Page 40

 

 

Condensed consolidated income statement

For the six month period ended 30 June 2017

	Note	Reviewed  6 months 2017 £m	Reviewed  6 months 2016 £m	Audited Full Year  2016  £m
Income
Gross written premiums		13,576	12,593	25,442
Premiums ceded to reinsurers		(1,076)	(1,160)	(2,364)
Premiums written net of reinsurance		12,500	11,433	23,078
Net change in provision for unearned premiums		(365)	(348)	(210)
Net earned premiums		12,135	11,085	22,868
Fee and commission income		1,125	996	1,962
Net investment income		10,754	15,164	30,257
Share of profit after tax of joint ventures and associates		10	195	216
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates	B4	202	(18)	(11)
		24,226	27,422	55,292
Expenses
Claims and benefits paid, net of recoveries from reinsurers		(12,501)	(11,453)	(23,782)
Change in insurance liabilities, net of reinsurance	B9a(ii)	(1,684)	(5,926)	(6,893)
Change in investment contract provisions		(5,584)	(4,576)	(14,039)
Change in unallocated divisible surplus	B13	794	(792)	(381)
Fee and commission expense		(2,200)	(1,654)	(3,885)
Other expenses		(1,669)	(2,071)	(3,853)
Finance costs		(353)	(295)	(626)
		(23,197)	(26,767)	(53,459)
Profit before tax		1,029	655	1,833
Tax attributable to policyholders' returns	B6	(154)	(318)	(640)
Profit before tax attributable to shareholders' profits		875	337	1,193
Tax expense	B6	(313)	(454)	(974)
Less: tax attributable to policyholders' returns	B6	154	318	640
Tax attributable to shareholders' profits		(159)	(136)	(334)
Profit for the period		716	201	859
Attributable to:
Equity holders of Aviva plc		637	130	703
Non-controlling interests		79	71	156
Profit for the period		716	201	859
Earnings per share	B7
Basic (pence per share)		14.9p	2.5p	15.3p
Diluted (pence per share)		14.7p	2.4p	15.1p

 

 

 

Page 41

 

Condensed consolidated statement of comprehensive income

For the six month period ended 30 June 2017

	Note	Reviewed 6 months 2017  £m	Reviewed 6 months 2016  £m	Audited Full Year 2016 £m
Profit for the period		716	201	859
Other comprehensive income:
Items that may be reclassified subsequently to income statement
Investments classified as available for sale
Fair value (losses)/gains		(10)	26	12
Fair value gains transferred to profit on disposals		(2)	-	(2)
Share of other comprehensive income of joint ventures and associates		1	3	(6)
Foreign exchange rate movements		46	866	1,128
Aggregate tax effect - shareholder tax on items that may be reclassified subsequently to income statement		5	(31)	(34)
Items that will not be reclassified to income statement
Owner-occupied properties - fair value gains/(losses)		(1)	2	4
Remeasurements of pension schemes	B15	(36)	776	311
Aggregate tax effect - shareholder tax on items that will not be reclassified subsequently to income statement		12	(170)	(70)
Total other comprehensive income, net of tax		15	1,472	1,343
Total comprehensive income for the period		731	1,673	2,202
Attributable to:
Equity holders of Aviva plc		619	1,488	1,901
Non-controlling interests		112	185	301
		731	1,673	2,202

 

 

 

 

 

 

Page 42

 

 

Condensed consolidated statement of changes in equity

For the six month period ended 30 June 2017

	Note	Reviewed 6 months 2017  £m	Reviewed 6 months 2016 £m	Audited Full Year 2016  £m
Balance at 1 January as reported		19,551	18,270	18,270
Profit for the period		716	201	859
Other comprehensive income		15	1,472	1,343
Total comprehensive income for the period		731	1,673	2,202
Owner-occupied properties fair value gains transferred to retained earnings on disposals		-	-	-
Dividends and appropriations	B8	(684)	(605)	(973)
Non-controlling interests share of dividends declared in the period		(55)	(62)	(135)
Transfer to profit on disposal of subsidiaries, joint ventures and associates		(31)	-	(7)
Capital contributions from non-controlling interests		39	8	9
Changes in non-controlling interests in subsidiaries		(202)	(1)	105
Treasury shares held by subsidiary companies		-	-	13
Reserves credit for equity compensation plans		46	20	38
Shares issued under equity compensation plans		5	3	12
Shares purchased in buy-back		(73)	-	-
Aggregate tax effect - shareholder tax		6	5	17
Balance at 30 June/31 December		19,333	19,311	19,551

 

 

 

 

 

Page 43

 

 

 

Condensed consolidated statement of financial position

As at 30 June 2017

	Note	Reviewed 30 June 2017  £m	Reviewed  30 June 2016 £m	Audited 31 December 2016  £m
Assets
Goodwill		1,911	1,979	2,045
Acquired value of in-force business and intangible assets	B21	4,841	5,450	5,468
Interests in, and loans to, joint ventures		1,214	1,765	1,604
Interests in, and loans to, associates		472	449	481
Property and equipment		510	482	487
Investment property		10,719	11,106	10,768
Loans		25,452	24,305	24,784
Financial investments		309,222	288,460	299,835
Reinsurance assets	B11	18,512	22,983	26,343
Deferred tax assets		186	128	180
Current tax assets		80	76	119
Receivables		9,060	8,762	7,794
Deferred acquisition costs and other assets		6,407	6,293	5,893
Prepayments and accrued income		2,929	2,908	2,882
Cash and cash equivalents	B19	42,456	34,911	38,708
Assets of operations classified as held for sale	B4	6,042	14,193	13,028
Total assets		440,013	424,250	440,419
Equity
Capital
Ordinary share capital		1,014	1,014	1,015
Preference share capital		200	200	200
		1,214	1,214	1,215
Capital reserves
Share premium		1,201	1,188	1,197
Merger reserve		8,975	8,974	8,974
		10,176	10,162	10,171
Treasury shares		(14)	(28)	(15)
Other reserves		780	587	797
Retained earnings		4,735	4,978	4,835
Equity attributable to shareholders of Aviva plc		16,891	16,913	17,003
Direct capital instrument and tier 1 notes		1,123	1,123	1,123
Equity excluding non-controlling interests		18,014	18,036	18,126
Non-controlling interests		1,319	1,275	1,425
Total equity		19,333	19,311	19,551
Liabilities
Gross insurance liabilities	B9	150,714	147,977	151,183
Gross liabilities for investment contracts	B10	203,726	186,006	197,095
Unallocated divisible surplus	B13	8,524	9,624	9,349
Net asset value attributable to unitholders		18,469	13,045	15,638
Provisions	B15	1,426	1,484	1,510
Deferred tax liabilities		2,325	2,207	2,413
Current tax liabilities		188	484	421
Borrowings	B14	10,338	9,681	10,295
Payables and other financial liabilities		17,057	18,020	17,751
Other liabilities		2,733	2,795	2,719
Liabilities of operations classified as held for sale	B4	5,180	13,616	12,494
Total liabilities		420,680	404,939	420,868
Total equity and liabilities		440,013	424,250	440,419

 

 

 

 

 

Page 44

 

 

Condensed consolidated statement of cash flows

For the six month period ended 30 June 2017

	Note	Reviewed 6 months 2017 £m	Reviewed 6 months  2016  £m	Audited  Full Year 2016  £m
Cash flows from operating activities1
Cash generated from operating activities		5,255	1,347	5,394
Tax paid		(405)	(219)	(647)
Total net cash from operating activities		4,850	1,128	4,747
Cash flows from investing activities
Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired		25	(114)	(432)
Disposals of subsidiaries, joint ventures and associates, net of cash transferred		(36)	-	42
New loans to joint ventures and associates		(2)	-	(3)
Repayment of loans to joint ventures and associates		-	71	97
Net new loans to joint ventures and associates		(2)	71	94
Purchases of property and equipment		(40)	(25)	(67)
Proceeds on sale of property and equipment		2	44	75
Purchases of intangible assets		(44)	(35)	(119)
Total net cash (used in)/from investing activities		(95)	(59)	(407)
Cash flows from financing activities
Proceeds from issue of ordinary shares		6	6	15
Shares purchased in buy-back		(73)	-	-
Treasury shares distributed from employee trusts		1	1	-
New borrowings drawn down, net of expenses		21	1,355	3,526
Repayment of borrowings		(129)	(867)	(2,340)
Net (repayment)/drawdown of borrowings		(108)	488	1,186
Interest paid on borrowings		(294)	(284)	(595)
Preference dividends paid	B8	(9)	(9)	(17)
Ordinary dividends paid	B8	(646)	(570)	(871)
Coupon payments on direct capital instrument and tier 1 notes	B8	(29)	(26)	(85)
Capital contributions from non-controlling interests of subsidiaries		39	-	9
Dividends paid to non-controlling interests of subsidiaries		(55)	(62)	(135)
Changes in controlling interest in subsidiaries		-	(1)	105
Total net cash (used in)/from financing activities		(1,168)	(457)	(388)
Total net increase in cash and cash equivalents		3,587	612	3,952
Cash and cash equivalents at 1 January		38,405	33,170	33,170
Effect of exchange rate changes on cash and cash equivalents		248	1,053	1,283
Cash and cash equivalents at 30 June/31 December	B19	42,240	34,835	38,405

1    Cash flows from operating activities includes interest received of £2,669 million (FY16: £5,642 million; HY16: £3,207 million) and dividends received of £2,054 million (FY16: £2,536 million; HY16: £1,204 million).

The cash flows presented in this statement cover all the Group's activities and include flows from both policyholder and shareholder activities. Operating cash flows reflect the movement in both policyholder and shareholder controlled cash and cash equivalent balances.

During the period the net operating cash inflow reflects a number of factors, including the level of premium income, payments of claims, creditors and surrenders and purchases and sales of operating assets including financial investments. It also includes changes in the size and value of consolidated cash investment funds and changes in the Group participation in these funds.

 

 

 

 

 

 

Page 45

 

 

B1 - Basis of preparation

The condensed consolidated interim financial statements for the six months to 30 June 2017 have been prepared in accordance with IAS 34, Interim Financial Reporting, as endorsed by the European Union (EU), and the Disclosure Rules and Transparency Rules of the Financial Conduct Authority.

The accounting policies applied in the condensed consolidated interim financial statements are the same as those applied in Aviva plc's 2016 Annual Report and Accounts. In addition, during the period ended 30 June 2017, Aviva plc ('the Group') adopted new amendments to International Financial Reporting Standards ('IFRS') that became effective on 1 January 2017, described in the 2016 Annual Report and Accounts, however these had no effect on reported profit or loss or equity, the statement of financial position or the statement of cash flows.

The results for the six months to 30 June 2017 are unaudited but have been reviewed by the auditor, PricewaterhouseCoopers LLP. The interim results do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The results for the full year 2016 have been taken from the Group's 2016 Annual Report and Accounts. Therefore, these interim financial statements should be read in conjunction with the 2016 Annual Report and Accounts that were prepared in accordance with IFRS as endorsed by the European Union. PricewaterhouseCoopers LLP reported on the 2016 financial statements and their report was unqualified and did not contain a Statement under section 498 (2) or (3) of the Companies Act 2006. The Group's 2016 Annual Report and Accounts has been filed with the Registrar of Companies.

After making enquiries, the directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence over a period of at least 12 months from the date of approval of the interim financial statements. For this reason, they continue to adopt the going concern basis in preparing the interim financial statements.

Items included in the financial statements of each of the Group's entities are measured in the currency of the primary economic environment in which that entity operates (the 'functional currency'). The condensed consolidated financial statements are stated in pounds sterling, which is the Company's functional and presentational currency. Unless otherwise noted, the amounts shown in the financial statements are in millions of pounds sterling (£m).

The long-term nature of much of the Group's operations means that, for management's decision-making and internal performance management, short-term realised and unrealised investment gains and losses are treated as non-operating items. As a result, the Group focuses on operating profit, a non-GAAP financial performance measure, that incorporates an expected return on investments supporting its long-term and non-long-term businesses. Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and short-term fluctuations from that level. Operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; amortisation and impairment of acquired value of in-force business; the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates; integration and restructuring costs; and other. Other items are those items that, in the Directors' view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance.

B2 - Presentation changes

There are no presentation changes in this period.

B3 - Exchange rates

The Group's principal overseas operations during the period were located within the eurozone, Canada and Poland. The results and cash flows of these operations have been translated into sterling at the average rates for the period and the assets and liabilities have been translated at the period end rates as follows:

	6 months 2017	6 months 2016	Full Year 2016
Eurozone
Average rate (€1 equals)	£0.86	£0.78	£0.82
Period end rate (€1 equals)	£0.88	£0.83	£0.85
Canada
Average rate ($CAD1 equals)	£0.59	£0.53	£0.56
Period end rate ($CAD1 equals)	£0.59	£0.58	£0.60
Poland
Average rate (PLN1 equals)	£0.20	£0.18	£0.19
Period end rate (PLN1 equals)	£0.21	£0.19	£0.19

 

 

 

Page 46

 

B4 - Subsidiaries, joint ventures and associates

This note provides details of the acquisitions and disposals of subsidiaries, joint ventures and associates that the Group has made during the period, together with details of businesses held for sale at the period end.

(a) Acquisitions

On 21 April 2017, Aviva plc announced the acquisition of VietinBank's 50% shareholding in its life insurance joint venture VietinBank Aviva Life Insurance Limited ('Aviva Vietnam') for a consideration of £20 million and signing of a new life insurance distribution agreement. Following completion of the transaction on 22 May 2017, Aviva Vietnam is now a wholly owned subsidiary, with a change in the legal entity name to Aviva Vietnam Life Insurance Company Limited. The change from an equity accounted joint venture to a consolidated subsidiary resulted in a fair value remeasurement gain of £6 million on the previous equity interest of £2 million and recognition of £18 million of goodwill and other intangible assets.

(b) Disposal and re-measurements of subsidiaries, joint ventures and associates

The profit/(loss) on the disposal and re-measurement of subsidiaries, joint ventures and associates comprises:

	6 months  2017  £m	6 months 2016 £m	Full Year  2016  £m
France - Antarius (see (i) below)	180	-	-
Ireland - health	-	(11)	(8)
Poland (see (ii) below)	16	-	-
Asia - Vietnam (see (a) above)	6	-	-
Other small operations	-	(7)	(3)
Total profit/(loss) on disposal and remeasurement	202	(18)	(11)

The profit on the disposal and remeasurement of subsidiaries, joint ventures and associates during the period of £202 million (HY16: loss of £18 million) consists of a £180 million profit on disposal of Antarius (see note B4(b)(i)) and £22 million of remeasurement gains in respect of the joint venture operations in Poland (see note B4(b)(ii)) and Aviva Vietnam (see note B4(a) above).

(i) Antarius

On 5 April 2017, Aviva announced that it had completed the sale of its entire 50% shareholding in Antarius to Sogecap, a subsidiary of Société Générale, for a consideration of approximately £433 million (€500 million). Antarius was owned jointly by Aviva and Crédit du Nord, a separate subsidiary of Société Générale. The transaction resulted in a profit on disposal of £180 million, calculated as follows:

	£m
Assets
Goodwill, AVIF and other intangibles	12
Investment property	49
Loans	78
Financial investments	10,873
Reinsurance assets	408
Other assets	1,499
Cash and cash equivalents	468
Total assets	13,387
Liabilities
Insurance liabilities	4,720
Liability for investment contract	7,247
Unallocated divisible surplus	832
Other liabilities	34
Total liabilities	12,833
Net assets	554
Non-controlling interests before disposal	(277)
Group's share of net assets disposed of	277
Cash consideration	433
Less: transaction costs	(2)
Net consideration	431
Revaluation reserves recycled to the income statement	26
Profit on disposal1	180

1    Under French reserving rules (applicable under grandfathering of French GAAP when IFRS was adopted), £147 million of the profit on disposal has been transferred to insurance liabilities at 30 June 2017. See note A4(b) for further details.

(ii) Poland

Remeasurement during the period relates to the joint venture insurance operations in Poland. As a result of changes agreed by Aviva and Santander to the shareholders' agreement, Aviva now controls the two joint venture companies and consolidates them with an effective date of 1 January 2017. The change from equity accounted joint ventures to consolidated subsidiaries resulted in a fair value remeasurement gain of £16 million on the previous equity interests of £48 million and recognition of a distribution agreement within intangible assets.

