Aviva 2013 Annual Report Download - page 247

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
245
Notes to the Company’s financial statements continued
H – Risk management
Risk management in the context of the Group is considered in the Group consolidated financial statements, note 58.
The business of the Company is managing its investments in subsidiary and joint venture operations. Its risks are considered to
be the same as those in the operations themselves and full details of the major risks and the Group’s approach to managing these
are given in the Group consolidated financial statements, note 58. Such investments are held by the Company at fair value in
accordance with accounting policy D.
The fair values of the subsidiaries and joint venture are estimated using applicable valuation models, underpinned by the
Company’s market capitalisation. This uses the Company’s closing share price at year end. Given that the key input into the
valuation model is based on an observable current share price, and therefore sensitive to movements in that price, the valuation
process is not sensitive to non-observable market assumptions.
Financial assets, other than investments in subsidiaries and the joint venture, largely consist of amounts due from subsidiaries.
As at the balance sheet date, these receivable amounts were neither past due nor impaired.
Financial liabilities owed by the Company as at the balance sheet date are largely in respect of borrowings (details of which are
provided in note F and the Group consolidated financial statements, note 50) and loans owed to subsidiaries. Loans owed to
subsidiaries were within agreed credit terms as at the balance sheet date.
Interest rate risk
Loans to and from subsidiaries are at either fixed or floating rates of interest, with the latter being exposed to fluctuations in these
rates. The choice of rates is designed to match the characteristics of financial investments (which are also exposed to interest rate
fluctuations) held in both the Company and the relevant subsidiary, to mitigate as far as possible each company’s net exposure.
All the Company’s long term external borrowings are at fixed rates of interest and are therefore not exposed to changes in
these rates. However, for short term commercial paper, the Company is affected by changes in these rates to the extent the
redemption of these borrowings is funded by the issuance of new commercial paper or other borrowings. Further details of the
Company’s borrowings are provided in note F and the Group consolidated financial statements, note 50.
The effect of a 100 basis point increase/decrease in interest rates would be a decrease/increase in profit before tax of £109
million (2012: decrease/increase of £111 million). The net asset value of the Company’s financial resources is not materially
affected by fluctuations in interest rates.
Currency risk
The Company’s direct subsidiaries are exposed to foreign currency risk arising from fluctuations in exchange rates during the
course of providing insurance and asset management services around the world. The exposure of the subsidiaries to currency risk is
considered from a Group perspective in the Group consolidated financial statements, note 58.
The Company faces exposure to foreign currency risk through some of its borrowings which are denominated in Euros.
However, most of these borrowings have been on-lent to a subsidiary which holds investments in Euros, generating the net
investment hedge described in the Group consolidated financial statements, note 59(a)(iii).
Liquidity risk
Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form.
The Company’s main sources of liquidity are liquid assets held within the Company and its subsidiary Aviva Group Holdings Limited
(AGH), and dividends received from the Group’s insurance and asset management businesses. Sources of liquidity in normal
markets also includes a variety of short and long-term instruments including commercial papers and medium and long-term debt.
In addition to the existing liquid resources and expected inflows, the Company maintains significant undrawn committed
borrowing facilities (£1.5 billion) from a range of leading international banks to further mitigate this risk.
Maturity analysis of external borrowings and amounts due to and by subsidiaries are provided in notes F and I respectively.