Final Results - PART 3 OF 4

RNS Number : 9298Y

Aviva PLC

09 March 2017

Part 3 of 4

Page 39

IFRS financial statements

In this section		Page
Consolidated financial statements
Consolidated income statement		40
Consolidated statement of comprehensive income		41
Consolidated statement of changes in equity		42
Consolidated statement of financial position		43
Consolidated statement of cash flows		44


Notes to the consolidated financial statements
B1(i)	Basis of preparation	45
B1(ii)	New standards, interpretations and amendments to published standards that have been adopted by the Group	45
B2	Prior period adjustments	46
B3	Exchange rates	47
B4	Subsidiaries	47
B5	Segmental Information	50
B6	Tax	58
B7	Earnings per share	60
B8	Dividends and appropriations	61
B9	Insurance liabilities	62
B10	Liability for investment contracts	72
B11	Reinsurance assets	74
B12	Effects of changes in assumptions and estimates during the year	76
B13	Unallocated divisible surplus	77
B14	Borrowings	77
B15	Pension obligations	78
B16	Related party transactions	81
B17	Risk management - framework	81
B18	Direct capital instrument and tier 1 notes	94
B19	Cash and cash equivalents	94
B20	Contingent liabilities and other risk factors	95
B21	AVIF and intangibles	96
B22	Subsequent events	96

Page 40

Consolidated income statement

For the year ended 31 December 2016

	Note	2016 £m	Restated¹ 2015 £m
Income
Gross written premiums		25,442	21,925
Premiums ceded to reinsurers		(2,364)	(2,890)
Premiums written net of reinsurance		23,078	19,035
Net change in provision for unearned premiums		(210)	(111)
Net earned premiums		22,868	18,924
Fee and commission income		1,962	1,797
Net investment income		30,257	2,825
Share of profit after tax of joint ventures and associates		216	180
(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates		(11)	2
		55,292	23,728
Expenses
Claims and benefits paid, net of recoveries from reinsurers		(23,782)	(21,985)
Change in insurance liabilities, net of reinsurance	B9a(ii)	(6,893)	6,681
Change in investment contract provisions		(14,039)	(1,487)
Change in unallocated divisible surplus	B13	(381)	984
Fee and commission expense		(3,885)	(3,324)
Other expenses		(3,853)	(2,784)
Finance costs		(626)	(618)
		(53,459)	(22,533)
Profit before tax		1,833	1,195
Tax attributable to policyholders' returns	B6	(640)	218
Profit before tax attributable to shareholders' profits		1,193	1,413
Tax expense	B6	(974)	(98)
Less: tax attributable to policyholders' returns	B6	640	(218)
Tax attributable to shareholders' profits	B6	(334)	(316)
Profit for the year		859	1,097

Attributable to:
Equity holders of Aviva plc		703	936
Non-controlling interests		156	161
Profit for the year		859	1,097
Earnings per share	B7
Basic (pence per share)		15.3p	23.1p
Diluted (pence per share)		15.1p	22.8p

1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note B2 for further details.

Page 41

Consolidated statement of comprehensive income

For the year ended 31 December 2016

	Note	2016 £m	Restated¹ 2015 £m
Profit for the year		859	1,097

Other comprehensive income:
Items that may be reclassified subsequently to income statement
Investments classified as available for sale
Fair value gains/(losses)		12	(9)
Fair value losses transferred to profit on disposals		(2)	-
Share of other comprehensive income of joint ventures and associates		(6)	(14)
Foreign exchange rate movements		1,128	(378)
Aggregate tax effect - shareholder tax on items that may be reclassified subsequently to income statement		(34)	13

Items that will not be reclassified to income statement
Owner-occupied properties - fair value gains		4	27
Remeasurements of pension schemes	B15	311	(235)
Aggregate tax effect - shareholder tax on items that will not be reclassified subsequently to income statement		(70)	93
Total other comprehensive income, net of tax		1,343	(503)
Total comprehensive income for the year		2,202	594

Attributable to:
Equity holders of Aviva plc		1,901	478
Non-controlling interests		301	116
		2,202	594

Page 42

Consolidated statement of changes in equity

For the year ended 31 December 2016

	Ordinary share capital £m	Preference share capital £m	Share premium £m	Merger reserve £m	Treasury shares £m	Other Reserves £m	Retained earnings £m	DCI and tier 1 notes £m	Total equity excluding non-controlling interest £m	Non-controlling interests £m	Total equity £m
Balance at 1 January	1,012	200	1,185	8,974	(29)	(114)	4,774	1,123	17,125	1,145	18,270
Profit for the year	-	-	-	-	-	-	703	-	703	156	859
Other comprehensive income	-	-	-	-	-	956	242	-	1,198	145	1,343
Total comprehensive income for the year	-	-	-	-	-	956	945	-	1,901	301	2,202
Owner-occupied properties fair value gains transferred to retained earnings on disposals	-	-	-	-	-	(46)	46	-	-	-	-
Dividends and appropriations	-	-	-	-	-	-	(973)	-	(973)	-	(973)
Non-controlling interests share of dividends declared in the year	-	-	-	-	-	-	-	-	-	(135)	(135)
Transfer to profit on disposal of subsidiaries, joint ventures and associates	-	-	-	-	-	(7)	-	-	(7)	-	(7)
Capital contributions from non-controlling interests	-	-	-	-	-	-	-	-	-	9	9
Changes in non-controlling interests in subsidiaries	-	-	-	-	-	-	-	-	-	105	105
Treasury shares held by subsidiary companies	-	-	-	-	13	-	-	-	13	-	13
Reserves credit for equity compensation plans	-	-	-	-	-	38	-	-	38	-	38
Shares issued under equity compensation plans	3	-	12	-	1	(30)	26	-	12	-	12
Aggregate tax effect - shareholder tax	-	-	-	-	-	-	17	-	17	-	17
Balance at 31 December	1,015	200	1,197	8,974	(15)	797	4,835	1,123	18,126	1,425	19,551

For the year ended 31 December 2015 - restated¹

	Ordinary share capital £m	Preference share capital £m	Share premium £m	Merger reserve £m	Treasury shares £m	Other Reserves £m	Retained earnings¹ £m	DCI and tier 1 notes £m	Total equity excluding non-controlling interest £m	Non-controlling interests £m	Total equity £m
Balance at 1 January as reported	737	200	1,172	3,271	(8)	229	4,617	892	11,110	1,166	12,276
Prior period adjustment¹	-	-	-	-	-	-	20	-	20	-	20
Balance at 1 January as restated	737	200	1,172	3,271	(8)	229	4,637	892	11,130	1,166	12,296

Profit for the year	-	-	-	-	-	-	936	-	936	161	1,097
Other comprehensive income	-	-	-	-	-	(316)	(142)	-	(458)	(45)	(503)
Total comprehensive income for the year	-	-	-	-	-	(316)	794	-	478	116	594
Issue of share capital - acquisition of Friends Life	272	-	-	5,703	-	-	-	-	5,975	-	5,975
Non-controlling interests in acquired subsidiaries²	-	-	-	-	-	-	-	-	-	504	504
Reclassification of non-controlling interests to financial liabilities³	-	-	-	-	-	-	-	-	-	(272)	(272)
Reclassification of non-controlling interests to tier 1 notes⁴	-	-	-	-	-	-	-	231	231	(231)	-
Owner-occupied properties fair value gains transferred to retained earnings on disposals	-	-	-	-	-	(33)	33	-	-	-	-
Dividends and appropriations	-	-	-	-	-	-	(724)	-	(724)	-	(724)
Non-controlling interests share of dividends declared in the year	-	-	-	-	-	-	-	-	-	(142)	(142)
Transfer to profit on disposal of subsidiaries, joint ventures and associates	-	-	-	-	-	1	-	-	1	-	1
Capital contributions from non-controlling interests	-	-	-	-	-	-	-	-	-	5	5
Changes in non-controlling interests in subsidiaries	-	-	-	-	-	-	-	-	-	(1)	(1)
Treasury shares held by subsidiary companies	-	-	-	-	(27)	-	-	-	(27)	-	(27)
Reserves credit for equity compensation plans	-	-	-	-	-	40	-	-	40	-	40
Shares issued under equity compensation plans	3	-	13	-	6	(35)	19	-	6	-	6
Aggregate tax effect - shareholder tax	-	-	-	-	-	-	15	-	15	-	15
Balance at 31 December	1,012	200	1,185	8,974	(29)	(114)	4,774	1,123	17,125	1,145	18,270

2 Includes Friends Life's Step-up Tier one Insurance Capital Securities ('STICS') issuances classified as equity instruments within non-controlling interests at the date of acquisition.

3 On 29 May 2015, notification was given that the Group would redeem the 2005 STICS issuance. At that date the instrument was reclassified as a financial liability. The instrument was redeemed on 1 July 2015, £272 million represents the fair value of instruments recognised on acquisition, made up of the £268 million outstanding principal redeemed on 1 July 2015 and £4 million amortised subsequent to the reclassification and included within finance costs in the income statement.

4 On 1 October 2015 Aviva plc replaced Friends Life Holdings plc as issuer of the 2003 STICS issuance which resulted in a reclassification of the STICS from non-controlling interests to DCI and tier 1 notes.

Page 43

Consolidated statement of financial position

As at 31 December 2016

	Note	2016 £m	Restated¹ 2015 £m
Assets
Goodwill		2,045	1,955
Acquired value of in-force business and intangible assets	B21	5,468	5,731
Interests in, and loans to, joint ventures		1,604	1,590
Interests in, and loans to, associates		481	329
Property and equipment		487	449
Investment property		10,768	11,301
Loans		24,784	22,433
Financial investments		299,835	274,217
Reinsurance assets	B11	26,343	20,918
Deferred tax assets		180	131
Current tax assets		119	114
Receivables		7,794	6,875
Deferred acquisition costs and other assets		5,893	5,018
Prepayments and accrued income		2,882	3,094
Cash and cash equivalents		38,708	33,676
Assets of operations classified as held for sale	B4	13,028	-
Total assets		440,419	387,831
Equity
Capital
Ordinary share capital		1,015	1,012
Preference share capital		200	200
		1,215	1,212
Capital reserves
Share premium		1,197	1,185
Merger reserve		8,974	8,974
		10,171	10,159
Treasury shares		(15)	(29)
Other reserves		797	(114)
Retained earnings		4,835	4,774
Equity attributable to shareholders of Aviva plc		17,003	16,002
Direct capital instrument and tier 1 notes	B18	1,123	1,123
Equity excluding non-controlling interests		18,126	17,125
Non-controlling interests		1,425	1,145
Total equity		19,551	18,270
Liabilities
Gross insurance liabilities	B9	151,183	140,556
Gross liabilities for investment contracts	B10	197,095	181,082
Unallocated divisible surplus	B13	9,349	8,811
Net asset value attributable to unitholders		15,638	11,415
Provisions		1,510	1,416
Deferred tax liabilities		2,413	2,084
Current tax liabilities		421	177
Borrowings	B14	10,295	8,770
Payables and other financial liabilities		17,751	12,448
Other liabilities		2,719	2,802
Liabilities of operations classified as held for sale	B4	12,494	-
Total liabilities		420,868	369,561
Total equity and liabilities		440,419	387,831

Page 44

Consolidated statement of cash flows

For the year ended 31 December 2016

The cash flows presented in this statement cover all the Group's activities and include flows from both policyholder and shareholder activities. All cash and cash equivalents are available for use by the Group.

	Note	2016 £m	2015 £m
Cash flows from operating activities¹
Cash generated from operating activities		5,394	5,197
Tax paid		(647)	(442)
Total net cash from operating activities		4,747	4,755
Cash flows from investing activities
Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired		(432)	7,783
Disposals of subsidiaries, joint ventures and associates, net of cash transferred		42	(3)
New loans to joint ventures and associates		(3)	(21)
Net repayment of/(new) loans to joint ventures and associates		97	-
Net new loans to joint ventures and associates		94	(21)
Purchases of property and equipment		(67)	(58)
Proceeds on sale of property and equipment		75	51
Purchases of intangible assets		(119)	(111)
Total net cash (used in)/from investing activities		(407)	7,641
Cash flows from financing activities
Proceeds from issue of ordinary shares		15	16
Treasury shares purchased for employee trusts		-	(1)
New borrowings drawn down, net of expenses		3,526	2,049
Repayment of borrowings²		(2,340)	(1,979)
Net drawdown of borrowings	B14	1,186	70
Interest paid on borrowings		(595)	(588)
Preference dividends paid	B8	(17)	(17)
Ordinary dividends paid	B8	(871)	(635)
Coupon payments on direct capital instrument and tier 1 notes	B8	(85)	(72)
Capital contributions from non-controlling interests of subsidiaries		9	5
Dividends paid to non-controlling interests of subsidiaries³		(135)	(142)
Changes in controlling interest in subsidiaries		105	(1)
Total net cash (used in)/from financing activities		(388)	(1,365)
Total net increase in cash and cash equivalents		3,952	11,031
Cash and cash equivalents at 1 January		33,170	22,564
Effect of exchange rate changes on cash and cash equivalents		1,283	(425)
Cash and cash equivalents at 31 December	B19	38,405	33,170

1 Cash flows from operating activities include interest received of £5,642 million (2015: £5,251 million) and dividends received of £2,536 million (2015: £2,353 million).

2 In 2015 this included redemption of 2005 STICS of £268 million.

3 Dividends paid to non-controlling interests of subsidiaries included £7 million in 2015 relating to the 2003 STICS which were reclassified from non-controlling interests to direct capital instrument and tier 1 notes in October 2015. Following reclassification, interest is included in coupon payments on direct capital instrument and tier 1 notes. Dividends paid to non-controlling interests of subsidiaries during 2015 also included £17 million relating to the 2005 STICS which were redeemed in July 2015.

Page 45

B1(i) Basis of preparation

(a) The results in this preliminary announcement have been taken from the Group's 2016 Annual report and accounts which will be available on the Company's website on 28 March 2017. The consolidated financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to those reporting under IFRS.

The basis of preparation and summary of accounting policies applicable to the Group's consolidated financial statements can be found in the Accounting policies section of the 2016 Annual report and accounts. The comparative figures have been restated for the adjustments detailed in note B2. In addition, the Group has adopted new amendments to published standards as described in B1(ii), however these had no effect on reported profit or loss or equity, the statement of financial position or the statement of cash flows.

The preliminary announcement for the year ended 31 December 2016 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The results for full year 2016 and 2015 have been audited by PricewaterhouseCoopers LLP (PwC). PwC have reported on the 2016 and 2015 consolidated financial statements. Both reports were unqualified and neither contained a statement under section 498 (2) or (3) of the Companies Act 2006. The Group's 2015 report and accounts have been filed with the Registrar of Companies.

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

b) 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 consolidated financial statements are stated in pounds sterling, which is the Company's functional and presentational currency. Unless otherwise noted, the amounts shown in these financial statements are in millions of pounds sterling (£m).

c) 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.

B1(ii) New standards, interpretations and amendments to published standards that have been adopted by the Group

The Group has adopted the following amendments to standards which became effective for the annual reporting period beginning on 1 January 2016.

(i) Amendments to IAS 16 and IAS 38 - Clarification of Acceptable Methods of Depreciation and Amortisation

These amendments provide additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible assets should be calculated. The amendments to IAS 16 and IAS 38 prohibit the use of revenue-based depreciation for property, plant and equipment and significantly limit the use of revenue-based amortisation for intangible assets. The adoption of these amendments has no impact for the Group's consolidated financial statements.

(ii) Amendments to IAS 27, Equity Method in Separate Financial Statements

The amendments to IAS 27 allow investments in subsidiaries to be accounted for using the equity method within the Company's financial statements. The Company has not elected to use the equity method in its separate financial statements.

(iii) Narrow scope amendments to IFRS10, IFRS 12 and IAS 28 - Applying the Consolidation Exception

These narrow scope amendments clarify the application of the requirements for investment entities to measure subsidiaries at fair value instead of consolidating them. There are no implications for the Group's consolidated financial statements as the Group does not meet the definition of an investment entity.

(iv) Amendments to IAS 1 - Disclosure Initiative

These amendments form part of the IASB's Disclosure Initiative and are intended to assist entities in applying judgement in considering presentation and disclosure requirements. The amendments clarify guidance in IAS 1 Presentation of Financial Statements on materiality and aggregation, the presentation of subtotals, the order of the notes to financial statements and the disclosure of accounting policies. The adoption of these amendments has no impact on the Group's consolidated financial statements.

(v) Annual Improvements to IFRSs 2012-2014

These improvements consist of amendments to five IFRSs including IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, IFRS 7 Financial Instruments: Disclosures and IAS 19 Employee Benefits. The amendments clarify existing guidance and there is no impact on the Group's consolidated financial statements.

Page 46

B2 - Prior period adjustments

During 2016, UK Life reviewed its accounting and modelling for annual management charge rebates relating to unit-linked investment contracts. It was concluded that an associated liability should be released partly offset by a reduction in deferred acquisition costs in accordance with IFRS. This has been presented as a prior year adjustment and has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in closing equity at 31 December 2015 of £38 million. The impact on the consolidated income statement, statement of financial position and equity are shown in the tables below. There is no impact on the consolidated statement of cash flows.

	2015
	As reported £m	Effect of prior period adjustments £m	Restated £m
Operating profit before tax attributable to shareholders' profits	2,665	23	2,688

Total expenses	(22,556)	23	(22,533)
Effect analysed as:
Fee and commission expense	(3,347)	23	(3,324)
Profit before tax	1,172	23	1,195
Tax expense	(93)	(5)	(98)
Profit for the period	1,079	18	1,097
Profit attributable to equity holders of Aviva plc	918	18	936
Operating earnings per share
Basic (pence per share)	49.2p	0.5p	49.7p
Diluted (pence per share)	48.7p	0.5p	49.2p
Earnings per share
Basic (pence per share)	22.6p	0.5p	23.1p
Diluted (pence per share)	22.3p	0.5p	22.8p

	31 December 2015
	As reported £m	Effect of prior period adjustments £m	Restated £m
Total assets	387,874	(43)	387,831
Effect analysed as:
Deferred acquisition costs and other assets	5,061	(43)	5,018
Total liabilities	369,642	(81)	369,561
Effect analysed as:
Gross liabilities for investment contracts	181,173	(91)	181,082
Deferred tax liabilities	2,074	10	2,084
	31 December 2015
	As reported £m	Effect of prior period adjustments £m	Restated £m
Total equity
Balance at 1 January	12,276	20	12,296
Total comprehensive income for the period	576	18	594
Other equity movements	5,380	-	5,380
Balance at 31 December	18,232	38	18,270

As a result of this adjustment, comparative information in note B5 Segmental information, note B6 Tax, note B7 Earnings per Share and note B10 Liability for investment contracts have been restated.

