Aviva 2013 Annual Report Download - page 224

Aviva plc
Annual report and accounts 2013
222
Notes to the consolidated financial statements continued
58 – Risk management continued
(x) Impairment of financial assets
In assessing whether financial assets carried at amortised costs or classified as available for sale are impaired, due consideration is
given to the factors outlined in accounting policies (T) and (V). The following table provides information regarding the carrying
value of financial assets subject to impairment testing that have been impaired and the ageing of those assets that are past due but
not impaired. The table excludes assets carried at fair value through profit or loss or ‘held for sale’.
Financial assets that are past due but not impaired
At 31 December 2013
Neither past
due nor
impaired
£m
0–3 months
£m
3–6 months
£m
6 months–1
year
£m
Greater
than 1 year
£m
Financial
assets that
have been
impaired
£m
Carrying
value
£m
Debt securities 1,133 — — — — — 1,133
Reinsurance assets 7,220 — — — — — 7,220
Other investments 7 — — — — 6 13
Loans 5,263 — — — — 139 5,402
Receivables and other financial assets 6,934 56 26 18 22 4 7,060
Financial assets that are past due but not impaired
At 31 December 2012 (Restated1 )
Neither past
due nor
impaired
£m
0–3 months
£m
3–6 months
£m
6 months–1
year
£m
Greater than
1 year
£m
Financial
assets that
have been
impaired
£m
Carrying
value
£m
Debt securities 517 — — — — — 517
Reinsurance assets 6,684 — — — — — 6,684
Other investments 9 — — — — 8 17
Loans 5,469 — — — — 151 5,620
Receivables and other financial assets 7,384 43 12 13 24 — 7,476
1 Restated for the impact of IFRS 10 (see note 1 for further details) and to exclude financial assets carried at fair value through profit or loss.
Excluded from the tables above are financial assets carried at fair value through profit or loss that are not subject to impairment
testing, as follows: £125.7 billion of debt securities (2012: £131.9 billion), £31.4 billion of other investments (2012: £28.6 billion )
and £18.5 billion of loans (2012: £18.9 billion). Of these financial assets none are past due other than £513 million (2012: £531
million) of loans that are deemed not to have met their contractual commitments, and are therefore considered to be non-
performing. The fair value of these loans reflects the underlying property exposure.
Where assets have been classed as ‘past due and impaired’, an analysis is made of the risk of default and a decision is made
whether to seek to mitigate the risk. There were no material financial assets that would have been past due or impaired had the
terms not been renegotiated.
(c) Market risk
Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations in interest rates, foreign currency
exchange rates, equity and property prices. Market risk arises in business units due to fluctuations in both the value of liabilities and
the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses and in the
value of investment assets owned directly by the shareholders. We actively seek some market risks as part of our investment and
product strategy. However, we have limited appetite for interest rate risk as we do not believe it is adequately rewarded.
The management of market risk is undertaken at business unit and at Group level. Businesses manage market risks locally using
the Group market risk framework and within local regulatory constraints. Group Risk is responsible for monitoring and managing
market risk at Group level and has established criteria for matching assets and liabilities to limit the impact of mismatches due to
market movements.
In addition, where the Group’s long-term savings businesses have written insurance and investment products where the
majority of investment risks are borne by its policyholders, these risks are managed in line with local regulations and marketing
literature, in order to satisfy the policyholders’ risk and reward objectives. The Group writes unit-linked business in a number of
its operations. The shareholders’ exposure to market risk on this business is limited to the extent that income arising from asset
management charges is based on the value of assets in the fund.
The most material types of market risk that the Group is exposed to are described below.
(i) Equity price risk
The Group is subject to equity price risk arising from changes in the market values of its equity securities portfolio.
We continue to limit our direct equity exposure in line with our risk preferences. The disposal of the Group’s remaining
shareholding in Delta Lloyd has decreased the Group’s shareholder equity price risk and, in particular, has led to a fall in equity
exposures. At a business unit level, investment limits and local asset admissibility regulations require that business units hold
diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have signigicant holdings
of unquoted equity securities.
Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model
the performance of equities through the use of risk models, in particular to understand the impact of equity performance on
guarantees, options and bonus rates. At 31 December 2013 the Group’s shareholder funds held £1.5 billion notional of equity
hedge put spreads, with up to 15 months to maturity with an average strike of 82-68% of the prevailing market levels on
31 December 2013.
Sensitivity to changes in equity prices is given in section ‘(j) risk and capital management’ below.