Aviva 2014 Annual Report Download - page 252

Aviva plc Annual report and accounts 2014
Financial and operating performance
248
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 and health 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, sterling strengthened against the euro, Canadian
dollar and Polish zloty which has impacted the overall results and
performance. See IFRS financial statements – note 2 – Exchange
rates. In addition, the Group undertook the following actions which
impacted the overall results and performance:
• The Group completed the sale of a number of operations
during the year, including operations in Italy (Eurovita
Assicurazioni S.p.A), Spain (CXG Aviva Corporacion Caixa
Galicia de Sueguros Reaseguros, S.A.), Turkey (Aviva Sigorta
A.S.), South Korea (Woori Aviva Life Insurance Co. Ltd), and
the US (River Road Asset Management, LLC). 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. Integration and restructuring costs of £140
million (2013: £366 million) mainly include £94 million of
Solvency II implementation costs (2013: £79 million).
Compared to the prior year, integration and restructuring
costs have reduced by £226 million principally driven by a
significant reduction in transformation spend.
• In addition, there was a favourable movement of £1,662
million (2013: £674 million adverse) 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 largely as a result of positive asset
performance driven by a fall in interest rates, partly offset by
an increase in the defined benefit obligation. 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.
The benign financial market conditions experienced in 2013
continued during 2014, albeit with increased volatility in the
second half of the year.
The economies where the Group has operations that were
impacted in 2014 by estimated low or negative growth include:
France 0.4%1 and Italy (0.4)% 1. Economic growth in the UK
was encouraging at 2.6%1 and the Canadian economy
remained solid with estimated growth of 2.4%1 in 2014. Some
of our other markets experienced stronger growth, for example
c.3%1 in both Poland and Turkey, and 7.4%1 in China.
The world economy is expected to grow c.3.5%1 in 2015
and 3.7%1 in 2016, slightly higher than the previous two years
(growth was 3.3%1 in both 2013 and 2014). Emerging markets
are expected to sustain high growth, although lower than pre-
crisis highs. The US is projected to continue leading the
developed market recovery, with Canada and the UK also
achieving reasonable growth, while eurozone growth is
expected to be low, with downside risks.
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.
With-profits business
With-profits products are mainly written in our UK & Ireland
operating segment, with small funds in France and Singapore.
These funds enable policyholders to participate in a large pool of
diverse investments, therefore reducing their exposure to individual
securities or asset classes. The investment pool is managed by us
with returns to with-profits policyholders paid through bonuses
which are added to the value of their policy. In order to provide an
element of stability in the returns to policyholders, bonuses are
designed to reduce policyholders' exposure to the volatility of
investment returns over time and to provide an equitable share of
surplus earned, depending on the investment and operating
performance of the fund. Shareholders also have a participating
interest in the with-profits funds and any declared bonuses.
Generally, policyholder and shareholder participation in with-profits
funds in the UK is split 90:10.
Shareholders' profits arising on with-profits business under
IFRS depend on the total bonuses declared to policyholders on
an annual basis.
The level of bonuses declared to policyholders is influenced by
the actual returns on investments and our expectation of future
rates of return. Whilst bonuses can never be negative, a predicted
sustained fall in equity markets could lead to a reduction in regular
and final bonus rates, thereby reducing both policyholder returns
and shareholders' profit under IFRS.
In 2014 and 2013 we made increases in the majority of final
bonus rates.
1 International Monetary Fund world economic outlook
248 | Aviva plc Annual report and accounts 2014