 

 

 

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B4 - Subsidiaries, joint ventures and associates continued

(c) Assets and liabilities of operations classified as held for sale

The assets and liabilities of operations classified as held for sale as at 30 June 2017 are as follows:

	30 June 2017 £m	30 June 2016 £m	31 December 2016  £m
Assets
Goodwill, AVIF and other intangibles	598	25	12
Property and equipment	1	-	-
Investment property	1	44	48
Loans	67	64	75
Financial investments	4,777	10,715	10,706
Reinsurance assets	101	972	411
Other assets	91	1,698	1,521
Cash and cash equivalents	406	683	255
	6,042	14,201	13,028
Additional impairment to write down the disposal group to fair value less cost to sell	-	(8)	-
Total assets	6,042	14,193	13,028
Liabilities
Insurance liabilities	(4,061)	(4,717)	(4,448)
Liability for investment contracts	-	(7,655)	(7,175)
Unallocated divisible surplus	(248)	(852)	(859)
Net assets attributable to unit holders	(555)	-	-
External borrowings	(13)	-	-
Other liabilities	(303)	(392)	(12)
Total liabilities	(5,180)	(13,616)	(12,494)
Net assets	862	577	534

Assets and liabilities of operations classified as held for sale as at 30 June 2017 relate to the expected disposal of three businesses in Spain and two businesses in Italy. See note B4(c)(i) and note B4(c)(ii) for further details. Assets and liabilities of operations classified as held for sale during 2016 relate to Antarius (see note B4(b)(i)) and other small operations disposed of during 2016.

(i) Spain

On 10 May 2017, Aviva announced the sale of its 50% shareholding in life insurance and pension partnerships Unicorp Vida and Caja España Vida, as well as its wholly owned retail life insurance business Aviva Vida y Pensiones, to Santalucía for a total consideration of approximately £409 million (€475 million). The transaction is subject to regulatory and anti-trust approvals and is expected to complete in the third quarter of 2017. These businesses have been classified as held for sale from May 2017, measured at their carrying amount and remain consolidated subsidiaries of Aviva at the balance sheet date.

(ii) Italy

On 29 June 2017, Banco BPM notified Aviva of the termination of their existing distribution bancassurance partnership with Aviva Italia Holding S.p.A, a subsidiary of Aviva, with effect from 31 December 2017. As part of the bancassurance agreement, Aviva holds an option to put its entire 50% shareholding of Avipop Assicurazioni S.p.A and Avipop Vita S.p.A to Banco BPM. In accordance with IFRS 5, these businesses have been classified as held for sale from June 2017. These businesses are measured at their carrying amount and remain consolidated subsidiaries of Aviva at the balance sheet date.

(d)  Subsequent events

On 19 July 2017, Aviva announced the sale of Friends Provident International Limited ('FPI') to RL360 Holding Company Limited, a subsidiary of International Financial Group Limited, for a total consideration of £340 million. The transaction is subject to regulatory approvals and is expected to complete in early 2018. In accordance with IFRS 5, the subsidiary has been classified as held for sale from July 2017 when management were committed to a plan to sell the business. The transaction is expected to create an IFRS loss on disposal and remeasurement of approximately £130 million.

 

 

Page 48

 

B5 - Segmental information

The Group's results can be segmented, either by activity or by geography. Our primary reporting format is along market reporting lines, with supplementary information being given by business activity. This note provides segmental information on the condensed consolidated income statement and condensed consolidated statement of financial position.

The Group has determined its operating segments along market reporting lines and internal management reporting.

United Kingdom and Ireland

The United Kingdom and Ireland comprises two operating segments - Life and General Insurance. The principal activities of our UK and Ireland Life operations (including Friends UK) are life insurance, long-term health (in the UK) and accident insurance, savings, pensions and annuity business. UK and Ireland General Insurance provides insurance cover to individuals and businesses, for risks associated mainly with motor vehicles, property and liability (such as employers' liability and professional indemnity liability) and medical expenses. UK and Ireland General Insurance includes the results of our Ireland Health business, up to the date of disposal on 1 August 2016.

Canada

The principal activity of the Canadian operation is general insurance. In particular it provides personal and commercial lines insurance products principally distributed through insurance brokers. Canada includes the operations of RBC General Insurance Company following its acquisition on 1 July 2016.

France

The principal activities of our French operations are long-term business and general insurance. The long-term business offers a range of long-term insurance and savings products, primarily for individuals, with a focus on the unit-linked market. The general insurance business predominantly sells personal and small commercial lines insurance products through agents and a direct insurer. The results of Antarius are included up to the date of disposal on 5 April 2017 (see B4 (b)(i) for further details).

Poland

Activities in Poland comprise long-term business and general insurance operations, including our long-term business in Lithuania.

Italy, Spain and Other

These countries are not individually significant at a Group level, so have been aggregated into a single reporting segment in line with IFRS 8. The principal activities of our Italian operations are long-term business and general insurance. The long-term business offers a range of long-term insurance and savings products and the general insurance business provides motor and home insurance products to individuals, as well as small commercial risk insurance to businesses. The principal activity of the Spanish operation is the sale of long-term business, accident and health insurance and a selection of savings products. As set out in note B4 (c) (i) and (ii) certain entities within our Spanish and Italian businesses are classified as held for sale as at 30 June 2017. Our 'Other' operations include our life operations in Turkey.

Asia

Our activities in Asia principally comprise our long-term insurance business operations in China, India, Singapore, Hong Kong, Vietnam, Indonesia, Taiwan and the international operations of Friends Life. This segment also includes general insurance and health operations in Singapore and health operations in Indonesia.

Aviva Investors

Aviva Investors operates in most of the markets in which the Group operates, in particular the UK, Europe, North America, Asia Pacific and other international businesses, managing policyholders' and shareholders' invested funds, providing investment management services for institutional pension fund mandates and managing a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs.

Other Group activities

Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in 'Other Group activities', along with central core structural borrowings and certain tax balances in the segmental statement of financial position. The results of our reinsurance operations are also included in this segment.

Measurement basis

The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are subject to normal commercial terms and market conditions. The Group evaluates performance of operating segments on the basis of:

(i)   profit or loss from operations before tax attributable to shareholders

(ii)  profit or loss from operations before tax attributable to shareholders, adjusted for non-operating items outside the segment
management's control, including investment market performance and fiscal policy changes.

 

 

 

 

 

 

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B5 - Segmental information continued

(a) (i) Segmental income statement for the six month period ended 30 June 2017

	United Kingdom & Ireland			Europe
	Life  £m	GI £m	Canada £m	France  £m	Poland  £m	Italy, Spain and Other £m	Asia £m	Aviva Investors £m	Other Group activities2 £m	Total  £m
Gross written premiums	3,070	2,464	1,529	3,053	286	2,657	517	-	-	13,576
Premiums ceded to reinsurers	(754)	(138)	(52)	(40)	(5)	(21)	(66)	-	-	(1,076)
Internal reinsurance revenue	(3)	-	-	-	-	(2)	(5)	-	10	-
Premiums written net of reinsurance	2,313	2,326	1,477	3,013	281	2,634	446	-	10	12,500
Net change in provision for unearned premiums	(38)	(128)	(48)	(128)	-	(9)	(14)	-	-	(365)
Net earned premiums	2,275	2,198	1,429	2,885	281	2,625	432	-	10	12,135
Fee and commission income	516	60	12	146	40	44	103	206	(2)	1,125
	2,791	2,258	1,441	3,031	321	2,669	535	206	8	13,260
Net investment income	8,045	41	57	1,417	197	240	480	61	216	10,754
Inter-segment revenue	-	-	-	-	-	-	-	113	-	113
Share of profit of joint ventures and associates	29	-	-	12	-	4	(35)	-	-	10
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	-	180	16	-	6	-	-	202
Segmental income1	10,865	2,299	1,498	4,640	534	2,913	986	380	224	24,339
Claims and benefits paid, net of recoveries from reinsurers	(5,679)	(1,368)	(898)	(2,717)	(215)	(1,383)	(235)	-	(6)	(12,501)
Change in insurance liabilities, net of reinsurance	(205)	42	(94)	(442)	(93)	(605)	(306)	-	19	(1,684)
Change in investment contract provisions	(3,772)	-	-	(859)	-	(713)	(178)	(62)	-	(5,584)
Change in unallocated divisible surplus	611	-	-	133	(4)	152	(98)	-	-	794
Fee and commission expense	(290)	(672)	(367)	(354)	(68)	(166)	(58)	(21)	(204)	(2,200)
Other expenses	(611)	(152)	(97)	(146)	(44)	(54)	(146)	(206)	(213)	(1,669)
Inter-segment expenses	(101)	(4)	(3)	(1)	(2)	-	-	-	(2)	(113)
Finance costs	(131)	-	(2)	(1)	-	(1)	(2)	-	(216)	(353)
Segmental expenses	(10,178)	(2,154)	(1,461)	(4,387)	(426)	(2,770)	(1,023)	(289)	(622)	(23,310)
Profit/(loss) before tax	687	145	37	253	108	143	(37)	91	(398)	1,029
Tax attributable to policyholders' returns	(144)	-	-	-	-	-	(10)	-	-	(154)
Profit/(loss) before tax attributable to shareholders' profits	543	145	37	253	108	143	(47)	91	(398)	875
Adjusted for non-operating items:
Reclassification of corporate costs and unallocated interest	-	(6)	14	24	-	-	-	2	(34)	-
Investment return variances and economic assumption changes on long-term business	(31)	-	-	157	(3)	-	56	-	-	179
Short-term fluctuation in return on investments backing non-long-term business	-	75	(11)	4	(1)	4	1	-	133	205
Economic assumption changes on general insurance and health business	-	23	-	(9)	-	-	-	-	(2)	12
Impairment of goodwill, joint ventures and associates and other amounts expensed	-	-	-	-	-	-	19	-	-	19
Amortisation and impairment of intangibles	33	15	22	-	3	3	5	3	7	91
Amortisation and impairment of AVIF	162	-	-	1	-	1	68	-	2	234
(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	-	(180)	(16)	-	(6)	-	-	(202)
Integration and restructuring costs	32	-	9	9	-	-	-	-	2	52
Other	-	-	-	-	-	-	-	-	-	-
Operating profit/(loss) before tax attributable to shareholders	739	252	71	259	91	151	96	96	(290)	1,465

1    Total reported income, excluding inter-segment revenue, includes £12,837 million from the United Kingdom (Aviva plc's country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts are written.

2    Other Group activities include Group Reinsurance.

 

 

 

 

 

 

 

 

 

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(a) (ii) Segmental income statement for the six month period ended 30 June 2016

		United Kingdom & Ireland				Europe
	Life £m	GI  £m	Canada £m	France £m	Poland  £m	Italy, Spain and Other £m	Asia  £m	Aviva Investors2 £m	Other Group activities3 £m	Total £m
Gross written premiums	2,439	2,454	1,091	3,499	237	2,413	460	-	-	12,593
Premiums ceded to reinsurers	(751)	(229)	(42)	(41)	(4)	(19)	(74)	-	-	(1,160)
Internal reinsurance revenue	(3)	(2)	-	-	-	(1)	(5)	-	11	-
Premiums written net of reinsurance	1,685	2,223	1,049	3,458	233	2,393	381	-	11	11,433
Net change in provision for unearned premiums	(34)	(136)	(29)	(117)	(12)	(7)	(13)	-	-	(348)
Net earned premiums	1,651	2,087	1,020	3,341	221	2,386	368	-	11	11,085
Fee and commission income	453	78	8	115	28	50	103	162	(1)	996
	2,104	2,165	1,028	3,456	249	2,436	471	162	10	12,081
Net investment income	13,431	132	42	704	3	416	316	39	81	15,164
Inter-segment revenue	-	-	-	-	-	-	-	117	-	117
Share of profit of joint ventures and associates	178	-	-	13	4	-	-	-	-	195
(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	(8)	(11)	-	-	-	-	-	-	1	(18)
Segmental income1	15,705	2,286	1,070	4,173	256	2,852	787	318	92	27,539
Claims and benefits paid, net of recoveries from reinsurers	(5,637)	(1,315)	(619)	(2,423)	(153)	(1,114)	(178)	-	(14)	(11,453)
Change in insurance liabilities, net of reinsurance	(4,459)	(79)	(41)	(479)	30	(677)	(213)	-	(8)	(5,926)
Change in investment contract provisions	(3,600)	-	-	(196)	-	(564)	(176)	(40)	-	(4,576)
Change in unallocated divisible surplus	(14)	-	-	(568)	4	(168)	(46)	-	-	(792)
Fee and commission expense	(272)	(629)	(285)	(211)	(38)	(146)	(61)	(18)	6	(1,654)
Other expenses	(754)	(162)	(53)	(131)	(34)	(61)	(138)	(205)	(533)	(2,071)
Inter-segment expenses	(106)	(3)	(2)	(3)	(2)	-	-	-	(1)	(117)
Finance costs	(89)	(1)	(1)	(1)	-	(2)	(2)	-	(199)	(295)
Segmental expenses	(14,931)	(2,189)	(1,001)	(4,012)	(193)	(2,732)	(814)	(263)	(749)	(26,884)
Profit/(loss) before tax	774	97	69	161	63	120	(27)	55	(657)	655
Tax attributable to policyholders' returns	(317)	-	-	-	-	-	(1)	-	-	(318)
Profit/(loss) before tax attributable to shareholders' profits	457	97	69	161	63	120	(28)	55	(657)	337
Adjusted for non-operating items:
Reclassification of corporate costs and unallocated interest	1	(1)	4	22	-	-	-	2	(28)	-
Investment return variances and economic assumption changes on long-term business	(82)	-	-	32	-	2	42	-	-	(6)
Short-term fluctuation in return on investments backing non-long-term business	(17)	(23)	4	(1)	(1)	4	-	-	372	338
Economic assumption changes on general insurance and health business	-	123	1	-	-	-	-	-	(1)	123
Impairment of goodwill, joint ventures and associates and other amounts expensed	-	-	-	-	-	-	-	-	-	-
Amortisation and impairment of intangibles	35	11	8	-	2	7	5	3	21	92
Amortisation and impairment of AVIF	241	-	-	2	1	1	71	-	2	318
Loss/(profit) on the disposal and remeasurement of subsidiaries, joint ventures and associates	8	11	-	-	-	-	-	-	(1)	18
Integration and restructuring costs	61	8	3	4	-	1	8	10	10	105
Other	-	-	-	-	-	-	-	-	-	-
Operating profit/(loss) before tax attributable to shareholders	704	226	89	220	65	135	98	70	(282)	1,325

1    Total reported income, excluding inter-segment revenue, includes £17,606 million from the United Kingdom (Aviva plc's country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts are written.

2    Aviva Investors operating profit also includes £1 million profit relating to the Aviva Investors Pooled Pensions business.

3    Other Group activities include Group Reinsurance.

 

 

 

 

 

 

 

 

 

 

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(a) (iii) Segmental income statement for the year ended 31 December 2016

		United Kingdom & Ireland				Europe
	Life  £m	GI £m	Canada  £m	France £m	Poland £m	Italy, Spain and Other £m	Asia £m	Aviva Investors2 £m	Other Group activities3 £m	Total  £m
Gross written premiums	5,458	4,750	2,542	6,624	496	4,652	920	-	-	25,442
Premiums ceded to reinsurers	(1,509)	(498)	(89)	(86)	(9)	(39)	(134)	-	-	(2,364)
Internal reinsurance revenue	(7)	(2)	-	-	-	(3)	(11)	-	23	-
Premiums written net of reinsurance	3,942	4,250	2,453	6,538	487	4,610	775	-	23	23,078
Net change in provision for unearned premiums	(2)	(132)	(33)	(8)	(16)	(11)	(8)	-	-	(210)
Net earned premiums	3,940	4,118	2,420	6,530	471	4,599	767	-	23	22,868
Fee and commission income	868	140	17	258	60	98	198	326	(3)	1,962
	4,808	4,258	2,437	6,788	531	4,697	965	326	20	24,830
Net investment income	24,903	283	50	2,951	141	533	1,240	83	73	30,257
Inter-segment revenue	-	-	-	-	-	-	-	234	-	234
Share of profit of joint ventures and associates	172	-	1	16	7	3	17	-	-	216
(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	(3)	(8)	-	-	-	-	-	-	-	(11)
Segmental income1	29,880	4,533	2,488	9,755	679	5,233	2,222	643	93	55,526
Claims and benefits paid, net of recoveries from reinsurers	(11,200)	(2,680)	(1,521)	(5,397)	(315)	(2,230)	(399)	-	(40)	(23,782)
Change in insurance liabilities, net of reinsurance	(3,381)	(550)	(16)	(1,221)	(79)	(1,303)	(349)	-	6	(6,893)
Change in investment contract provisions	(10,069)	-	-	(1,636)	-	(1,180)	(1,069)	(85)	-	(14,039)
Change in unallocated divisible surplus	(259)	-	-	(276)	2	132	20	-	-	(381)
Fee and commission expense	(862)	(1,277)	(628)	(632)	(77)	(275)	(108)	(35)	9	(3,885)
Other expenses	(1,427)	(263)	(150)	(266)	(64)	(106)	(289)	(393)	(895)	(3,853)
Inter-segment expenses	(212)	(8)	(5)	(1)	(5)	-	-	-	(3)	(234)
Finance costs	(195)	(2)	(4)	(1)	-	(3)	(3)	-	(418)	(626)
Segmental expenses	(27,605)	(4,780)	(2,324)	(9,430)	(538)	(4,965)	(2,197)	(513)	(1,341)	(53,693)
Profit/(loss) before tax	2,275	(247)	164	325	141	268	25	130	(1,248)	1,833
Tax attributable to policyholders' returns	(638)	-	-	-	-	-	(2)	-	-	(640)
Profit/(loss) before tax attributable to shareholders' profits	1,637	(247)	164	325	141	268	23	130	(1,248)	1,193
Adjusted for non-operating items:
Reclassification of corporate costs and unallocated interest	-	(5)	17	46	-	-	-	5	(63)	-
Investment return variances and economic assumption changes on long-term business	(503)	-	-	86	1	27	10	-	-	(379)
Short-term fluctuation in return on investments backing non-long-term business	(135)	(79)	42	(2)	(1)	13	-	-	680	518
Economic assumption changes on general insurance and health business	-	229	-	13	-	-	-	-	-	242
Impairment of goodwill, joint ventures and associates and other amounts expensed	-	-	-	-	-	-	-	-	-	-
Amortisation and impairment of intangibles	71	24	29	2	3	7	9	6	24	175
Amortisation and impairment of AVIF	387	-	-	3	2	2	142	-	4	540
Loss/(profit) on the disposal and remeasurement of subsidiaries, joint ventures and associates	3	8	-	-	-	-	-	-	-	11
Integration and restructuring costs	119	15	18	8	-	1	17	19	15	212
Other4	-	498	-	-	-	-	-	-	-	498
Operating profit/(loss) before tax attributable to shareholders	1,579	443	270	481	146	318	201	160	(588)	3,010

1    Total reported income, excluding inter-segment revenue, includes £33,784 million from the United Kingdom (Aviva plc's country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts are written.

