Aviva 2013 Annual Report Download - page 292

Aviva plc
Annual report and accounts 2013
290
Shareholder information continued
representative of our liquidity, we believe that our working
capital is sufficient for our present operational requirements. For
additional information, see ‘IFRS Financial statements – note 58
– Risk management – liquidity risk’.
Extraordinary market conditions
Starting in mid-September 2008, the global financial markets
experienced unprecedented disruption, adversely affecting the
business environment in general, as well as financial services
companies in particular. Markets have improved but continue to
be fragile. A return to adverse financial market conditions could
significantly affect our ability to meet liquidity needs and obtain
capital, although management believes that we have liquidity
and capital resources to meet business requirements under
current and stressed market conditions.
At 31 December 2013, total consolidated cash and cash
equivalents net of bank overdrafts amounted to £24,857
million, an increase of £1,404 million over £23,453 million
in 2012.
Processes for monitoring and managing liquidity risk,
including liquidity stress models, have been enhanced to take
into account the extraordinary market conditions, including the
impact on policyholder and counterparty behaviour, the ability
to sell various investment assets and the ability to raise
incremental funding from various sources. Management has
taken steps to strengthen liquidity in light of its assessment of
the impact of market conditions, including issuing €650 million
Lower Tier 2 hybrid debt in July 2013, and will continue to
monitor liquidity closely.
Management of capital resources
We seek to maintain an efficient capital structure using a
combination of equity shareholders’ funds, preference capital,
subordinated debt and borrowings. This structure is consistent
with our risk profile and the regulatory and market
requirements of our business.
In managing our capital, we seek to:
 match the profile of our assets and liabilities, taking into
account the risks inherent in each business;
 maintain financial strength to support new business growth
whilst still satisfying the requirements of policyholders,
regulators and rating agencies;
 retain economic capital financial flexibility by maintaining
strong liquidity, access to a range of capital markets and
significant unutilised committed credit lines;
 allocate capital efficiently to support growth and repatriate
excess capital where appropriate; and
 manage exposures to movements in exchange rates by
aligning the deployment of capital by currency with our
capital requirements by currency.
We are subject to a number of regulatory capital tests and
employ realistic scenario tests to allocate capital and manage
risk. The impact of these regulatory capital tests on our ability to
transfer capital around the Group through dividends and capital
injections is discussed later in this section under the headings
‘Sources of liquidity’ and ‘Capital injections’.
At 31 December 2013, the Group had £16.1 billion (31
December 2012: £16.5 billion) of total capital employed in
our trading operations which is financed by a combination of
equity shareholders’ funds, preference capital, direct capital
instruments, subordinated debt and internal and external
borrowings.
In addition to external funding sources, we have a number
of internal debt arrangements in place. These have enabled us
to deploy cash from some parts of the business to others in
order to fund growth. Although intra-Group loans in nature,
they are counted as part of the capital base for the purpose of
capital management. All internal loans satisfy arm’s length
criteria and all interest payments have been made when due.
Management of debt
Aviva plc is the principal financing vehicle in our centralised
funding strategy. We aim to manage our external debt in line
with rating agency limits applicable for entities with a rating in
the AA range. We manage the maturity of our borrowings and
our undrawn committed facilities to avoid bunching of
maturities. We aim to maintain access to a range of funding
sources, including the banking market, the commercial paper
market and the long-term debt capital markets. We issue debt
in a variety of currencies, predominantly sterling and euros,
based on investor demand at the time of issuance and
management of the Group’s foreign exchange translation
exposures in the statement of financial position.
In July 2013, we issued €650 million of Lower Tier 2
subordinated debt callable in 2023. In October 2013, we repaid
a €650 million Lower Tier 2 subordinated debt instrument at its
first call date.
At 31 December 2013, our total external borrowings,
including subordinated debt and securitised mortgage loans,
amounted to £7.8 billion (2012: £8.3 billion). Of the total
borrowings, £5.1 billion (2012: £5.1 billion) are considered to
be core borrowings and are included within the Group’s capital
employed. The balance of £2.7 billion (2012: £3.2 billion)
represents operational debt issued by operating subsidiaries.
We also have substantial committed credit facilities available for
our use. At 31 December 2013, we had undrawn committed
credit facilities expiring within one year of £0.4 billion (2012:
£0.4 billion) and £1.1 billion in credit facilities expiring after
more than one year (2012: £1.7 billion). Of these facilities,
£750 million was allocated in 2013 (2012: £750 million) to
support our commercial paper programme.
Further information on the maturity profile, currency and
interest rate structure of our borrowings is presented in ‘IFRS
Financial statements – note 50 – Borrowings’. Commercial
paper is issued for terms up to 12 months and is generally
reissued at maturity. On 28 February 2014, the Company gave
notice of its intention to redeem two subordinated debt
instruments of £200 million and €50 million at their first call
dates of 1 April and 30 April respectively.
The table below presents our debt position for the periods
indicated:
2013
£m
Restated1
2012
£m
Core structural borrowings
Subordinated debt 4,370 4,337
Debenture loans 199 199
Commercial paper 556 603
5,125 5,139
Operating borrowings
Operational borrowings at amortised cost 1,410 1,853
Operational borrowings at fair value 1,313 1,332
2,723 3,185
7,848 8,324
Less: Amounts classified as held for sale (29) (145)
Total 7,819 8,179
1 Comprises the impact of the adoption of IFRS 10 on the prior year comparative and the resulting consolidation
and deconsolidation of entities based on the revised definition and criteria of control outlined in accounting
Policy (D). See ‘IFRS Financial statements – note 1’ for further details.
In the UK, we have raised non-recourse funding secured against
books of mortgages. This funding has been raised through the
use of special-purpose entities. The beneficial interest in the
books of mortgages has been passed to these special-purpose
entities. These entities, which are owned by independent
trustees, have funded this transfer through the issue of loan
notes.
The value of the secured assets and the corresponding non-
recourse funding was £1,313 million (2012: £1,332 million).
We continue to receive fees from these special purpose entities
in respect of loan administration services.