88RK.L Regulatory News (88RK)

FRIENDS LIFE HOLDINGS PLC - 2016 ANNUAL REPORT AND FINANCIAL STATEMENTS

Following the release by Friends Life Holdings plc (the "Company") on 9 March 2017 of the Company's 2016 Preliminary Results Announcement for the year ended 31 December 2016 the Company announces that it has, on 30 March 2017, issued to shareholders its 2016 Annual Report and Financial Statements, which is now available to view on the Aviva plc website at www.aviva.com/reports.

A copy of the 2016 Annual Report and Financial Statements has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do.

Enquiries:

Kirsty Cooper, Group General Counsel and Company Secretary, Aviva plc

Telephone - 020 7662 6646

Roy Tooley, Head of Secretariat- Corporate

Telephone - 020 7662 6019

Friends Life Holdings' LEI code is 213800WTATMITUGXJQ69

Information required under Disclosure & Transparency Rule 6.3

This announcement should be read in conjunction with the Company's preliminary results announcement issued on 9 March 2017. Together these constitute the material required by DTR 6.3 to be communicated to the media in full unedited text through a Regulatory Information Service. This material is not a substitute for reading the Company's 2016 Annual Report and Accounts. Page references in the text below refer to page numbers in the 2016 Annual Report and Accounts.

Directors' responsibility statement pursuant to the Disclosure and Transparency Rule 4

Statement of directors' responsibilities

The directors are responsible for preparing the Strategic Report, Directors' Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. In preparing these financial statements, the directors have also elected to comply with IFRSs, issued by the International Accounting Standards Board (IASB). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and accounting estimates that are reasonable and prudent;

• state whether applicable IFRSs as adopted by the European Union, and IFRSs as issued by the IASB have been followed, subject to any material departures disclosed and explained in the financial statements; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess a company's performance, business model and strategy.

Statement of directors' responsibilities continued

The directors are responsible for the maintenance and integrity of the Group's information on the Aviva Group website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Principal risks and uncertainties

A description of the principal risks and uncertainties facing the Group and the Group's risk management policies to manage and mitigate these risks are set out in note 32 to the financial statements.

Risk factors beyond the Group's control that could cause actual results to differ materially from those estimated include:

Credit risk

The net asset value of the Group's financial resources is exposed to the potential default on its long term loans to Friends Life Limited (FLL), a subsidiary undertaking of Aviva plc, and which has an external insurer financial strength rating of A+, and as such the risk of counterparty default is considered remote.

Foreign exchange risk

The net asset value of the Group's financial resources is exposed to potential fluctuations in foreign exchange rates through its issuance of US$575 million (2015: US$575 million) reset perpetual subordinated note. The US$ cash flows for the coupons and principal up until the first reset date in 2018 have been fully hedged with cross currency derivative swaps.

Risk management

(a) The Company's approach to risk and capital management

Risk management framework

The Company's risk management framework is aligned with that of the Aviva plc Group and forms an integral part of the management and Board processes and decision-making framework.

The Company's risk management approach is proportionate to its activities as a non-trading issuer of three subordinated debt instruments listed on the London Stock Exchange. At least annually the Company's management review the key risks specific to the Company.

To promote a consistent and rigorous approach to risk management, the Aviva plc Group has set out formal risk management policies and business standards which set out the risk strategy, framework and minimum requirements for the Group's worldwide operations, including the Company.

The directors recognise the critical importance of having efficient and effective risk management systems in place and acknowledge that they are responsible for the Company's framework of internal control and of reviewing its effectiveness. The framework is designed to manage rather than eliminate the risk of failure to achieve the Company's objectives, and can only provide reasonable assurance against misstatement or loss. The directors of the Company are satisfied that their adherence to this Group framework provides an adequate means of managing risk in the Company.

Sections (b) to (f) below are limited to the specific risks of the Company.

(b) Credit risk

Credit risk is the risk of financial loss as a result of the default or failure of third parties to meet their payment obligations to the Company, or variations in market values as a result of changes in expectation related to these risks.

The Group and Company's approach to managing credit risk recognises that there is a risk of adverse financial impact resulting from fluctuations in credit quality of third parties including default, rating transition and credit spread movements.