2    Aviva Investors operating profit includes £2 million profit relating to the Aviva Investors Pooled Pensions business.

3    Other Group activities include Group Reinsurance.

4    Other items include an exceptional charge of £475 million (2015: £nil) relating to the impact of the change in the Ogden discount rate from 2.5% set in 2001 to minus 0.75% announced by the Lord Chancellor on 27 February 2017. Refer to note B9 (C) (iii) for further details. Other items also include a loss upon the completion of an outwards reinsurance contract by the UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks. The £23 million loss comprises £107 million in premiums ceded less £78 million in reinsurance recoverables recognised and £6 million claims handling provisions.

 

 

 

 

 

 

 

 

 

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(a) (iv) Segmental statement of financial position as at 30 June 2017

	United Kingdom & Ireland			Europe
	Life £m	GI  £m	Canada  £m	France £m	Poland £m	Italy, Spain and Other  £m	Asia £m	Aviva Investors £m	Other Group activities  £m	Total £m
Goodwill	663	1,021	87	-	28	50	62	-	-	1,911
Acquired value of in-force business and intangible assets	2,956	151	279	88	79	191	1,001	6	90	4,841
Interests in, and loans to, joint ventures and associates	937	-	14	183	-	70	482	-	-	1,686
Property and equipment	72	26	39	248	4	3	10	4	104	510
Investment property	6,427	207	-	2,998	-	-	-	909	178	10,719
Loans	24,502	5	157	741	-	11	36	-	-	25,452
Financial investments	184,945	4,174	4,552	70,211	3,493	20,959	11,934	545	8,409	309,222
Deferred acquisition costs	1,335	546	375	323	106	76	137	-	-	2,898
Other assets	42,589	6,414	1,373	10,381	310	1,375	1,704	1,056	11,530	76,732
Assets of operations classified as held for sale	-	-	-	-	-	6,042	-	-	-	6,042
Total assets	264,426	12,544	6,876	85,173	4,020	28,777	15,366	2,520	20,311	440,013
Insurance liabilities
Long-term business and outstanding claims provisions	104,987	6,039	3,233	16,622	3,158	7,091	4,130	-	6	145,266
Unearned premiums	265	2,284	1,549	607	118	293	86	-	-	5,202
Other insurance liabilities	-	72	119	53	-	-	-	-	2	246
Liability for investment contracts	128,506	-	-	52,233	2	12,993	8,509	1,483	-	203,726
Unallocated divisible surplus	2,251	-	-	5,200	69	701	303	-	-	8,524
Net asset value attributable to unitholders	76	-	-	3,141	-	-	-	-	15,252	18,469
External borrowings	1,798	-	-	1	-	34	-	-	8,505	10,338
Other liabilities, including inter-segment liabilities	14,898	(314)	981	4,797	211	511	657	457	1,531	23,729
Liabilities of operations classified as held for sale	-	-	-	-	-	5,180	-	-	-	5,180
Total liabilities	252,781	8,081	5,882	82,654	3,558	26,803	13,685	1,940	25,296	420,680
Total equity										19,333
Total equity and liabilities										440,013

(a) (v) Segmental statement of financial position as at 30 June 2016

	United Kingdom & Ireland			Europe
	Life £m	GI  £m	Canada  £m	France  £m	Poland  £m	Italy, Spain and Other  £m	Asia £m	Aviva Investors  £m	Other Group activities £m	Total £m
Goodwill	663	1,016	26	6	26	192	50	-	-	1,979
Acquired value of in-force business and intangible assets	3,323	149	83	83	11	604	1,135	12	50	5,450
Interests in, and loans to, joint ventures and associates	1,415	-	10	166	46	78	499	-	-	2,214
Property and equipment	89	27	15	254	3	5	9	2	78	482
Investment property	7,165	205	-	2,336	-	1	-	1,140	259	11,106
Loans	23,338	5	164	732	1	29	36	-	-	24,305
Financial investments	171,680	4,201	3,703	65,171	2,720	22,774	10,500	523	7,188	288,460
Deferred acquisition costs	1,427	496	304	274	38	82	84	4	-	2,709
Other assets	47,874	6,461	1,603	7,743	246	1,687	1,565	989	5,184	73,352
Assets of operations classified as held for sale	1,197	455	-	12,541	-	-	-	-	-	14,193
Total assets	258,171	13,015	5,908	89,306	3,091	25,452	13,878	2,670	12,759	424,250
Insurance liabilities
Long-term business and outstanding claims provisions	104,326	5,414	2,716	15,036	2,509	9,382	3,614	-	35	143,032
Unearned premiums	260	2,268	1,215	567	63	273	77	-	-	4,723
Other insurance liabilities	-	77	92	50	-	-	-	-	3	222
Liability for investment contracts	118,071	-	-	47,196	2	11,298	7,738	1,701	-	186,006
Unallocated divisible surplus	2,609	-	-	5,324	56	1,359	276	-	-	9,624
Net asset value attributable to unitholders	84	-	-	2,665	-	471	-	-	9,825	13,045
External borrowings	1,914	-	-	-	-	55	-	-	7,712	9,681
Other liabilities, including inter-segment liabilities	17,754	83	904	4,043	107	752	581	471	295	24,990
Liabilities of operations classified as held for sale	1,171	395	-	12,050	-	-	-	-	-	13,616
Total liabilities	246,189	8,237	4,927	86,931	2,737	23,590	12,286	2,172	17,870	404,939
Total equity										19,311
Total equity and liabilities										424,250

 

 

 

 

 

 

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(a) (vi) Segmental statement of financial position as at 31 December 2016

	United Kingdom & Ireland					Europe
	Life £m	GI £m	Canada £m	France  £m	Poland  £m	Italy, Spain and Other  £m	Asia £m	Aviva Investors £m	Other Group activities  £m	Total £m
Goodwill	663	1,018	88	-	26	199	51	-	-	2,045
Acquired value of in-force business and intangible assets	3,152	160	292	86	12	619	1,062	9	76	5,468
Interests in, and loans to, joint ventures and associates	1,257	-	13	169	48	71	527	-	-	2,085
Property and equipment	78	27	24	240	4	5	12	5	92	487
Investment property	6,504	208	-	2,878	-	1	-	951	226	10,768
Loans	23,793	5	170	757	-	22	37	-	-	24,784
Financial investments	173,069	4,324	4,670	68,427	3,015	24,108	11,460	574	10,188	299,835
Deferred acquisition costs	1,224	507	360	280	45	82	113	3	-	2,614
Other assets	52,754	6,175	1,372	7,716	237	1,644	1,479	961	6,967	79,305
Assets of operations classified as held for sale	-	-	-	13,028	-	-	-	-	-	13,028
Total assets	262,494	12,424	6,989	93,581	3,387	26,751	14,741	2,503	17,549	440,419
Insurance liabilities
Long-term business and outstanding claims provisions	104,194	6,098	3,248	15,932	2,698	10,241	3,750	-	12	146,173
Unearned premiums	227	2,136	1,527	463	68	281	64	-	-	4,766
Other insurance liabilities	-	72	118	51	-	-	-	-	3	244
Liability for investment contracts	125,198	-	-	49,929	2	12,000	8,395	1,571	-	197,095
Unallocated divisible surplus	2,858	-	-	5,151	60	1,074	206	-	-	9,349
Net asset value attributable to unitholders	76	-	-	2,349	-	509	-	-	12,704	15,638
External borrowings	1,793	-	-	1	-	46	-	-	8,455	10,295
Other liabilities, including inter-segment liabilities	15,701	(404)	1,107	4,694	139	758	645	396	1,778	24,814
Liabilities of operations classified as held for sale	-	-	-	12,494	-	-	-	-	-	12,494
Total liabilities	250,047	7,902	6,000	91,064	2,967	24,909	13,060	1,967	22,952	420,868
Total equity										19,551
Total equity and liabilities										440,419

(b) Further analysis by products and services

The Group's results can be further analysed by products and services which comprise long-term business, general insurance and health, fund management and other activities.

Long-term business

Our long-term business comprises life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of the other life and related business written in our associates and joint ventures, as well as lifetime mortgage business written in the UK.

General insurance and health

Our general insurance and health business provides insurance cover to individuals and to small and medium sized businesses, for risks associated mainly with motor vehicles, property and liability, such as employers' liability and professional indemnity liability, and medical expenses.

Fund management

Our fund management business invests policyholders' and shareholders' funds, provides investment management services for institutional pension fund mandates and manages a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. Clients include Aviva Group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors.

Other

Other includes service companies, head office expenses, such as Group treasury and finance functions, and certain financing costs and taxes not allocated to business segments.

 

 

 

 

 

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(b) (i) Segmental income statement - products and services for the six month period ended 30 June 2017

	Long-term business £m	General insurance and health2  £m	Fund management £m	Other £m	Total  £m
Gross written premiums1	8,114	5,462	-	-	13,576
Premiums ceded to reinsurers	(838)	(238)	-	-	(1,076)
Premiums written net of reinsurance	7,276	5,224	-	-	12,500
Net change in provision for unearned premiums	-	(365)	-	-	(365)
Net earned premiums	7,276	4,859	-	-	12,135
Fee and commission income	710	7	178	230	1,125
	7,986	4,866	178	230	13,260
Net investment income/(expense)	10,443	122	(1)	190	10,754
Inter-segment revenue	-	-	115	-	115
Share of profit of joint ventures and associates	10	-	-	-	10
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates	196	6	-	-	202
Segmental income	18,635	4,994	292	420	24,341
Claims and benefits paid, net of recoveries from reinsurers	(9,418)	(3,083)	-	-	(12,501)
Change in insurance liabilities, net of reinsurance	(1,620)	(64)	-	-	(1,684)
Change in investment contract provisions	(5,584)	-	-	-	(5,584)
Change in unallocated divisible surplus	794	-	-	-	794
Fee and commission expense	(610)	(1,258)	(20)	(312)	(2,200)
Other expenses	(799)	(295)	(208)	(367)	(1,669)
Inter-segment expenses	(107)	(7)	-	(1)	(115)
Finance costs	(132)	(2)	-	(219)	(353)
Segmental expenses	(17,476)	(4,709)	(228)	(899)	(23,312)
Profit/(loss) before tax	1,159	285	64	(479)	1,029
Tax attributable to policyholder returns	(154)	-	-	-	(154)
Profit/(loss) before tax attributable to shareholders' profits	1,005	285	64	(479)	875
Adjusted for:
Non-operating items	314	132	5	139	590
Operating profit/(loss) before tax attributable to shareholders' profits	1,319	417	69	(340)	1,465

1    Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £40 million, of which £22 million relates to property and liability insurance and £18 million relates to long-term business.

2    General insurance and health business segment includes gross written premiums of £552 million relating to health business. The remaining business relates to property and liability insurance.

 

 

 

 

 

 

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B5 - Segmental information continued

(b) (ii) Segmental income statement - products and services for the six month period ended 30 June 2016

	Long-term business £m	General insurance and health2 £m	Fund management £m	Other £m	Total  £m
Gross written premiums1	7,733	4,860	-	-	12,593
Premiums ceded to reinsurers	(845)	(315)	-	-	(1,160)
Premiums written net of reinsurance	6,888	4,545	-	-	11,433
Net change in provision for unearned premiums	-	(348)	-	-	(348)
Net earned premiums	6,888	4,197	-	-	11,085
Fee and commission income	638	20	139	199	996
	7,526	4,217	139	199	12,081
Net investment income/(expense)	14,905	209	(1)	51	15,164
Inter-segment revenue	-	-	119	-	119
Share of profit of joint ventures and associates	193	2	-	-	195
(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	(8)	(11)	-	1	(18)
Segmental income	22,616	4,417	257	251	27,541
Claims and benefits paid, net of recoveries from reinsurers	(8,782)	(2,671)	-	-	(11,453)
Change in insurance liabilities, net of reinsurance	(5,739)	(187)	-	-	(5,926)
Change in investment contract provisions	(4,576)	-	-	-	(4,576)
Change in unallocated divisible surplus	(792)	-	-	-	(792)
Fee and commission expense	(451)	(1,102)	(17)	(84)	(1,654)
Other expenses	(976)	(261)	(206)	(628)	(2,071)
Inter-segment expenses	(113)	(6)	-	-	(119)
Finance costs	(112)	(2)	-	(181)	(295)
Segmental expenses	(21,541)	(4,229)	(223)	(893)	(26,886)
Profit/(loss) before tax	1,075	188	34	(642)	655
Tax attributable to policyholder returns	(318)	-	-	-	(318)
Profit/(loss) before tax attributable to shareholders' profits	757	188	34	(642)	337
Adjusted for:
Non-operating items	469	146	15	358	988
Operating profit/(loss) before tax attributable to shareholders' profits	1,226	334	49	(284)	1,325

1    Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £71 million, of which £29 million relates to property and liability insurance and £42 million relates to long-term business.

2    General insurance and health business segment includes gross written premiums of £646 million relating to health business. The remaining business relates to property and liability insurance.

 

 

 

 

 

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B5 - Segmental information continued

(b) (iii) Segmental income statement - products and services for the year ended 31 December 2016

	Long-term business  £m	General insurance and health2 £m	Fund management £m	Other  £m	Total £m
Gross written premiums1	15,748	9,694	-	-	25,442
Premiums ceded to reinsurers	(1,697)	(667)	-	-	(2,364)
Premiums written net of reinsurance	14,051	9,027	-	-	23,078
Net change in provision for unearned premiums	-	(210)	-	-	(210)
Net earned premiums	14,051	8,817	-	-	22,868
Fee and commission income	1,234	26	300	402	1,962
	15,285	8,843	300	402	24,830
Net investment income/(expense)	29,695	383	(2)	181	30,257
Inter-segment revenue	-	-	239	-	239
Share of profit of joint ventures and associates	213	3	-	-	216
(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	(3)	(8)	-	-	(11)
Segmental income	45,190	9,221	537	583	55,531
Claims and benefits paid, net of recoveries from reinsurers	(18,026)	(5,756)	-	-	(23,782)
Change in insurance liabilities, net of reinsurance	(6,249)	(644)	-	-	(6,893)
Change in investment contract provisions	(14,039)	-	-	-	(14,039)
Change in unallocated divisible surplus	(381)	-	-	-	(381)
Fee and commission expense	(1,369)	(2,299)	(33)	(184)	(3,885)
Other expenses	(1,887)	(521)	(396)	(1,049)	(3,853)
Inter-segment expenses	(222)	(12)	-	(5)	(239)
Finance costs	(183)	(5)	-	(438)	(626)
Segmental expenses	(42,356)	(9,237)	(429)	(1,676)	(53,698)
Profit/(loss) before tax	2,834	(16)	108	(1,093)	1,833
Tax attributable to policyholder returns	(640)	-	-	-	(640)
Profit/(loss) before tax attributable to shareholders' profits	2,194	(16)	108	(1,093)	1,193
Adjusted for:
Non-operating items	448	849	30	490	1,817
Operating profit/(loss) before tax attributable to shareholders' profits	2,642	833	138	(603)	3,010

1    Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £138 million, of which £54 million relates to property and liability insurance and £84 million relates to long-term business.

2    General insurance and health business segment includes gross written premiums of £1,030 million relating to health business. The remaining business relates to property and liability insurance.