Page 47

B3 - Exchange rates

The Group's principal overseas operations during the year 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 year and the assets and liabilities have been translated at the year end rates as follows:

	2016	2015
Eurozone
Average rate (€1 equals)	£0.82	£0.72
Period end rate (€1 equals)	£0.85	£0.74
Canada
Average rate ($CAD1 equals)	£0.56	£0.51
Period end rate ($CAD1 equals)	£0.60	£0.49
Poland
Average rate (PLN1 equals)	£0.19	£0.17
Period end rate (PLN1 equals)	£0.19	£0.17

B4 - Subsidiaries

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

(a) Acquisitions

(i) RBC General Insurance
On 1 July 2016, Aviva plc announced its Canadian business, Aviva Canada had completed the acquisition of 100% of the outstanding shares of RBC General Insurance Company ('RBC'), the existing home and motor insurance business of RBC Insurance, and entered into a 15-year strategic agreement with RBC Insurance. Through this agreement, Aviva Canada will provide policy administration and claims services, and RBC Insurance customers will access Aviva Canada's full suite of property and casualty (P&C) products. The acquisition extends Aviva's presence in the Canadian general insurance market and brings diversification to existing distribution channels.

Under the agreement, Aviva paid RBC Insurance £345 million (CAD$598 million) on 1 July 2016, the date on which the general insurance company became a wholly owned subsidiary of the Group and was renamed Aviva General Insurance Company. A further c.£29 million (CAD$50 million) commission is payable over three years as part of a deferred consideration agreement.

The following table summarises the consideration for the acquisition, the fair value of the assets acquired, liabilities assumed and resulting allocation to goodwill:

	Fair Value £m
Assets
Intangible assets	210
Financial investments	749
Reinsurance assets	29
Receivables	189
Other assets	6
Cash and cash equivalents	26
Total identifiable assets	1,209
Liabilities
Insurance liabilities	825
Deferred tax liabilities	49
Payables and other financial liabilities	3
Other liabilities	16
Total identifiable liabilities	893
Net identifiable assets acquired	316
Goodwill arising on acquisition	58
Consideration	374

For cash flow purposes, the amounts included within the Group's consolidated statement of cash flows related to this acquisition are as follows:

	£m
Consideration
Cash	345
Deferred cash consideration	-
Directly attributable costs	7
	352
Less: Cash and cash equivalents acquired	26
Net cash outflow	326

Page 48

B4 - Subsidiaries continued

Fair value and accounting policy adjustments

The adjustments arising on acquisition were in respect of the following:

· Recognition of identifiable intangible assets at fair value and related deferred tax liability; and

· Elimination of deferred acquisition costs.

Intangible assets

Within intangible assets of £210 million, £190 million relate to RBC Insurance's distribution network and RBC's customer relationships, the value of which is based on the multi-period excess earnings method. The useful lives of the access to the distribution network and value of the customer relationships have been assessed as 15 years and 10 years, respectively. These will be amortised over these periods, along with the corresponding release of the applicable deferred tax liability, in accordance with the Group's accounting policies.

Other intangible assets of £20 million were recognised upon acquisition representing the fair value of future profits from the general insurance book as at 1 July 2016. This will be amortised based on its useful life of approximately two years in accordance with the Group's accounting policies.

Goodwill

The residual goodwill on acquisition of £58 million, none of which is expected to be deductible for tax purposes, is attributable to the future synergies expecting to arise from combining the operations of the Aviva Canada insurance entities with that of RBC.

Profit and loss

In the period 1 July 2016 to 31 December 2016, the acquired general insurance company contributed net earned premiums of £239 million and a profit before tax attributable to shareholders of £4 million, including £17 million of integration and restructuring costs, to the consolidated results of the Group.

If the acquisition had been effective on 1 January 2016, on a pro-forma basis the Group's net earned premiums is estimated at £23.3 billion and profit before tax attributable to shareholders is estimated at £1,200 million. In determining this amount, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 January 2016. The pro-forma results are provided for information purposes only and do not necessarily reflect the actual results that would have occurred had the acquisition taken place on 1 January 2016, nor are they necessarily indicative of the future results of the combined Group.

(ii) Other acquisitions

On 29 April 2016, Aviva plc completed the acquisition of an additional 23% share in Aviva Life Insurance Company India Limited ('Aviva India') from its partner Dabur invest Corp (a part of the Dabur Group) which brings the Group's holding to 49%. As the Group continues to have significant influence, Aviva India continues to be equity accounted as an associate.

(b) Disposal and remeasurement of subsidiaries, joint ventures and associates

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

	2016 £m	2015 £m
Ireland - health	(8)	-
Turkey - long-term business	-	1
Other small operations	(3)	1
Total (loss)/profit on disposal and remeasurement	(11)	2

The total Group loss on disposal and remeasurement of subsidiaries, joint ventures and associates is £11 million (2015: £2 million profit). This primarily relates to the Group's sale in its entire stake in its Irish private medical insurance business and a closed book of offshore bonds business which both completed in the third quarter of 2016.

The assets and liabilities of operations classified as held for sale as at 31 December 2016 are as follows:

	2016 £m	2015 £m
Assets
Goodwill, AVIF and other intangibles	12	-
Investment property	48	-
Loans	75	-
Financial investments	10,706	-
Reinsurance assets	411	-
Other assets	1,521	-
Cash and cash equivalents	255	-
Total assets	13,028	-
Liabilities
Insurance liabilities	(4,448)	-
Liability for investment contracts	(7,175)	-
Unallocated divisible surplus	(859)	-
Other liabilities	(12)	-
Total liabilities	(12,494)	-
Net assets	534	-

Page 49

B4 - Subsidiaries continued

Assets and liabilities of operations classified as held for sale as at 31 December 2016 relate to Antarius S.A. ('Antarius'), a consolidated subsidiary of Aviva. The subsidiary has been classified as held for sale from May 2016, the date when the transaction was expected to complete within 12 months. The business is measured at its carrying amount. See note B4 (d)(ii) for further details.

(d) Subsequent events

(i) Aviva Hong Kong

On 20 January 2017, it was announced that Aviva, Hillhouse Capital ('Hillhouse') and Tencent Holdings Limited ('Tencent') had agreed to develop an insurance company in Hong Kong, which will focus on digital insurance. As part of the agreement, Hillhouse and Tencent will acquire shares in Aviva Life Insurance Company Limited ('Aviva Hong Kong'). Following completion of the transaction, which is expected in the fourth quarter of 2017, Aviva and Hillhouse will each hold 40% and Tencent will hold 20% shareholdings in Aviva Hong Kong. The transaction is subject to customary closing conditions, including regulatory approval. Aviva Hong Kong remains a consolidated subsidiary of Aviva at the balance sheet date.

(ii) Antarius

On 9 February 2017, Aviva announced the sale of its entire 50% shareholding in Antarius to Sogecap, a subsidiary of Société Générale, for a consideration of approximately £425 million (€500 million), payable in cash upon completion. Antarius is currently owned jointly by Aviva and Crédit du Nord, a separate subsidiary of Société Générale. This agreement follows Crédit du Nord's decision in 2015 to exercise its option to purchase Aviva's shareholding in Antarius. All regulatory approvals for the transaction have been received with completion expected on 1 April 2017.

(e) Significant restrictions

In certain jurisdictions the ability of subsidiaries to transfer funds to the Group in the form of cash dividends or to repay loans and advances is subject to local corporate or insurance laws and regulations and solvency requirements. There are no protective rights of non-controlling interests which significantly restrict the Group's ability to access or use the assets and settle the liabilities of the Group.

Page 50

B5 - Segmental information

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

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

United Kingdom & Ireland

United Kingdom and Ireland comprises two operating segments - Life and General Insurance. The principal activities of our UK and Ireland Life operations are life insurance, long-term health (in the UK) and accident insurance, savings, pensions and annuity business, and include the UK insurance operations acquired as part of the acquisition of Friends Life in 2015. 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 & Ireland General Insurance includes the results of our Ireland Health business, up to the date of disposal on 1 August 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.

As set out in note B4, the operations of Antarius are classified as held for sale as at 31 December 2016.

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 life 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. Our 'Other' operations include our life operations in Turkey.

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.

Asia

Our activities in Asia principally comprise our long-term 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, France, 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 internal reinsurance operations are also included in this segment.

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B5 - Segmental information continued

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.

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

	United Kingdom & Ireland				Europe
	Life £m	GI £m	France £m	Poland £m	Italy, Spain and Other £m	Canada £m	Asia £m	Aviva Investors² £m	Other Group activities³ £m	Total £m
Gross written premiums	5,458	4,750	6,624	496	4,652	2,542	920	-	-	25,442
Premiums ceded to reinsurers	(1,509)	(498)	(86)	(9)	(39)	(89)	(134)	-	-	(2,364)
Internal reinsurance revenue	(7)	(2)	-	-	(3)	-	(11)	-	23	-
Premiums written net of reinsurance	3,942	4,250	6,538	487	4,610	2,453	775	-	23	23,078
Net change in provision for unearned premiums	(2)	(132)	(8)	(16)	(11)	(33)	(8)	-	-	(210)
Net earned premiums	3,940	4,118	6,530	471	4,599	2,420	767	-	23	22,868
Fee and commission income	868	140	258	60	98	17	198	326	(3)	1,962
	4,808	4,258	6,788	531	4,697	2,437	965	326	20	24,830
Net investment income	24,903	283	2,951	141	533	50	1,240	83	73	30,257
Inter-segment revenue	-	-	-	-	-	-	-	234	-	234
Share of profit of joint ventures and associates	172	-	16	7	3	1	17	-	-	216
(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	(3)	(8)	-	-	-	-	-	-	-	(11)
Segmental income¹	29,880	4,533	9,755	679	5,233	2,488	2,222	643	93	55,526
Claims and benefits paid, net of recoveries from reinsurers	(11,200)	(2,680)	(5,397)	(315)	(2,230)	(1,521)	(399)	-	(40)	(23,782)
Change in insurance liabilities, net of reinsurance	(3,381)	(550)	(1,221)	(79)	(1,303)	(16)	(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)	(632)	(77)	(275)	(628)	(108)	(35)	9	(3,885)
Other expenses	(1,427)	(263)	(266)	(64)	(106)	(150)	(289)	(393)	(895)	(3,853)
Inter-segment expenses	(212)	(8)	(1)	(5)	-	(5)	-	-	(3)	(234)
Finance costs	(195)	(2)	(1)	-	(3)	(4)	(3)	-	(418)	(626)
Segmental expenses	(27,605)	(4,780)	(9,430)	(538)	(4,965)	(2,324)	(2,197)	(513)	(1,341)	(53,693)
Profit/(loss) before tax	2,275	(247)	325	141	268	164	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)	325	141	268	164	23	130	(1,248)	1,193
Adjusted for non-operating items:
Reclassification of corporate costs and unallocated interest	-	(5)	46	-	-	17	-	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)	(2)	(1)	13	42	-	-	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	2	3	7	29	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	8	-	1	18	17	19	15	212
Other⁴	-	498	-	-	-	-	-	-	-	498
Operating profit/(loss) before tax attributable to shareholders	1,579	443	481	146	318	270	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 were 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 released.

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B5 - Segmental information continued

(a) (ii) Segmental income statement for the year ended 31 December 2015 - restated¹

	United Kingdom & Ireland				Europe
	Life £m	GI £m	France £m	Poland £m	Italy, Spain and Other £m	Canada £m	Asia £m	Aviva Investors³ £m	Other Group activities⁴ £m	Total £m
Gross written premiums	5,402	4,503	5,777	484	2,733	2,109	917	-	-	21,925
Premiums ceded to reinsurers	(1,355)	(1,163)	(75)	(6)	(42)	(117)	(132)	-	-	(2,890)
Internal reinsurance revenue	(5)	(1)	-	(1)	(4)	-	(2)	-	13	-
Premiums written net of reinsurance	4,042	3,339	5,702	477	2,687	1,992	783	-	13	19,035
Net change in provision for unearned premiums	(1)	(53)	(11)	(13)	(7)	(15)	(14)	-	3	(111)
Net earned premiums	4,041	3,286	5,691	464	2,680	1,977	769	-	16	18,924
Fee and commission income	810	160	232	40	115	28	134	281	(3)	1,797
	4,851	3,446	5,923	504	2,795	2,005	903	281	13	20,721
Net investment income/(expense)	448	159	1,949	(1)	444	49	(325)	155	(53)	2,825
Inter-segment revenue	-	-	-	-	-	-	-	195	-	195
Share of profit of joint ventures and associates	149	-	7	5	8	-	11	-	-	180
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates	2	-	-	-	(1)	-	1	-	-	2
Segmental income²	5,450	3,605	7,879	508	3,246	2,054	590	631	(40)	23,923
Claims and benefits paid, net of recoveries from reinsurers	(10,663)	(2,533)	(4,454)	(302)	(2,343)	(1,240)	(415)	-	(35)	(21,985)
Change in insurance liabilities, net of reinsurance	7,070	492	(1,093)	17	264	(12)	(68)	-	11	6,681
Change in investment contract provisions	943	-	(1,915)	18	(702)	-	328	(159)	-	(1,487)
Change in unallocated divisible surplus	22	-	841	12	93	-	16	-	-	984
Fee and commission expense	(562)	(1,195)	(623)	(57)	(252)	(571)	(114)	(26)	76	(3,324)
Other expenses	(1,369)	(223)	(205)	(51)	(111)	(81)	(250)	(365)	(129)	(2,784)
Inter-segment expenses	(169)	(5)	(9)	(6)	-	(4)	-	-	(2)	(195)
Finance costs	(214)	(1)	(1)	-	(4)	(4)	(3)	-	(391)	(618)
Segmental expenses	(4,942)	(3,465)	(7,459)	(369)	(3,055)	(1,912)	(506)	(550)	(470)	(22,728)
Profit/(loss) before tax	508	140	420	139	191	142	84	81	(510)	1,195
Tax attributable to policyholders' returns	232	-	-	-	-	-	(14)	-	-	218
Profit/(loss) before tax attributable to shareholders' profits	740	140	420	139	191	142	70	81	(510)	1,413
Adjusted for non-operating items:
Reclassification of corporate costs and unallocated interest	7	(1)	20	-	-	6	-	4	(36)	-
Investment return variances and economic assumption changes on long-term business	-	-	(17)	-	14	-	(11)	-	-	(14)
Short-term fluctuation in return on investments backing non-long-term business	53	84	2	(2)	31	47	-	-	(131)	84
Economic assumption changes on general insurance and health business	-	98	-	-	-	2	-	-	-	100
Impairment of goodwill, joint ventures and associates and other amounts expensed	-	-	-	-	9	-	13	-	-	22
Amortisation and impairment of intangibles	84	14	-	2	14	10	9	10	12	155
Amortisation and impairment of AVIF	350	-	5	2	5	-	136	-	-	498
(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates	(2)	-	-	-	1	-	(1)	-	-	(2)
Integration and restructuring costs	215	26	19	-	3	7	7	11	91	379
Other⁵	-	53	-	-	-	-	-	-	-	53
Operating profit/(loss) before tax attributable to shareholders	1,447	414	449	141	268	214	223	106	(574)	2,688

2 Total reported income, excluding inter-segment revenue, includes £9,031 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 were written.

3 Aviva Investors operating profit includes £1 million profit relating to Aviva Investors Pooled Pensions business.

4 Other Group activities include Group Reinsurance.

5 Other items represents 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 £53 million loss comprises £712 million in premiums ceded less £659 million in reinsurance recoverables recognised.

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B5 - Segmental information continued

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

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

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(a) (iv) Segmental statement of financial position as at 31 December 2015 - restated¹

	United Kingdom & Ireland		Europe
	Life £m	GI £m	France £m	Poland £m	Italy, Spain and Other £m	Canada £m	Asia £m	Aviva Investors £m	Other Group activities £m	Total £m
Goodwill	663	1,026	5	23	172	21	45	-	-	1,955
Acquired value of in-force business and intangible assets	3,600	139	86	12	539	69	1,206	15	65	5,731
Interests in, and loans to, joint ventures and associates	1,291	-	138	39	72	7	372	-	-	1,919
Property and equipment	130	27	225	3	5	10	8	1	40	449
Investment property	7,483	198	2,089	-	1	-	-	1,146	384	11,301
Loans	21,502	5	733	1	26	135	31	-	-	22,433
Financial investments	163,987	4,715	65,413	2,575	19,176	3,187	9,684	515	4,965	274,217
Deferred acquisition costs	1,351	418	227	32	77	255	57	4	-	2,421
Other assets	42,636	5,301	9,678	239	1,480	860	1,351	901	4,959	67,405
Assets of operations classified as held for sale	-	-	-	-	-	-	-	-	-	-
Total assets	242,643	11,829	78,594	2,924	21,548	4,544	12,754	2,582	10,413	387,831
Insurance liabilities
Long-term business and outstanding claims provisions	99,435	5,439	16,487	2,308	7,699	2,058	2,865	-	18	136,309
Unearned premiums	226	2,083	393	45	237	1,016	48	-	-	4,048
Other insurance liabilities	-	76	44	-	-	77	-	-	2	199
Liability for investment contracts	114,052	-	47,834	2	9,770	-	7,681	1,743	-	181,082
Unallocated divisible surplus	2,575	-	4,941	55	1,047	-	193	-	-	8,811
Net asset value attributable to unitholders	203	-	2,863	-	413	-	-	-	7,936	11,415
External borrowings	1,903	-	-	-	49	-	-	-	6,818	8,770
Other liabilities, including inter-segment liabilities	12,271	(1,240)	4,066	99	715	596	565	370	1,485	18,927
Liabilities of operations classified as held for sale	-	-	-	-	-	-	-	-	-	-
Total liabilities	230,665	6,358	76,628	2,509	19,930	3,747	11,352	2,113	16,259	369,561
Total equity										18,270
Total equity and liabilities										387,831

(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. Long-term business also includes 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 and provides investment management services for institutional pension fund mandates. It 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 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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(b) (ii) Segmental income statement - products and services for the year ended 31 December 2015 - restated¹

	Long-term business £m	General insurance and health³ £m	Fund management £m	Other £m	Total £m
Gross written premiums²	13,187	8,738	-	-	21,925
Premiums ceded to reinsurers	(1,529)	(1,361)	-	-	(2,890)
Premiums written net of reinsurance	11,658	7,377	-	-	19,035
Net change in provision for unearned premiums	-	(111)	-	-	(111)
Net earned premiums	11,658	7,266	-	-	18,924
Fee and commission income	1,161	61	274	301	1,797
	12,819	7,327	274	301	20,721
Net investment income/(expense)	2,667	240	(5)	(77)	2,825
Inter-segment revenue	-	-	201	-	201
Share of profit of joint ventures and associates	177	3	-	-	180
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	1	1	-	-	2
Segmental income	15,664	7,571	470	224	23,929
Claims and benefits paid, net of recoveries from reinsurers	(16,809)	(5,176)	-	-	(21,985)
Change in insurance liabilities, net of reinsurance	6,205	476	-	-	6,681
Change in investment contract provisions	(1,487)	-	-	-	(1,487)
Change in unallocated divisible surplus	984	-	-	-	984
Fee and commission expense	(1,098)	(2,118)	(23)	(85)	(3,324)
Other expenses	(1,663)	(368)	(367)	(386)	(2,784)
Inter-segment expenses	(190)	(11)	-	-	(201)
Finance costs	(202)	(5)	-	(411)	(618)
Segmental expenses	(14,260)	(7,202)	(390)	(882)	(22,734)
Profit/(loss) before tax	1,404	369	80	(658)	1,195
Tax attributable to policyholder returns	218	-	-	-	218
Profit/(loss) before tax attributable to shareholders' profits	1,622	369	80	(658)	1,413
Adjusted for:
Non-operating items	820	396	26	33	1,275
Operating profit/(loss) before tax attributable to shareholders' profits	2,442	765	106	(625)	2,688

2 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £146 million, of which £66 million relates to property and liability insurance and £80 million relates to long-term business.

