Aviva 2013 Annual Report Download - page 250

Aviva plc
Annual report and accounts 2013
248
Financial and operating performance
Financial and operating performance
Our main activities are the provision of products and services in
relation to long-term insurance and savings, fund management
and general insurance.
Factors affecting results of operations
Our financial results are affected, to some degree, by a number
of external factors, including demographic trends, general
economic and market conditions, government policy and
legislation and exchange rate fluctuations. See ‘Other
information – Risk and capital management’ for more
information on these and other risk factors. In addition, our
financial results are affected by corporate actions taken by the
Group, including acquisitions, disposals and other actions aimed
at achieving our stated strategy. We believe that all of these
factors will continue to affect our results in the future.
During the year, the Group undertook the following actions
which impacted the overall results and performance:
 During the year, the Group modified its management
structure, and the Group’s operating segments were
changed to align them with this revised structure. Further
details of the reportable segments are given in ‘IFRS
Financial statements – note 5 – Segmental information’.
 On 2 October 2013 the Group completed the sale of its
United States life and related internal asset management
business (US Life) to Athene Holding. Profit on disposal was
£808 million, mainly reflecting currency translation and
investment valuation reserves recycled to the income
statement on completion. See ‘IFRS Financial statements –
note 4 – Subsidiaries’ for further details. The results of
US Life are presented as discontinued operations for all
periods presented.
 The Group also completed the sale of a number of
operations during the year, including operations in Russia,
Malaysia and Spain (Aseval). See ‘IFRS Financial statements –
note 4 – Subsidiaries’ for further details.
 The Group continued to undertake restructuring and
transformation activity to align our business operations with
our strategy, including the Group’s cost savings programme.
Integration and restructuring costs of £366 million (2012:
£468 million) mainly include transformation costs, and
Solvency II implementation costs of £79 million (2012:
£117 million).
 In addition, there was an adverse movement of £674 million
relating to the Group’s staff pension schemes which has
been recognised in other comprehensive income. This was
principally due to the main UK staff pension scheme where
the surplus has decreased over the year largely as a result of
narrowing spreads between corporate bonds and gilts. See
‘IFRS Financial statements – note 49 – Pension obligations’
for further details.
Demographic trends
Our results are affected by the demographic make-up of the
countries in which we operate. The types of products that we
sell reflect the needs of our customers. For example, in countries
with a high proportion of older people, a larger proportion of
our sales will reflect their needs for pre- and post-retirement
planning. Our sales levels will also be impacted by our ability
to help provide useful information to such policyholders on
retirement planning and to offer products that are competitive
and respond to such policyholders’ needs.
In our long-term insurance and savings business we make
assumptions about key non-economic factors, such as the
mortality rate that we expect to be experienced by our
policyholders. In countries where the life expectancy is growing,
this will need to be reflected in our pricing models as lower
mortality rates will increase profitability of life insurance
products but will reduce the returns on annuity products.
We review our assumptions against our own experience and
industry expectations.
Economic conditions
Our results are affected by the economic conditions in our
geographic markets and, consequently, by economic cycles in
those markets. High levels of general economic activity typically
result in high levels of demand for, and sales of, our products
and services. Economic activity in turn is affected by government
monetary and fiscal policy as well as by global trading
conditions and external shocks such as terrorist activity, war and
oil price movements.
2013 saw the global economy recovering although the
eurozone lagged behind. The challenging conditions in the
economies of major European markets meant that for much of
the year consumer confidence remained low. Nevertheless Aviva
has increased sales significantly in France and Poland and seen a
smaller increase in our turnaround business in Italy.
The economies where the Group has operations that were
impacted in 2013 by estimated low or negative growth include:
France (0.2%)1; Spain (-1.2%)1; and Italy (-1.8%)1. Economic
growth in the UK was more encouraging at 1.7%1 and the
Canadian economy remains healthy with estimated growth
of 1.7%1 in 2013. The picture has been brighter still in some
of our growth markets with Turkey, for example, growing
at 3.8%1.
Over the next 3 years the world economy is expected to
grow c.4%1 annually (vs. 2.9%1 in 2008‐12 and 4.2%1 in
2000‐7). Emerging markets will continue to grow strongly,
although lower than historically. The US is leading the
developed market recovery while the eurozone is expected
to continue to lag behind.
Capital and credit market conditions
An important part of our business involves investing client,
policyholder and shareholder funds across a wide range of
financial investments, including equities, fixed income securities
and properties. Our results are sensitive to volatility in the
market value of these investments, either directly because we
bear some or all of the investment risk, or indirectly because we
earn management fees for investments managed on behalf of
policyholders. Investment market conditions also affect the
demand for a substantial portion of our life insurance products.
In general, rising equity price levels have a positive effect on the
demand for equity-linked products, such as unit trusts and unit-
linked life insurance products, and conversely have a negative
effect on the demand for products offering fixed or guaranteed
minimum rates of return. Declining equity price levels tend to
have the opposite effects.
During 2013, the total long-term business investment
return variance was £403 million positive (2012: £278 million
negative).
For continuing operations, life investment variances were
£49 million negative (2012: £620 million negative). Negative
variances in the UK resulting from increasing the allowance for
credit defaults on commercial mortgages were partly offset by
narrowing spreads on government and corporate bonds in Italy
and Spain.
For 2012, the adverse life investment variances of £620
million predominantly related to the UK. This was mainly due to
increasing the allowance for credit defaults on UK commercial
mortgages to reflect uncertainty in the macro-economic
environment, and the cost of de-risking activity. Elsewhere,
positive variances in Spain and France were offset by a negative
variance in Italy.
The positive variance of £452 million (2012: £342 million
positive) for discontinued operations relates to the US business
1 International Monetary Fund