 

 

 

 

 

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B5 - Segmental information continued

(c) (i) Segmental statement of financial position - products and services as at 30 June 2017

	Long-term business  £m	General insurance and health  £m	Fund management £m	Other £m	Total  £m
Goodwill	755	1,086	3	67	1,911
Acquired value of in-force business and intangible assets	4,304	458	6	73	4,841
Interests in, and loans to, joint ventures and associates	1,663	10	-	13	1,686
Property and equipment	262	125	4	119	510
Investment property	10,197	344	-	178	10,719
Loans	25,288	164	-	-	25,452
Financial investments	289,348	11,432	51	8,391	309,222
Deferred acquisition costs	1,756	1,142	-	-	2,898
Other assets	54,045	9,529	953	12,205	76,732
Assets of operations classified as held for sale	5,733	309	-	-	6,042
Total assets	393,351	24,599	1,017	21,046	440,013
Gross insurance liabilities	133,908	16,806	-	-	150,714
Gross liabilities for investment contracts	203,726	-	-	-	203,726
Unallocated divisible surplus	8,524	-	-	-	8,524
Net asset value attributable to unitholders	3,217	-	-	15,252	18,469
External borrowings	1,702	-	-	8,636	10,338
Other liabilities, including inter-segment liabilities	19,122	1,195	440	2,972	23,729
Liabilities of operations classified as held for sale	5,006	174	-	-	5,180
Total liabilities	375,205	18,175	440	26,860	420,680
Total equity					19,333
Total equity and liabilities					440,013

(c) (ii) Segmental statement of financial position - products and services as at 30 June 2016

	Long-term business £m	General insurance and health  £m	Fund management £m	Other £m	Total  £m
Goodwill	887	1,025	-	67	1,979
Acquired value of in-force business and intangible assets	5,062	346	12	30	5,450
Interests in, and loans to, joint ventures and associates	2,167	39	-	8	2,214
Property and equipment	280	107	2	93	482
Investment property	10,479	368	-	259	11,106
Loans	24,135	170	-	-	24,305
Financial investments	270,739	10,527	32	7,162	288,460
Deferred acquisition costs	1,729	976	4	-	2,709
Other assets	56,016	9,680	901	6,755	73,352
Assets of operations classified as held for sale	13,738	455	-	-	14,193
Total assets	385,232	23,693	951	14,374	424,250
Gross insurance liabilities	132,840	15,137	-	-	147,977
Gross liabilities for investment contracts	186,006	-	-	-	186,006
Unallocated divisible surplus	9,624	-	-	-	9,624
Net asset value attributable to unitholders	3,221	-	-	9,824	13,045
External borrowings	1,872	-	-	7,809	9,681
Other liabilities, including inter-segment liabilities	20,694	1,416	455	2,425	24,990
Liabilities of operations classified as held for sale	13,221	395	-	-	13,616
Total liabilities	367,478	16,948	455	20,058	404,939
Total equity					19,311
Total equity and liabilities					424,250

 

 

 

 

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B5 - Segmental information continued

(c) (iii) Segmental statement of financial position - products and services as at 31 December 2016

	Long-term business £m	General insurance and health  £m	Fund management £m	Other  £m	Total £m
Goodwill	889	1,086	3	67	2,045
Acquired value of in-force business and intangible assets	4,845	571	9	43	5,468
Interests in, and loans to, joint ventures and associates	2,030	42	-	13	2,085
Property and equipment	264	109	5	109	487
Investment property	10,202	341	-	225	10,768
Loans	24,607	177	-	-	24,784
Financial investments	277,889	11,699	51	10,196	299,835
Deferred acquisition costs	1,574	1,037	3	-	2,614
Other assets	61,780	8,995	835	7,695	79,305
Assets of operations classified as held for sale	13,028	-	-	-	13,028
Total assets	397,108	24,057	906	18,348	440,419
Gross insurance liabilities	134,695	16,488	-	-	151,183
Gross liabilities for investment contracts	197,095	-	-	-	197,095
Unallocated divisible surplus	9,349	-	-	-	9,349
Net asset value attributable to unitholders	2,934	-	-	12,704	15,638
External borrowings	1,718	-	-	8,577	10,295
Other liabilities, including inter-segment liabilities	19,930	1,215	371	3,298	24,814
Liabilities of operations classified as held for sale	12,494	-	-	-	12,494
Total liabilities	378,215	17,703	371	24,579	420,868
Total equity					19,551
Total equity and liabilities					440,419

 

 

 

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B6 - Tax

This note analyses the tax charge for the period and explains the factors that affect it.

(a)  Tax charged to the income statement

(i)   The total tax charge comprises:

	6 months  2017  £m	6 months 2016  £m	Full Year 2016  £m
Current tax
For the period	269	602	930
Prior period adjustments	8	(6)	1
Total current tax	277	596	931
Deferred tax
Origination and reversal of temporary differences	48	(131)	72
Changes in tax rates or tax laws	(13)	(11)	(14)
Write down/(back) of deferred tax assets	1	-	(15)
Total deferred tax	36	(142)	43
Total tax charged to income statement	313	454	974

(ii)  The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Ireland and Singapore insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholders' returns included in the charge above is £154 million (HY16: £318 million charge; FY16: £640 million charge).

(iii) The tax charge above, comprising current and deferred tax, can be analysed as follows:

	6 months 2017 £m	6 months  2016 £m	Full Year  2016 £m
UK tax	209	312	688
Overseas tax	104	142	286
	313	454	974

(b)  Tax (credited)/charged to other comprehensive income

(i)   The total tax (credit)/charge comprises:

	6 months 2017 £m	6 months 2016 £m	Full Year 2016 £m
Current tax
In respect of pensions and other post-retirement obligations	(29)	(16)	(25)
In respect of foreign exchange movements	3	22	31
	(26)	6	6
Deferred tax
In respect of pensions and other post-retirement obligations	18	185	94
In respect of fair value (losses)/gains on owner-occupied properties	(1)	1	1
In respect of unrealised (losses)/gains on investments	(8)	9	3
	9	195	98
Total tax (credited)/charged to other comprehensive income	(17)	201	104

(ii)  The tax charge attributable to policyholders' returns included above is £nil (HY16: £nil; FY16: £nil).

 

 

 

 

 

 

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B6 - Tax continued

(c) Tax credited to equity

Tax credited directly to equity in the period in respect of coupon payments on the direct capital instrument and tier 1 notes amounted to £6 million (HY16: £5 million; FY16: £17 million).

(d) Tax reconciliation

The tax on the Group's profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows:

	Shareholder £m	Policyholder £m	6 months 2017  £m	Shareholder £m	Policyholder £m	6 months 2016  £m	Shareholder £m	Policyholder £m	Full Year 2016  £m
Total profit before tax	875	154	1,029	337	318	655	1,193	640	1,833
Tax calculated at standard UK corporation tax rate of 19.25% (2016: 20.00%)	168	30	198	67	64	131	239	128	367
Reconciling items
Different basis of tax - policyholders	-	124	124	-	254	254	-	513	513
Adjustment to tax charge in respect of prior periods	(10)	-	(10)	(1)	-	(1)	(34)	-	(34)
Non-assessable income and items not taxed at the full statutory rate	(8)	-	(8)	9	-	9	39	-	39
Non-taxable (profit)/loss on sale of subsidiaries and associates	(52)	-	(52)	2	-	2	1	-	1
Disallowable expenses	25	-	25	26	-	26	49	-	49
Different local basis of tax on overseas profits	49	-	49	50	-	50	97	(1)	96
Change in future local statutory tax rates	(13)	-	(13)	(11)	-	(11)	(36)	-	(36)
Movement in deferred tax not recognised	(3)	-	(3)	(1)	-	(1)	(13)	-	(13)
Tax effect of profit from joint ventures and associates	2	-	2	-	-	-	(6)	-	(6)
Other	1	-	1	(5)	-	(5)	(2)	-	(2)
Total tax charged to income statement	159	154	313	136	318	454	334	640	974

The tax charge attributable to policyholders' returns is removed from the Group's total profit before tax in arriving at the Group's profit before tax attributable to shareholders' profits. As the net of tax profit attributable to with-profit and unit-linked policyholders is zero, the Group's pre-tax profit attributable to policyholders is an amount equal and opposite to the tax charge attributable to policyholders included in the total tax charge. The difference between the policyholder tax charge and the impact of this item in the tax reconciliation can be explained as follows:

	6 months 2017 £m	6 months 2016 £m	Full Year  2016 £m
Tax attributable to policyholder returns	154	318	640
UK corporation tax at a rate of 19.25% (2016: 20.00%) in respect of the policyholder tax deduction	(30)	(64)	(128)
Different local basis of tax of overseas profits	-	-	1
Different basis of tax - policyholders per tax reconciliation	124	254	513

The rate of corporation tax in the UK from 1 April 2017 is 19% reduced from 20% at 1 April 2016, giving a standard UK rate of 19.25%. Finance Act 2016 introduced legislation reducing the rate of corporation tax to 17% from 1 April 2017. In addition, during 2016, the French government reduced the French corporation tax rate from 34.43% to 28.92% from 1 January 2020. These reduced rates were used in the calculation of deferred tax assets and liabilities in the UK and France at 31 December 2016 and 30 June 2017.

 

 

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B7 - Earnings per share

(a) Basic earnings per share

(i)   The profit attributable to ordinary shareholders is:

			6 months 2017			6 months 2016			Full Year 2016
	Operating profit £m	Non-operating items  £m	Total  £m	Operating profit £m	Non-operating items £m	Total £m	Operating profit £m	Non-operating items £m	Total £m
Profit before tax attributable to shareholders' profits	1,465	(590)	875	1,325	(988)	337	3,010	(1,817)	1,193
Tax attributable to shareholders' profit	(311)	152	(159)	(323)	187	(136)	(706)	372	(334)
Profit for the period	1,154	(438)	716	1,002	(801)	201	2,304	(1,445)	859
Amount attributable to non-controlling interests	(73)	(6)	(79)	(67)	(4)	(71)	(147)	(9)	(156)
Cumulative preference dividends for the period	(9)	-	(9)	(9)	-	(9)	(17)	-	(17)
Coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax)	(23)	-	(23)	(21)	-	(21)	(68)	-	(68)
Profit attributable to ordinary shareholders	1,049	(444)	605	905	(805)	100	2,072	(1,454)	618

(ii)  Basic earnings per share is calculated as follows:

	6 months 2017			6 months 2016			Full Year 2016
	Before tax £m	Net of tax, non-controlling interests, preference dividends and DCI1 £m	Per share  p	Before tax £m	Net of tax, non-controlling interests, preference dividends and DCI1 £m	Per share  p	Before tax £m	Net of tax, non-controlling interests, preference dividends and DCI1 £m	Per share p
Operating profit attributable to ordinary shareholders	1,465	1,049	25.8	1,325	905	22.4	3,010	2,072	51.1
Non-operating items:
Investment return variances and economic assumption changes on long-term business	(179)	(129)	(3.2)	6	(2)	-	379	313	7.8
Short-term fluctuation in return on investments backing non-long-term business	(205)	(166)	(4.1)	(338)	(267)	(6.6)	(518)	(398)	(9.8)
Economic assumption changes on general insurance and health business	(12)	(10)	(0.2)	(123)	(98)	(2.4)	(242)	(193)	(4.8)
Impairment of goodwill, joint ventures and associates and other amounts expensed	(19)	(19)	(0.5)	-	-	-	-	-	-
Amortisation and impairment of intangibles	(91)	(71)	(1.7)	(92)	(68)	(1.7)	(175)	(137)	(3.4)
Amortisation and impairment of acquired value of in-force business	(234)	(201)	(4.9)	(318)	(270)	(6.7)	(540)	(455)	(11.2)
Profit/(loss) on disposal and remeasurement of subsidiaries, joint ventures and associates	202	192	4.7	(18)	(18)	(0.4)	(11)	(16)	(0.4)
Integration and restructuring costs	(52)	(40)	(1.0)	(105)	(82)	(2.1)	(212)	(170)	(4.2)
Other2	-	-	-	-	-	-	(498)	(398)	(9.8)
Profit attributable to ordinary shareholders	875	605	14.9	337	100	2.5	1,193	618	15.3

1    DCI includes the direct capital instrument and tier 1 notes.

2    Other items include an exceptional charge of £nil (HY16 £nil; FY16: £475 million), £nil net of tax (HY16 £nil; FY16: £380 million), relating to the impact of the change in the Ogden discount rate from 2.5% set in 2001 to minus 0.75% announced by the Lord Chancellor on 27 February 2017.

(iii) The calculation of basic earnings per share uses a weighted average of 4,061 million (HY16: 4,046 million; FY16: 4,051 million) ordinary shares in issue, after deducting treasury shares. The actual number of shares in issue at 30 June 2017 was 4,055 million (HY16: 4,058 million; FY16: 4,062 million) and 4,052 million (HY16: 4,051 million; FY16: 4,058 million) excluding treasury shares.

 

(iv) On 25 May 2017 Aviva announced a share buy-back of ordinary shares for an aggregate purchase price of up to £300 million, during the period from 25 May 2017 to no later than 15 December 2017. The number of shares in issue has reduced by 14 million as at 30 June 2017 in respect of shares acquired and cancelled under the buy-back programme. Net of new shares issued during the period, the number of shares in issue reduced by 7 million.

 

 

 

 

 

 

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B7 - Earnings per share continued

(b) Diluted earnings per share

(i)   Diluted earnings per share is calculated as follows:

	6 months 2017			6 months 2016			Full Year 2016
	Total £m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share  p	Total  £m	Weighted average number of shares million	Per share p
Profit attributable to ordinary shareholders	605	4,061	14.9	100	4,046	2.5	618	4,051	15.3
Dilutive effect of share awards and options	-	47	(0.2)	-	39	(0.1)	-	38	(0.2)
Diluted earnings per share	605	4,108	14.7	100	4,085	2.4	618	4,089	15.1

(ii)  Diluted earnings per share on operating profit attributable to ordinary shareholders is calculated as follows:

	6 months 2017			6 months 2016			Full Year 2016
	Total £m	Weighted average number of shares million	Per share  p	Total  £m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share p
Operating profit attributable to ordinary shareholders	1,049	4,061	25.8	905	4,046	22.4	2,072	4,051	51.1
Dilutive effect of share awards and options	-	47	(0.3)	-	39	(0.2)	-	38	(0.4)
Diluted operating profit per share	1,049	4,108	25.5	905	4,085	22.2	2,072	4,089	50.7

 

 

 

 

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B8 - Dividends and appropriations

	6 months 2017 £m	6 months 2016  £m	Full Year  2016 £m
Ordinary dividends declared and charged to equity in the period
Final 2016 - 15.88 pence per share, paid on 17 May 2017	646	-	-
Final 2015 - 14.05 pence per share, paid on 17 May 2016	-	570	570
Interim 2016 - 7.42 pence per share, paid on 17 November 2016	-	-	301
	646	570	871
Dividends waived/unclaimed returned to the Company	-	-	-
Preference dividends declared and charged to equity in the period	9	9	17
Coupon payments on direct capital instrument and tier 1 notes	29	26	85
	684	605	973

Subsequent to 30 June 2017, the directors declared an interim dividend for 2017 of 8.40 pence per ordinary share (HY16: 7.42 pence), amounting to £340 million (HY16: £301 million) in total based on shares in issue as at 2 August 2017. The dividend will be paid on 17 November 2017 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2017.

Interest on the direct capital instrument and tier 1 notes is treated as an appropriation of retained profits and, accordingly, is accounted for when paid. Tax relief is obtained at a rate of 19.25% (2016: 20.00%).

 

 

 

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B9 - Insurance liabilities

(a) Carrying amount

(i) Insurance liabilities (gross of reinsurance) at 30 June/31 December comprised:

			30 June 2017			30 June 2016			31 December 2016
	Long-term business £m	General insurance and health £m	Total £m	Long-term business  £m	General insurance and health  £m	Total  £m	Long-term business  £m	General insurance and health  £m	Total £m
Long-term business provisions
Participating	53,134	-	53,134	55,145	-	55,145	56,760	-	56,760
Unit-linked non-participating	16,941	-	16,941	15,031	-	15,031	16,026	-	16,026
Other non-participating	65,677	-	65,677	65,172	-	65,172	64,432	-	64,432
	135,752	-	135,752	135,348	-	135,348	137,218	-	137,218
Outstanding claims provisions	2,090	9,041	11,131	1,980	7,780	9,760	1,925	8,749	10,674
Provision for claims incurred but not reported	-	2,676	2,676	-	2,851	2,851	-	2,960	2,960
	2,090	11,717	13,807	1,980	10,631	12,611	1,925	11,709	13,634
Provision for unearned premiums	-	5,203	5,203	-	4,723	4,723	-	4,766	4,766
Provision arising from liability adequacy tests1	-	13	13	-	12	12	-	13	13
Total	137,842	16,933	154,775	137,328	15,366	152,694	139,143	16,488	155,631
Less: Amounts classified as held for sale	(3,934)	(127)	(4,061)	(4,488)	(229)	(4,717)	(4,448)	-	(4,448)
	133,908	16,806	150,714	132,840	15,137	147,977	134,695	16,488	151,183

1    Provision arising from liability adequacy tests relates to general insurance business only. Liability adequacy test provisions for life operations are included in other line items.