The credit risks of the Group and Company arise directly through exposures to loans to third parties and fellow Aviva Group counterparties, cash deposits, derivative counterparties and receivables. The Group and Company's maximum exposure to credit risk of financial assets, without taking collateral into account, is represented by the carrying amount of assets included in the Statement of Financial Position.

The Group and Company have significant financial exposure to amounts due from fellow Aviva Group companies. The credit risk arising from Aviva Group counterparties failing to meet all or part of their obligations is considered remote. Due to the nature of the intra-group loans, and the fact that these loans are not traded, the Company does not allow for fluctuations in market value caused by changing perceptions of the credit worthiness of such counterparties.

Financial assets, other than equities, are graded according to current external credit ratings issued. AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB ratings. Financial investments which fall outside this range are classified as sub-investment grade.

The following table provides information regarding the aggregated credit risk exposure of the Group for financial assets with external credit ratings. 'Not rated' assets capture assets not rated by external ratings agencies.

Risk management continued

(b) Credit risk continued

The Group and Company's principal counterparty exposure, amounting to £856 million (2015: £856 million), is to fellow Aviva plc group company, FLL, which has an external insurer financial strength rating of A+, and as such the risk of counterparty default is considered remote. Due to the nature of the loans to FLL, and the fact that these loans are recognised at amortised cost are settled, and not traded, the Group and Company is not exposed to the risk of changes to their market value caused by changing perceptions of the credit worthiness of such counterparties.

Although there is no contractual obligation for FLL to make interest payments or redeem the principal of the internal STICS, the Group and Company has an expectation and is confident that interest will be paid for the reasons set out above as well as the consequential restrictions on the ability of FLL to make dividend payments and redeem capital under the terms of the internal STICS, if it defers any interest payment. The Company's exposure to the internal STICS, which is classified as available for sale, at 31 December 2016 amounted to £489 million (2015: £486 million). The price of the internal STICS is sensitive to changes in the inputs used to determine its fair value, principally being market observable yields, as described in note 14, and as such the Company is exposed to changes in market perception as to the credit worthiness of the issuers of the instruments on which the market observable yields are based, being considered a suitable proxy for the internal STICS. The impact of a 100bps increase / decrease in the market observable yields used to calculate the fair value of the internal STICS would be a £15 million decrease / £16 million increase (2015: £19 million decrease / £20 million increase) in profit before tax and ordinary shareholders' net equity.

Although derivative instruments are not rated individually, the counterparties to these contracts all have investment grade issuer credit ratings, and the credit exposures are fully collaterised at 31 December 2016. Further information on collateral held in respect of derivatives is provided in Note 34(c).

The credit quality of receivables and other financial assets is monitored by the Group and Company, and provisions for impairment are made for irrecoverable amounts. There were no financial assets past due or impaired in either 2016 or 2015.

(c) Market risk

Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations in interest rates, equity prices, foreign currency exchange rates, and property prices. Market risk arises due to fluctuations in both the value of liabilities and the value of investments held.

The management of market risk is undertaken at business unit and at Aviva Group level. Businesses manage market risks locally using the Group market risk framework and within local regulatory constraints. Group Capital is responsible for monitoring and managing market risk at Group level and has established criteria for matching assets and liabilities to limit the impact of mismatches due to market movements.

For each of the major components of market risk, described in more detail below, additional policies and business standards are in place to set out how each risk should be managed and monitored, and the approach to setting an appropriate risk appetite.

Risk management continued

(c) Market risk continued

(d) Liquidity risk

Liquidity risk is the risk of the Group and Company not being able to make payments as they become due because there are insufficient assets in cash form.

The Group and Company has set its investment strategy to ensure it has sufficient liquid funds to meet its expected obligations as they fall due. In extreme circumstances, the Group and Company would approach the Company's parent, Aviva plc, for additional short-term borrowing whilst the Group and Company liquidated other assets. Aviva plc maintains significant undrawn committed borrowing facilities (£1,650 million) from a range of highly-rated banks to mitigate this risk further. In addition, the Company's long term subordinated debt and subordinated perpetual debt is irrevocably guaranteed by Friends Life Limited (see note 25). Aviva plc has an external issuer credit rating of A- and Friends Life Limited has an external insurer financial strength rating of A+, and therefore the likelihood of Aviva plc being unable to provide liquid funds to the Group and Company or FLL failing to honour its guarantee is considered remote.