3 General insurance and health business segment includes gross written premiums of £1,092 million relating to health business. The remaining business relates to property and liability insurance.

Page 57

B5 - Segmental information continued

(b) (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

(b) (iv) Segmental statement of financial position - products and services as at 31 December 2015 - restated¹

	Long-term business £m	General insurance and health £m	Fund management £m	Other £m	Total £m
Goodwill	862	1,035	-	58	1,955
Acquired value of in-force business and intangible assets	5,369	309	15	38	5,731
Interests in, and loans to, joint ventures and associates	1,878	34	-	7	1,919
Property and equipment	299	95	1	54	449
Investment property	10,582	335	-	384	11,301
Loans	22,292	141	-	-	22,433
Financial investments	258,995	10,280	23	4,919	274,217
Deferred acquisition costs	1,604	812	5	-	2,421
Other assets	52,844	7,315	769	6,477	67,405
Assets of operations classified as held for sale	-	-	-	-	-
Total assets	354,725	20,356	813	11,937	387,831
Gross insurance liabilities	127,050	13,506	-	-	140,556
Gross liabilities for investment contracts	181,082	-	-	-	181,082
Unallocated divisible surplus	8,811	-	-	-	8,811
Net asset value attributable to unitholders	3,479	-	-	7,936	11,415
External borrowings	1,857	-	-	6,913	8,770
Other liabilities, including inter-segment liabilities	15,397	(307)	346	3,491	18,927
Liabilities of operations classified as held for sale	-	-	-	-	-
Total liabilities	337,676	13,199	346	18,340	369,561
Total equity					18,270
Total equity and liabilities					387,831

Page 58

B6 - Tax

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

(a) Tax charged to the income statement

(i) The total tax charge comprises:

	2016 £m	Restated¹ 2015 £m
Current tax
For the period	930	500
Prior period adjustments	1	(68)
Total current tax	931	432
Deferred tax
Origination and reversal of temporary differences	72	(222)
Changes in tax rates or tax laws	(14)	(82)
Write back of deferred tax assets	(15)	(30)
Total deferred tax	43	(334)
Total tax charged to income statement	974	98

(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, Irish and Singapore life insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholder returns included in the charge above is £640 million (2015: credit of £218 million).

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

	2016 £m	Restated¹ 2015 £m
UK tax	688	(289)
Overseas tax	286	387
	974	98

(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax expense by £10 million and £8 million (2015: £5 million and £30 million), respectively.

(v) Deferred tax charged/(credited) to the income statement represents movements on the following items:

	2016 £m	Restated¹ 2015 £m
Long-term business technical provisions and other insurance items	(147)	517
Deferred acquisition costs	(12)	(41)
Unrealised gains/(losses) on investments	144	(847)
Pensions and other post-retirement obligations	21	(4)
Unused losses and tax credits	39	34
Subsidiaries, associates and joint ventures	4	4
Intangibles and additional value of in-force long-term business	(99)	(149)
Provisions and other temporary differences	93	152
Total deferred tax charged /(credited) to income statement	43	(334)

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

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

	2016 £m	2015 £m
Current tax
In respect of pensions and other post-retirement obligations	(25)	(44)
In respect of foreign exchange movements	31	(7)
	6	(51)
Deferred tax
In respect of pensions and other post-retirement obligations	94	(49)
In respect of fair value gains on owner-occupied properties	1	-
In respect of unrealised gains on investments	3	(6)
	98	(55)
Total tax charged/(credited) to other comprehensive income	104	(106)

(ii) The tax charge attributable to policyholders' returns included above is £nil (2015: £nil).

Page 59

B6 - Tax continued

Tax credited directly to equity in the year in respect of coupon payments on the direct capital instrument and tier 1 notes amounted to £17 million (2015: £15 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	2016 £m	Shareholder £m	Policyholder £m	Restated¹ 2015 £m
Total profit/(loss) before tax	1,193	640	1,833	1,413	(218)	1,195

Tax calculated at standard UK corporation tax rate of 20.00% (2015: 20.25%)	239	128	367	286	(44)	242
Reconciling items
Different basis of tax - policyholders	-	513	513	-	(174)	(174)
Adjustment to tax charge in respect of prior periods	(34)	-	(34)	(46)	-	(46)
Non-assessable income and items not taxed at the full statutory rate	39	-	39	19	-	19
Non-taxable loss/(profit) on sale of subsidiaries and associates	1	-	1	1	-	1
Disallowable expenses	49	-	49	67	-	67
Different local basis of tax on overseas profits	97	(1)	96	126	-	126
Change in future local statutory tax rates	(36)	-	(36)	(82)	-	(82)
Movement in deferred tax not recognised	(13)	-	(13)	(52)	-	(52)
Tax effect of profit from joint ventures and associates	(6)	-	(6)	(6)	-	(6)
Other	(2)	-	(2)	3	-	3
Total tax charged/(credited) to income statement	334	640	974	316	(218)	98

The tax charge/(credit) attributable to policyholder 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 profits 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/(credit) attributable to policyholders included in the total tax charge. The difference between the policyholder tax charge/(credit) and the impact of this item in the tax reconciliation can be explained as follows:

	2016 £m	2015 £m
Tax attributable to policyholder returns	640	(218)
UK corporation tax at a rate of 20.00% (2015: 20.25%) in respect of the policyholder tax deduction	(128)	44
Different local basis of tax of overseas profits	1	-
Different basis of tax - policyholders per tax reconciliation	513	(174)

Finance (No 2) Act 2015 introduced legislation reducing the rate of corporation tax from 20% at 1 April 2016 to 19% from 1 April 2017 and to 18% from 1 April 2020. These reduced rates were used in the calculation of the UK's deferred tax assets and liabilities as at 31 December 2015. Finance Act 2016, which received Royal Assent on 15 September 2016, reduced the corporation tax rate to 17% from 1 April 2020.

In addition, the French government has reduced the rate of corporation tax from 34.43% to 28.92% with effect from 1 January 2020. The further reduction in the future corporation tax rates in the UK from 18% to 17%, and the reduction in France from 34.43% to 28.92% has been used in the calculation of deferred tax assets and liabilities in the UK and France for the year ended 31 December 2016. This results in a reduction in the Group's net deferred tax liabilities of £24 million, comprising a £14 million credit in the income statement and a £10 million credit in the statement of comprehensive income.

Page 60

B7 - Earnings per share

This note shows how we calculate earnings per share, based both on the present shares in issue (the basic earnings per share) and the potential future shares in issue, including conversion of share options granted to employees (the diluted earnings per share). We have also shown the same calculations based on our operating profit as we believe this gives a better indication of operating performance.

(a) Basic earnings per share

(i) The profit attributable to ordinary shareholders is:

			2016			Restated¹ 2015
	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	3010	(1,817)	1,193	2,688	(1,275)	1,413
Tax attributable to shareholders' profit	(706)	372	(334)	(603)	287	(316)
Profit for the year	2,304	(1,445)	859	2,085	(988)	1,097
Amount attributable to non-controlling interests	(147)	(9)	(156)	(152)	(9)	(161)
Cumulative preference dividends for the year	(17)	-	(17)	(17)	-	(17)
Coupon payments in respect of direct capital instrument (DCI) and tier 1 notes (net of tax)	(68)	-	(68)	(57)	-	(57)
Profit attributable to ordinary shareholders	2,072	(1,454)	618	1,859	(997)	862

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

			2016			Restated¹ 2015
	Before tax £m	Net of tax, non-controlling interests, preference dividends and DCI² £m	Per share p	Before tax £m	Net of tax, non-controlling interests, preference dividends and DCI² £m	Per share p
Operating profit attributable to ordinary shareholders	3,010	2,072	51.1	2,688	1,859	49.7
Non-operating items:
Investment return variances and economic assumption changes on long-term business	379	313	7.8	14	(37)	(1.0)
Short-term fluctuation in return on investments backing non-long-term business	(518)	(398)	(9.8)	(84)	(62)	(1.7)
Economic assumption changes on general insurance and health business	(242)	(193)	(4.8)	(100)	(80)	(2.1)
Impairment of goodwill, joint ventures and associates and other amounts expensed	-	-	-	(22)	(22)	(0.6)
Amortisation and impairment of intangibles	(175)	(137)	(3.4)	(155)	(121)	(3.2)
Amortisation and impairment of acquired value of in-force business	(540)	(455)	(11.2)	(498)	(376)	(10.1)
(Loss)/profit on disposal and remeasurement of subsidiaries, joint ventures and associates	(11)	(16)	(0.4)	2	2	0.1
Integration and restructuring costs and other	(212)	(170)	(4.2)	(379)	(259)	(6.9)
Other³	(498)	(398)	(9.8)	(53)	(42)	(1.1)
Profit attributable to ordinary shareholders	1,193	618	15.3	1,413	862	23.1

2 DCI includes the direct capital instrument and tier 1 notes

3 Other items include an exceptional charge of £475 million (2015: £nil), £380 million net of tax (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.

(iii) The calculation of basic earnings per share uses a weighted average of 4,051 million (2015: 3,741 million) ordinary shares in issue, after deducting treasury shares. The actual number of shares in issue at 31 December 2016 was 4,062 million (2015: 4,048 million) and 4,058 million (2015: 4,042 million) excluding treasury shares.

Page 61

B7 - Earnings per share continued

(b) Diluted earnings per share

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

			2016			Restated¹ 2015
	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	618	4,051	15.3	862	3,741	23.1
Dilutive effect of share awards and options	-	38	(0.2)	-	39	(0.3)
Diluted earnings per share	618	4,089	15.1	862	3,780	22.8

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

			2016			Restated¹ 2015
	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	2,072	4,051	51.1	1,859	3,741	49.7
Dilutive effect of share awards and options	-	38	(0.4)	-	39	(0.5)
Diluted operating profit per share	2,072	4,089	50.7	1,859	3,780	49.2

B8 - Dividends and appropriations

This note analyses the total dividends and other appropriations we paid during the year. The table below does not include the final dividend proposed after the year end because it is not accrued in these financial statements.

	2016 £m	2015 £m
Ordinary dividends declared and charged to equity in the year
Final 2015 - 14.05 pence per share, paid on 17 May 2016	570	-
Final 2014 - 12.25 pence per share, paid on 15 May 2015	-	362
Interim 2016 - 7.42 pence per share, paid on 17 November 2016	301	-
Interim 2015 - 6.75 pence per share, paid on 17 November 2015	-	273
	871	635
Preference dividends declared and charged to equity in the year	17	17
Coupon payments on direct capital instrument and tier 1 notes	85	72
	973	724

Subsequent to 31 December 2016, the directors proposed a final dividend for 2016 of 15.88 pence per ordinary share (2015: 14.05 pence), amounting to £645 million (2015: £570 million) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 17 May 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 20.00% (2015: 20.25%).

Page 62

B9 - Insurance liabilities

This note analyses the Group insurance contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used.

(a) Carrying amount

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

			2016			Restated¹ 2015
	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	56,760	-	56,760	50,558	-	50,558
Unit-linked non-participating	16,026	-	16,026	14,768	-	14,768
Other non-participating	64,432	-	64,432	60,022	-	60,022
	137,218	-	137,218	125,348	-	125,348
Outstanding claims provisions	1,925	8,749	10,674	1,702	7,063	8,765
Provision for claims incurred but not reported	-	2,960	2,960	-	2,383	2,383
	1,925	11,709	13,634	1,702	9,446	11,148
Provision for unearned premiums	-	4,766	4,766	-	4,048	4,048
Provision arising from liability adequacy tests²	-	13	13	-	12	12
Total	139,143	16,488	155,631	127,050	13,506	140,556
Less: Amounts classified as held for sale	(4,448)	-	(4,448)	-	-	-
	134,695	16,488	151,183	127,050	13,506	140,556

1 Restated following a reclassification from participating to other non-participating long-term business provisions in the UK of £3,317 million.

2 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 on 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.

2016	Gross £m	Reinsurance¹ £m	Net £m
Long-term business
Change in long-term business provisions (note B9b(iv))	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 B9c(iv) and B11c(ii))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.

2015	Gross £m	Reinsurance¹ £m	Net £m
Long-term business
Change in long term business provisions (note B9b(iv))	(6,640)	252	(6,388)
Change in provision for outstanding claims	179	4	183
	(6,461)	256	(6,205)
General insurance and health
Change in insurance liabilities (note B9c(iv) and B11c(ii))	29	(504)	(475)
Less: Unwind of discount on GI reserves and other	(10)	9	(1)
	19	(495)	(476)
Total change in insurance liabilities	(6,442)	(239)	(6,681)

1 Reinsurance assets at 31 December 2015 for General insurance and health business include the impact of the £659 million reinsurance asset relating to an outwards reinsurance contract completed by the UK General Insurance business.

Page 63

B9 - Insurance liabilities continued

(b) Long-term business liabilities

(i) Business description

The Group underwrites long-term business in a number of countries as follows:

· In the UK mainly in:

- New With-Profits Sub-Fund (NWPSF) of Aviva Life & Pensions UK (UKLAP), where the with-profit policyholders are entitled to at least 90% of the distributed profits, with the shareholders receiving the balance. Any surplus or deficit emerging in NWPSF that is not distributed as bonus will be transferred from this sub-fund to the Reattributed Inherited Estate External Support Account (RIEESA) (see below).

- Old With-Profits Sub-Fund (OWPSF), With-Profits Sub-Fund (WPSF) and Provident Mutual Sub-Fund (PMSF) of UKLAP, where the with-profit policyholders are entitled to at least 90% of the distributed profits, with the shareholders receiving the balance.

- 'Non-profit' funds of Aviva Annuity UK, UKLAP, Friends Life Limited and Friends Life and Pensions Limited, where shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profit business written by WPSF and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the non-profit funds.

- The RIEESA of UKLAP, which is a non-profit fund where shareholders are entitled to 100% of the distributed profits, but these cannot be distributed until the 'lock-in' criteria set by the Reattribution Scheme have been met. The RIEESA is used to provide capital support to NWPSF, and has been used in the past to write non-participating business.

- The Friends Life Limited FP With-Profits Fund (FP WPF), which will formally be closed to new business during 2017 and where shareholders are entitled to 10% of the distributed profits, plus 60% of the surplus arising on pre-demutualisation non-profit and unitised business and non-investment sources of surplus on policies held by post-demutualisation policyholders. The Friends Provident demutualisation occurred in 2001.

- The Friends Life Limited With-Profits Fund (FPLAL WPF), which is closed to new business and where policyholders are entitled to 100% of the distributed profits.

- The Friends Life Limited FLC New With-Profits Fund (FLC New WPF), the Friends Life Limited FLC Old With-Profits Fund (FLC Old WPF), the Friends Life Limited WL With-Profits Fund (WL WPF) and Friends Life Limited FLAS With-Profits Fund (FLAS WPF) which are closed to new business and where policyholders are entitled to 90% of the distributed profits aside from certain policies in the FLC New WPF and the FLC Old WPF with guaranteed bonus rates, and certain policies in the WL WPF which are reinsured into the fund where the shareholders do not receive one-ninth of the bonus.

- The Friends Life and Pensions Limited SGF With-Profits Fund (SGF WPF), (which was deemed a with-profit fund on 1 January 2016), is closed to new business and where policyholders are entitled to 100% of the distributed profits.

· In France, the majority of policyholders' benefits are determined by investment performance, subject to certain guarantees, and shareholders' profits are derived largely from management fees. In addition, a substantial number of policies participate in investment returns, with the balance being attributable to shareholders.

· In other operations in Europe and Asia, a range of long-term insurance and savings products are written.

(ii) Group practice

The long-term business provision is calculated separately for each of the Group's life operations. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, modified where necessary to reflect the requirements of the Companies Act 2006.

Material judgement is required in calculating the provisions and is exercised particularly through the choice of assumptions where discretion is permitted. In turn, the assumptions used depend on the circumstances prevailing in each of the life operations. Provisions are most sensitive to assumptions regarding discount rates and mortality/morbidity rates. Where discount rate assumptions are based on current market yields on fixed interest securities, allowance is made for default risk implicit in the yields on the underlying assets.

Bonuses paid during the year are reflected in claims paid, whereas those allocated as part of the bonus declaration are included in the movements in the long-term business provision.

For UK with-profit life funds falling within the scope of FRS 27, which was grandfathered from UK regulatory requirements under IFRS 4 prior to the adoption of Solvency II, an amount may be recognised for the present value of future profits (PVFP) on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value. For our UK with-profit funds, (excluding Friends Life), no adjustment for this value is made to the participating insurance and investment contract liabilities or the unallocated divisible surplus. For Friends Life with-profits funds the non-participating liabilities are measured on a realistic basis with implicit recognition of the present value of future profits and hence no additional explicit adjustment is required for this value.

(iii) Methodology and assumptions

There are two main methods of actuarial valuation of liabilities arising under long-term insurance contracts - the net premium method and the gross premium method - both of which involve the discounting of projected premiums and claims.

Under the net premium method, the premium taken into account in calculating the provision is determined actuarially, based on the valuation assumptions regarding discount rates, mortality and disability. The difference between this premium and the actual premium payable provides a margin for expenses. This method does not allow for voluntary early termination of the contract by the policyholder, and so no assumption is required for persistency.

The gross premium method uses the amount of contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future expenses. These assumptions can vary by contract type and reflect current and expected future experience.