(ii) Change in insurance liabilities recognised as an expense

The purpose of the following table is to reconcile the change in insurance liabilities, net of reinsurance, shown in the income statement, to the change in insurance liabilities recognised as an expense in the relevant movement tables in this note. The components of the reconciliation are the change in provision for outstanding claims on long-term business (which is not included in a separate movement table), and the unwind of discounting on general insurance reserves (which is included within finance costs in the income statement). For general insurance and health business, the change in the provision for unearned premiums is not included in the reconciliation as, within the income statement, this is included within earned premiums.

30 June 2017	Gross £m	Reinsurance £m	Net  £m
Long-term business
Change in long-term business provisions (note B9(b))	2,000	(523)	1,477
Change in provision for outstanding claims	147	(4)	143
	2,147	(527)	1,620
General insurance and health
Change in insurance liabilities (note B9(c))	(8)	73	65
Less: Unwind of discount on GI reserves and other	(5)	4	(1)
	(13)	77	64
Total change in insurance liabilities	2,134	(450)	1,684

 

30 June 2016	Gross  £m	Reinsurance £m	Net £m
Long-term business
Change in long-term business provisions (note B9(b))	6,144	(564)	5,580
Change in provision for outstanding claims	171	(12)	159
	6,315	(576)	5,739
General insurance and health
Change in insurance liabilities (note B9(c))	498	(310)	188
Less: Unwind of discount on GI reserves and other	(5)	4	(1)
	493	(306)	187
Total change in insurance liabilities	6,808	(882)	5,926

 

31 December 2016	Gross £m	Reinsurance1 £m	Net £m
Long-term business
Change in long-term business provisions (note B9(b))	7,164	(993)	6,171
Change in provision for outstanding claims	91	(13)	78
	7,255	(1,006)	6,249
General insurance and health
Change in insurance liabilities (note B9(c))2	867	(222)	645
Less: Unwind of discount on GI reserves and other	(11)	10	(1)
	856	(212)	644
Total change in insurance liabilities	8,111	(1,218)	6,893

1    Reinsurance assets at 31 December 2016 for General insurance and health business include the impact of the £78 million reinsurance asset relating to an outwards reinsurance contract completed by the UK General Insurance business.

2    Includes £475 million in the UK General Insurance business relating to the impact of the change in the Ogden discount rate.

 

 

 

 

 

 

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B9 - Insurance liabilities continued

(b) Movements in long-term business liabilities 

The following movements have occurred in the long-term business provisions (gross of reinsurance) during the period:

	6 months 2017 £m	6 months  2016 £m	Full Year  2016 £m
Carrying amount at 1 January	137,218	125,348	125,348
Provisions in respect of new business	2,959	2,596	5,224
Expected change in existing business provisions	(4,027)	(3,778)	(8,235)
Variance between actual and expected experience	1,512	942	4,752
Impact of operating assumption changes	(2)	(125)	(536)
Impact of economic assumption changes	1,274	6,529	5,930
Other movements1	284	(20)	29
Change in liability recognised as an expense (note B9 a(ii))	2,000	6,144	7,164
Effect of portfolio transfers, acquisitions and disposals2	(4,429)	-	-
Foreign exchange rate movements	897	3,861	4,761
Other movements	66	(5)	(55)
Carrying amount at 30 June/31 December	135,752	135,348	137,218

1    Other movements during 2017 primarily relates to a special bonus distribution to with-profit policyholders (UK Life).

2    The movement during 2017 primarily relates to the disposal of Antarius in France.

(c) Movements in general insurance and health liabilities

The following changes have occurred in the general insurance and health claims provisions (gross of reinsurance) during the period:

	6 months  2017  £m	6 months 2016  £m	Full Year  2016 £m
Carrying amount at 1 January	11,709	9,446	9,446
Impact of changes in assumptions	(12)	239	324
Claim losses and expenses incurred in the current period	3,342	3,266	6,703
Decrease in estimated claim losses and expenses incurred in prior periods	(88)	(179)	(7)
Incurred claims losses and expenses	3,242	3,326	7,020
Less:
Payments made on claims incurred in the current period	(1,363)	(1,260)	(3,505)
Payments made on claims incurred in prior periods	(2,014)	(1,716)	(2,893)
Recoveries on claim payments	122	143	234
Claims payments made in the period, net of recoveries	(3,255)	(2,833)	(6,164)
Unwind of discounting	5	5	11
Changes in claims reserve recognised as an expense (note B9 a(ii))	(8)	498	867
Effect of portfolio transfers, acquisitions and disposals	2	(38)	430
Foreign exchange rate movements	14	725	966
Other movements	-	-	-
Carrying amount at 30 June/31 December	11,717	10,631	11,709

 

 

 

 

 

 

 

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B10 - Liability for investment contracts

(a) Carrying amount

The liability for investment contracts (gross of reinsurance) at 30 June/31 December comprised:

	30 June 2017 £m	30 June 2016 £m	31 December 2016 £m
Long-term business
Participating contracts	85,435	87,709	89,739
Non-participating contracts at fair value	118,291	105,952	114,531
Total	203,726	193,661	204,270
Less: Amounts classified as held for sale	-	(7,655)	(7,175)
	203,726	186,006	197,095

(b) Movements in participating investment contracts 

The following movements have occurred in the provisions (gross of reinsurance) during the period:

	6 months 2017 £m	6 months 2016 £m	Full Year 2016 £m
Carrying amount at 1 January	89,739	78,048	78,048
Provisions in respect of new business	2,339	2,332	4,584
Expected change in existing business provisions	(2,510)	(2,176)	(4,893)
Variance between actual and expected experience	1,085	1,011	3,084
Impact of operating assumption changes	(1)	-	36
Impact of economic assumption changes	92	236	450
Other movements1	132	(5)	(347)
Change in liability recognised as an expense2	1,137	1,398	2,914
Effect of portfolio transfers, acquisitions and disposals3	(7,243)	-	-
Foreign exchange rate movements	1,780	6,992	8,721
Other movements4	22	1,271	56
Carrying amount at 30 June/31 December	85,435	87,709	89,739

1    Other movements during 2017 primarily relates to a special bonus distribution to with-profit policyholders (UK Life).

2    Total interest expense for participating investment contracts recognised in profit or loss is £2,374 million (HY16: £2,082 million, FY16: £3,111 million).

3    The movement during 2017 relates to the disposal of Antarius in France.

4    Other movements during the first half of 2016 comprise liabilities in the UK of £1,271 million reclassified from non-participating investment contracts. During the second half of 2016 the reclassification methodology was reviewed which resulted in a reduced valuation of the amount of liability to be reclassified. In addition, a further reclassification from participating investment contracts to non-participating investment contracts was undertaken.

(c) Movements in non-participating investment contracts

The following movements have occurred in the provisions (gross of reinsurance) during the period:

	6 months  2017 £m	6 months 2016  £m	Full Year 2016 £m
Carrying amount at 1 January	114,531	103,034	103,034
Provisions in respect of new business	1,796	1,455	3,222
Expected change in existing business provisions	(2,129)	(1,775)	(3,481)
Variance between actual and expected experience	3,872	3,660	11,105
Impact of operating assumption changes	-	-	17
Impact of economic assumption changes	(1)	1	2
Other movements	-	(2)	334
Change in liability	3,538	3,339	11,199
Effect of portfolio transfers, acquisitions and disposals1	(4)	-	(757)
Foreign exchange rate movements	199	850	1,065
Other movements2	27	(1,271)	(10)
Carrying amount at 30 June/31 December	118,291	105,952	114,531

1    The movement during 2016 relates to the disposal of a closed book of offshore bonds business. The movement during 2017 relates to the disposal of Antarius in France.

2    Other movements during the first half of 2016 comprise liabilities in the UK of £1,271 million reclassified to participating investment contracts. During the second half of 2016 the reclassification methodology was reviewed which resulted in a reduced valuation of the amount of liability to be reclassified. In addition, a further reclassification to non-participating investment contracts from participating investment contracts was undertaken.

For non-participating investment contracts, deposits collected and amounts withdrawn are not shown on the income statement, but are accounted for directly through the statement of financial position as an adjustment to the gross liabilities for investment contracts. The associated change in investment contract provisions shown on the income statement consists of the attributed investment return. Participating investment contracts are treated consistently with insurance contracts with the change in investment contract provisions primarily consisting of the movement in participating investment contract liabilities (net of reinsurance) over the reporting period.

 

 

 

 

 

 

 

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B11 - Reinsurance assets

The reinsurance assets at 30 June/31 December comprised:

	30 June 2017 £m	30 June 2016  £m	31 December 2016 £m
Long-term business
Insurance contracts	6,278	5,712	6,186
Participating investment contracts	22	12	2
Non-participating investment contracts1	10,170	15,859	18,366
	16,470	21,583	24,554
Outstanding claims provisions	67	66	65
	16,537	21,649	24,619
General insurance and health
Outstanding claims provisions2	1,065	1,055	1,090
Provisions for claims incurred but not reported2	741	911	795
	1,806	1,966	1,885
Provisions for unearned premiums	270	340	250
	2,076	2,306	2,135
	18,613	23,955	26,754
Less: Amounts classified as held for sale	(101)	(972)	(411)
Total	18,512	22,983	26,343

1    Balances in respect of all reinsurance treaties are included under reinsurance assets, regardless of whether they transfer significant insurance risk. The reinsurance assets classified as non-participating investment contracts are financial instruments measured at fair value through profit or loss. During the first half of 2017, £8,934 million of reinsurance assets (UK Life) have been reclassified as collective investments in unit linked funds following a restructure of a reinsurance treaty.

2    Reinsurance assets at 31 December 2016 for General insurance and health business include the impact of the £78 million reinsurance asset relating to an outwards reinsurance contract completed by the UK General Insurance business and the remaining recoveries expected in respect of the Alberta fires in Canada.

B12 - Effect of changes in assumptions and estimates during the period

This disclosure only allows for the impact on liabilities and related assets, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing financial assets.

	Effect on profit 6 months 2017 £m	Effect on profit 6 months 2016 £m	Effect on profit Full Year  2016 £m
Assumptions
Long-term insurance business
Interest rates	(970)	(4,269)	(4,490)
Expenses	(2)	-	48
Persistency rates	-	-	(80)
Mortality for assurance contracts	-	-	(11)
Mortality for annuity contracts	-	63	294
Tax and other assumptions	-	89	97
Investment contracts
Expenses	(1)	-	-
General insurance and health business
Change in discount rate assumptions	(12)	(123)	(242)
Change in expense ratio and other assumptions	-	-	-
Total	(985)	(4,240)	(4,384)

The impact of interest rates on long-term business relates primarily to annuities in the UK (including any change in credit default and reinvestment risk provisions), where a decrease in the valuation interest rate, in response to narrowing of credit spreads partially offset by increasing risk free rates, has increased liabilities. The overall impact on profit also depends on movements in the value of assets backing the liabilities, which is not included in this disclosure.

The adverse change in discount rate assumptions on general insurance and health business of £12 million (HY16: £123 million adverse) arises mainly as a result of an increase in the estimated future inflation rate used to value periodic payment orders partly offset by a slight increase in the interest rates used to discount claim reserves for periodic payment orders and latent claims. During 2016 market interest rates used to discount periodic payment orders and latent claims reduced and the estimated future inflation rate used to value periodic payment orders was increased to be consistent with market expectations. This was, in part, offset by a change in estimate for the interest rate used to discount periodic payment orders to allow for the illiquid nature of these liabilities.

 

 

 

 

 

 

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B13 - Unallocated divisible surplus

An unallocated divisible surplus (UDS) is established where the nature of policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain at the reporting date. Therefore the expected duration for settlement of the UDS is not defined.

This note shows the movements in the UDS during the period.

	6 months 2017 £m	Restated1 6 months 2016 £m	Full Year  2016  £m
Carrying amount at 1 January	10,208	8,811	8,811
Change in participating fund assets	554	4,497	4,977
Change in participating fund liabilities	(1,348)	(3,705)	(4,596)
Change in liability recognised as an expense	(794)	792	381
Effect of portfolio transfers, acquisitions and disposals2	(832)	-	-
Foreign exchange rate movements	190	873	1,016
Carrying amount at 30 June/31 December	8,772	10,476	10,208
Less: Amounts classified as held for sale	(248)	(852)	(859)
	8,524	9,624	9,349

1    A review of the 6 months 2016 movement in unallocated divisible surplus identified inconsistencies in the presentational approach taken for each participating fund across the Group. As a result, the 6 months 2016 analysis has been restated to present the movement in participating fund assets and liabilities consistently on a gross basis for all funds. The 6 months 2016 'Change in participating fund assets' has increased by £3,695 million and 'Change in participating fund liabilities' has decreased by £3,695 million. There is no impact on the carrying amount of unallocated divisible surplus at 1 January 2016 and 30 June 2016.

2    The movement during 2017 relates to the disposal of Antarius.

The amount of UDS at 30 June 2017 has decreased to £8.8 billion (HY16: £10.5 billion, FY16: £10.2 billion) including amounts classified as held for sale, and £8.5 billion (HY16: £9.6 billion, FY16: £9.3 billion) excluding amounts classified as held for sale. The decrease is mainly due to the sale of Antarius and a distribution of assets out of UK Life's UDS in anticipation of a special bonus to policyholders, partly offset by the weakening of sterling against the euro.

Where the aggregate amount of participating assets is less than the participating liabilities within a fund then the shortfall may be held as negative UDS, subject to recoverability testing as part of the liability adequacy requirements of IFRS 4. There are no material negative UDS balances at the participating fund-level within each life entity in the current and comparative periods with the exception of one fund in UK Life in the comparative period (FY16: a negative UDS of £16 million). This negative UDS balance was tested for recoverability and considered to be recoverable by comparing the excess of IFRS participating liabilities over the adjusted Solvency II best estimate liabilities for the relevant contracts. The Solvency II best estimate liabilities were adjusted where Solvency II does not represent a best estimate of shareholders' interests consistent with the impairment test for goodwill for long term business and for AVIF on insurance contracts.

 

 

 

 

 

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B14 - Borrowings

The Group's borrowings are either core structural borrowings or operational borrowings. This note shows the carrying values of each type.

(a) Analysis of total borrowings:

Total borrowings comprise:

	30 June 2017 £m	30 June 2016  £m	31 December 2016  £m
Core structural borrowings, at amortised cost	8,636	7,809	8,577
Operational borrowings, at amortised cost	501	566	608
Operational borrowings, at fair value	1,214	1,306	1,110
	1,715	1,872	1,718
	10,351	9,681	10,295
Less: Amounts classified as held for sale	(13)	-	-
Total	10,338	9,681	10,295

(b) Core structural borrowings

The carrying amounts of these borrowings are:

	30 June  2017 £m	30 June 2016 £m	31 December 2016  £m
Subordinated debt
6.125% £700 million subordinated notes 2036	693	693	694
6.125% £800 million undated subordinated notes	795	795	795
6.875% £600 million subordinated notes 2058	594	594	594
6.875% €500 million subordinated notes 2038	439	415	427
12.00% £162 million subordinated notes 2021	208	219	213
8.25% £500 million subordinated notes 2022	590	607	598
6.625% £450 million subordinated notes 2041	448	447	448
8.25% $400 million subordinated notes 2041	-	298	-
7.875% $575 million undated subordinated notes	463	463	494
6.125% €650 million subordinated notes 2043	568	538	552
3.875% €700 million subordinated notes 2044	611	577	593
5.125% £400 million subordinated notes 2050	395	394	394
3.375% €900 million subordinated notes 2045	780	738	758
4.50% C$450 million subordinated notes 2021	265	256	269
4.375% £400 million subordinated notes 2049	393	-	393
	7,242	7,034	7,222
Senior notes
0.100% €350 million senior notes 2018	306	-	298
0.625% €500 million senior notes 2023	436	-	424
	742	-	722
Commercial paper	661	815	642
	8,645	7,849	8,586
Less: Amount held by Group companies	(9)	(40)	(9)
Total	8,636	7,809	8,577

 

(c) Operational borrowings

The carrying amounts of these borrowings are:

	30 June  2017 £m	30 June 2016 £m	31 December 2016  £m
Amounts owed to financial institutions
Loans1	501	566	608
Securitised mortgage loan notes
UK lifetime mortgage business	1,214	1,306	1,110
Total	1,715	1,872	1,718

1    Includes held for sale operational borrowings of £13 million on 30 June 2017 (2016: £nil).

 

 

 

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B15 - Pension obligations and other provisions

(a)  Carrying amounts

(i) Provisions in the condensed consolidated statement of financial position

In the condensed consolidated statement of financial position, provisions include pension scheme deficits and comprise:

	30 June  2017 £m	30 June 2016 £m	31 December 2016 £m
Total IAS 19 obligations to the main staff pension schemes	892	786	843
Deficits in other staff pension schemes	60	52	56
Total IAS 19 obligations to staff pension schemes	952	838	899
Restructuring provisions	80	170	111
Other provisions	397	476	501
Total provisions	1,429	1,484	1,511
Less: Amounts classified as held for sale	(3)	-	(1)
	1,426	1,484	1,510

(ii) Pension obligations

The assets and liabilities of the Group's material defined benefit schemes as at 30 June/31 December are shown below.

