Aviva 2013 Annual Report Download - page 304

Aviva plc
Annual report and accounts 2013
302
Shareholder information continued
Failure to comply with client contractual requirements and/or
guidelines could result in damage awards against us and our
fund management operations and loss of revenues due to
client terminations.
When clients retain us to manage assets on their behalf, we
must comply with contractual obligations and guidelines agreed
with such clients in the provision of our services. A failure to
comply with these guidelines or contractual requirements could
result in damage to our reputation or in our clients seeking to
recover losses, withdrawing their funds or terminating their
contracts, any of which could cause our revenues and earnings
to decline.
Failure to manage risks in operating securities lending of
Group and third party client assets could adversely affect our
results of operations and financial condition and for our fund
management operations lead to a loss of clients and a decline
in revenues and liquidity.
In operating securities lending of Group and third party client
assets, our fund management operations must manage risks
associated with (i) ensuring that the value of the collateral held
against the securities on loan does not decline in value or
become illiquid and that our nature and value complies with
regulatory requirements and investment requirements; (ii) the
potential that a borrower defaults or does not return a loaned
security on a timely basis; and (iii) errors in the settlement of
securities, daily mark-to-market valuations and collateral
collection. The failure of our fund management controls to
mitigate these risks could result in financial losses for us and
third party clients that participate in our securities lending
programmes.
Liquidity risks relating to Aviva’s business
Adverse capital and credit market conditions may affect our
ability to meet liquidity needs and to access capital which
could adversely affect our results of operations or
financial condition.
At Group level, we need some of our invested assets to be liquid
to pay our operating expenses, taxes, interest on our debt,
dividends on our capital stock and repay maturing debt. At an
operational level we also need liquidity to meet insurance
claims. Without sufficient liquidity, we could be forced to curtail
our operations and our business would suffer. The principal
sources of our liquidity are insurance premiums, annuity
considerations, deposit funds and cash flow from our
investment portfolio and assets, consisting mainly of cash or
assets that are readily convertible into cash. Sources of liquidity
in normal markets also include a variety of short and long-term
instruments, including repurchase agreements, commercial
paper, medium and long-term debt, junior subordinated debt,
securities, capital securities and stockholders’ equity.
We hold certain investments that may lack liquidity such as
privately placed fixed-maturity securities, and unlisted equities.
The valuations of such assets are based on inputs which are not
directly observable in the market. The inputs used reflect the
assumptions that we consider market participants would
normally use based on a combination of independent third party
evidence and internally developed models, intended to be
calibrated to market observable data where possible. These are
known as Level 3 asset classes in our fair value hierarchy and
represented 17% of total financial assets and investment
properties held at fair value as of 31 December 2013. As has
been the case across the industry, even some higher-quality
assets have been more illiquid as a result of the recent
challenging market conditions.
The reported value of our relatively illiquid types of investments,
our investments in the asset classes described in the paragraph
above and, at times, our higher-quality, generally liquid asset
classes, do not necessarily reflect the lowest current market
price for the asset. If we were forced to sell certain of our assets
in the current market, there can be no certainty that we would
be able to sell them for the prices at which we have recorded
them and we may be forced to sell them at significantly
lower prices.
We may need to seek additional financing in the event
internal resources are not sufficient to meet our needs. The
availability of additional financing will depend on a variety of
factors such as market conditions, the general availability of
credit, the overall availability of credit to the financial services
industry and the market’s perception of our financial condition.
Disruptions and uncertainty or volatility in the capital and credit
markets may exert downward pressure on availability of liquidity
and credit capacity for certain issuers and may limit our access
to capital required to operate and grow our business. Such
market conditions may limit our ability to replace, in a timely
manner, maturing debt, satisfy statutory capital requirements
and generate fee income and market-related revenue to meet
liquidity needs.
As such, we may be forced to delay raising capital, issue
shorter-term securities than we prefer, or bear an unattractive
cost of capital which could decrease profitability and reduce
financial flexibility. Our results of operations, financial condition
and cash flows could be materially adversely affected.
As a holding company, Aviva plc is dependent on our
operating subsidiaries to cover operating expenses and
dividend payments.
As a holding company, Aviva plc has no substantial operations
of our own. Our principal sources of funding are dividends from
subsidiaries, shareholder-backed funds and any amounts that
may be raised through the issuance of debt and commercial
paper. Our insurance and fund management operations are
generally conducted through direct and indirect subsidiaries.
Certain subsidiaries have regulatory restrictions that may limit
the payment of dividends, which in some circumstances could
limit our ability to pay dividends to shareholders. The inability
of our subsidiaries to pay dividends in an amount sufficient
to enable us to meet our cash requirements at the holding
company level could have a material adverse impact on
our business.
A requirement to pay intercompany indebtedness early
could have negative consequences for our business and
results of operations.
An intercompany loan was granted by Aviva Insurance Limited
to Aviva Group Holdings Limited in February 2013 (the balance
of which was £4.8 billion as at 31 December 2013). We have
agreed with the Board of the UK General Insurance Company
(AIL) an appropriate target for the long term level of the internal
loan between the Group Holding Company (AGH) and AIL.
That level has been set such that AIL places no reliance on the
loan to meet its stressed insurance liabilities assessed on a 1:200
basis. Our prudential regulators, PRA, agree with this approach.
The effect of this would be to reduce the internal loan balance
from its level at the end of February 2014 of £4.1 billion to
approximately £2.2 billion. We will complete this reduction by
the end of 2015. A requirement to reduce the loan more rapidly
or to a greater extent than planned could have negative
consequences for our business and results of operations and,
in particular, could impact on the ability of subsidiaries to remit
dividends to the Issuer.