Page 64

B9 - Insurance liabilities continued

(a) UK

With-profit business

For reporting periods up to and including 31 December 2015, the valuation of with-profit business was stated at the amount of the Solvency I Pillar 1, realistic value of liabilities adjusted to exclude the shareholders' share of projected future bonuses, in accordance with FRS 27 (grandfathered under IFRS 4). The key elements of the realistic liabilities are the with-profit benefit reserve (WPBR) and the present value of the expected cost of any payments in excess of the WPBR (referred to as the cost of future policy-related liabilities). The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities, which includes the value of any 'planned enhancements' to benefits agreed by the company.

The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract. For a small proportion of business, a prospective valuation approach is used, including allowance for anticipated future regular and final bonuses.

The cost of future policy-related liabilities include:

· Maturity Guarantees;

· Guarantees on surrender, including no-MVR (Market Value Reduction) Guarantees and Guarantees linked to inflation;

· Guaranteed Annuity Options;

· GMP (Guaranteed Minimum Pension) underpin on Section 32 transfers; and

· Expected payments under Mortgage Endowment Promise.

The cost of future policy-related liabilities is determined using a market-consistent approach and, in the main, this is based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market-related assumptions (for example, persistency, mortality and expenses) are assessed on a best estimate basis with reference to Company and wider industry experience, adjusted to take into account future trends.

On 1 January 2016 the Solvency I Pillar 1 regulatory regime was replaced with Solvency II, under which realistic liabilities were replaced with Best Estimate Liabilities (BEL). Key differences between the realistic liabilities and the Solvency II BEL are that BEL excludes the shareholder's share of future bonuses, excludes certain planned and approved enhancements to benefits (part of Solvency II surplus funds) and uses a higher yield (EIOPA specified) for future investment returns and discounting. Adjusting the yield used in the calculation of the BEL by removing the volatility and credit risk adjustments, including planned enhancements that are part of Solvency II surplus funds and making other less significant adjustments, results in a valuation in accordance with FRS 27. Consequently, for periods subsequent to 31 December 2015, the with-profit business is valued based on an adjusted Solvency II BEL assessment, which represents a change in estimate of the liabilities.

The principal assumptions underlying the cost of future policy-related liabilities are as follows:

Future investment return

A 'risk-free' rate equal to the spot yield on UK swaps is used for the valuation of with-profit business. The rates vary according to the outstanding term of the policy, with a typical rate as at 31 December 2016 of 1.25% (2015: 2.04%) for a policy with ten years outstanding.

Volatility of investment return

Volatility assumptions are set with reference to implied volatility data on traded market instruments, where available, or on a best estimate basis where not.

Volatility	2016	2015
Equity returns	23.9%	22.6%
Property returns	16.4%	16.0%
Fixed interest yields	51.3%	30.6%

The equity volatility used depends on term, money-ness and region. The figure shown is for a sample UK equity, at the money, with a ten-year term. Fixed interest yield volatility is also dependent on term and money-ness. The figure shown is for a ten-year swap option with ten-year term, currently at the money.

Future regular bonuses

Annual bonus assumptions for 2017 have been set consistently with the year-end 2016 declaration. Future annual bonus rates reflect the principles and practices of each fund. In particular, the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent with past practice.

Mortality

Mortality assumptions for with-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below:

Mortality table used	2016	2015
Assurances, pure endowments and deferred annuities before vesting	Nil or Axx00 adjusted	Nil or Axx00 adjusted

Pensions business after vesting and pensions annuities in payment	PCMA00/PCFA00 adjusted plus allowance for future mortality improvement	PCMA00/PCFA00 adjusted plus allowance for future mortality improvement

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B9 - Insurance liabilities continued

Allowance for future mortality improvement is in line with the rates shown for non-profit business below.

Non-profit business

The valuation of non-profit business is based on grandfathered regulatory requirements under IFRS 4 prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. Conventional non-profit contracts, including those written in the with-profit funds, are valued using gross premium methods which discount projected future cash flows. The cash flows are calculated using the amount of contractual premiums payable, together with explicit assumptions for investment returns, inflation, discount rates, mortality, morbidity, persistency and future expenses. These assumptions vary by contract type and reflect current and expected future experience with an allowance for prudence. For Friends Life with-profits funds the non-participating liabilities are measured on a realistic basis with implicit recognition of the present value of future profits.

For unit-linked and some unitised with-profit business, the provisions are valued by adding a prospective non-unit reserve to the bid value of units. The prospective non-unit reserve is calculated by projecting the future non-unit cash flows using prudent assumptions and on the assumption that future premiums cease, unless it is more onerous to assume that they continue. Where appropriate, allowance for persistency is based on actual experience.

Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term interest rates as measured by gilt yields. An explicit allowance for risk is included by restricting the yields for equities and properties with reference to a margin over long-term interest rates or by making an explicit deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. A further margin for risk is then deducted for all asset classes.

The provisions held in respect of guaranteed annuity options are a prudent assessment of the additional liability incurred under the option on a basis and method consistent with that used to value basic policy liabilities, and includes a prudent assessment of the proportion of policyholders who will choose to exercise the option.

Valuation discount rates for business in the non-profit funds are as follows:

Valuation discount rates	2016	2015
Assurances
Life conventional non-profit	0.5% to 2.6%	1.3% to 3.3%
Pensions conventional non-profit	0.8% to 2.1%	1.4% to 2.7%
Annuities
Conventional immediate and deferred annuities	0.6% to 2.8%	0.9% to 3.6%
Non-unit reserves on Unit-linked business
Life	0.7% to 1.3%	1.5% to 2.8%
Pensions	0.7% to 1.6%	1.5% to 3.5%
Income Protection
Active lives	1.0% to 2.6%	1.5% to 3.3%
Claims in payment (level and index linked)	(0.2)% to 1.6%	0.0% to 2.3%

The above valuation discount rates are after reduction for credit risk. For conventional immediate annuity business the allowance for credit risk comprises long-term assumptions for defaults, which vary by asset category and rating. The credit risk allowance made for corporate bonds (including non Private Finance Initiative infrastructure assets) and mortgages (including healthcare and commercial and infrastructure mortgages, but excluding equity release), held by Aviva Annuity UK Limited equated to 46 bps and 50 bps respectively at 31 December 2016 (2015: 58 bps and 59 bps respectively) and for Friends Life Limited equated to 37 bps and 42 bps respectively at 31 December 2016 (2015: 56 bps for the corporate bonds, no mortgages at 2015). For corporate bonds, the allowance represented approximately 31% of the average credit spread for the portfolio for both Aviva Annuity UK Limited and Friends Life Limited (2015: 32% and 40% respectively). The total valuation allowance held by Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including healthcare mortgages, was £1.3 billion (2015: £1.5 billion) over the remaining term of the portfolio while for Friends Life Limited it was £0.5 billion (2015: £0.7 billion). Total liabilities for the annuity business were £50 billion at 31 December 2016 (2015: £47 billion).

Mortality assumptions for non-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below:

Mortality tables used	2016	2015
Assurances
Non-profit	AM00/AF00 or TM00/TF00 adjusted for smoker status and age/sex specific factors	AM00/AF00 or TM00/TF00 adjusted for smoker status and age/sex specific factors

Pure endowments and deferred annuities before vesting	AM00/AF00 adjusted	AM00/AF00 adjusted
Annuities in payment
Pensions business and general annuity business	PCMA00/PCFA00 adjusted plus allowance for future mortality improvement	PCMA00/PCFA00 adjusted plus allowance for future mortality improvement

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For the largest portfolio of pensions annuity business in Aviva Annuity UK Limited, the underlying mortality assumptions for Males are 98.5% of PCMA00 (2015: 101.5% of PCMA00) with base year 2000; for Females the underlying mortality assumptions are 91.5% of PCFA00 (2015: 96.5% of PCFA00) with base year 2000. For the largest portfolio of pensions annuity business in Friends Life Limited, the underlying mortality assumptions for Males are 100.0% of PCMA00 (2015: 102.5% of PCMA00) with base year 2000; for Females the underlying mortality assumptions are 100.0% of PCFA00 (2015: 97.5% of PCFA00) with base year 2000. For all the main portfolios of annuities, improvements are based on CMI_2015 (2015: CMI_2013) with a long-term improvement rate of 1.75% (2015: 1.75%) for males and 1.5% (2015: 1.5%) for females, both with an addition of 0.5% (2015: 0.5%) to all future annual improvement adjustments. For pension annuity business in Aviva Annuity UK limited, year-specific adjustments are made to allow for potential selection effects due to the development of the Enhanced Annuity market and covering possible selection effects from pension freedom reforms.

(b) France

The majority of reserves arise from single premium savings products and are based on the accumulated fund values, adjusted to maintain consistency with the value of the assets backing the policyholder liabilities. For traditional business, the net premium method is used for prospective valuations, in accordance with local regulation, where the valuation assumptions depend on the date of issue of the contract. The valuation discount rate also depends on the original duration of the contract and mortality rates are based on industry tables.

	Valuation discount rates	Mortality tables used
	2016 and 2015	2016 and 2015
		TD73-77, TD88-90,TH00-02
		TF00-02, H_AVDBS, F_AVDBS
Life assurances	0% to 4.5%	H_SSDBS, F_SSDBS
Annuities	0% to 4.5%	TGF05/TGH05

In all other countries, local generally accepted interest rates and published standard mortality tables are used for different categories of business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people.

(iv) Movements

The following movements have occurred in the gross long-term business provisions during the year:

	2016 £m	2015 £m
Carrying amount at 1 January	125,348	98,110
Provisions in respect of new business	5,224	4,059
Expected change in existing business provisions	(8,235)	(8,180)
Variance between actual and expected experience	4,752	428
Impact of operating assumption changes	(536)	(735)
Impact of economic assumption changes	5,930	(2,242)
Other movements	29	30
Change in liability recognised as an expense (note B9a(ii))	7,164	(6,640)
Effect of portfolio transfers, acquisitions and disposals¹	-	35,099
Foreign exchange rate movements	4,761	(1,221)
Other movements	(55)	-
Carrying amount at 31 December	137,218	125,348

1 The movement during 2015 primarily relates to Friends Life, as at the acquisition date.

For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.

The £4.8 billion impact of variance between actual and expected experience in 2016 is mainly due to higher than expected equity returns in the UK increasing with-profit and unit-linked liabilities.

The impact of operating assumption changes of £(0.5) billion in 2016 reduces the carrying value of insurance liabilities and relates mainly to mortality releases in the UK business (with the impact on profit partially offset by a corresponding reduction in reinsurance assets).

The £5.9 billion impact of economic assumption changes in 2016 reflects a decrease in valuation interest rates in response to decreased interest rates and narrowing spreads, primarily in respect of immediate annuity and participating insurance contracts in the UK.

For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note B12, together with the impact of movements in related non-financial assets.

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(i) Provisions for outstanding claims

Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the statement of financial position date. The reserves for general insurance and health business are based on information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.

Provisions for outstanding claims are established to cover the outstanding expected ultimate liability for losses and loss adjustment expenses (LAE) in respect of all claims that have already occurred. The provisions established cover reported claims and associated LAE, as well as claims incurred but not yet reported and associated LAE.

The Group only establishes loss reserves for losses that have already occurred. The Group therefore does not establish catastrophe equalisation reserves that defer a share of income in respect of certain lines of business from years in which a catastrophe does not occur to future periods in which catastrophes may occur. When calculating reserves, the Group takes into account estimated future recoveries from salvage and subrogation, and a separate asset is recorded for expected future recoveries from reinsurers after considering their collectability.

The table below shows the split of total general insurance and health outstanding claim provisions and IBNR provisions, gross of reinsurance, by major line of business.

	As at 31 December 2016			As at 31 December 2015
	Outstanding claim provisions £m	IBNR provisions £m	Total claim provisions £m	Outstanding claim provisions £m	IBNR provisions £m	Total claim provisions £m
Motor	4,690	1,623	6,313	3,509	1,055	4,564
Property	1,711	57	1,768	1,339	158	1,497
Liability	1,907	1,257	3,164	1,776	1,106	2,882
Creditor	23	20	43	23	18	41
Other	418	3	421	416	46	462
	8,749	2,960	11,709	7,063	2,383	9,446

(ii) Discounting

Outstanding claims provisions are based on undiscounted estimates of future claim payments, except for the following classes of business for which discounted provisions are held:

		Rate		Mean term of liabilities
Class	2016	2015	2016	2015
Reinsured London Market business	2.0%	2.0%	9 years	9 years
Latent claims	0.00% to 2.31%	0.00% to 2.30%	6 to 15 years	6 to 15 years
Structured settlements	0.15% to 2.98%	2.1%	13 to 39 years	38 years

The gross outstanding claims provision before discounting was £12,196 million (2015: £9,911 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.

The discount rate that has been applied to latent claims reserves and reinsured London Market business is based on the relevant swap curve in the relevant currency having regard to the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between 6 and 15 years depending on the geographical region.

The discount rates applied to structured settlements have increased between 2015 and 2016 in order to allow for the illiquid nature of these liabilities. In 2016 the valuation of periodic payment orders (PPOs) or structured settlements also moved to a market consistent basis for inflation based on the price of index linked gilts rather than RPI. During 2016, the propensity for new bodily injury claims settled by PPO, which are reserved for on a discounted basis, has reduced.

Any change in discount rates between the start and the end of the accounting period is reflected outside of operating profit as an economic assumption change.

(iii) Assumptions

Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are set by skilled claims technicians and established case setting procedures. Claims technicians apply their experience and knowledge to the circumstances of individual claims. They take into account all available information and correspondence regarding the circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians set case estimates according to documented claims department policies and specialise in setting estimates for certain lines of business or types of claim. Claims above certain limits are referred to senior claims handlers for estimate authorisation.

No adjustments are made to the claims technicians' case estimates included in booked claim provisions, except for rare occasions when the estimated ultimate cost of individual large or unusual claims may be adjusted, subject to internal reserve committee approval, to allow for uncertainty regarding, for example, the outcome of a court case. The ultimate cost of outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. The main assumption underlying these techniques is that a company's past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where this is considered appropriate.

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Claim development is separately analysed for each geographic area, as well as by each line of business. Certain lines of business are also further analysed by claim type or type of coverage. In addition, large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development.

The assumptions used in most non-life actuarial projection techniques, including future rates of claims inflation or loss ratio assumptions, are implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in the future, for example, to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures in order to arrive at a point estimate for the ultimate cost of claims that represents the likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved. The range of possible outcomes does not, however, result in the quantification of a reserve range. The following explicit assumptions are made which could materially impact the level of booked net reserves:

(a) UK mesothelioma claims

The level of uncertainty associated with latent claims is considerable due to the relatively small number of claims and the long-tail nature of the liabilities. UK mesothelioma claims account for a large proportion of the Group's latent claims. The key assumptions underlying the estimation of these claims include claim numbers, the base average cost per claim, future inflation in the average cost of claims and legal fees.

The best estimate of the liabilities reflects the latest available market information and studies. Many different scenarios can be derived by flexing these key assumptions and applying different combinations of the different assumptions. An upper and lower scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate £25 million (2015: £30 million) greater than the best estimate, or £45 million (2015: £60 million) lower than the best estimate. These scenarios do not, however, constitute an upper or lower bound on these liabilities.

(b) Interest rates used to discount latent claim liabilities and structured settlements

The discount rates used in determining our latent claim liabilities and structured settlements are based on the relevant swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement of claims. The range of discount rates used is shown in section (ii) above and depends on the duration of the claim and the reporting date. The discount rates applied to structured settlements have been increased during 2016 in order to allow for the illiquid nature of these liabilities. At 31 December 2016, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £220 million (2015: £60 million), excluding the offsetting effect on asset values as assets are not hypothecated across classes of business. The impact has increased during 2016 due to an increase in reserves for bodily injury claims settled by periodic payment orders (PPOs) or structured settlements as a result of an increase in the estimated future inflation rate used to value these liabilities to be consistent with market expectations. The impact of a 1% fall in interest rates across all assets and liabilities of our general insurance and health businesses is shown in note B17.

The uncertainties involved in estimating loss reserves are allowed for in the reserving process and by the estimation of explicit reserve uncertainty distributions. The reserve estimation basis for non-life claims requires all non-life businesses to calculate booked claim provisions as the best estimate of the cost of future claim payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each business unit in accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties specific to each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy also seek to ensure that the allowance for risk and uncertainty is set consistently across both business units and reporting periods.

Changes to claims development patterns can materially impact the results of actuarial projection techniques. However, allowance for the inherent uncertainty in the assumptions underlying reserving projections is automatically allowed for in the explicit allowance for risk and uncertainty included when setting booked reserves.

Subsequent Event

Lump sum payments in settlement of bodily injury claims decided by the UK courts are calculated in accordance with the Ogden Tables and discount rate. The Ogden discount rate is set by the Lord Chancellor in accordance with the Damages Act 1996 and is applied when calculating the present value of future care costs and loss of earnings for claims settlement purposes.

On 27 February 2017 the Lord Chancellor announced a reduction in the discount rate used in the Ogden tables from 2.5% set in 2001 to minus 0.75%. The reduction in the Ogden discount rate will increase lump sum payments to UK bodily injury claimants. As a result claim reserves in the UK have been strengthened by £475 million to allow for the impact of the reduction in the current discount rate. The Lord Chancellor has also announced that the framework for setting the discount rate is under review and a public consultation will be launched before the end of April 2017. The timing of the conclusion of this review and its outcome and impact on future Ogden discount rates is unclear.

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(iv) Movements

The following changes have occurred in the general insurance and health claims provisions during the year:

	2016 £m	2015 £m
Carrying amount at 1 January	9,446	9,876
Impact of changes in assumptions	324	115
Claim losses and expenses incurred in the current year	6,703	5,889
Decrease in estimated claim losses and expenses incurred in prior periods	(7)	(463)
Incurred claims losses and expenses	7,020	5,541
Less:
Payments made on claims incurred in the current year	(3,505)	(3,153)
Payments made on claims incurred in prior periods	(2,893)	(2,650)
Recoveries on claim payments	234	281
Claims payments made in the period, net of recoveries	(6,164)	(5,522)
Unwind of discounting	11	10
Changes in claims reserve recognised as an expense (note B9a(ii))	867	29
Effect of portfolio transfers, acquisitions and disposals	430	(64)
Foreign exchange rate movements	966	(395)
Carrying amount at 31 December	11,709	9,446

The effect of changes in the main assumptions is given in note B12 and the economic assumption changes are explained in note A6.

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(d) Loss development tables

(i) Description of tables

The tables that follow present the development of claim payments and the estimated ultimate cost of claims for the accident years 2007 to 2016. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year. For example, with respect to the accident year 2007, by the end of 2016 £8,278 million had actually been paid in settlement of claims. In addition, as reflected in the lower section of the table, the original estimated ultimate cost of claims of £8,530 million was re-estimated to be £8,380 million at 31 December 2016.