	30 June  2017 £m	30 June 2016 £m	31 December 2016 £m
Total fair value of assets	19,225	19,726	20,327
Present value of scheme liabilities	(16,115)	(16,399)	(17,347)
Net surplus in the schemes	3,110	3,327	2,980
Less: consolidation elimination for non-transferable Group insurance policy1	(628)	(605)	(633)
Net IAS 19 surplus in the schemes	2,482	2,722	2,347
Surplus included in other assets	3,374	3,508	3,190
Deficits included in provisions	(892)	(786)	(843)
Net IAS 19 surplus in the schemes	2,482	2,722	2,347

1    As at 30 June 2017, the scheme assets in the Friends Provident Pension Scheme include an insurance policy of £628 million (30 June 2016: £605 million, 31 December 2016: £633 million) issued by a Group company that is not transferable under IAS 19 and consequently is eliminated from the IAS 19 net surplus balance. The IAS 19 fair value of scheme assets at 30 June 2017, excluding this policy is £18,597 million (30 June 2016: £19,121 million, 31 December 2016: £19,694 million).

(b)  Movements in the schemes' surpluses and deficits

Movements in the pension schemes' surpluses and deficits comprise:

	6 months 2017	6 months 2016	Full Year 2016
	£m	£m	£m
Net IAS 19 surplus in the schemes at 1 January	2,347	1,837	1,837
Past service costs - amendments	-	(1)	(1)
Administrative expenses1	(8)	(7)	(13)
Total pension cost charged to net operating expenses	(8)	(8)	(14)
Net interest credited/(charged) to investment income/(finance costs)2	30	37	73
Total recognised in income statement	22	29	59
Remeasurements:
Actual return on these assets	16	3,090	4,044
Less: Interest income on scheme assets	(239)	(298)	(590)
Return on scheme assets excluding amounts in interest income	(223)	2,792	3,454
Gains/(losses) from change in financial assumptions	282	(2,022)	(3,944)
(Losses)/gains from change in demographic assumptions	(36)	-	363
Experience (losses)/gains	(59)	6	438
Total remeasurements recognised in other comprehensive income	(36)	776	311
Employer contributions	153	123	190
Administrative expenses paid from scheme assets1	-	-	(2)
Foreign exchange rate movements	(4)	(43)	(48)
Net IAS 19 surplus in the schemes at 30 June/31 December	2,482	2,722	2,347

1    Administrative expenses are expensed as incurred.

2    Net interest income of £40 million (HY16: £48 million, FY16: £102 million) has been credited to investment income and net interest expense of £10 million (HY16: £11 million, FY16: £29 million) has been charged to finance costs in HY17.

The increase in the surplus during the period is primarily due to employer contributions into the schemes partly offset by remeasurements recognised in other comprehensive income. The remeasurements recognised are mainly due to lower inflation and narrowing spreads in the UK partly offset by favourable UK equity and property performance.

 

 

 

 

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B16 - Related party transactions

During the period, there have been no changes in the nature of the related party transactions from those described in the Group's annual report and accounts for the year ended 31 December 2016. There were no transactions with related parties that had a material effect on the result for the period ended 30 June 2017, 30 June 2016 or 31 December 2016.

B17 - Fair value

This note explains the methodology for valuing our assets and liabilities measured at fair value, and for fair value disclosures. It also provides an analysis of these according to a 'fair value hierarchy', determined by the market observability of valuation inputs.

(a) Basis for determining fair value hierarchy

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the 'fair value hierarchy' described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1

Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets and liabilities that the entity can access at the measurement date.

Level 2

Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the instrument. Level 2 inputs include the following:

· Quoted prices for similar assets and liabilities in active markets.

· Quoted prices for identical or similar assets and liabilities in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.

· Inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, implied volatilities, and credit spreads).

· Market-corroborated inputs.

Where we use broker quotes and no information as to the observability of inputs is provided by the broker, the investments are classified as follows:

· Where the broker price is validated by using internal models with market observable inputs and the values are similar, we classify the investment as Level 2.

· In circumstances where internal models are not used to validate broker prices, or the observability of inputs used by brokers is unavailable, the investment is classified as Level 3.

Level 3

Inputs to Level 3 fair values are unobservable inputs for the asset or liability. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the assumptions the business unit considers that market participants would use in pricing the asset or liability. Examples are investment properties, certain private equity investments and private placements.

The majority of the Group's assets and liabilities measured at fair value are based on quoted market information or observable market data. 15.8% of assets and 3.3% of liabilities measured at fair value are based on estimates and recorded as Level 3. Where estimates are used, these are based on a combination of independent third-party evidence and internally developed models, calibrated to market observable data where possible. Third-party valuations using significant unobservable inputs validated against Level 2 internally modelled valuations are classified as Level 3, where there is a significant difference between the third-party price and the internally modelled value. Where the difference is insignificant, the instrument would be classified as Level 2.

(b)  Changes to valuation technique

There were no changes in the valuation techniques during the period compared to those described in the 2016 annual report and accounts.

 

 

 

 

 

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B17 - Fair value continued

(c) Comparison of the carrying amount and fair values of financial instruments

Set out below is a comparison of the carrying amounts and fair values of financial assets and liabilities, excluding those classified as held for sale. These amounts may differ where the asset or liability is carried on a measurement basis other than fair value, e.g. amortised cost.

		30 June  2017		30 June  2016		31 December 2016
	Fair value	Carrying amount	Fair value	Carrying amount	Fair value	Carrying amount
	£m	£m	£m	£m	£m	£m
Financial assets
Loans1	25,459	25,452	24,259	24,305	24,705	24,784
Financial Investments	309,222	309,222	288,460	288,460	299,835	299,835
Fixed maturity securities	171,070	171,070	173,798	173,798	175,536	175,536
Equity securities	73,575	73,575	63,331	63,331	68,348	68,348
Other investments (including derivatives)	64,577	64,577	51,331	51,331	55,951	55,951
Financial liabilities
Non-participating investment contracts2	118,291	118,291	105,243	105,243	114,527	114,527
Net asset value attributable to unitholders	18,469	18,469	13,045	13,045	15,638	15,638
Borrowings1	11,545	10,338	9,866	9,681	10,926	10,295
Derivative liabilities3	6,093	6,093	8,127	8,127	6,795	6,795

1    Within the fair value, the estimated fair value has been provided for the portion of loans and borrowings that are carried at amortised cost as disclosed in note B17(d).

2    Non-participating investment contracts are included within gross liabilities for investment contracts on the condensed consolidated statement of financial position and disclosed in note B10.

3    Derivative liabilities are included within payables and other financial liabilities on the condensed consolidated statement of financial position.

Fair value of the following assets and liabilities approximate to their carrying amounts:

· Receivables

· Cash and cash equivalents

· Payables and other financial liabilities

· The equivalent assets to those above, which are classified as held for sale

(d) Fair value hierarchy analysis

An analysis of assets and liabilities measured at amortised cost and fair value categorised by fair value hierarchy is given below. Financial instruments relating to operations classified as held for sale have been excluded from the individual asset and liability line items and have been disclosed separately.

	Fair value hierarchy
	Level 1	Level 2	Level 3	Sub-total Fair value	Amortised cost	Total carrying value
At 30 June 2017	£m	£m	£m	£m	£m	£m
Recurring fair value measurements
Investment Property	-	-	10,719	10,719	-	10,719
Loans	-	3	22,225	22,228	3,224	25,452
Financial investments measured at fair value
Fixed maturity securities	98,044	56,430	16,596	171,070	-	171,070
Equity securities	72,675	-	900	73,575	-	73,575
Other investments (including derivatives)	55,072	5,164	4,341	64,577	-	64,577
Financial assets of operations classified as held for sale	4,135	705	5	4,845	-	4,845
Total	229,926	62,302	54,786	347,014	3,224	350,238
Financial liabilities measured at fair value
Non-participating investment contracts1	114,721	227	3,343	118,291	-	118,291
Net asset value attributable to unit holders	18,445	-	24	18,469	-	18,469
Borrowings	-	-	1,214	1,214	9,124	10,338
Derivative liabilities2	431	5,510	152	6,093	-	6,093
Financial liabilities of operations classified as held for sale	555	-	-	555	-	555
Total	134,152	5,737	4,733	144,622	9,124	153,746

1    In addition to the balances in this table, included within reinsurance assets in the condensed consolidated statement of financial position and note B11 are £10,170 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.

2    Derivative liabilities are included within payables and other financial liabilities on the condensed consolidated statement of financial position.

	Fair value hierarchy
	Level 1	Level 2	Level 3	Total fair value
At 30 June 2017	£m	£m	£m	£m
Non-recurring fair value measurement1
Properties occupied by group companies	-	-	327	327
Total	-	-	327	327

1    Non-recurring fair value measurements of assets or liabilities are those fair value measurements that other IFRSs permit or require in particular circumstances.

 

 

 

 

 

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B17 - Fair value continued

	Fair value hierarchy
	Level 1	Level 2	Level 3	Sub-total fair value	Amortised cost	Total carrying value
At 30 June 2016	£m	£m	£m	£m	£m	£m
Recurring fair value measurements
Investment Property	-	-	11,106	11,106	-	11,106
Loans	-	1,000	19,781	20,781	3,524	24,305
Financial investments measured at fair value
Fixed maturity securities	94,715	63,214	15,869	173,798	-	173,798
Equity securities	62,341	-	990	63,331	-	63,331
Other investments (including derivatives)	39,265	8,043	4,023	51,331	-	51,331
Financial assets of operations classified as held for sale	9,462	445	852	10,759	64	10,823
Total	205,783	72,702	52,621	331,106	3,588	334,694
Financial liabilities measured at fair value
Non-participating investment contracts1	101,612	300	3,331	105,243	-	105,243
Net asset value attributable to unit holders	13,022	-	23	13,045	-	13,045
Borrowings	-	809	497	1,306	8,375	9,681
Derivative liabilities2	274	5,722	2,131	8,127	-	8,127
Financial liabilities of operations classified as held for sale	705	4	-	709	-	709
Total	115,613	6,835	5,982	128,430	8,375	136,805

1    In addition to the balances in this table, included within reinsurance assets in the statement of condensed consolidated financial position and note B11 are £15,859 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.

2    Derivative liabilities are included within payables and other financial liabilities on the condensed consolidated statement of financial position.

	Fair value hierarchy
	Level 1	Level 2	Level 3	Total fair value
At 30 June 2016	£m	£m	£m	£m
Non-recurring fair value measurement1
Properties occupied by group companies	-	-	347	347
Total	-	-	347	347

1    Non-recurring fair value measurements of assets or liabilities are those fair value measurements that other IFRSs permit or require in particular circumstances.

	Fair value hierarchy
	Level 1	Level 2	Level 3	Sub-total  Fair value	Amortised cost	Total carrying value
At 31 December 2016	£m	£m	£m	£m	£m	£m
Recurring fair value measurements
Investment Property	-	-	10,768	10,768	-	10,768
Loans	-	360	20,923	21,283	3,501	24,784
Financial investments measured at fair value
Fixed maturity securities	96,102	62,987	16,447	175,536	-	175,536
Equity securities	67,435	-	913	68,348	-	68,348
Other investments (including derivatives)	45,710	6,240	4,001	55,951	-	55,951
Financial assets of operations classified as held for sale	9,408	366	980	10,754	75	10,829
Total	218,655	69,953	54,032	342,640	3,576	346,216
Financial liabilities measured at fair value
Non-participating investment contracts1	110,900	219	3,408	114,527	-	114,527
Net asset value attributable to unit holders	15,618	-	20	15,638	-	15,638
Borrowings	-	-	1,110	1,110	9,185	10,295
Derivative liabilities2	401	4,794	1,600	6,795	-	6,795
Financial liabilities of operations classified as held for sale	-	4	-	4	-	4
Total	126,919	5,017	6,138	138,074	9,185	147,259

1    In addition to the balances in this table, included within reinsurance assets in the statement of condensed consolidated financial position and note B11 are £18,366 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.

2    Derivative liabilities are included within payables and other financial liabilities on the condensed consolidated statement of financial position.

	Fair value hierarchy
	Level 1	Level 2	Level 3	Total fair value
At 31 December 2016	£m	£m	£m	£m
Non-recurring fair value measurement1
Properties occupied by group companies	-	-	321	321
Total	-	-	321	321

1    Non-recurring fair value measurements of assets or liabilities are those fair value measurements that other IFRSs permit or require in particular circumstances.

 

 

 

 

 

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B17 - Fair value continued

(e) Transfers between Levels of the fair value hierarchy

For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels of the fair value hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of the reporting period.

Transfers between Level 1 and Level 2

There were no significant transfers between Level 1 and Level 2 investments during the six month period ended 30 June 2017.

Transfers to/from Level 3

Transfers into Level 3 assets of £1.6 billion included:

· £1.2 billion of debt securities held in the UK and France which were transferred from Level 2 due to the unavailability of significant observable market data or sufficiently significant differences between the valuation provided by the counterparty and broker quotes and the validation models.

· £0.3 billion of student accommodation mortgage loans were transferred from Level 2 to Level 3. These are valued using a discounted cash flow model which uses a liquidity premium derived from the new business on the whole of the UK Life commercial mortgages portfolio as no new student accommodation business has been written recently. Therefore the liquidity premium used in the model is no longer deemed an observable input.

 

Transfers out of Level 3 assets of £1.4 billion relate principally to £1.3 billion of debt securities which were transferred to Level 2 by our UK business, as observable inputs became available or where the valuation provided by the counterparty and broker quotes are corroborated using valuation models with observable inputs.

Transfers out of Level 3 liabilities of £1.4 billion relate to RPI swaps held by the UK business. The levelling review conducted during the period suggested that the market for these is liquid and deep, the inputs are now deemed to be observable and as a result these were transferred to Level 2.

(f) Valuation approach for fair value assets and liabilities classified as Level 2

Please see note B17(a) for a description of typical Level 2 inputs.

Debt securities, in line with market practice, are generally valued using an independent pricing service. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis. Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing service providers are used, a single valuation is obtained and applied. When prices are not available from pricing services, quotes are sourced from brokers.

Over the counter derivatives are valued using broker quotes or models such as the option pricing model, simulation models or a combination of models. The inputs for these models include current market and contractual prices for underlying instruments, period to maturity, correlations, yield curves and volatility of the underlying instruments which are deemed to be observable.

Unit Trusts and other investment funds included under the Other investments category are valued using net assets values which are not subject to a significant adjustment for restrictions on redemption or for a limited trading activity.

(g) Further information on Level 3 assets and liabilities:

The table below shows movement in the Level 3 assets and liabilities measured at fair value:

						Assets				Liabilities
	Investment  Property	Loans	Debt securities	Equity securities	Other investments (including derivatives)	Financial assets of operations classified as held for sale	Non participating investment contracts	Net asset value attributable to unitholders	Derivative liabilities	Borrowings
At 30 June 2017	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Opening balance at 1 January 2017	10,768	20,923	16,447	913	4,001	980	(3,408)	(20)	(1,600)	(1,110)
Total net gains/(losses) recognised in the income statement1	223	536	154	(64)	(75)	-	(25)	(4)	(52)	(121)
Purchases	217	505	358	57	699	-	(70)	-	(40)	-
Issuances	-	72	-	-	-	-	-	-	-	-
Disposals	(577)	(96)	(495)	(12)	(319)	(988)	171	-	156	17
Settlements2	-	(6)	(9)	-	-	-	9	-	-	-
Transfers into Level 3	-	288	1,203	4	61	-	(17)	-	(2)	-
Transfers out of Level 3	-	-	(1,262)	-	(105)	-	4	-	1,387	-
Reclassification to held for sale	(1)	-	-	-	(4)	5	-	-	-	-
Foreign exchange rate movements	89	3	200	2	83	8	(7)	-	(1)	-
Balance at 30 June 2017	10,719	22,225	16,596	900	4,341	5	(3,343)	(24)	(152)	(1,214)

1    Total net gains/(losses) recognised in the income statement includes realised gains/(losses) on disposals.

2    Settlements include effective settlements of Group holdings.

 

 

 

 

 

 

 

 

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B17 - Fair value continued

						Assets				Liabilities
	Investment Property	Loans	Debt securities	Equity securities	Other investments (including derivatives)	Financial assets of operations classified as held for sale	Non participating investment contracts	Net asset value attributable to unitholders	Derivative liabilities	Borrowings
At 30 June 2016	£m	£m	£m	£m	£m	£m	£m		£m	£m
Opening balance at 1 January 2016	11,301	18,129	14,603	936	4,153	-	(3,421)	(22)	(1,093)	(527)
Total net gains/(losses) recognised in the income statement1	38	1,043	517	51	19	(76)	104	(1)	(952)	28
Purchases	99	46	860	66	240	65	(61)	-	(107)	-
Issuances	-	1,004	4	-	-	-	(22)	-	-	-
Disposals	(604)	(272)	(590)	(85)	(421)	(12)	43	-	25	-
Settlements2	-	(171)	(5)	-	-	-	3	-	-	2
Transfers into Level 3	-	-	1,213	6	22	123	(22)	-	-	-
Transfers out of Level 3	-	-	(1,036)	(1)	(80)	(5)	51	-	-	-
Reclassification to held for sale	(40)	-	(590)	-	(36)	666	-	-	-	-
Foreign exchange movements	312	2	893	17	126	91	(6)	-	(4)	-
Balance at 30 June 2016	11,106	19,781	15,869	990	4,023	852	(3,331)	(23)	(2,131)	(497)

1    Total net (losses)/gains recognised in the income statement includes realised gains/(losses) on disposals.

2    Settlements include effective settlements of Group holdings.

						Assets				Liabilities
	Investment Property	Loans	Debt securities	Equity securities	Other investments (including derivatives)	Financial assets of operations classified as held  for sale	Non participating investment contracts	Net asset value attributable to unitholders	Derivative liabilities	Borrowings
At 31 December 2016	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Opening balance at 1 January 2016	11,301	18,129	14,603	936	4,153	-	(3,421)	(22)	(1,093)	(527)
Total net gains/(losses) recognised in the income statement1	(75)	483	586	55	161	13	(111)	2	(575)	217
Purchases	721	116	1,587	94	718	228	(184)	-	(302)	-
Issuances	-	2,612	-	-	-	-	(41)	-	-	-
Disposals	(1,534)	(1,140)	(1,528)	(194)	(1,144)	(75)	358	-	196	-
Settlements2	-	-	67	-	-	-	21	-	-	17
Transfers into Level 3	-	718	1,893	-	40	50	(40)	-	-	(817)
Transfers out of Level 3	-	-	(1,284)	(1)	(111)	(15)	81	-	179	-
Reclassification to held for sale	(40)	-	(590)	-	(36)	666	-	-	-	-
Foreign exchange rate movements	395	5	1,113	23	220	113	(71)	-	(5)	-
Balance at 31 December 2016	10,768	20,923	16,447	913	4,001	980	(3,408)	(20)	(1,600)	(1,110)

1    Total net gains/(losses) recognised in the income statement includes realised gains/(losses) on disposals.

2    Settlements include effective settlements of Group holdings.

Total net gains recognised in the income statement in the first half of 2017 in respect of Level 3 assets measured at fair value amounted to £0.8 billion (HY16: net gains of £1.6 billion) with net losses in respect of liabilities of £0.2 billion (HY16: net losses of £0.8 billion). This balance includes £0.6 billion of net gains (HY16: £1.6 billion) attributable to those assets still held at the end of the period and £74 million of net losses (HY16: net losses of £841 million) attributable to those liabilities still held at the end of the period.

