Aviva: COVID-19 remains biggest threat to capital; flags Brexit shock waves

Risk uncertainty associated with the macroeconomic implications of the COVID-19 pandemic remains the biggest immediate threat to Aviva’s capital and liquidity positions, the carrier said as it delivered its interim results for 2021 this week.

The comments were made by Aviva as it said it would return “at least” £4bn to shareholders by next June following a major overhaul of the business under CEO Amanda Blanc, (pic) which has seen it agree plans to sell eight businesses in including Aviva France for EUR 3.2 billion.

Announcing its half-year results, Aviva’s operating profit increased by 17 % year on year to £725 million, including its best revenue performance from UK general insurance in a decade.

Commenting on the risk environment in its interim report, the insurer noted that economies continued to recover from the impacts of COVID-19 in the first half of 2021, supported by fiscal measures, robust economic activity, the vaccine roll-out and continuing accommodative central banks’ policies.

This backdrop, along with reducing concerns about inflation, was supportive for risk assets (equities and credit) and sovereign bonds which generally recorded a positive performance in the first half of 2021.

However it added that– notwithstanding this positive environment ­– it continued to take actions to reduce our exposure to credit spread and counterparty default risk in vulnerable sectors.

The insurer was clear that COVID-19, which has seen it embroiled in legal action in the UK and Canada with regard to business interruption claims, remains a major risk: “The biggest immediate threat to the Group’s capital and liquidity positions remains the macroeconomic implications of the COVID-19 pandemic.”

It added that areas of uncertainty include credit downgrades, interest rate reductions, falls in commercial and residential property prices and defaults on the commercial mortgage portfolio:

“We continue to closely track these developments in our businesses and take appropriate actions to ensure that the impact on our businesses and our customers is limited. The group continues to maintain strong solvency and liquidity positions through a range of scenarios and stress testing. These scenarios allow for the potential impacts of COVID-19 both directly on operations of the Group and also the wider macroeconomic environment, and the Group has considerable resilience to external shocks, even in severe downside scenarios.”

The shock waves of Brexit were also flagged as a potential risk:

“Despite the EU-UK Trade Agreement and the EU’s recent positive data adequacy decision in respect of the UK, there remain medium-term risks to the group’s operations which could arise as the UK-EU relationship evolves and as a result of the UK’s 3rd country relationship with the EU. In particular, the possibility of future EU restrictions on asset management delegation back to the UK, limitations on outsourcing arrangements with EU subsidiaries and restrictions on use by EU insurers (including Aviva’s Irish subsidiary) of UK branches for passporting.”

Noting that climate change continues to gain increasing focus from regulators and government bodies, Aviva said it remains committed to supporting a low carbon economy “that will improve the resilience of our economy, society and the financial system in line with the 2015 Paris Agreement target on climate change. Within our sustainability ambition, our plan is to become a Net Zero company by 2040.”

The insurer also said it is in the process of implementing the new international accounting standard for insurance contracts, and that the e adoption of IFRS 17 significantly impacts the measurement and presentation of the contracts in scope of the standard. Aviva said it is expected that the standard will apply to annual reporting periods beginning on or after 1 January 2023.

The insurer was clear that COVID-19, which has seen it embroiled in legal action in the UK and Canada with regard to business interruption claims, remains a major risk: “The biggest immediate threat to the Group’s capital and liquidity positions remains the macroeconomic implications of the COVID-19 pandemic.”

Follow us on twitter: @risksEmerging

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