditions in the global financial markets
and the economy generally may adversely affect our business
and results of operations, and these conditions may continue.
Our results of operations are materially affected by uncertainty
in the worldwide financial markets and macro-economic
conditions generally. A wide variety of factors, including
concerns over slowing growth, high sovereign debt within, and
to a lesser degree outside, the eurozone, the stability and
solvency of financial institutions, longer-term low interest rates
in developed markets, inflationary threats as well as geopolitical
issues in the Middle East and North Africa, together with a lack
of a decisive political majority in a number of countries including
the US and Italy, have contributed to increased volatility in the
financial markets in recent years and have diminished growth
expectations for the global economy going forward. Global
fixed income markets continue to experience periods of both
volatility and limited market liquidity, which have affected a
broad range of asset classes and sectors.
Factors relating to general economic conditions, such as
consumer spending, business investment, government
spending, the volatility and strength of both debt and equity
markets, and inflation, all affect the profitability of our business.
In a sustained economic phase of low growth and high public
debt, characterised by higher unemployment, lower household
income, lower corporate earnings, lower business investment
and lower consumer spending, the demand for financial and
insurance products could be adversely affected. In addition, we
may experience an elevated incidence of claims or surrenders of
policies. Any potential material adverse effect will also be
dependent upon customer behaviour and confidence.
As a global business, we are exposed to various local
political, regulatory and economic conditions, business risks
and challenges which may affect the demand for our
products and services, the value of our investment portfolios
and the credit quality of local counterparties.
We offer our products and services in Europe (including the UK),
North America and the Asia Pacific region through wholly
owned and majority-owned subsidiaries, joint ventures,
companies in which we hold non-controlling equity stakes,
agents and independent contractors. Our international
operations expose us to different local political, regulatory,
business and financial risks and challenges which may affect the
demand for the our products and services, the value of our
investment portfolio, the required levels of capital and surplus,
and the credit quality of local counterparties. These risks
include, for example, political, social or economic instability in
countries in which we operate, discriminatory regulation, credit
risks of our counterparties, lack of local business experience in
certain markets, risks associated with exposure to insurance
industry insolvencies through policyholder guarantee funds or
similar mechanisms set up in markets in which we are present
and, in certain cases, risks associated with the potential
incompatibility with foreign partners, especially in countries in
which we are conducting business through entities which we do
not control. Some of our international insurance operations are,
and are likely to continue to be, in emerging markets where
these risks are heightened. Our overall success as a global
business depends, in part, upon our ability to succeed in
different economic, social and political conditions.
Credit risks relating to Aviva’s business
Market developments and government actions regarding the
sovereign debt crisis in Europe, particularly in Greece, Ireland,
Italy, Portugal and Spain, could have a material adverse
effect on our results of operations, financial condition
and liquidity.
The continued uncertainty over the outcome of various
European Union (“EU”) and international financial support
programmes, and the possibility that other EU member states
may experience similar financial pressures, could further disrupt
global markets. In particular, this crisis has disrupted, and could
further disrupt, equity and fixed income markets, and has
resulted in volatile bond yields on the sovereign debt of EU
members.
The issues arising out of the current sovereign debt crisis
may transcend Europe, cause investors to lose confidence in the
safety and soundness of European financial institutions and the
stability of European member economies, and likewise affect UK
and US based financial institutions, the stability of the global
financial markets and any economic recovery. We hold
investments in both UK and non-UK securities.
If an EU member state were to default on our obligations or
to seek to leave the eurozone, or if the eurozone were broken
up entirely, the impact on the financial and currency markets
would be significant and could impact materially all financial
institutions, including the Group. Recent political negotiations
in the US over raising the US debt ceiling indicate that a risk of
sovereign debt default and the potential adverse impact on
global markets which could result from this, is not limited to the
eurozone. Such events could adversely affect our business and
results of operations, financial condition and liquidity.
Credit spread volatility may adversely affect the net
unrealised value of our investment portfolio and the results
of our operations.
Our exposure to credit spreads primarily relates to market price
variability associated with changes in credit spreads in our
investment portfolio, which is largely held to maturity. Credit
spread moves may be caused by changes in the perception of
the credit worthiness of the issuer, or from market factors such
as the market’s risk appetite and liquidity. A widening of credit
spreads will generally reduce the value of fixed income securities
we hold. Conversely, credit spread tightening will generally
increase the value of fixed income securities we hold. It can be
difficult to value certain of our securities if trading becomes less
liquid. Accordingly, valuations of investments may include
assumptions or estimates that may have significant period to
period changes that could have a material adverse effect on our
consolidated results of operations or financial condition.
Downturns in the net unrealised value of our investment
portfolio may also have a material adverse effect on our
regulatory capital surplus based on the EU Insurance Groups
Directive and under the Individual Capital Assessment required
by the Prudential Regulation Authority (“PRA”) in the UK.
Although our financial statements reflect the market value of
assets, our priority remains the management of assets and
liabilities over the longer term.
Losses due to defaults by counterparties, including potential
sovereign debt defaults or restructurings, could adversely
affect the value of our investments and reduce our
profitability and shareholders’ equity.
We choose to take and manage credit risk through investment
assets partly to increase returns to policyholders whose policies
the assets back, and partly to optimise the return for
shareholders.