The original estimates will be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity.

The Group aims to maintain reserves in respect of its general insurance and health business that protect against adverse future claims experience and development. The Group establishes reserves in respect of the current accident year (2016), where the development of claims is less mature, that allow for the greater uncertainty attaching to the ultimate cost of current accident year claims. As claims develop and the ultimate cost of claims become more certain, the absence of adverse claims experience will result in a release of reserves from earlier accident years, as shown in the loss development tables and movements table (c)(iv) above. Releases from prior accident year reserves are also due to an improvement in the estimated cost of claims.

Key elements of the release from prior accident year general insurance and health net provisions during 2016 were:

· £208 million strengthening from UK & Ireland due to the impact of the change in the Ogden discount rate in the UK partly offset by other favourable developments on personal motor and commercial liability claims.

· £154 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes in Ontario.

· £90 million release from Europe mainly due to favourable development in France and Italy.

There was also a £78 million reduction in net claim reserves relating to an outwards reinsurance contract completed by the UK General Insurance business.

Key elements of the release from prior accident year general insurance and health net provisions during 2015 were:

· £166 million release from UK & Ireland due to favourable development on personal and commercial motor, commercial liability and commercial property claims.

· £109 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes in Ontario.

· £52 million release from Europe mainly due to favourable development in France and Italy.

There was also a £659 million reduction in net claim reserves relating to an outwards reinsurance contract completed by the UK General Insurance business.

(ii) Gross figures

Before the effect of reinsurance, the loss development table is:

Accident year	All prior years £m	2007 £m	2008 £m	2009 £m	2010 £m	2011 £m	2012 £m	2013 £m	2014 £m	2015 £m	2016 £m	Total £m
Gross cumulative claim payments
At end of accident year		(4,393)	(4,915)	(3,780)	(3,502)	(3,420)	(3,055)	(3,068)	(3,102)	(2,991)	(3,534)
One year later		(6,676)	(7,350)	(5,464)	(5,466)	(4,765)	(4,373)	(4,476)	(4,295)	(4,285)
Two years later		(7,191)	(7,828)	(6,102)	(5,875)	(5,150)	(4,812)	(4,916)	(4,681)
Three years later		(7,513)	(8,304)	(6,393)	(6,163)	(5,457)	(5,118)	(5,221)
Four years later		(7,836)	(8,607)	(6,672)	(6,405)	(5,712)	(5,376)
Five years later		(8,050)	(8,781)	(6,836)	(6,564)	(5,864)
Six years later		(8,144)	(8,906)	(6,958)	(6,649)
Seven years later		(8,224)	(8,986)	(7,043)
Eight years later		(8,257)	(9,012)
Nine years later		(8,278)
Estimate of gross ultimate claims
At end of accident year		8,530	9,508	7,364	6,911	6,428	6,201	6,122	5,896	5,851	6,947
One year later		8,468	9,322	7,297	7,006	6,330	6,028	6,039	5,833	5,930
Two years later		8,430	9,277	7,281	6,950	6,315	6,002	6,029	5,865
Three years later		8,438	9,272	7,215	6,914	6,292	5,952	6,067
Four years later		8,409	9,235	7,204	6,912	6,262	6,002
Five years later		8,446	9,252	7,239	6,906	6,265
Six years later		8,381	9,213	7,217	6,926
Seven years later		8,381	9,207	7,256
Eight years later		8,378	9,202
Nine years later		8,380
Estimate of gross ultimate claims		8,380	9,202	7,256	6,926	6,265	6,002	6,067	5,865	5,930	6,947
Cumulative payments		(8,278)	(9,012)	(7,043)	(6,649)	(5,864)	(5,376)	(5,221)	(4,681)	(4,285)	(3,534)
	2,568	102	190	213	277	401	626	846	1,184	1,645	3,413	11,465
Effect of discounting	(400)	(12)	(16)	(27)	(28)	(2)	1	(3)	-	-	-	(487)
Present value	2,168	90	174	186	249	399	627	843	1,184	1,645	3,413	10,978
Cumulative effect of foreign exchange movements	-	13	(6)	(1)	(7)	(3)	5	22	64	176	-	263
Effect of acquisitions	73	17	19	31	40	39	33	46	61	68	41	468
Present value recognised in the statement of financial position	2,241	120	187	216	282	435	665	911	1,309	1,889	3,454	11,709

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(iii) Net of reinsurance

After the effect of reinsurance, the loss development table is:

Accident year	All prior years £m	2007 £m	2008 £m	2009 £m	2010 £m	2011 £m	2012 £m	2013 £m	2014 £m	2015 £m	2016 £m	Total £m
Net cumulative claim payments
At end of accident year		(4,317)	(4,808)	(3,650)	(3,386)	(3,300)	(2,925)	(2,905)	(2,972)	(2,867)	(3,309)
One year later		(6,542)	(7,165)	(5,286)	(5,242)	(4,578)	(4,166)	(4,240)	(4,079)	(4,061)
Two years later		(7,052)	(7,638)	(5,885)	(5,637)	(4,963)	(4,575)	(4,649)	(4,432)
Three years later		(7,356)	(8,094)	(6,177)	(5,905)	(5,263)	(4,870)	(4,918)
Four years later		(7,664)	(8,356)	(6,410)	(6,137)	(5,485)	(5,110)
Five years later		(7,852)	(8,515)	(6,568)	(6,278)	(5,626)
Six years later		(7,942)	(8,626)	(6,657)	(6,361)
Seven years later		(8,004)	(8,682)	(6,708)
Eight years later		(8,033)	(8,714)
Nine years later		(8,055)
Estimate of net ultimate claims
At end of accident year		8,363	9,262	7,115	6,650	6,202	5,941	5,838	5,613	5,548	6,489
One year later		8,302	9,104	7,067	6,751	6,103	5,765	5,745	5,575	5,635
Two years later		8,244	9,028	7,036	6,685	6,095	5,728	5,752	5,591
Three years later		8,249	9,007	6,978	6,644	6,077	5,683	5,733
Four years later		8,210	8,962	6,940	6,634	6,034	5,717
Five years later		8,221	8,949	6,977	6,614	6,005
Six years later		8,149	8,926	6,908	6,624
Seven years later		8,143	8,894	6,897
Eight years later		8,133	8,898
Nine years later		8,154
Estimate of net ultimate claims		8,154	8,898	6,897	6,624	6,005	5,717	5,733	5,591	5,635	6,489
Cumulative payments		(8,055)	(8,714)	(6,708)	(6,361)	(5,626)	(5,110)	(4,918)	(4,432)	(4,061)	(3,309)
	928	99	184	189	263	379	607	815	1,159	1,574	3,180	9,377
Effect of discounting	(191)	(12)	(14)	(15)	(24)	3	1	3	-	-	-	(249)
Present value	737	87	170	174	239	382	608	818	1,159	1,574	3,180	9,128
Cumulative effect of foreign exchange movements	-	13	(6)	(2)	(7)	(3)	5	22	62	170	-	254
Effect of acquisitions	61	17	20	31	40	39	33	46	61	68	26	442
Present value recognised in the statement of financial position	798	117	184	203	272	418	646	886	1,282	1,812	3,206	9,824

In the loss development tables shown above, the cumulative claim payments and estimates of cumulative claims for each accident year are translated into sterling at the exchange rates that applied at the end of that accident year. The impact of using varying exchange rates is shown at the bottom of each table. Disposals are dealt with by treating all outstanding and IBNR claims of the disposed entity as 'paid' at the date of disposal.

The loss development tables above include information on asbestos and environmental pollution claims provisions from business written before 2007. The undiscounted claim provisions, net of reinsurance, in respect of this business at 31 December 2016 were £134 million (2015: £237 million). The movement in the year reflects a reduction of £78 million due to the reinsurance contract completed by the UK General Insurance business covering a proportion of these liabilities, favourable claims development of £34 million, claim payments net of reinsurance recoveries and foreign exchange rate movements.

(e) Provision for unearned premiums

Movements

The following changes have occurred in the provision for unearned premiums (UPR) during the year:

	2016 £m	2015 £m
Carrying amount at 1 January	4,048	4,107
Premiums written during the year	9,694	8,738
Less: Premiums earned during the year	(9,503)	(8,613)
Changes in UPR recognised as an (income)/expense	191	125
Gross portfolio transfers and acquisitions¹	124	-
Foreign exchange rate movements	403	(184)
Carrying amount at 31 December	4,766	4,048

1 Relates to the acquisition of Royal Bank of Canada General Insurance Company.

Page 72

B10 - Liability for investment contracts

This note analyses our investment contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used.

(a) Carrying amount

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

	2016 £m	Restated¹ 2015 £m
Long-term business
Participating contracts	89,739	78,048
Non-participating contracts at fair value	114,531	103,034
Total	204,270	181,082
Less: Amounts classified as held for sale	(7,175)	-
	197,095	181,082

1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. See note B2 for further details.

(b) Long-term business investment liabilities

Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer, and are therefore treated as financial instruments under IFRS.

Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according to the methodology and Group practice for long-term business liabilities as described in note B9. They are not measured at fair value as there is currently no agreed definition of fair valuation for discretionary participation features under IFRS. In the absence of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB has deferred consideration of participating contracts to Phase II of its insurance contracts project. This is expected to be addressed in the forthcoming insurance contract standard (i.e. IFRS 17).

For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus.

Investment contracts that do not contain a discretionary participation feature are referred to as non-participating contracts and the liability is measured at either fair value or amortised cost. We currently have no non-participating investment contracts measured at amortised cost.

Of the non-participating investment contracts measured at fair value, £113,307 million in 2016 are unit-linked in structure and the fair value liability is equal to the current unit fund value, including any unfunded units, plus if required, additional non-unit reserves based on a discounted cash flow analysis. These contracts are generally classified as 'Level 1' in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied by the number of units in issue, and any non-unit reserve is insignificant.

For unit-linked business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term.

For non-participating investment contracts acquired in a business combination, an acquired value of in-force business asset is recognised in respect of the fair value of the investment management services component of the contracts, which is amortised on a systematic basis over the useful lifetime of the related contracts. The amount of the acquired value of in-force business asset is shown in note B21, which relates primarily to the acquisition of Friends Life in 2015.

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.

The following movements have occurred in the gross provisions for investment contracts in the year:

(i) Participating investment contracts

	2016 £m	2015 £m
Carrying amount at 1 January	78,048	67,232
Provisions in respect of new business	4,584	3,710
Expected change in existing business provisions	(4,893)	(4,219)
Variance between actual and expected experience	3,084	1,590
Impact of operating assumption changes	36	43
Impact of economic assumption changes	450	97
Other movements	(347)	49
Change in liability recognised as an expense¹	2,914	1,270
Effect of portfolio transfers, acquisitions and disposals²	-	12,245
Foreign exchange rate movements	8,721	(2,699)
Other movements	56	-
Carrying amount at 31 December	89,739	78,048

1 Total interest expense for participating investment contracts recognised in profit or loss is £3,111 million (2015: £1,931 million).

2 The movement during 2015 relates to the acquisition of Friends Life.

Page 73

B10 - Liability for investment contracts continued

For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.

The variance between actual and expected experience in 2016 of £3.1 billion is primarily driven by favourable equity returns in the UK.

The impact of assumption changes in the analysis shows the resulting movement in the carrying value of participating investment contract liabilities. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes do impact profit, these are included in the effect of changes in assumptions and estimates during the year shown in note B12, together with the impact of movements in related non-financial assets.

(ii) Non-participating investment contracts

	2016 £m	Restated¹ 2015 £m
Carrying amount at 1 January	103,034	49,922
Provisions in respect of new business	3,222	2,644
Expected change in existing business provisions	(3,481)	(2,726)
Variance between actual and expected experience	11,105	(2,906)
Impact of operating assumption changes	17	32
Impact of economic assumption changes	2	3
Other movements	334	38
Change in liability	11,199	(2,915)
Effect of portfolio transfers, acquisitions and disposals²	(757)	56,401
Foreign exchange rate movements	1,065	(374)
Other movements	(10)	-
Carrying amount at 31 December	114,531	103,034

1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. See note B2 for further details.

2 The movement during 2015 primarily relates to the acquisition of Friends Life. The movement during 2016 relates to the disposal of a closed book of offshore bonds business.

For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience in 2016 of £11.1 billion is primarily driven by the impact of positive equity returns in the UK.

The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of non-participating investment contract liabilities. The impacts of assumption changes on profit are included in the effect of changes in assumptions and estimates during the year shown in note B12, which combines participating and non-participating investment contracts together with the impact of movements in related non-financial assets.

Page 74

B11 - Reinsurance assets

This note details the reinsurance recoverables on our insurance and investment contract liabilities.

(a) Carrying amounts

The reinsurance assets at 31 December comprised:

	2016 £m	2015 £m
Long-term business
Insurance contracts	6,186	5,018
Participating investment contracts	2	11
Non-participating investment contracts^1,2	18,366	13,967
	24,554	18,996
Outstanding claims provisions	65	38
	24,619	19,034
General insurance and health
Outstanding claims provisions³	1,090	988
Provisions for claims incurred but not reported³	795	607
	1,885	1,595
Provisions for unearned premiums	250	289
	2,135	1,884
	26,754	20,918
Less: Amounts classified as held for sale	(411)	-
Total	26,343	20,918

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.

2 Reinsurance assets in 2016 include the reclassification of £1,061 million of UK Life investments in certain life insurance funds from unit trusts and other investment vehicles (financial instruments) to reinsurance assets.

3 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. Reinsurance assets at 31 December 2015 for General insurance and health business include the impact of the £659 million reinsurance asset relating to an outwards reinsurance contract completed by the UK General Insurance business.

Of the above total, £22,919 million (2015: £16,341 million) is expected to be recovered more than one year after the statement of financial position date.

(b) Assumptions

The assumptions, including discount rates, used for reinsurance contracts follow those used for insurance contracts. Reinsurance assets are valued net of an allowance for their recoverability.

Page 75

B11 - Reinsurance assets continued

The following movements have occurred in the reinsurance assets during the year:

(i) In respect of long-term business provisions

	2016 £m	2015 £m
Carrying amount at 1 January	18,996	6,568
Assets in respect of new business	941	664
Expected change in existing business assets	300	197
Variance between actual and expected experience	3,149	(1,007)
Impact of operating assumption changes	(182)	(351)
Impact of economic assumption changes	171	(177)
Other movements¹	1,003	636
Change in assets	5,382	(38)
Effect of portfolio transfers, acquisitions and disposals²	8	12,504
Foreign exchange rate movements	168	(38)
Carrying amount at 31 December	24,554	18,996

1 The other movements in 2015 include the reclassification of the UK Life staff pension scheme investments in Blackrock and Schroder life insurance funds from investments to reinsurance assets. The movement during 2016 includes the reclassification of UK Life investments in certain life insurance funds from unit trusts and other investment vehicles (financial instruments) to reinsurance assets.

2 The movement during 2015 relates to Friends Life, as at the acquisition date. The movement during 2016 relates to the recognition of a reinsurance asset following disposal of a closed book of offshore bonds business.

The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets and mainly relates to business in the UK, with corresponding movements in gross insurance contract liabilities. For participating businesses, a movement in reinsurance assets is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes do impact profit, these are included in the effect of changes in assumptions and estimates during the year shown in note B12, together with the impact of movements in related liabilities and other non-financial assets.

(ii) In respect of general insurance and health outstanding claims provisions and IBNR

	2016 £m	2015 £m
Carrying amount at 1 January	1,595	1,097
Impact of changes in assumptions	80	14
Reinsurers' share of claim losses and expenses
Incurred in current year	433	301
Incurred in prior years¹	109	527
Reinsurers' share of incurred claim losses and expenses	542	828
Less:
Reinsurance recoveries received on claims
Incurred in current year	(195)	(121)
Incurred in prior years	(214)	(225)
Reinsurance recoveries received in the year	(409)	(346)
Unwind of discounting	9	8
Change in reinsurance asset recognised as income (note B9a(ii))	222	504
Effect of portfolio transfers, acquisitions and disposals	(25)	(4)
Foreign exchange rate movements	97	(2)
Other movements	(4)	-
Carrying amount at 31 December	1,885	1,595

1 The change in reinsurance assets for 2016 includes the impact of the £78 million reinsurance asset relating to an outwards reinsurance contract completed by the UK General Insurance business. The change in reinsurance assets for 2015 includes the impact of the £659 million reinsurance asset relating to an outwards reinsurance contract completed by the UK General Insurance business

(iii) Reinsurers' share of the provision for UPR

	2016 £m	2015 £m
Carrying amount at 1 January	289	250
Premiums ceded to reinsurers in the year¹	668	1360
Less: Reinsurers' share of premiums earned during the year¹	(687)	(1,346)
Changes in reinsurance asset recognised as income	(19)	14
Reinsurers' share of portfolio transfers and acquisitions	(38)	33
Foreign exchange rate movements	18	(8)
Carrying amount at 31 December	250	289

1 For 2016 includes £107 million (2015: £712 million) of ceded premiums relating to an outwards reinsurance contract completed by the UK General Insurance business.

Page 76

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

Certain estimates and assumptions used in determining our liabilities for insurance and investment contract business were changed from 2015 to 2016, affecting the profit recognised for the year with an equivalent effect on liabilities. This note analyses the effect of the changes. This note 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 2016 £m	Effect on profit 2015 £m
Assumptions
Long-term insurance business
Interest rates	(4,490)	2,053
Expenses	48	248
Persistency rates	(80)	(2)
Mortality for assurance contracts	(11)	1
Mortality for annuity contracts	294	17
Tax and other assumptions	97	48
Investment contracts
Expenses	-	(4)
General insurance and health business
Change in discount rate assumptions	(242)	(100)
Change in expense ratio and other assumptions	-	1
Total	(4,384)	2262

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 decreasing risk-free rates and narrowing credit spreads, 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.

In the UK, expense reserves have reduced and persistency reserves have increased following a review of recent experience. There has been a release of annuitant mortality reserves in the UK following a review of recent experience (including the exposure to anti-selection risk) and the adoption of the CMI_2015 mortality improvement assumptions, partially offset by a change in base mortality assumptions in response to revisions in the calculation of mortality exposure.

Tax and other assumptions include the profit arising from a change in estimate related to the recoverability testing of the deferred acquisition cost assets (DAC) in the UK. The allowance for risk for non-participating investment contracts and the level of prudence for insurance contracts has been re-assessed, resulting in amortisation or impairment of DAC in prior reporting periods being reversed (subject to the original amortisation profile).

The adverse change in discount rate assumptions on general insurance and health business of £242 million arises as a result of a decrease in the real interest rates used to discount claim reserves for periodic payment orders and latent claims. Market interest rates used to discount periodic payment orders and latent claims have reduced and the estimated future inflation rate used to value periodic payment orders has been increased to be consistent with market expectations. This has, in part, been 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.

