Aviva 2014 Annual Report Download - page 303

Aviva plc Annual report and accounts 2014
299
Risks relating to our business
You should carefully review the following risk factors
together with other information contained in this
Annual Report before making an investment decision
relating to our ordinary shares or ADSs. Our business,
financial position, results of our operations and cash
flow could be materially affected by any of these risks,
the trading price of our ordinary shares or ADSs could
decline due to any of these risks and investors may
lose part or all of their investment.
Ongoing difficult conditions in the global financial markets
and the economy generally may adversely affect our business
and results of operations, and these conditions may continue.
Our results of operations are materially affected by uncertainty
in the worldwide financial markets and macro-economic
conditions generally. A wide variety of factors, including
concerns over slowing growth, high sovereign debt within, and
to a lesser degree outside, the eurozone, the stability and
solvency of financial institutions, longer-term low interest rates
in developed markets, inflationary threats as well as geopolitical
issues in, and emanating from, the Middle East, Russia, Ukraine
and North Africa, have contributed to increased volatility in the
financial markets in recent years and have diminished growth
expectations for the global economy going forward. Global
fixed income markets continue to experience periods of both
volatility and limited market liquidity, which have affected a
broad range of asset classes and sectors.
Factors relating to general economic conditions (such as
consumer spending, business investment, government
spending, exchange rates and commodity prices) uncertainty
over the United Kingdom’s continued membership of and
influence in the European Union (“EU”), the volatility and
strength of both debt and equity markets, and inflation, all
affect the profitability of our business. In a sustained economic
phase of low growth and high public debt, characterised by
higher unemployment, lower household income, lower
corporate earnings, lower business investment and lower
consumer spending, the demand for financial and insurance
products could be adversely affected. In addition, we may
experience an elevated incidence of claims or surrenders of
policies or claims of mis-selling. Any potential material adverse
effect will also be dependent upon customer behaviour and
confidence.
As a result of these market exposures, our financial position
and results of operations may be subject to significant volatility,
and there can be no assurance as to the effects of this volatility,
particularly if it is prolonged, on our financial position or results
of operations. Such effects may include, inter alia: (i) a general
reduction in business activity and market volumes which affects
fees, commissions and margins from customer-driven
transactions and revenues, and from sales of insurance
products; (ii) market downturns which are likely to reduce the
volume and valuations of assets managed on behalf of clients,
thereby reducing asset-based and performance-based fees;
(iii) reduced market liquidity, limiting trading and arbitrage
opportunities and presenting impediments for managing risks,
impacting both trading income and performance-based fees;
(iv) a reduced value in assets held for our own account as
trading positions could continue to fall in value; (v) increased
impairments and defaults on credit exposures and on trading
and investment positions, which losses may be exacerbated by
falling collateral values; (vi) increased collateral requirements
under derivative and other financial instruments; (vii) increased
costs of hedging against market risks such as equity or interest
rate exposure; (viii) pressure to reduce equity and/or debt
investments or maintain additional capital in respect of such
holdings; (ix) an increase in technical provisions and capital
requirements in response to market-related stress tests; and (x) a
requirement to hold a larger proportion of liquid assets in order
to off-set the impact of a reduction in market liquidity on a
company’s ability to meet payment obligations.
The interdependence of global financial institutions means
that the failure of a sufficiently large and influential financial
institution could materially disrupt global securities markets or
clearance and settlement systems in the markets. This could
cause severe market decline or volatility. Such a failure could
also lead to a chain of defaults by counterparties that could
materially adversely affect the Group. This risk, known as
“systemic risk”, could adversely impact our future product sales
as a result of reduced confidence in the financial services
industry. It could also adversely impact our results because of
market declines and write-downs of assets.
As a global business, we are exposed to various local
political, regulatory and economic conditions, business risks
and challenges which may affect the demand for the our
products and services, the value of the our investment
portfolios and the credit quality of local counterparties.
We offer our products and services in Europe (including the
United Kingdom (“UK”)), North America and the Asia Pacific
region through wholly owned and majority-owned subsidiaries,
joint ventures, companies in which we hold non-controlling
equity stakes, agents and independent contractors. Our
international operations expose us to different local political,
regulatory, business and financial risks and challenges which
may affect the demand for the our products and services, the
value of our investment portfolio, the required levels of capital
and surplus, and the credit quality of local counterparties. These
risks include, for example, political, social or economic instability
in countries in which we operate, discriminatory regulation,
credit risks of our counterparties, lack of local business
experience in certain markets, risks associated with exposure to
insurance industry insolvencies through policyholder guarantee
funds or similar mechanisms set up in markets in which we are
present and, in certain cases, risks associated with the potential
incompatibility with foreign partners, especially in countries in
which we are conducting business through entities which we do
not control. Some of our international insurance operations are,
and are likely to continue to be, in emerging markets where
these risks are heightened. Our overall success as a global
business depends, in part, upon our ability to succeed in
different economic, social and political conditions.
Credit risks relating to Aviva’s business
Market developments and government actions regarding the
sovereign debt crisis in Europe, particularly in Greece, Cyprus,
Ireland, Italy, Portugal and Spain, could have a material
adverse effect on our results of operations, financial
condition and liquidity.
The continued uncertainty over the outcome of various EU and
international financial support programmes, and the possibility
that other EU member states may experience similar financial
pressures, could further disrupt global markets. In particular, this
crisis has disrupted, and could further disrupt, equity and fixed
income markets, and has resulted in volatile bond yields on the
sovereign debt of EU members.
The issues arising out of the current sovereign debt crisis
may transcend Europe, cause investors to lose confidence in the
safety and soundness of European financial institutions and the
stability of European member economies, and likewise affect UK
and U.S. based financial institutions, the stability of the global
financial markets and any economic recovery. We hold
investments in both UK and non-UK securities.
If an EU member state were to default on our obligations or
to seek to leave the eurozone, or if the eurozone were broken
Other information
Aviva plc Annual report and accounts 2014 |299