The following table provides an analysis, by maturity date of the principal, of the carrying value of financial assets which are available to fund the repayment of liabilities as they crystallise:

Risk management continued

The derivative financial instruments above with a positive carrying value of £114 million (2015: £37 million) are comprised of cross currency swaps. An increase in the USD:GBP exchange rate could result in these derivatives having a negative carrying value, requiring cash resources to fund collateral and other contractual payments.

(d) Liquidity risk continued

The following table shows the Company's financial liabilities analysed by duration:

(e) Operational risk

Operational risk is the risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment.

Given its limited activities, the key operational risks to the Company are inadequate governance and lack of sufficiently robust financial controls. The risks are mitigated by the Board's adoption and implementation of the Group's risk management policies and framework and compliance with the Group's financial reporting and controls framework.

(f) Capital management

The Group and Company's capital risk is determined with reference to the requirements of the Group and Company's stakeholders. In managing capital, the Group and Company seeks to maintain sufficient, but not excessive, financial strength to support the payment of interest due on loans and the requirements of other stakeholders. The sources of capital used by the Group and Company are equity shareholders' funds. At 31 December 2016 the Company had £341 million (2015: £561 million) of total capital employed.

Related party transactions

(a) The Group had the following related party transactions

(i) Loans receivable

On 8 November 2012 the Company provided an unsecured loan of £356 million to its subsidiary, FLL. The loan accrues interest at a rate of 7.92% per annum with settlement expected to be received at maturity in 8 November 2018. As at the Statement of Financial Position date, the total loan balance outstanding was £356 million (2015: £356 million).

On 21 April 2011 the Company provided an unsecured loan of £500 million to its subsidiary, FLL. The loan accrues interest at a rate of 8.25% per annum with settlement expected to be received at maturity in 21 April 2022. As at the Statement of Financial Position date, the total loan balance outstanding was £500 million (2015: £500 million).

The maturity analysis of the related party loans receivable is as follows:

The interest received on these loans shown in the Income Statement is £69 million (2015: £80 million). The 2015 interest received includes £11 million of interest from loan with AGH which was repaid in 2015. Refer note 4.

(ii) Other transactions

Services provided to related parties

The related parties' receivables are not secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit terms.

Services provided by related parties

Expenses incurred relate to share scheme charges and corporate costs of £Nil (2015: £18 million).

The related parties' payables are not secured and no guarantees were received in respect thereof. The payables will be settled in accordance with normal credit terms.

There were no non-audit fees paid to the Company's auditors during the year (2015: £Nil). Audit fees as decribed in note 6 are borne by the Company's ultimate parent, Aviva plc.

Related party transactions continued

a) The Company had the following related party transactions continued

(ii) Other transactions continued

Group relief

Transactions with Group companies for settlement of corporation tax assets and liabilities by group relief are described in note 17.

Dividends paid

Dividends paid relates to an intercompany transaction of £210 million (2015: £4,865 million) with the Company's parent, AGH.

(b) Key management compensation

Key management, which comprises the directors of the Company, are not remunerated directly for their services as directors for the Company and the amount of time spent performing their duties are incidental to their role across the Aviva Group. The majority of such costs are borne by Aviva plc and are not recharged to the Company. Refer to note 2 for details of director's remuneration.

(c) Ultimate parent entity

The immediate parent entity is Aviva Group Holdings Limited, a private limited Group incorporated and domiciled in England and Wales. The ultimate parent entity and controlling party is Aviva plc, a public limited Group incorporated and domiciled in England and Wales. This is the parent undertaking of the smallest and largest Group to consolidate these financial statements. Copies of Aviva plc consolidated financial statements are available on application to the Group Secretary, Aviva plc, St Helen's, 1 Undershaft, London EC3P 3DQ, and on the Aviva plc website at www.aviva.com.