Page 77

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 year.

	2016 £m	Restated¹ 2015 £m
Carrying amount at 1 January	8,811	9,467
Change in participating fund assets	4,977	(1,625)
Change in participating fund liabilities	(4,596)	641
Change in liability recognised as an expense	381	(984)
Effect of portfolio transfers, acquisition and disposals²	-	724
Foreign exchange rate movements	1,016	(396)
Carrying amount at 31 December	10,208	8,811
Less: Amounts classified as held for sale	(859)	-
	9,349	8,811

1 A review of the 2015 movement in unallocated divisible surplus identified inconsistencies in the presentational approach taken for each participating fund across the Group. As a result, the 2015 analysis has been restated to present the movement in participating fund assets and liabilities consistently on a gross basis for all funds. The 2015 'Change in participating fund assets' has decreased by £690 million, 'Change in participating fund liabilities' increased by £677 million and the 'Other movements' of £13 million have been allocated between the change in participating fund assets and liabilities lines. There is no impact on the carrying amount of unallocated divisible surplus at 1 January 2015 and 31 December 2015.

2 The movement during 2015 relates to the acquisition of Friends Life.

The amount of UDS has increased to £10.2 billion at 31 December 2016 (2015: £8.8 billion) including amounts classified as held for sale, and £9.3 billion excluding amounts classified as held for sale. The increase is predominantly due to 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 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 with a negative UDS of £16 million (2015: a negative UDS of £22 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.

B14 - Borrowings

Our borrowings are either core structural borrowings or operational borrowings. This note shows the carrying values and contractual maturity amounts of each type, and explains their main features and movements during the year.

(a) Analysis of total borrowings

Total borrowings comprise:

	2016 £m	2015 £m
Core structural borrowings, at amortised cost	8,577	6,912
Operational borrowings, at amortised cost	608	550
Operational borrowings, at fair value	1,110	1,308
	1,718	1,858
	10,295	8,770

(b) Movements during the year

Movements in borrowings during the year were:

			2016			2015
	Core Structural £m	Operational £m	Total £m	Core Structural £m	Operational £m	Total £m
New borrowings drawn down, excluding commercial paper, net of expenses	1,372	148	1,520	1,045	22	1,067
Repayment of borrowings, excluding commercial paper	(320)	(56)	(376)	(833)	(161)	(994)
Movement in commercial paper¹	42	-	42	(3)	-	(3)
Net cash inflow/(outflow)	1,094	92	1,186	209	(139)	70
Foreign exchange rate movements	574	33	607	(106)	(2)	(108)
Borrowings acquired/(loans repaid) for non-cash consideration	-	-	-	1,568	11	1,579
Fair value movements	-	(220)	(220)	-	37	37
Amortisation of discounts and other non-cash items	(34)	(16)	(50)	(27)	(17)	(44)
Movements in debt held by Group companies²	31	(29)	2	(42)	(100)	(142)
Movements in the year	1,665	(140)	1,525	1,602	(210)	1,392
Balance at 1 January	6,912	1,858	8,770	5,310	2,068	7,378
Balance at 31 December	8,577	1,718	10,295	6,912	1,858	8,770

1 Gross issuances of commercial paper were £2,006 million in 2016 (2015: £982 million), offset by repayments of £1,964 million (2015: £985 million).

2 Certain subsidiary companies have purchased issued subordinated notes and securitised loan notes as part of their investment portfolios. In the consolidated statement of financial position, borrowings are shown net of these holdings but movements in such holdings over the year are reflected in the tables above.

Page 78

B15 - Pension obligations

The Group operates a number of defined benefit and defined contribution pension schemes. The material defined benefit schemes are in the UK, Ireland, and Canada with the main UK scheme being the largest. The assets and liabilities of these defined benefit schemes as at 31 December 2016 are shown below.

				2016				2015
	UK £m	Ireland £m	Canada £m	Total £m	UK £m	Ireland £m	Canada £m	Total £m
Total fair value of scheme assets	18,803	610	281	19,694	15,445	484	232	16,161
Present value of defined benefit obligation	(16,131)	(848)	(368)	(17,347)	(13,344)	(673)	(307)	(14,324)
Net IAS 19 surpluses/(deficits) in the schemes	2,672	(238)	(87)	2,347	2,101	(189)	(75)	1,837

Surpluses included in other assets	3,190	-	-	3,190	2,523	-	-	2,523
Deficits included in provisions	(518)	(238)	(87)	(843)	(422)	(189)	(75)	(686)
Net IAS 19 surpluses/(deficits) in the schemes	2,672	(238)	(87)	2,347	2,101	(189)	(75)	1,837

Page 79

B15 - Pension obligations continued

Movements in the scheme deficits and surpluses

Movements in the pension schemes' surpluses and deficits comprise:

	Fair Value of Scheme Assets	Present Value of defined benefit obligation	IAS 19 Pensions net surplus/ (deficits)
2016	£m	£m	£m
Net IAS 19 surplus in the schemes at 1 January	16,161	(14,324)	1,837
Past service costs - amendments	-	(1)	(1)
Administrative expenses¹	-	(13)	(13)
Total pension cost charged to net operating expenses	-	(14)	(14)
Net interest credited/(charged) to investment income /(finance costs)²	590	(517)	73
Total recognised in income	590	(531)	59

Remeasurements:
Actual return on these assets	4,044	-	4,044
Less: Interest income on scheme assets	(590)	-	(590)
Return on scheme assets excluding amounts in interest income	3,454	-	3,454
Losses from change in financial assumptions	-	(3,944)	(3,944)
Gains from change in demographic assumptions	-	363	363
Experience gains	-	438	438
Total recognised in other comprehensive income	3,454	(3,143)	311

Employer contributions	190	-	190
Plan participant contributions	6	(6)	-
Benefits paid	(825)	825	-
Administrative expenses paid from scheme assets¹	(15)	13	(2)
Foreign exchange rate movements	133	(181)	(48)
Net IAS 19 surplus in the schemes at 31 December	19,694	(17,347)	2,347

1 Administrative expenses are expensed as incurred.

2 Net interest income of £102 million has been credited to investment income and net interest expense of £29 million has been charged to finance costs.

The increase in the surplus during the period is primarily due to remeasurements recognised in other comprehensive income which reflect increased asset values mainly driven by a reduction in interest rates in the UK partly offset by an increase in the defined benefit obligation following a decrease in the UK discount rate.

Page 80

B15 - Pension obligations continued

	Fair Value of Scheme Assets	Present Value of defined benefit obligation	IAS 19 Pensions net surplus/ (deficits)
2015	£m	£m	£m
Net IAS 19 surplus in the schemes at 1 January	15,474	(13,170)	2,304
Past service costs - amendments	-	1	1
Administrative expenses¹	-	(15)	(15)
Total pension cost charged to net operating expenses	-	(14)	(14)
Net interest credited/(charged) to investment income /(finance costs)²	584	(504)	80
Total recognised in income	584	(518)	66

Remeasurements:
Actual return on these assets	99	-	99
Less: Interest income on scheme assets	(584)	-	(584)
Return on scheme assets excluding amounts in interest income	(485)	-	(485)
Gains from change in financial assumptions	-	234	234
Gains from change in demographic assumptions	-	3	3
Experience gains	-	13	13
Total recognised in other comprehensive income	(485)	250	(235)

Acquisitions - gross surplus	1,701	(1,633)	68
Acquisitions - consolidation elimination for non-transferable Group insurance policy³	(631)	-	(631)
Acquisitions - net deficit	1,070	(1,633)	(563)
Employer contributions	240	-	240
Plan participant contributions	3	(3)	-
Benefits paid	(656)	656	-
Administrative expenses paid from scheme assets¹	(15)	15	-
Foreign exchange rate movements	(54)	79	25
Net IAS 19 surplus in the schemes at 31 December	16,161	(14,324)	1,837

1 Administrative expenses are expensed as incurred.

2 Net interest income of £105 million has been credited to investment income and net interest expense of £25 million has been charged to finance costs.

3 The gross surplus of £68 million on acquisition relates to the FPPS. As the FPPS assets include an insurance policy of £631 million at acquisition date, issued by a Group company that is not transferable under IAS 19, it is eliminated from the scheme assets.

Page 81

B16 - Related party transactions

This note gives details of the transactions between Group companies and related parties which comprise our joint ventures, associates and staff pension schemes.

The Group undertakes transactions with related parties in the normal course of business. Loans to related parties are made on normal arm's-length commercial terms.

Services provided to, and by related parties

				2016 £m				2015 £m
	Income earned in the year £m	Expenses incurred in the year £m	Payable at year end £m	Receivable at year end £m	Income earned in the year £m	Expenses incurred in the year £m	Payable at year end £m	Receivable at year end £m
Associates	4	(3)	-	-	9	(7)	-	-
Joint ventures	46	-	-	2	27	-	-	192
Employee pension schemes	16	-	-	5	13	-	-	3
	66	(3)	-	7	49	(7)	-	195

Transactions with joint ventures in the UK relate to the property management undertakings. Our interest in these joint ventures comprises a mix of equity and loans, together with the provision of administration services and financial management to many of them. Our UK life insurance companies earned interest on loans advanced to these entities, which were fully repaid in 2016. Our fund management companies also charge fees to these joint ventures for administration services and for arranging external finance.

Key management personnel of the Company may from time to time purchase insurance, savings, asset management or annuity products marketed by group companies on equivalent terms to those available to all employees of the Group. In 2016 and 2015, other transactions with key management personnel were not deemed to be significant either by size or in the context of their individual financial positions.

Our UK fund management companies manage most of the assets held by the Group's main UK staff pension scheme, for which they charge fees based on the level of funds under management. The main UK scheme holds investments in Group-managed funds and insurance policies with other group companies. As at 31 December 2016, the Friends Provident Pension Scheme ('FPPS'), acquired in 2015 as part of the acquisition of the Friends Life business, held an insurance policy of £633 million (2015: £546 million) issued by a group company, which eliminates on consolidation.

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

B17 - Risk management

This note sets out the major risks our businesses and our shareholders face and describes the Group's approach to managing these. It also gives sensitivity analyses around the major economic and non-economic assumptions that can cause volatility in the Group's earnings and capital position.

(a) Risk management framework

The risk management framework (RMF) in Aviva forms an integral part of the management and Board processes and decision-making framework across the Group. The key elements of our risk management framework comprise 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 (IMMMR) risks, including the use of our risk models and stress and scenario testing.

For the purposes of risk identification and measurement, and aligned to Aviva's risk policies, risks are usually grouped by risk type: credit, market, liquidity, life insurance (including long-term health), general insurance (including short-term health), asset management and operational risk. Risks falling within these types may affect a number of metrics including those relating to balance sheet strength, liquidity and profit. They may also affect the performance of the products we deliver to our customers and the service to our customers and distributors, which can be categorised as risks to our brand and reputation or as conduct risk.

To promote a consistent and rigorous approach to risk management across all businesses we have a set of risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group's worldwide operations. The business chief executive officers and chief risk officers, on a semi-annual basis during 2016, sign-off compliance with these policies and standards, providing assurance to the relevant oversight committees that there is a consistent framework for managing our business and the associated risks.

A regular top-down key risk identification and assessment process is carried out by the risk function. This includes the consideration of emerging risks and is supported by deeper thematic reviews. This process is replicated at the business unit level. The risk assessment processes are used to generate risk reports which are shared with the relevant risk committees.

Risk models are an important tool in our measurement of risks and are used to support the monitoring and reporting of the risk profile and in the consideration of the risk management actions available. We carry out a range of stress (where one risk factor, such as equity returns, is assumed to vary) and scenario (where combinations of risk factors are assumed to vary) tests to evaluate their impact on the business and the management actions available to respond to the conditions envisaged. For those risk types managed through the holding of capital, being our principal risk types except for liquidity risk, we measure and monitor our risk profile on the basis of the Solvency II solvency capital requirement (SCR).

Roles and responsibilities for risk management in Aviva are based around the 'three lines of defence model' where ownership for risk is taken at all levels in the Group. Line management in the business is accountable for risk management, including the implementation of the risk management framework and embedding of the risk culture. The risk function is accountable for quantitative and qualitative oversight and challenge of the IMMMR process and for developing the risk management framework. Internal Audit provides an independent assessment of the risk framework and internal control processes.

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Board oversight of risk and risk management across the Group is maintained on a regular basis through its Risk Committee and Governance Committee. The Board has overall responsibility for determining risk appetite, which is an expression of the risk the business is willing to take. Risk appetites are set relative to capital and liquidity at Group and in the business units.

Economic capital risk appetites are also set for each risk type, calculated on the basis of the Solvency II solvency capital requirement (SCR). The Group's position against risk appetite is monitored and reported to the Board on a regular basis. Long-term sustainability depends upon the protection of franchise value and good customer relationships. As such, Aviva has a risk preference that we will not accept risks that materially impair the reputation of the Group and requires that customers are always treated with integrity. The oversight of risk and risk management at the Group level is supported by the Asset Liability Committee (ALCO), which focuses on business and financial risks, and the Operational Risk Committee (ORC) which focuses on operational and reputational risks. Similar committee structures with equivalent terms of reference exist in the business units.

The risk management framework of a small number of our joint ventures and strategic equity holdings differs from the Aviva framework outlined in this note. We work with these entities to understand how their risks are managed and to align them, where possible, with Aviva's framework.

Further information on the types and management of specific risk types is given in sections (b) to (j) below.

(b) Credit risk

Credit risk is the risk of financial loss as a result of the default or failure of third parties to meet their payment obligations to Aviva, or variations in market values as a result of changes in expectations related to these risks. Credit risk is an area where we can provide the returns required to satisfy policyholder liabilities and to generate returns for our shareholders. In general we prefer to take credit risk over equity and property risks, due to the better expected risk adjusted return, our credit risk analysis capability and the structural investment advantages conferred to insurers with long-dated, relatively illiquid liabilities.

Our approach to managing credit risk recognises that there is a risk of adverse financial impact resulting from fluctuations in credit quality of third parties including default, rating transition and credit spread movements. Our credit risks arise principally through exposures to debt security investments, structured asset investments, bank deposits, derivative counterparties, mortgage lending and reinsurance counterparties.

The Group manages its credit risk at business unit and Group level. All business units are required to implement credit risk management processes (including limits frameworks), operate specific risk management committees, and ensure detailed reporting and monitoring of their exposures against pre-established risk criteria. At Group level, we manage and monitor all exposures across our business units on a consolidated basis, and operate a Group limit framework that must be adhered to by all.

A detailed breakdown of the Group's current credit exposure by credit quality is shown below.

(i) Financial exposures by credit ratings

Financial assets are graded according to current external credit ratings issued. AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB ratings. Financial assets which fall outside this range are classified as sub-investment grade. The following table provides information regarding the aggregated credit risk exposure of the Group for financial assets with external credit ratings. 'Not rated' assets capture assets not rated by external ratings agencies.

As at 31 December 2016	AAA	AA	A	BBB	Below BBB	Not rated	Carrying value including held for sale £m	Less: Amounts classified as held for sale £m	Carrying value £m
Debt securities	11.4%	34.1%	19.0%	24.2%	5.9%	5.4%	183,274	(7,738)	175,536
Reinsurance assets	0.0%	92.0%	6.3%	0.1%	0.0%	1.6%	26,754	(411)	26,343
Other investments	0.0%	0.2%	0.5%	0.0%	0.0%	99.3%	58,255	(2,304)	55,951
Loans	0.0%	8.0%	0.0%	0.1%	0.0%	91.9%	24,859	(75)	24,784
Total							293,142	(10,528)	282,614

As at 31 December 2015	AAA	AA	A	BBB	Below BBB	Not rated	Carrying value including held for sale £m	Less: Amounts classified as held for sale £m	Carrying value £m
Debt securities	12.4%	37.4%	19.8%	21.2%	4.0%	5.2%	162,964	-	162,964
Reinsurance assets	0.1%	88.2%	8.0%	0.0%	0.0%	3.7%	20,918	-	20,918
Other investments	0.0%	0.1%	0.8%	0.0%	0.0%	99.1%	47,695	-	47,695
Loans	0.0%	8.2%	1.3%	0.1%	0.0%	90.4%	22,433	-	22,433
Total							254,010	-	254,010

The majority of non-rated debt securities within shareholder assets are held by our businesses in the UK. Of these securities most 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; these include £2.3 billion (2015: £2.2 billion) of debt securities held in our UK Life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade.

The Group continues to hold a series of macro credit hedges to reduce the overall credit risk exposure. The Group's maximum exposure to credit risk of financial assets, without taking collateral or these hedges into account, is represented by the carrying value of the financial instruments in the statement of financial position. These comprise debt securities, reinsurance assets, derivative assets, loans and receivables. The carrying values of these assets are disclosed in section D. Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements.

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To the extent that collateral held is greater than the amount receivable that it is securing, the table above shows only an amount equal to the latter. In the event of default, any over-collateralised security would be returned to the relevant counterparty.

(ii) Financial exposures to peripheral European countries and worldwide banks

Included in our debt securities and other financial assets are exposures to peripheral European countries and worldwide banks. We continued in 2016 to limit our direct shareholder and participating assets exposure to the governments (including local authorities and agencies) and banks of Greece, Portugal, Italy and Spain. Information on our exposures to peripheral European sovereigns and banks is provided in D3.3.5. We continue to monitor closely the situation in the eurozone and have had additional restrictions on further investment in place since late 2009.

(iii) Other investments

Other investments (including assets of operations classified as held for sale) include unit trusts and other investment vehicles; derivative financial instruments, representing positions to mitigate the impact of adverse market movements; and other assets includes deposits with credit institutions and minority holdings in property management undertakings.

The credit quality of the underlying debt securities within investment vehicles is managed by the safeguards built into the investment mandates for these funds which determine the funds' risk profiles. At the Group level, we also monitor the asset quality of unit trusts and other investment vehicles against Group set limits.

A proportion of the assets underlying these investments are represented by equities and so credit ratings are not generally applicable. Equity exposures are managed against agreed benchmarks that are set with reference to overall appetite for market risk.

(iv) Loans

The Group loan portfolio principally comprises:

· Policy loans which are generally collateralised by a lien or charge over the underlying policy;

· Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions. These loans are fully collateralised by other securities;

· Healthcare, infrastructure and PFI loans secured against healthcare, education, social housing and emergency services related premises; and

· Mortgage loans collateralised by property assets.

We use loan to value; interest and debt service cover; and diversity and quality of the tenant base metrics to internally monitor our exposures to mortgage loans. We use credit quality, based on dynamic market measures, and collateralisation rules to manage our stock lending activities. Policy loans are loans and advances made to policyholders, and are collateralised by the underlying policies.

