Aviva 2014 Annual Report Download - page 253

Aviva plc Annual report and accounts 2014
249
General insurance and health underwriting cycle
Our general insurance and health business is comprised of our
property and casualty insurance and health insurance
operations. In 2014, general insurance and health sales
accounted for 41% of Group net written premiums (NWP) from
continuing operations. Demand for general insurance is usually
price-sensitive because of the limited degree of product
differentiation inherent in the industry. As a result, the price of
insuring property and casualty risks is subject to a cycle (called
an underwriting cycle). In periods when the price of risk is high,
the high profitability of selling insurance attracts new entrants
and hence new capital into the market. Increased competition,
however, drives prices down. Eventually the business becomes
uneconomic and some industry players, suffering from losses,
exit the market whilst others fail, resulting in lower capital
invested within the market. Decreased competition leads to
increasing prices, thereby repeating the cycle. Our various
general insurance markets are not always at the same stage of
the underwriting cycle.
In the UK, the personal motor market has seen further rate
reductions in 2014 reflecting intense competition and regulatory
change. This follows a period of rate increases in previous periods
in response to rising claims costs and frequencies. Challenging
rating conditions also apply to other UK classes of business.
We expect the underwriting cycle to continue in the future
but to be less pronounced than in the past because of structural
changes to the industry over the past decade. Capital markets
are imposing financial discipline by being increasingly more
demanding about performance from insurance companies
before extending new capital. Such discipline, together with the
increased concentration of competitors within the market, and
the adoption of more advanced pricing methods, is expected to
make the underwriting cycle less pronounced in the future.
Natural and man-made disasters
Our general insurance business results are affected by the amount
of claims we need to pay out which, in turn, can be subject to
significant volatility depending on many factors, including natural
and man-made disasters. Natural disasters arise from adverse
weather, earthquakes and other such natural phenomena. Man-
made disasters include accidents and intentional events, such as
acts of terrorism. These events are difficult to predict with a high
degree of accuracy, although they generally occur infrequently at a
material level. Our exposure to large disasters is somewhat
reduced through our focus on personal lines business and small to
medium sized commercial risks in the general insurance business.
The Group cedes the majority of its worldwide catastrophe risk to
third-party reinsurers.
In 2014 our operations in Canada suffered from losses due
to the severe winter in the first quarter of 2014 followed by
hailstorms in August (see 'Market performance – Canada' below
for further details) and our operations in France were also
impacted by adverse weather.
Government policy and legislation
Changes in government policy and legislation applicable to our
business in many of the markets in which we operate,
particularly in the UK, may affect the results of our operations.
These include changes to the tax treatment of financial products
and services, government pension arrangements and policies,
the regulation of selling practices and the regulation of solvency
standards. Such changes may affect our existing and future
business by, for example, causing customers to cancel existing
policies, requiring us to change our range of products and
services, forcing us to redesign our technology, requiring us to
retrain our staff or increase our tax liability. As a global business,
we are exposed to various local political, regulatory and
economic conditions, and business risks and challenges which
may affect the demand for our products and services, the value
of our investments portfolio and the credit quality of local
counterparties. Our regulated business is subject to extensive
regulatory supervision both in the UK and internationally. For
details please refer to the section 'Shareholder information -
Regulation'.
Exchange rate fluctuations
We publish our consolidated financial statements in pounds
sterling. Due to our substantial non-UK operations, a significant
portion of our operating earnings and net assets are
denominated in currencies other than sterling, most notably the
euro, Canadian dollar and the Polish zloty. As a consequence,
our results are exposed to translation risk arising from
fluctuations in the values of these currencies against sterling.
We generally do not hedge foreign currency revenues, as we
retain local currency in each business to support business
growth, to meet local and regulatory market requirements and
to maintain sufficient assets in local currency to match local
currency liabilities.
Movements in exchange rates may affect the value of
consolidated shareholders' equity, which is expressed in sterling.
Exchange differences taken to other comprehensive income
arise on the translation of the net investment in foreign
subsidiaries, associates and joint ventures. This aspect of foreign
exchange risk is monitored centrally against limits that we have
set to control the extent to which capital deployment and
capital requirements are not aligned. We use currency
borrowings and derivatives when necessary to keep currency
exposures within these predetermined limits, and to hedge
specific foreign exchange risks when appropriate; for example,
in any acquisition or disposal activity.
During 2014, sterling strengthened against a number of
currencies including the Euro and the Canadian dollar. This
resulted in a foreign currency loss in other comprehensive
income from continuing operations of £396 million (2013: £35
million loss).
The impact of these fluctuations is limited to a significant
degree, however, by the fact that revenues, expenses, assets
and liabilities within our non-UK operations are generally
denominated in local currencies.
Acquisitions and disposals
Over the last three years we have completed and announced a
number of transactions, some of which have had a material
impact on our results. These transactions reflect our strategic
objectives of narrowing our focus to businesses where we can
produce attractive returns and exit businesses which we do not
consider central to our future growth.
Activity in 2014
In May 2014, the Group restructured its existing business in
Indonesia and reduced its ownership interest from 60% to 50%
to form a 50-50 joint venture (Astra Aviva Life) between Aviva
and PT Astra International Tbk.
On 27 June 2014, the Group completed the disposal of its
47% holding in Woori Aviva Life Insurance Co. Ltd in South
Korea for consideration of £17 million.
On 30 June 2014, Finoa Srl, an Italian holding company in
which the Group owns a 50% share, disposed of its entire
interest in Eurovita Assicurazioni S.p.A for gross cash
consideration of £36 million.
Also on 30 June 2014, the Group completed the sale of US
equity manager River Road Asset Management, LLC (“River
Road”) to Affiliated Managers Group, Inc. for consideration of
£75 million.
In October 2013, the Group completed the sale of its US Life
subsidiary. In 2014, the Group paid a settlement of £20 million
related to the purchase price adjustment. The settlement and
the aggregate development of other provisions related to the
discontinued operations in 2014 resulted in a net £58 million
gain which has been presented as profit on disposal of
discontinued operations.
Other information
Aviva plc Annual report and accounts 2014 |249