The principal assets classified as Level 3, and the valuation techniques applied to them, are described below.

(i) Investment property

· Investment property amounting to £10.7 billion (FY16: £10.8 billion) is valued in the UK at least annually by external chartered surveyors in accordance with guidance issued by The Royal Institution of Chartered Surveyors, and using estimates during the intervening period. Outside the UK, valuations are produced by external qualified professional appraisers in the countries concerned. Investment properties are valued on an income approach that is based on current rental income plus anticipated uplifts at the next rent review, lease expiry, or break option taking into consideration lease incentives and assuming no further growth in the estimated rental value of the property. The uplift and discount rates are derived from rates implied by recent market transactions on similar properties. These inputs are deemed unobservable.

(ii) Loans

· Commercial mortgage loans, Primary Healthcare, Infrastructure and Private Finance Initiative (PFI) loans held by our UK Life business amounting to £13.0 billion (FY16: £12.3 billion), were valued using a Portfolio Credit Risk Model (PCRM). This model calculates a Credit Risk Adjusted Value (CRAV) for each loan. The risk-adjusted cash flows are discounted using a yield curve, taking into account the term dependent gilt yield curve, and global assumptions for the liquidity premium. Loans valued using this model have been classified as Level 3 as the liquidity premium is deemed to be non-market observable. The liquidity premium used in the discount rate ranges between 105 bps to 230 bps.

 

 

 

 

 

 

 

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B17 - Fair value continued

· Equity release and securitised mortgage loans held by our UK Life business amounting to £8.6 billion (FY16: £8 billion) are valued using an internal model. Inputs to the model include primarily property growth rates, mortality and morbidity assumptions, cost of capital and liquidity premium which are not deemed to be market observable.

· Non-recourse loans of £0.6 billion (FY16: £0.6 billion) have been valued using internally developed discounted cash flow models incorporating a significant number of modelling assumptions and unobservable market data including the probability of counterparty default and illiquidity premium.

(iii) Debt securities

· Privately placed notes, commercial real estate loans, PFI loans and infrastructure loans held by our UK Life business of £3.1 billion (FY16: £3.1 billion) are not traded in active markets. Valuations are obtained from third party evaluated pricing services which represent the vendor's opinion of the asset values or discounted cash flow models which incorporate significant unobservable inputs.

· Structured bond-type and non-standard debt products held by our business in France amounting to £6.5 billion (FY16: £7.4 billion) and bonds held by our UK business of £2.7 billion (FY16: £2.6 billion) have no active market. These debt securities are valued either using counterparty or broker quotes and validated against internal or third-party models. These bonds have been classified as Level 3 because either (i) the third-party models included a significant unobservable liquidity adjustment, or (ii) differences between the valuation provided by the counterparty and broker quotes and the validation model were sufficiently significant to result in a Level 3 classification.

· Collateralised loan obligations of £0.4 billion (FY16: £0.4 billion) have been valued using internally developed discounted cash flow models incorporating a significant number of modelling assumptions and unobservable market data including assumptions regarding correlation among the underlying loans, a probability of default and liquidity premium.

· Corporate debt securities held by our French business of £2.1 billion (FY16: £1.5 billion) and debt securities of £1.2 billion held by our UK and Asia businesses (FY16: £1.4 billion) which are not traded in an active market have been valued using third party or counterparty valuations. These prices are considered to be unobservable due to infrequent market transactions.

(iv) Equity securities

· Equity securities which primarily comprise private equity holdings of £0.8 billion (FY16: £0.8 billion) held predominantly in the UK are valued by a number of third party specialists. These are valued using a range of techniques, including earnings multiples, forecast cash flows and price/earnings ratios which are deemed to be unobservable.

(v) Other investments

· The following Other investments are valued based on external valuation reports received from fund managers:

-    Private equity investment funds amounting to £0.6 billion (FY16: £0.8 billion);

-    Other investment funds including property funds amounting to £1.3 billion (FY16: £0.8 billion);

-    External hedge funds held principally by businesses in the UK and France amounting to £0.4 billion (FY16: £0.5 billion); and

-    Discretionary managed funds held in Asia amount to £1.6 billion (FY16: £1.7 billion).

 

Where these valuations are at a date other than balance sheet date, as in the case of some private equity funds, we make adjustments for items such as subsequent draw-downs and distributions and the fund manager's carried interest.

· Derivative assets of £0.4 million in the UK are predominantly comprised of uncollateralised interest rate and inflation swaps with PFI counterparties. These are valued in the same way as collateralised swaps but a subsequent adjustment which makes use of unobservable inputs is made to the value to reflect the counterparty credit risk.

Remaining Level 3 investments amount to £0.7 billion (FY16: £0.3 billion) within debt securities, equity securities and other investments held by a number of businesses throughout the Group.

Where possible, the Group tests the sensitivity of the fair values of Level 3 investments to changes in unobservable inputs to reasonable alternatives. Valuations for Level 3 investments are sourced from independent third parties when available and, where appropriate, validated against internally-modelled valuations, third-party models or broker quotes. Where third-party pricing sources are unwilling to provide a sensitivity analysis for their valuations, the Group undertakes, where feasible, sensitivity analysis on the following basis:

· For third-party valuations validated against internally-modelled valuations using significant unobservable inputs, the sensitivity of the internally modelled valuation to changes in unobservable inputs to a reasonable alternative is determined.

· For third-party valuations either not validated or validated against a third-party model or broker quote, the third-party valuation in its entirety is considered an unobservable input. Sensitivities are determined by flexing inputs of internal models to a reasonable alternative, including the yield, NAV multiple or other suitable valuation multiples of the financial instrument implied by the third-party valuation. For example, for a fixed income security the implied yield would be the rate of return which discounts the security's contractual cash flows to equal the third-party valuation.

On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for £54 billion of the Group's Level 3 assets. For these Level 3 assets, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by +£2.5 billion / -£2.3 billion. Of the £0.8 billion Level 3 assets for which sensitivity analysis is not provided, it is estimated that a 10% change in valuation assumptions downwards of these assets would result in a change in fair value of approximately £80 million.

 

 

 

 

 

 

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B17 - Fair value continued

(vi) Liabilities

The principal liabilities classified as Level 3, and the valuation techniques applied to them, are:

· £3.3 billion (FY16: £3.4 billion) of non-participating investment contract liabilities are classified as Level 3, either because the underlying unit funds are classified as Level 3 assets or because the liability relates to unfunded units or other non-unit adjustments which are based on a discounted cash flow analysis using unobservable market data and assumptions.

· £1.3 billion (FY16: £1.1 billion) of securitised mortgage loan notes, presented within Borrowings, are valued using a similar technique to the related Level 3 securitised mortgage assets.

· Remaining Level 3 liabilities amount to £0.1 billion (FY16: £nil) and relate to a range of liabilities held by a number of businesses throughout the Group.

Where possible, the Group tests the sensitivity of the fair values of Level 3 liabilities to changes in unobservable inputs to reasonable alternatives. Sensitivities are determined by flexing inputs of internal models to a reasonable alternative, including the yield, NAV multiple or other suitable valuation multiples of the financial instrument implied by the third-party valuation.

On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for £4.7 billion of the Group's Level 3 liabilities. For these Level 3 liabilities, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by approximately ±£0.6 billion. Of the £45 million Level 3 liabilities for which sensitivity analysis is not provided, it is estimated that a 10% change in valuation assumptions downwards of these assets would result in a change in fair value of approximately £5 million. 

 

 

 

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B18 - Risk management

As a global insurance group, risk management is at the heart of what we do and is the source of value creation as well as a vital form of control. It is an integral part of managing and maintaining financial strength and stability for our customers, shareholders and other stakeholders.

Our sustainability and financial strength are underpinned by an effective risk management process which helps us identify major risks to which we may be exposed, establish appropriate controls and take mitigating actions for the benefit of our customers and investors. The Group's risk strategy is to invest its available capital to optimise the balance between return and risk while maintaining an appropriate level of economic (i.e. risk-based) capital and regulatory capital. Consequently, our risk management goals are to:

· Embed rigorous risk management throughout the business, based on setting clear risk appetites and staying within these;

· Allocate capital where it will make the highest returns on a risk-adjusted basis; and

· Meet the expectations of our customers, investors and regulators that we will maintain sufficient capital surpluses to meet our liabilities even if a number of extreme risks materialise.

Aviva's risk management framework has been designed and implemented to support these objectives. The key elements of our risk management framework comprise our risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and responsibilities; and the processes we use to identify, measure, manage, monitor and report risks, including the use of our risk models and stress and scenario testing.

Risk environment

The first half of 2017 saw a slowing of UK economic growth as rising inflation following last year's depreciation in sterling and stagnant real wages depressed consumer demand. In the Eurozone economic growth has picked up supported by the European Central Bank's asset purchase regime and loose monetary policy. While UK and Eurozone monetary policy has remained loose, the US Federal reserve has continued its gradual increase in interest rates started in 2016 with two further rate rises. Despite this the US dollar has weakened from its previous highs in the aftermath of last year's US Presidential election, as expectations of a significant fiscal stimulus have receded. Equity markets remain strong and at record highs, while commodity prices have remained generally stable.

Looking forward, political uncertainty as a result of the UK's inconclusive General Election and uncertainty over the outcome of Brexit negotiations and future trading arrangements with the European Union are likely to weigh negatively on UK macroeconomic growth and possibly sterling. Despite this further rises in inflation and concerns over consumer credit growth may cause the Bank of England to tighten monetary policy, possibly resulting in a pick-up in current exceptionally low long-term UK gilt yields. Economic prospects in France and the wider Eurozone are likely to remain favourable in the short term at least, bolstered by the outcome of the recent French Presidential and Parliamentary elections, albeit a potential Eurozone banking crisis remains a threat to Eurozone economic stability despite recent progress in Spain and Italy in resolving failing banks. Likely further increases in interest rates, by the US Federal reserve, raises the prospect of increasing divergence in US and European monetary policy. Other possible shocks to global growth in the second half of 2017 include a credit crunch in China, where indebtedness is currently at record levels.

During the first six months of the year there were also several high profile cyber security breaches for corporates in the UK and elsewhere and this risk is expected to continue to increase in the future.

In February 2017, the Lord Chancellor announced a change in the Ogden discount rate used to calculate lump sum payments in settlement of bodily injury claims in the UK, significantly increasing lump sum payments and insurance liabilities. Consultations continue with the UK Government on how the discount rate is set to mitigate its impact. In June 2017 the FCA published the final findings from its market study on the Asset Management industry as a precursor to future regulatory changes which may impact how asset managers and investment platforms operate and charge fees. In the UK we continue to review the appropriateness of pension lifestyle investment strategies in light of the 2015 pension reforms and changes to customer behaviour in response, which may be further impacted by the FCA's industry review of these strategies, which was also published in June 2017. The Group is taking action to ensure it will be compliant with the General Data Protection Regulations and Insurance Distribution Directive, which will become effective in the EU, including the UK, during 2018.

The International Association of Insurance Supervisors (IAIS) continues to develop the higher loss absorbency capital requirements, which will apply from January 2019, should the Group remain a Global Systemically Important Insurer (G-SII). In May 2017, the International Accounting Standards Board (IASB) issued its standard for the accounting of insurance contracts IFRS17, with an implementation date of 2021.

Risk profile

We continue to manage our risk profile to reflect Aviva's objective of maintaining financial strength and reducing capital volatility, and reallocating capital in line with the Group's strategy through the disposal of our joint venture with Credit du Nord in France and pending disposals of Friends Provident International Limited and businesses in Spain (expected to complete early 2018 and the third quarter of 2017 respectively subject to regulatory and anti-trust approvals) and Italy (expected to complete in 2018) while investing in new business opportunities. Measures to maintain the resilience of the Group's capital position include putting in place a number of foreign exchange, credit and equity hedges. These are used to mitigate the Group's foreign exchange, credit and equity risk exposure, and enable the Group to accept other credit risks offering better risk adjusted returns while remaining within appetite. In addition, we renewed our catastrophe reinsurance programme to reduce the Group's potential loss to an extreme insurance loss event.

Going forward, the Group's focus will continue to be on increasing cash flow and capital generation, while maintaining a strong balance sheet with limited volatility and external leverage at a level commensurate with an AA financial strength rating.

 

 

 

 

 

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B18 - Risk management continued

Material risks and uncertainties

In accordance with the requirements of the FCA Handbook (DTR 4.2.7) we provide an update here on the material risks and uncertainties facing the Group. The types of risks to which the Group is exposed have not changed significantly over the half-year to 30 June 2017 and remain credit, market, life insurance, general insurance (including health insurance), liquidity, asset management, operational and reputational risks. These risks are described below. Further detail on these risks is given within note 56 of the Aviva plc Annual Report and Accounts 2016.

(a) Credit risk

Aviva has a strong record of managing credit risk and we see credit as an area where we can make a good return for the benefit of both our policyholders and shareholders. During the first half of 2017 restrictions to our sovereign and corporate debt exposure to Greece, Italy, Portugal and Spain remained in place. We have in place a comprehensive group-wide reporting system that consolidates credit exposures across geographies, business lines and exposure types. We have a robust framework of limits and controls to diversify the portfolio and enable the early identification of potential issues. Refer to section D.3.3.5 of this report for details of our sovereign exposures to Greece, Ireland, Portugal, Spain and Italy.

During the first half of 2017 the credit rating profile of our debt securities portfolio has remained strong. At 30 June 2017, the proportion of our shareholder debt securities that are investment grade has decreased slightly to 93.1% (31 December 2016: 93.5%). Of the remaining 6.9% of shareholder debt securities that do not have an external rating of BBB or higher 84% are not rated by the major rating agencies. However, most of these are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality.

The Group's largest reinsurance counterparty is BlackRock Life Ltd (including subsidiaries) as a result of the BlackRock funds offered to UK Life customers via unit linked contracts. Whilst the risk of default is considered remote due to the nature of the arrangement and the counterparty, the Group is in the process of restructuring the agreements with BlackRock Life Ltd to significantly reduce this exposure. Since the beginning of the year, the Group's credit exposure to BlackRock Life Ltd has been almost halved to £9.2 billion at 30 June 2017 (31 December 2016: £17.1 billion) and will be further significantly reduced during the remainder of 2017 and into early 2018.

The Group continues to hold a series of macro credit hedges to reduce the overall credit risk exposure.

(b) Market risk

We continue to limit our direct equity exposure. A rolling central equity hedging strategy remains in place to help control the Group's overall direct and indirect exposure to equities. At 30 June 2017 the Group continues to hold a series of macro equity hedges to reduce the overall shareholder equity risk exposure.