The adverse impact on the valuation of the Group's UK mortgage portfolio in the first half of 2016 of revised expectations of future property prices and rental income in light of the UK referendum vote for the UK to leave the European Union has been broadly offset in the second half of the year as expectations for future property price and rental growth have increased.

(v) Credit concentration risk

The long-term and general insurance businesses are generally not individually exposed to significant concentrations of credit risk due to the regulations applicable in most markets and the Group credit policy and limits framework, which limit investments in individual assets and asset classes. Credit concentrations are monitored as part of the regular credit monitoring process and are reported to Group ALCO. With the exception of government bonds the largest aggregated counterparty exposure within shareholder assets (i.e. excluding potential exposures arising from reinsurance of unit-linked funds) is to the Swiss Reinsurance Company Limited (including subsidiaries), representing approximately 2.5% of the total shareholder assets.

(vi) Reinsurance credit exposures

The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall risk is within appetite. The Group Capital and Group Risk teams have an active monitoring role with escalation to the Chief Financial Officer (CFO), Chief Risk Officer (CRO), Group ALCO and the Board Risk Committee as appropriate.

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. At 31 December 2016, the reinsurance asset recoverable, including debtor balances, from BlackRock Life Ltd was £17,087 million (2015: £12,660 million), reflecting increased valuations of BlackRock funds and net customer inflows. While 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.

(vii) Securities finance

The Group has significant securities financing operations within the UK and smaller operations in some other businesses. The risks within this activity are mitigated by collateralisation and minimum counterparty credit quality requirements.

(viii) Derivative credit exposures

The Group is exposed to counterparty credit risk through derivative trades. This risk is generally mitigated through holding collateral for most trades. Residual exposures are captured within the Group's credit management framework.

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(ix) Unit-linked business

In unit-linked business the policyholder bears the direct market risk and credit risk on investment assets in the unit funds and the shareholders' exposure to credit risk is limited to the extent of the income arising from asset management charges based on the value of assets in the fund.

(x) Impairment of financial assets

The following table provides information regarding the carrying value of financial assets subject to impairment testing that have been impaired and the ageing of those assets that are past due but not impaired. The table excludes assets carried at fair value through profit or loss and held for sale.

		Financial assets that are past due but not impaired
At 31 December 2016	Neither past due nor impaired £m	0-3 months £m	3-6 months £m	6 months-1 year £m	Greater than 1 year £m	Financial assets that have been impaired £m	Carrying value £m
Debt securities	1,092	-	-	-	-	-	1,092
Reinsurance assets	8,388	-	-	-	-	-	8,388
Other investments	1	-	-	-	-	-	1
Loans	3,501	-	-	-	-	-	3,501
Receivables and other financial assets	7,717	61	7	8	1	-	7,794

		Financial assets that are past due but not impaired
At 31 December 2015	Neither past due nor impaired £m	0-3 months £m	3-6 months £m	6 months- 1 year £m	Greater than 1 year £m	Financial assets that have been impaired £m	Carrying value £m
Debt securities	918	-	-	-	-	-	918
Reinsurance assets	6,951	-	-	-	-	-	6,951
Other investments	-	-	-	-	-	-	-
Loans	3,353	-	-	-	-	1	3,354
Receivables and other financial assets	6,775	84	5	7	3	1	6,875

Excluded from the tables above are financial and reinsurance assets carried at fair value through profit or loss that are not subject to impairment testing, as follows: £182.2 billion of debt securities (2015: £162.0 billion), £58.3 billion of other investments (2015: £47.7 billion), £21.3 billion of loans (2015: £19.1 billion) and £18.4 billion of reinsurance assets (2015: £14.0 billion).

Where assets have been classed as 'past due and impaired', an analysis is made of the risk of default and a decision is made whether to seek to mitigate the risk. There were no material financial assets that would have been past due or impaired had the terms not been renegotiated.

Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations in interest rates, foreign currency exchange rates, equity and property prices. Market risk arises in business units due to fluctuations in both the value of liabilities and the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses and in the value of investment assets owned directly by the shareholders. We actively seek some market risks as part of our investment and product strategy. However, we have limited appetite for interest rate risk as we do not believe it is adequately rewarded.

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

In addition, where the Group's long-term savings businesses have written insurance and investment products where the majority of investment risks are borne by its policyholders, these risks are managed in line with local regulations and marketing literature, in order to satisfy the policyholders' risk and reward objectives. The Group writes unit-linked business in a number of its operations. The shareholders' exposure to market risk on this business is limited to the extent that income arising from asset management charges is based on the value of assets in the fund.

The most material types of market risk that the Group is exposed to are described below.

(i) Equity price risk

The Group is subject to direct equity price risk arising from changes in the market values of its equity securities portfolio. Our most material indirect equity price risk exposures are to policyholder unit-linked funds, which are exposed to a fall in the value of the fund thereby reducing the fees we earn on those funds, and participating contracts, which are exposed to a fall in the value of the funds thereby increasing our costs for policyholder guarantees. We also have some equity exposure in shareholder funds through equities held to match inflation-linked liabilities.

We continue to limit our direct equity exposure in line with our risk preferences. At a business unit level, investment limits and local investment regulations require that business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdings of unquoted equity securities.

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Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of risk models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. An equity hedging strategy remains in place to help control the Group's overall direct and indirect exposure to equities. At 31 December 2016 the Group continues to hold a series of macro equity hedges to reduce the overall shareholder equity risk exposure.

Sensitivity to changes in equity prices is given in section '(j) risk and capital management' below.

(ii) Property price risk

The Group is subject to property price risk directly due to holdings of investment properties in a variety of locations worldwide and indirectly through investments in mortgages and mortgage backed securities. Investment in property is managed at business unit level, and is subject to local regulations on investments, liquidity requirements and the expectations of policyholders.

As at 31 December 2016, no material derivative contracts had been entered into to mitigate the effects of changes in property prices.

Sensitivity to changes in property prices is given in section '(j) risk and capital management' below.

(iii) Interest rate risk

Interest rate risk arises primarily from the Group's investments in long-term debt and fixed income securities and their movement relative to the value placed on the insurance liabilities. A number of policyholder product features have an influence on the Group's interest rate risk. The major features include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values.

Exposure to interest rate risk is monitored through several measures that include duration, economic capital modelling, sensitivity testing and stress and scenario testing. The impact of exposure to sustained low interest rates is considered within our scenario testing.

The Group typically manages interest rate risk by investing in fixed interest securities which closely match the interest rate sensitivity of the liabilities where such investments are available. In particular, a key objective is to at least match the duration of our annuity liabilities with assets of the same duration, and in some cases where appropriate cash flow matching has been used. 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 risk is also managed in some business units using a variety of derivative instruments, including futures, options, swaps, caps and floors.

Some of the Group's products, principally participating contracts, expose us to the risk that changes in interest rates will impact on profits through a change in the interest spread (the difference between the amounts that we are required to pay under the contracts and the investment income we are able to earn on the investments supporting our obligations under those contracts). The primary markets where Aviva is exposed to this risk are the UK, France and Italy.

The low interest rate environment in a number of markets around the world has resulted in our current reinvestment yields being lower than the overall current portfolio yield, primarily for our investments in fixed income securities and commercial mortgage loans. We anticipate that interest rates may remain below historical averages before the 2008 financial crisis for an extended period of time and that financial markets may continue to have periods of high volatility. Investing activity will continue to decrease the portfolio yield as long as market yields remain below the current portfolio level. We expect the decline in portfolio yield will result in lower net investment income in future periods.

Other product lines of the Group, such as protection, are not significantly sensitive to interest rate or market movements. For unit-linked business, the shareholder margins emerging are typically a mixture of annual management fees and risk/expense charges. Risk and expense margins will be largely unaffected by low interest rates. Annual management fees may increase in the short term as the move towards low interest rates increases the value of unit funds. However, in the medium term, unit funds will grow at a lower rate which will reduce fund charges. For the UK annuities business interest rate exposure is mitigated by closely matching the duration of liabilities with assets of the same duration.

The UK participating business includes contracts with features such as guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. These liabilities are managed through duration matching of assets and liabilities and the use of derivatives, including swaptions. As a result, the Group's exposure to sustained low interest rates on this portfolio is not material. The Group's key exposure to low interest rates arises through its other participating contracts, principally in Italy and France. Some of these contracts also include features such as guaranteed minimum bonuses, guaranteed investment returns and guaranteed surrender values. In a low interest rate environment there is a risk that the yield on assets might not be sufficient to cover these obligations. For certain of its participating contracts the Group is able to amend guaranteed crediting rates. Our ability to lower crediting rates may be limited by competition, bonus mechanisms and contractual arrangements.

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The following table summarises the weighted average minimum guaranteed crediting rates and weighted average book value yields on assets as at 31 December 2016 for our Italian and French participating contracts, where the Group's key exposure to sustained low interest rates arises.

	Weighted average minimum guaranteed crediting rate	Weighted average book value yield on assets	Participating contract liabilities £m
France	0.78%	3.39%	74,606
Italy	0.93%	3.61%	12,514
Other¹	N/A	N/A	59,379
Total	N/A	N/A	146,499

1 'Other' includes UK participating business

Profit before tax on General Insurance and Health Insurance business is generally a mixture of insurance, expense and investment returns. The asset portfolio is invested primarily in fixed income securities and the reduction in interest rates in recent years has reduced the investment component of profit. The portfolio investment yield and average total invested assets in our general insurance and health business are set out in the table below.

	Portfolio investment yield¹	Average assets £m
2014	2.76%	17,200
2015	2.58%	15,268
2016	2.47%	14,369

1 Before realised and unrealised gains and losses and investment expenses

The nature of the business means that prices in certain circumstances can be increased to maintain overall profitability. This is subject to the competitive environment in each market. To the extent that there are further falls in interest rates the investment yield would be expected to decrease further in future periods.

Sensitivity to changes in interest rates is given in section '(j) risk and capital management' below.

(iv) Inflation risk

Inflation risk arises primarily from the Group's exposure to general insurance claims inflation, to inflation linked benefits within the defined benefit staff pension schemes and within the UK annuity portfolio and to expense inflation. Increases in long-term inflation expectations are closely linked to long-term interest rates and so are frequently considered with interest rate risk. Exposure to inflation risk is monitored through economic capital modelling, sensitivity testing and stress and scenario testing. The Group typically manages inflation risk through its investment strategy and, in particular, by investing in inflation linked securities and through a variety of derivative instruments, including inflation linked swaps.

(v) Currency risk

The Group has minimal exposure to currency risk from financial instruments held by business units in currencies other than their functional currencies, as nearly all such holdings are backing either unit-linked or with-profit contract liabilities or hedging. As a result the foreign exchange and losses on investments are largely offset by changes in unit-linked and with-profit liabilities and fair value changes in derivatives attributable to changes in foreign exchange rates recognised in the income statement.

The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately 63% of the Group's premium income arises in currencies other than sterling and the Group's net assets are denominated in a variety of currencies, of which the largest are sterling, euro and Canadian dollars. The Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group's business and meet local regulatory and market requirements. However, the Group does use foreign currency forward contracts to hedge planned dividends from its subsidiaries.

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Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities, however movements may impact the value of the Group's consolidated shareholders' equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the Group's regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set. Except where the Group has applied net investment hedge accounting, foreign exchange gains and losses on foreign currency borrowings are recognised in the income statement, whereas foreign exchange gains and losses arising on consolidation from the translation of assets and liabilities of foreign subsidiaries are recognised in other comprehensive income. At 31 December 2016, the Group's exposure to euro and Canadian dollars has decreased compared to prior year due to new debt issuance in these currencies, capital repatriation and the increased purchase of foreign currency forward contracts to hedge planned dividends from subsidiaries. Foreign currency capital deployed (included in Other below) in the Group's targeted high growth markets has increased in 2016 to fund future growth. At 31 December 2016 and 2015, the Group's total equity deployment by currency including assets 'held for sale' was:

	Sterling £m	Euro £m	CAD$ £m	Other £m	Total £m
Capital 31 December 2016	15,813	923	627	2,188	19,551
Capital 31 December 2015 (restated)¹	14,371	2,011	979	909	18,270

1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in equity at 31 December 2015 of £38 million. See note B2 for further details.

A 10% change in sterling to euro/Canada$ (CAD$) period-end foreign exchange rates would have had the following impact on total equity.

	10% increase in sterling / euro rate £m	10% decrease in sterling / euro rate £m	10% increase in sterling / CAD$ rate £m	10% decrease in sterling / CAD$ rate £m
Net assets at 31 December 2016	(92)	92	(63)	20
Net assets at 31 December 2015	(166)	128	(33)	67

A 10% change in sterling to euro/Canada$ (CAD$) average foreign exchange rates applied to translate foreign currency profits would have had the following impact on profit before tax, including resulting gains and losses on foreign exchange hedges and excluding 'discontinued operations'.

	10% increase in sterling/ euro rate £m	10% decrease in sterling/ euro rate £m	10% increase in sterling/ CAD$ rate £m	10% decrease in sterling/ CAD$ rate £m
Impact on profit before tax 31 December 2016	(55)	67	(15)	(9)
Impact on profit before tax 31 December 2015	8	23	25	(46)

The balance sheet changes arise from retranslation of business unit statements of financial position from their functional currencies into sterling, with above movements being taken through the currency translation reserve. These balance sheet movements in exchange rates therefore have no impact on profit. Net asset and profit before tax figures are stated after taking account of the effect of currency hedging activities.

(vi) Derivatives risk

Derivatives are used by a number of the businesses. Derivatives are primarily used for efficient investment management, risk hedging purposes, or to structure specific retail savings products. Activity is overseen by the Group Capital and Group Risk teams, which monitor exposure levels and approve large or complex transactions.

The Group applies strict requirements to the administration and valuation processes it uses, and has a control framework that is consistent with market and industry practice for the activity that is undertaken.

(vii) Correlation risk

The Group recognises that lapse behaviour and potential increases in consumer expectations are sensitive to and interdependent with market movements and interest rates. These interdependencies are taken into consideration in the internal economic capital model and in scenario analysis.

(d) 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. 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 financial resources to meet its obligations as they fall due through the application of a Group liquidity risk policy and business standard and through the development of its liquidity risk management plan. 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. In addition to the existing liquid resources and expected inflows, the Group maintains significant undrawn committed borrowing facilities (£1,650 million) from a range of leading international banks to further mitigate this risk.

Maturity analyses

The following tables show the maturities of our insurance and investment contract liabilities, and of the financial and reinsurance assets held to meet them.

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(i) Analysis of maturity of insurance and investment contract liabilities

For non-linked insurance business, the following table shows the gross liability at 31 December 2016 and 2015 analysed by remaining duration. The total liability is split by remaining duration in proportion to the cash-flows expected to arise during that period, as permitted under IFRS 4, Insurance Contracts.

Almost all linked business and non-linked investment contracts may be surrendered or transferred on demand. For such contracts, the earliest contractual maturity date is therefore the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial position liability. However, we expect surrenders, transfers and maturities to occur over many years, and therefore the tables below reflect the expected cash flows for these contracts, rather than their contractual maturity date. This table includes assets held for sale.

At 31 December 2016	Total £m	On demand or within 1 year £m	1-5 years £m	5-15 years £m	Over 15 years £m
Long-term business
Insurance contracts - non-linked	116,400	9,757	31,423	44,791	30,429
Investment contracts - non-linked	70,749	5,358	14,687	27,568	23,136
Linked business	156,264	24,165	47,465	58,284	26,350
General insurance and health	16,488	6,761	6,594	2,448	685
Total contract liabilities	359,901	46,041	100,169	133,091	80,600

At 31 December 2015	Total £m	On demand or within 1 year £m	1-5 years £m	5-15 years £m	Over 15 years £m
Long-term business
Insurance contracts - non-linked	114,533	9,847	30,715	43,513	30,458
Investment contracts - non-linked	63,505	4,506	13,666	25,477	19,856
Linked business	130,185	15,221	41,442	51,368	22,154
General insurance and health	13,506	5,844	5,160	1,992	510
Total contract liabilities	321,729	35,418	90,983	122,350	72,978

(ii) Analysis of maturity of financial assets

The following table provides an analysis, by maturity date of the principal, of the carrying value of financial assets which are available to fund the repayment of liabilities as they crystallise. This table excludes assets held for sale.

At 31 December 2016	Total £m	On demand or within 1 year £m	1-5 years £m	Over 5 years £m	No fixed term (perpetual) £m
Debt securities	175,536	25,817	47,971	101,580	168
Equity securities	68,348	-	-	-	68,348
Other investments	55,951	48,059	2,202	4,143	1,547
Loans	24,784	1,352	5,609	17,819	4
Cash and cash equivalents	38,708	38,708	-	-	-
	363,327	113,936	55,782	123,542	70,067

At 31 December 2015	Total £m	On demand or within 1 year £m	1-5 years £m	Over 5 years £m	No fixed term (perpetual) £m
Debt securities	162,964	21,912	46,551	93,753	748
Equity securities	63,558	-	-	-	63,558
Other investments	47,695	42,733	940	2,464	1,558
Loans	22,433	1,485	2,404	18,540	4
Cash and cash equivalents	33,676	33,676	-	-	-
	330,326	99,806	49,895	114,757	65,868

The assets above are analysed in accordance with the earliest possible redemption date of the instrument at the initiation of the Group. Where an instrument is transferable back to the issuer on demand, such as most unit trusts or similar types of investment vehicle, it is included in the 'On demand or within 1 year' column. Debt securities with no fixed contractual maturity date are generally callable at the option of the issuer at the date the coupon rate is reset under the contractual terms of the instrument. The terms for resetting the coupon are such that we expect the securities to be redeemed at this date, as it would be uneconomic for the issuer not to do so, and for liquidity management purposes we manage these securities on this basis. The first repricing and call date is normally ten years or more after the date of issuance. Most of the Group's investments in equity securities and fixed maturity securities are market traded and therefore, if required, can be liquidated for cash at short notice.

Page 89

B17 - Risk management continued

(e) Life and health insurance risk

Life insurance risk in the Group arises through its exposure to mortality risk and exposure to worse than anticipated operating experience on factors such as persistency levels, exercising of policy holder options and management and administration expenses. 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. The Group chooses to take measured amounts of life and health insurance risk provided that the relevant business has the appropriate core skills to assess and price the risk and adequate returns are available. The Group's underwriting strategy and appetite is communicated via specific policy statements, related business standards and guidelines. Life insurance risk is managed primarily at business unit level with oversight at the Group level. The underlying risk profile of our life and health insurance risks, primarily persistency, longevity, mortality and expense risk, has remained stable during 2016, although the current continued relatively low levels of interest rates have increased our sensitivity to longevity shocks compared to historical norms. The continuing reduction in individual annuity new business volumes, since the end to compulsory annuitisation in April 2015, will reduce our longevity risks exposure over the longer term to the extent not offset by increased bulk purchase annuity volumes. Despite this longevity risk remains the Group's most significant life insurance risk due to the Group's existing annuity portfolio.

