Aviva 2014 Annual Report Download - page 307

Aviva plc Annual report and accounts 2014
303
disruption will not arise. Such market conditions may limit our
ability to replace, in a timely manner, maturing debt, satisfy
statutory capital requirements and generate fee income and
marketrelated revenue to meet liquidity needs.
As such, we may be forced to reduce our dividends, 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 over the
medium to long term on its operating subsidiaries to cover
operating expenses and dividend payments.
As a holding company, Aviva plc has no substantial operations of
its 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 and could prompt a decision to inject capital, which in
some more adverse circumstances and over the longer term could
limit our ability to pay dividends to shareholders. This could have a
material adverse impact on our business.
A requirement to pay down intercompany indebtedness early
could have negative consequences for our business and
results of operations
An intercompany loan from Aviva Group’s UK general insurance
company, Aviva Insurance Limited, to the Aviva Group’s holding
company, Aviva Group Holdings Limited, was established in
February 2013 (the balance of which was £3.2 billion as at 31
December 2014 and £2.8 billion at the end of February 2015).
The Aviva Group has agreed with the board of Aviva Insurance
Limited an appropriate target for the long-term level of this loan
as part of Aviva Insurance Limited’s capital structure. That level
has been set such that Aviva Insurance Limited places no
reliance on the loan to meet its stressed insurance liabilities, as
assessed on a 1:200 basis. The Aviva Group’s prudential
regulator, the PRA, has agreed to this approach. This objective is
not expected to change as a result of the proposed acquisition
of Friends Life by Aviva (the “Proposed Acquisition”) and plans
to reduce the internal loan to approximately £2.2 billion by the
end of 2015 currently satisfy this objective. However, a
requirement to reduce the loan more rapidly or to a greater
extent than planned, including accelerating the cash repayment
of the loan, for example following a loss or deterioration in the
capital position of Aviva Insurance Limited, could have negative
consequences for our business and results of operations and, in
particular, could impact on the ability of Aviva Insurance Limited
to remit dividends to Aviva plc.
Insurance risks relating to Aviva’s business
The cyclical nature of the insurance industry may cause
fluctuations in our results.
Historically, the insurance industry has been cyclical and
operating results of insurers have fluctuated because of volatile
and sometimes unpredictable developments, many of which are
beyond the direct control of any insurer. Although we have a
geographically diverse group of businesses providing a wide
range of products, we expect to experience the effects of this
cyclical nature, including changes in sales and premium levels.
The unpredictability and competitive nature of the general
insurance business has contributed historically to significant
quarter-to-quarter and year-to-year fluctuations in underwriting
results and net earnings.
The use of inaccurate assumptions in pricing and reserving
for insurance business may have an adverse effect on our
business profitability.
Our life insurance companies are required to make a number of
assumptions in relation to the business written, including the
mortality and morbidity rates of our customers (the proportion
of customers dying or falling sick or recovering from illness), the
development of interest rates, persistency rates (the proportion
of customers retaining existing policies and continuing to pay
premiums up to their maturity dates), the exercise by customers
of options included within their policies and future levels of
expenses. By their nature, these assumptions may prove to be
incorrect.
When establishing their liabilities, our life insurance
companies allow for changes in the assumptions made, monitor
their experience against the actuarial assumptions used and
assess the information gathered to refine their long-term
assumptions, together with taking actual claims experience into
account. However, it is not possible to determine precisely the
total amounts that will ultimately be paid under the policies
written by the business as amounts may vary from estimates.
Changes in assumptions may also lead to changes in the level of
capital required to be maintained, meaning that we may need
to increase the amount of our reserves. This could have a
material adverse impact on our value, the results of our
operations and financial condition.
Additionally, our management of the general insurance
business requires the general insurance companies to make a
number of assumptions in relation to the business written.
These assumptions include the costs of writing the business and
settling claims, and the frequency and severity of claims. The
assumptions may turn out to be incorrect, thereby adversely
impacting on our profit. Additionally, man-made disasters,
including accidents and intentional events, are particularly
difficult to predict with a high degree of accuracy. These would
also have an adverse impact on our profit due to higher than
expected claims.
Furthermore, outstanding claims provisions for the general
insurance business are based on the best-estimate ultimate cost
of all claims incurred but not settled at a given date, whether
reported or not, together with related claims handling costs.
Any provisions for re-opened claims are also included. A range
of methods, including stochastic projections, may be used to
determine these provisions. Underlying these methods are a
number of explicit or implicit assumptions relating to the
expected settlement amount and settlement pattern of claims.
If the assumptions underlying the reserving basis were to prove
incorrect, we might have to increase the amount of the general
insurance provisions, which would adversely impact our financial
condition or results of operations.
We have a significant exposure to annuity business and a
significant life insurance risk is associated with longevity.
Longevity statistics are monitored in detail, compared with
emerging industry trends, and the results are used to inform
both the reserving and pricing of annuities. It is likely that
uncertainty will remain in the development of future longevity
that cannot be mitigated.
A strengthening in the longevity assumption, either to
reflect changes in the underlying life expectancy (for example,
as a result of healthier lifestyles, improved screening
programmes or increased availability or effectiveness of medical
treatments) of the population or of our particular portfolio used
to calculate our long-term business liabilities, would result in an
increase in these reserves and reduce shareholders’ equity.
Other information
Aviva plc Annual report and accounts 2014 |303