We have a limited appetite for interest rate risk as we do not believe it is currently adequately rewarded. Our conservative and disciplined approach to asset and liability management and pricing limit our exposure to interest rate and guarantee risk. Asset and liability durations across the Group are generally well matched and actions have been taken to manage guarantee risk in the current low interest rate environment. In particular, a key objective is to match the duration and expected cash flows of our annuity liabilities with assets of the same duration and cash flow. These assets include corporate bonds, residential mortgages and commercial mortgages. Should they default before maturity, it is assumed that the Group can reinvest in assets of a similar risk and return profile, which is subject to market conditions. Interest rate hedges are used to manage asymmetric interest rate exposures in some of our life insurance businesses as well as an efficient way to manage cash flow and duration matching (the most material examples relate to guaranteed annuity exposures in both UK and Ireland). These hedges are used to protect against interest rate falls and are sufficient in scale to materially reduce the Group's interest rate exposure.

At a Group level we actively seek to manage currency risk primarily by matching assets and liabilities in functional currencies at the business unit level. Planned foreign currency remittances from subsidiaries and disposal proceeds are often hedged using foreign exchange forwards to provide certainty regarding the sterling value to be received by the Group, while foreign exchange swaps are in place to hedge certain non-sterling borrowings. Hedges may also be used to protect the Group's capital against a significant depreciation in local currency versus sterling. At 30 June 2017, Canadian dollar hedges with notional values of £0.8 billion were in place.

(c) Liquidity risk

Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form or that can easily be turned into cash.

The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid assets such as commercial mortgages. The Group seeks to ensure that it maintains sufficient liquid financial resources to meet its obligations as they fall due through the application of a Group liquidity risk policy and business standard. At Group and business unit level, there is a liquidity risk appetite which requires that sufficient liquid resources be maintained to cover net outflows in a stress scenario. The Group centre's main sources of liquidity are liquid assets held within Aviva plc, Aviva Group Holdings Limited (AGH) and Friends Life Holdings plc, and dividends received from the Group's insurance and asset management businesses. Sources of liquidity in normal markets also include a variety of short and long-term instruments including commercial papers and medium and long-term debt. In addition to the existing liquid resources and expected inflows, the Group and Company maintain significant undrawn committed borrowing facilities (30 June 2017: £1.65 billion) from a range of leading international banks to further mitigate this risk.

 

 

 

 

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B18 - Risk management continued

(d) Life insurance risk

The profile of our life insurance risks, primarily longevity, persistency, mortality and expense risk, has remained stable in the first half of 2017. Longevity risk remains the Group's most significant life insurance risk due to the Group's annuity portfolio and is amplified by the current low level of interest rates. Persistency risk remains significant and continues to have a volatile outlook, with underlying performance linked to economic conditions. Businesses across the Group mitigate this risk through a range of customer retention activities. The Group has continued to write substantial volumes of life protection business, and to utilise reinsurance to reduce exposure to potential mortality losses. All life insurance risks benefit from significant diversification against other risks in the portfolio, limiting the impact on the Group's aggregate risk profile.

Provisions made for insurance liabilities are inherently uncertain. Due to this uncertainty, life insurance reserves are regularly reviewed by qualified and experienced actuaries at the business unit and Group level in accordance with the Group's reserving framework. This and other risks are subject to an overarching risk management framework and various mechanisms to govern and control our risks and exposures.

(e) General insurance and health insurance risk

The Group writes a balanced portfolio of general insurance risk (including personal motor; household; commercial motor; property and liability) across a geographically diversified spread of markets including UK; Ireland; Canada; France; Italy; Singapore and Poland. This risk is taken on, in line with our underwriting and pricing expertise, to provide an appropriate level of return for an acceptable level of risk. Underwriting discipline and a robust governance process is at the core of the Group's underwriting strategy.

The Group's health insurance business (including private health insurance, critical illness cover, income protection and personal accident insurance, as well as a range of corporate healthcare products) exposes the Group to morbidity risk (the proportion of our customers falling sick) and medical expense inflation.

Provisions made for insurance liabilities are inherently uncertain. Due to this uncertainty, general and health insurance reserves are regularly reviewed by qualified and experienced actuaries at the business unit and Group level in accordance with the Group's reserving framework. These and other key risks, including the occurrence of unexpected claims from a single source or cause and inadequate reinsurance protection/risk transfer, are subject to an overarching risk management framework and various mechanisms to govern and control our risks and exposures.

During the first half of 2017, Aviva's general insurance and health insurance risk profile has remained stable. As with life insurance risks, general and health insurance risks also benefit from the significant diversification that arises from being part of a large and diverse portfolio, limiting the impact on the Group's aggregate risk profile.

Aviva successfully completed the renewal of its group-wide catastrophe protection on 1 January 2017, maintaining the level of reinsurance it purchases which includes both event and aggregate catastrophe protection on a group-wide basis. Processes are in place to manage catastrophe risk in individual business units and at a group level.

(f) Asset management risk

Asset management risk is the failure to provide expected investment outcomes for clients resulting in reduced new business and loss of sustainable earnings. The risk arises through loss of client business due to poor investment performance or fund liquidity, product competitiveness, talent retention and capability.

Aviva is directly exposed to the risks associated with operating an asset management business through its ownership of Aviva Investors. The underlying risk profile of our asset management risk is managed via investment performance reviews, recruitment and retention of specialist investment professionals and leadership, product development capabilities, fund liquidity management, competitive margins, client retention strategies, and proactive responses to regulatory developments. Funds invested in illiquid assets such as real estate and infrastructure projects are particularly exposed to liquidity risk. These key risks are monitored on an on-going basis with issues escalated to the Aviva Investors Risk Management Committee and ultimately to the Aviva Investors Holdings Limited Board Risk Committee.

(g) Operational risk

The Group continues to operate, validate and enhance its key operational controls and purchase insurance to minimise losses arising from inadequate or ineffective internal processes, people and systems or from external events. We continue to invest to reduce our operational risk exposures through on-going investment in our Security Transformation programme in response to the increasing cyber security risk and continued investment in simplifying our technology estate to improve the resilience and reliability of our systems. The Group maintains constructive relationships with its regulators around the world and developments in relation to key regulatory changes, such as requirements for Global Systemically Important Insurers (G-SII), are monitored closely.

(h) Brand and reputation risk

Our success and results are, to a certain extent, dependent on the strength of our brands, the brands of our partners and our reputation with customers, agents, regulators, rating agencies, investors and analysts. While we are well recognised, we are vulnerable to adverse market and customer perception. Any of our brands or our reputation could also be affected if products or services recommended by us or any of our intermediaries do not perform as expected whether or not the expectations are founded, or the customer's expectations for the product have changed. We monitor this risk and have controls in place to limit our exposure.

 

 

 

 

 

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B18 - Risk management continued

(i) Risk and capital management

(i) Sensitivity test analysis

The Group uses a number of sensitivity tests to understand the volatility of earnings, the volatility of its capital requirements, and to manage its capital more efficiently. Sensitivities to economic and operating experience are regularly produced on the Group's key financial performance metrics to inform the Group's decision making and planning processes, and as part of the framework for identifying and quantifying the risks to which each of its business units, and the Group as a whole, are exposed.

(ii) Life insurance and investment contracts

The nature of long-term business is such that a number of assumptions are made in compiling these financial statements. Assumptions are made about investment returns, expenses, mortality rates, and persistency in connection with the in-force policies for each business unit. Assumptions are best estimates based on historic and expected experience of the business.

(iii) General insurance and health business

General insurance and health claim liabilities are estimated by using standard actuarial claims projection techniques. These methods extrapolate the claims development for each accident year based on the observed development of earlier years. In most cases, no explicit assumptions are made as projections are based on assumptions implicit in the historic claims.

(iv) Sensitivity test results

Illustrative results of sensitivity testing for long-term business, general insurance and health business and the fund management and non-insurance business are set out below. For each sensitivity test the impact of a reasonably possible change in a single factor is shown, with other assumptions left unchanged.

Sensitivity factor	Description of sensitivity factor applied
Interest rate and investment return	The impact of a change in market interest rates by a 1% increase or decrease. The test allows consistently for similar changes to investment returns and movements in the market value of backing fixed interest securities.
Credit Spreads	The impact of a 0.5% increase in credit spreads over risk-free interest rates on corporate bonds and other non-sovereign credit assets. The test allows for any consequential impact on liability valuations.
Equity/property market values	The impact of a change in equity/property market values by ±10%.
Expenses	The impact of an increase in maintenance expenses by 10%.
Assurance mortality/morbidity (long-term insurance only)	The impact of an increase in mortality/morbidity rates for assurance contracts by 5%.
Annuitant mortality (long-term insurance only)	The impact of a reduction in mortality rates for annuity contracts by 5%.
Gross loss ratios (non-long-term insurance only)	The impact of an increase in gross loss ratios for general insurance and health business by 5%.

Long-term business

Sensitivities as at 30 June 2017

30 June 2017 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property  -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality  -5%
Insurance participating	(20)	-	(15)	(165)	20	(40)	(5)	(15)
Insurance non-participating	(165)	60	(720)	(70)	45	(195)	(95)	(925)
Investment participating	(10)	5	-	(5)	-	(10)	-	-
Investment non-participating	25	(35)	-	45	(60)	(65)	-	-
Assets backing life shareholders' funds	(115)	170	5	(85)	85	-	-	-
Total	(285)	200	(730)	(280)	90	(310)	(100)	(940)

 

 

30 June 2017 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates  -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property  -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality  -5%
Insurance participating	(20)	-	(15)	(165)	20	(40)	(5)	(15)
Insurance non-participating	(165)	60	(720)	(70)	45	(195)	(95)	(925)
Investment participating	(10)	5	-	(5)	-	(10)	-	-
Investment non-participating	25	(35)	-	45	(60)	(65)	-	-
Assets backing life shareholders' funds	(155)	215	-	(85)	85	-	-	-
Total	(325)	245	(735)	(280)	90	(310)	(100)	(940)

 

 

 

 

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B18 - Risk management continued

Sensitivities as at 31 December 2016

31 December 2016 Impact on profit before tax £m	Interest rates +1%	Interest rates  -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	(50)	30	(10)	(130)	65	(30)	(5)	(15)
Insurance non-participating	(190)	20	(775)	(35)	10	(190)	(90)	(920)
Investment participating	(10)	5	(5)	-	-	(5)	-	-
Investment non-participating	10	(15)	-	50	(70)	(65)	-	-
Assets backing life shareholders' funds	(115)	190	10	(85)	85	-	-	-
Total	(355)	230	(780)	(200)	90	(290)	(95)	(935)

 

31 December 2016 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%	Expenses +10%	Assurance mortality  +5%	Annuitant mortality  -5%
Insurance participating	(50)	30	(10)	(130)	65	(30)	(5)	(15)
Insurance non-participating	(190)	20	(775)	(35)	10	(190)	(90)	(920)
Investment participating	(10)	5	(5)	-	-	(5)	-	-
Investment non-participating	10	(15)	-	50	(70)	(65)	-	-
Assets backing life shareholders' funds	(155)	230	5	(85)	85	-	-	-
Total	(395)	270	(785)	(200)	90	(290)	(95)	(935)

Changes in sensitivities between HY17 and FY16 reflect underlying movements in market interest rates, portfolio growth, changes to asset mix and the relative durations of assets and liabilities and asset liability management actions. The sensitivities to economic and demographic movements relate mainly to business in the UK.

General insurance and health business sensitivities as at 30 June 2017

30 June 2017 Impact on profit before tax £m	Interest rates +1%	Interest rates  -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property  -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(315)	315	(145)	90	(90)	(75)	(150)
Net of reinsurance	(385)	375	(145)	90	(90)	(75)	(145)

 

30 June 2017 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates  -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios  +5%
Gross of reinsurance	(315)	315	(145)	90	(90)	(25)	(150)
Net of reinsurance	(385)	375	(145)	90	(90)	(25)	(145)

Sensitivities as at 31 December 2016

31 December 2016 Impact on profit before tax £m	Interest rates +1%	Interest rates  -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property  -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(315)	320	(145)	85	(85)	(115)	(340)
Net of reinsurance	(385)	375	(145)	85	(85)	(115)	(320)

 

31 December 2016 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates  -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property  -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(315)	320	(145)	85	(85)	(25)	(340)
Net of reinsurance	(385)	375	(145)	85	(85)	(25)	(320)

For general insurance and health, the impact of the expense sensitivity on profit also includes the increase in ongoing administration expenses, in addition to the increase in the claims handling expense provision.

 

 

 

 

 

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B18 - Risk management continued

Fund management and non-insurance business sensitivities as at 30 June 2017

30 June 2017 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property  -10%
Total	(35)	30	10	-	5

 

30 June 2017 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates  -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property  -10%
Total	(25)	25	10	-	5

 

Sensitivities as at 31 December 2016

31 December 2016 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%
Total	-	-	10	(10)	15

 

31 December 2016 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	-	-	10	(10)	15

Limitations of sensitivity analysis

The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.

The sensitivity analyses do not take into consideration that the Group's assets and liabilities are actively managed. Additionally, the financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group's financial risk management strategy aims to manage the exposure to market fluctuations.

As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation, adjusting bonuses credited to policyholders, and taking other protective action.

A number of the business units use passive assumptions to calculate their long-term business liabilities. Consequently, a change in the underlying assumptions may not have any impact on the liabilities, whereas assets held at market value in the statement of financial position will be affected. In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in shareholder equity. Similarly, for general insurance liabilities, the interest rate sensitivities only affect profit and equity where explicit assumptions are made regarding interest (discount) rates or future inflation.

Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Group's view of possible near-term market changes that cannot be predicted with any certainty, and the assumption that all interest rates move in an identical fashion.

 

 

 

 

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B19 - Cash and cash equivalents

Cash and cash equivalents in the statement of cash flows at 30 June/31 December comprised:

	30 June 2017 £m	30 June 2016  £m	31 December 2016  £m
Cash and cash equivalents	42,456	34,911	38,708
Cash and cash equivalents of operations classified as held for sale	406	683	255
Bank overdrafts	(622)	(759)	(558)
Net cash and cash equivalents at 30 June/31 December	42,240	34,835	38,405

B20 - Contingent liabilities and other risk factors

During the period, there have been no material changes in the main areas of uncertainty over the calculation of our liabilities from those described in note 52 of the Group's 2016 Annual report and accounts. An update on material risks is provided in note B18 Risk management.

B21 - Acquired value of in-force business and intangible assets

Acquired value of in-force business and intangible assets presented in the statement of financial position is comprised of:

	30 June 2017 £m	30 June  2016 £m	31 December 2016  £m
Acquired value of in-force business on insurance contracts1	1,646	1,870	1,750
Acquired value of in-force business on investment contracts2	1,967	2,199	2,097
Intangible assets	1,672	1,394	1,633
	5,285	5,463	5,480
Less: Amounts classified as held for sale	(444)	(13)	(12)
Total	4,841	5,450	5,468

1    On insurance and participating investment contracts.

2    On non-participating investment contracts.

The acquired value of in-force business on insurance and investment contracts has reduced in the period primarily due to an amortisation charge of £232 million (HY16: £317 million charge, FY16: £539 million charge). There were no impairments of acquired value of in-force business in the period (HY16: £nil, FY16: £nil).

The increase in intangible assets primarily relates to a distribution agreement in Poland following the consolidation of its insurance operations (see note B4 (b)(ii)), partially offset by the amortisation charge for the period.

 

 

 

 

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Directors' responsibility statement

The directors confirm that these condensed interim financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as endorsed by the EU and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

· an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

Information on the current directors responsible for providing this statement can be found on the Company's website at: http://www.aviva.com/investor-relations/corporate-governance/board-of-directors/

 

 

By order of the Board

 

 

 

 

 

Mark Wilson                                                                            Thomas D. Stoddard

Group chief executive officer                                                  Chief financial officer

2 August 2017

 

 

 

 

 

 

Page 86

 

 

Independent review report to Aviva plc

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed Aviva plc's condensed consolidated interim financial statements (the "interim financial statements") in the half year report of Aviva plc for the six month period ended 30 June 2017. Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

 

What we have reviewed

The Condensed consolidated interim financial statements, which are prepared by Aviva plc, comprise:

· the Condensed consolidated statement of financial position as at 30 June 2017;

· the Condensed consolidated income statement and statement of comprehensive income for the period then ended;

· the Condensed consolidated statement of cash flows for the period then ended;

· the Condensed consolidated statement of changes in equity for the period then ended; and

· the explanatory Notes to the condensed consolidated interim financial statements.

The condensed consolidated interim financial statements included in the half year report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note B1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the condensed consolidated interim financial statements and the review

Our responsibilities and those of the directors

The half year report, including the condensed consolidated interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half year report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express to the company a conclusion on the condensed consolidated interim financial statements in the half year report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of condensed consolidated interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the half year report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated interim financial statements.

 

 

 

 

 

 

 

PricewaterhouseCoopers LLP

Chartered Accountants

2 August 2017

London

 

 

Notes:

(a)  The maintenance and integrity of the Aviva plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.

(b)  Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.