Persistency risk remains significant and continues to have a volatile outlook with underlying performance linked to some degree to economic conditions. However, businesses across the Group have continued to make progress with a range of customer retention activities. The Group has continued to write considerable volumes of life protection business, and to utilise reinsurance to reduce exposure to potential losses. More generally, life insurance risks are believed to provide a significant diversification against other risks in the portfolio. Life insurance risks are modelled within the internal economic capital model and subject to sensitivity and stress and scenario testing. The assumption and management of life and health insurance risks is governed by the group-wide business standards covering underwriting, pricing, product design and management, in-force management, claims handling, and reinsurance. The individual life and health insurance risks are managed as follows:

· Mortality and morbidity risks are mitigated by use of reinsurance. The Group allows businesses to select reinsurers, from those approved by the Group, based on local factors, but retains oversight of the overall exposures and monitors that the aggregation of risk ceded is within credit risk appetite.

· Longevity risk and internal experience analysis are monitored against the latest external industry data and emerging trends. While individual businesses are responsible for reserving and pricing for annuity business, the Group monitors the exposure to this risk and any associated capital implications. The Group has used reinsurance solutions to reduce the risks from longevity and continually monitors and evaluates emerging market solutions to mitigate this risk further.

· Persistency risk is managed at a business unit level through frequent monitoring of company experience, and benchmarked against local market information. Generally, persistency risk arises from customers lapsing their policies earlier than has been assumed. Where possible the financial impact of lapses is reduced through appropriate product design. Businesses also implement specific initiatives to improve the retention of policies which may otherwise lapse. The Group has developed guidelines on persistency management.

· Expense risk is primarily managed by the business units through the assessment of business unit profitability and frequent monitoring of expense levels.

Embedded derivatives

The Group is exposed to the risk of changes in policyholder behavior due to the exercise of options, guarantees and other product features embedded in its long-term savings products. These product features offer policyholders varying degrees of guaranteed benefits at maturity or on early surrender, along with options to convert their benefits into different products on pre-agreed terms. The extent of the impact of these embedded derivatives differs considerably between business units and exposes Aviva to changes in policyholder behaviour in the exercise of options as well as market risk.

Examples of each type of embedded derivative affecting the Group are:

· Options: call, put, surrender and maturity options, guaranteed annuity options, options to cease premium payment, options for withdrawals free of market value adjustment, annuity options, and guaranteed insurability options.

· Guarantees: embedded floor (guaranteed return), maturity guarantee, guaranteed death benefit, and guaranteed minimum rate of annuity payment.

· Other: indexed interest or principal payments, maturity value, loyalty bonus.

The impact of these is reflected in the economic capital model and managed as part of the asset liability framework.

(f) General insurance risk

Types of risk

General insurance risk in the Group arises from:

· Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations;

· Unexpected claims arising from a single source or cause;

· Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten; and

· Inadequate reinsurance protection or other risk transfer techniques.

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B17 - Risk management continued

Aviva has a preference for general insurance risk in measured amounts for explicit reward, in line with our core skills in underwriting and pricing. The majority of the general insurance business underwritten by the Group continues to be short tail in nature such as motor, household and commercial property insurances. The Group's underwriting strategy and appetite is communicated via specific policy statements, related business standards and guidelines. General insurance risk is managed primarily at business unit level with oversight at the Group level. Claims reserving is undertaken by local actuaries in the various general insurance businesses and is also subject to periodic external reviews. Reserving processes are further detailed in note B9 'insurance liabilities', including information on the adverse impact on reserves following the announcement on 27 February 2017 of the change in the Ogden discount rate used to calculate lump sum payments in settlement of bodily injury claims.

The vast majority of the Group's general insurance business is managed and priced in the same country as the domicile of the customer.

Management of general insurance risks

Significant insurance risks will be reported under the risk management framework. Additionally, the economic capital model is used to assess the risks that each general insurance business unit, and the Group as a whole, is exposed to, quantifying their impact and calculating appropriate capital requirements.

Business units have developed mechanisms that identify, quantify and manage accumulated exposures to contain them within the limits of the appetite of the Group. The business units are assisted by the General Insurance Council which provides technical input for major decisions which fall outside individual delegated limits or escalations outside group risk preferences, group risk accumulation, concentration and profitability limits.

Reinsurance strategy

Significant reinsurance purchases are reviewed annually at both business unit and Group level to verify that the levels of protection being bought reflect any developments in exposure and the risk appetite of the Group. The basis of these purchases is underpinned by analysis of economic capital, earnings and capital volatility, cash flow and liquidity and the Group's franchise value.

Detailed actuarial analysis is used to calculate the Group's extreme risk profile and then design cost and capital efficient reinsurance programmes to mitigate these risks to within agreed appetites. For businesses writing general insurance we analyse the natural catastrophe exposure using our own internal probabilistic catastrophe model which is benchmarked against external catastrophe models widely used by the rest of the (re)insurance industry.

The Group cedes much of its worldwide catastrophe risk to third-party reinsurers through excess of loss and aggregate excess of loss structures. The Group purchases a group-wide catastrophe reinsurance programme to protect against catastrophe losses exceeding a 1 in 200 year return period. The total Group potential retained loss from its most concentrated catastrophe exposure peril (Northern Europe Windstorm) is approximately £150 million on a per occurrence basis and £175 million on an annual aggregate basis. Any losses above these levels are covered by the group-wide catastrophe reinsurance programme to a level in excess of a 1 in 200 year return period. In addition the Group purchases a number of GI business line specific reinsurance programmes with various retention levels to protect both capital and earnings, and has reinsured 100% of its latent exposures to its historic UK employers' liability and public liability business written prior to 31 December 2000.

(g) Asset management risk

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 derived from investment performance, specialist investment professionals and leadership, product development capabilities, fund liquidity, margin, client retention, regulatory developments, fiduciary and contractual responsibilities. Funds invested in illiquid assets such as commercial property are particularly exposed to liquidity risk. The risk profile is regularly monitored.

A client relationship team is in place to manage client retention risk, while all new asset management products undergo a review and approval process at each stage of the product development process, including approvals from legal, compliance and risk functions. Investment performance against client objectives relative to agreed benchmarks is monitored as part of our investment performance and risk management process, and subject to further independent oversight and challenge by a specialist risk team, reporting directly to the Aviva Investors' Chief Risk Officer.

(h) Operational risk

Operational risk is the risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment. We have limited appetite for operational risk and aim to reduce these risks as far as is commercially sensible.

Our business units are primarily responsible for identifying and managing operational risks within their businesses, within the group-wide operational risk framework including the risk and control self-assessment process. Businesses must be satisfied that all material risks falling outside our risk tolerances are being mitigated, monitored and reported to an appropriate level. Any risks with a high potential impact are monitored centrally on a regular basis. Businesses use key indicator data to help monitor the status of the risk and control environment. They also identify and capture loss events, taking appropriate action to address actual control breakdowns and promote internal learning.

(i) Brand and reputation risk

We are exposed to the risk that litigation, employee misconduct, operational failures, the outcome of regulatory investigations, media speculation and negative publicity, disclosure of confidential client information, inadequate services, whether or not founded, could impact our brands or reputation. 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 customers' expectations for the product change. We seek to reduce this risk to as low a level as commercially sensible.

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B17 - Risk management continued

The FCA regularly considers whether we are meeting the requirement to treat our customers fairly and we make use of various metrics to assess our own performance, including customer advocacy, retention and complaints. Failure to meet these requirements could also impact our brands or reputation.

If we do not manage the perception of our brands and reputation successfully, it could cause existing customers or agents to withdraw from our business and potential customers or agents to choose not to do business with us.

(j) 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. A number of the key assumptions for the Group's central scenario are disclosed elsewhere in these statements.

(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 (life 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 31 December 2016

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)

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)

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B17 - Risk management continued

Sensitivities as at 31 December 2015

2015 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	30	(65)	(30)	(135)	130	(25)	(10)	(50)
Insurance non-participating	(75)	80	(495)	25	(25)	(155)	(115)	(725)
Investment participating	5	(5)	-	-	-	(5)	-	-
Investment non-participating	(20)	20	(5)	35	(35)	(20)	-	-
Assets backing life shareholders' funds	(140)	85	(65)	40	(40)	-	-	-
Total	(200)	115	(595)	(35)	30	(205)	(125)	(775)

2015 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	30	(65)	(30)	(135)	130	(25)	(10)	(50)
Insurance non-participating	(75)	80	(495)	25	(25)	(155)	(115)	(725)
Investment participating	5	(5)	-	-	-	(5)	-	-
Investment non-participating	(20)	20	(5)	35	(35)	(20)	-	-
Assets backing life shareholders' funds	(175)	120	(70)	40	(40)	-	-	-
Total	(235)	150	(600)	(35)	30	(205)	(125)	(775)

Changes in sensitivities between 2016 and 2015 reflect underlying movements in market interest rates, portfolio growth, changes to asset mix and the relative durations of assets and liabilities, asset liability management actions, as well as a transfer in the UK of non-participating insurance business from a with-profit fund to a non-profit fund and changes to the level of DAC in the UK. The sensitivities to economic and demographic movements relate mainly to business in the UK.

General insurance and health business sensitivities as at 31 December 2016

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)

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)

Sensitivities as at 31 December 2015

2015 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	(225)	210	(130)	65	(65)	(100)	(270)

Net of reinsurance	(305)	300	(130)	65	(65)	(100)	(260)

2015 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	(225)	210	(130)	70	(70)	(20)	(270)

Net of reinsurance	(305)	300	(130)	70	(70)	(20)	(260)

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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B17 - Risk management continued

Fund management and non-insurance business sensitivities as at 31 December 2016

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

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

Sensitivities as at 31 December 2015

2015 Impact on profit before tax (£m)	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	-	-	10	(30)	45

2015 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	(30)	45

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.

Page 94

B18 - Direct capital instrument and tier 1 notes

Notional amount	2016 £m	2015 £m
5.9021% £500 million direct capital instrument - Issued November 2004	500	500
8.25% $650 million fixed rate tier 1 notes - Issued May 2012	392	392
6.875% £210 million STICS - Issued November 2003	231	231
Total	1,123	1,123

The direct capital instrument (the DCI) was issued on 25 November 2004. The DCI has no fixed redemption date but the Company may, at its sole option, redeem all (but not part) of the principal amount on 27 July 2020, at which date the interest rate changes to a variable rate, or on any respective coupon payment date thereafter. The variable rate will be the six month sterling deposit rate plus margin.

The fixed rate tier 1 notes (the FxdRNs) were issued on 3 May 2012. The FxdRNs are perpetual but the Company may, at its sole option, redeem all (but not part) of the FxdRNs at their principal amounts on 3 November 2017, or on any respective coupon payment date thereafter.

The Step-up Tier one Insurance Capital Securities ('STICS') were issued on 21 November 2003 by Friends Life Holdings plc. The STICS are irrevocably guaranteed on a subordinated basis by Friends Life Limited. On 1 October 2015 Aviva plc replaced Friends Life Holdings plc as issuer which resulted in a reclassification of the STICS from non-controlling interests. The STICS have no fixed redemption date but the Company may, at its sole option, redeem the instrument (in whole or in part) on 21 November 2019, or on the coupon payment date falling on successive fifth anniversaries from this date. For each coupon period beginning 21 November 2019, the STICS will bear interest reset every five years at the rate per annum which is the aggregate of 2.97% and the Gross Redemption Yield of the Benchmark Gilt.

The Company has the option to defer coupon payments on the DCI, FxdRNs or STICS on any relevant payment date.

In relation to the DCI, deferred coupons shall only be satisfied should the Company exercise its sole option to redeem the instruments.

In relation to the FxdRNs, deferred coupons may be satisfied at any time, at the sole option of the Company. The Company is required to satisfy deferred coupons on the FxdRNs upon redemption.

In relation to the STICS, deferred coupons may be satisfied at any time, at the sole option of the Company. The Company is required to satisfy deferred coupons upon the earliest of the following:

· Resumption of payment of coupons on the STICS; or

· Redemption; or

· The commencement of winding up of the issuer.

No interest will accrue on any deferred coupon on the DCI or FxdRNs. Interest will accrue on deferred coupons on the STICS at the then current rate of interest on the STICS.

Deferred coupons on the DCI, FxdRNs and the STICS will be satisfied by the issue and sale of ordinary shares in the Company at their prevailing market value, to a sum as near as practicable to (and at least equal to) the relevant deferred coupons. In the event of any coupon deferral, the Company will not declare or pay any dividend on its ordinary or preference share capital. These instruments have been treated as equity.

At the end of 2016 the fair value of the DCI, FxdRNs and the STICS was £1,286 million (2015: £1,223 million).

B19 - Cash and cash equivalents

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

	2016 £m	2015 £m
Cash and cash equivalents	38,708	33,676
Cash and cash equivalents of operations classified as held for sale	255	-
Bank overdrafts	(558)	(506)
Net cash and cash equivalents at 31 December	38,405	33,170

Page 95

B20 - Contingent liabilities and other risk factors

This note sets out the main areas of uncertainty over the calculation of our liabilities.

(a) Uncertainty over claims provisions

Note B9 gives details of the estimation techniques used by the Group to determine the general insurance business outstanding claims provisions and of the methodology and assumptions used in determining the long-term business provisions. These approaches are designed to allow for the appropriate cost of policy-related liabilities, with a degree of prudence, to give a result within the normal range of outcomes. However, the actual cost of settling these liabilities may differ, for example because experience may be worse than that assumed, or future general insurance business claims inflation may differ from that expected, and hence there is uncertainty in respect of these liabilities.

(b) Asbestos, pollution and social environmental hazards

In the course of conducting insurance business, various companies within the Group receive general insurance liability claims, and become involved in actual or threatened related litigation arising therefrom, including claims in respect of pollution and other environmental hazards. Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including Europe, Canada and Australia. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents they cover and the uncertainties associated with establishing liability, the ultimate cost cannot be determined with certainty. However, on the basis of current information having regard to the level of provisions made for general insurance claims and substantial reinsurance cover now in place, the directors consider that any additional costs arising are not likely to have a material impact on the financial position of the Group.

As a normal part of their operating activities, various Group companies have given guarantees and options, including interest rate guarantees, in respect of certain long-term insurance and investment products. In providing these guarantees and options, the Group's capital position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, property values and equity prices. Interest rate guaranteed returns, such as those available on guaranteed annuity options, are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made. The directors continue to believe that the existing provisions for such guarantees and options are sufficient.

(d) Regulatory compliance

The Group's insurance and investment business is subject to local regulation in each of the countries in which it operates. A number of the Group's UK subsidiaries are dual regulated (directly authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation) while others are solo regulated (regulated solely by the FCA for both prudential and conduct regulation). Between them, the PRA and FCA have broad powers including the authority to grant, vary the terms of, or cancel a regulated firm's authorisation; to investigate marketing and sales practices; and to require the maintenance of adequate financial resources. The Group's regulators outside the UK typically have similar powers, but in some cases they also operate a system of 'prior product approval'.

The Group's regulated businesses have compliance resources to respond to regulatory enquiries in a constructive way, and take corrective action when warranted. However, all regulated financial services companies face the risk that their regulator could find that they have failed to comply with applicable regulations or have not undertaken corrective action as required.

The impact of any such finding (whether in the UK or overseas) could have a negative impact on the Group's reported results or on its relations with current and potential customers. Regulatory action against a member of the Group could result in adverse publicity for, or negative perceptions regarding, the Group, or could have a material adverse effect on the business of the Group, its results, operations and/or financial condition and divert management's attention from the day-to-day management of the business.

(e) Structured settlements

The Company has purchased annuities from licensed Canadian life insurers to provide for fixed and recurring payments to claimants. As a result of these arrangements, the Company is exposed to credit risk to the extent that any of the life insurers fail to fulfill their obligations. The Company's maximum exposure to credit risk for these types of arrangements is approximately CAD$1,181 million as at 31 December 2016 (2015: CAD$1,212 million). Credit risk is managed by acquiring annuities from a diverse portfolio of life insurers with proven financial stability. This risk is reduced to the extent of coverage provided by Assuris, the Canadian life insurance industry compensation plan. As at 31 December 2016, no information has come to the Company's attention that would suggest any weakness or failure in life insurers from which it has purchased annuities and consequently no provision for credit risk is required.

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B20 - Contingent liabilities and other risk factors continued

(f) Other

In the course of conducting insurance and investment business, various Group companies receive liability claims, and become involved in actual or threatened related litigation. In the opinion of the directors, adequate provisions have been established for such claims and no material loss will arise in this respect.

In addition, in line with standard business practice, various Group companies have given guarantees, indemnities and warranties in connection with disposals in recent years of subsidiaries and associates to parties outside the Aviva Group. In the opinion of the directors, no material unprovisioned loss will arise in respect of these guarantees, indemnities and warranties.

There are a number of charges registered over the assets of Group companies in favour of other Group companies or third parties. In addition, certain of the Company's assets are charged in favour of certain of its subsidiaries as security for intra-Group loans.

The Group's insurance subsidiaries pay contributions to levy schemes in several countries in which we operate. Given the economic environment, there is a heightened risk that the levy contributions will need to be increased to protect policyholders if an insurance company falls into financial difficulties. The directors continue to monitor the situation but are not aware of any need to increase provisions at the statement of financial position date.

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:

	2016 £m	2015 £m
Acquired value of in-force business on insurance contracts	1,750	2,002
Acquired value of in-force business on investment contracts	2,097	2,381
Intangible assets	1,633	1,348
	5,480	5,731
Less: Amounts classified as held for sale	(12)	-
Total	5,468	5,731

The acquired value of in-force business on insurance and investment contracts has reduced primarily due to an amortisation charge of £539 million (2015: £496 million charge).

The increase in the intangible assets primarily relates to intangibles of £210 million acquired as part the acquisition of RBC General Insurance Company (see note B4), capitalised software in the UK and foreign exchange rate movements, partially offset by the amortisation charge for the year.

B22 - Subsequent events

For subsequent events relating to the acquisition and disposal of subsidiaries, refer to note B4. Subsequent events relating to insurance liabilities are reflected in note B9 (c)(iii).

In addition to the above:

· In December 2016, Aviva and Santander agreed changes to the shareholders' agreement in respect of their joint venture insurance operations in Poland, with an effective date of 1 January 2017. Following these changes, Aviva controls the companies and will consolidate them in 2017.

· On 9 November 2016 the UK Life Board approved the transfer of the whole of the long-term insurance business of Aviva Annuity UK Limited to its parent undertaking Aviva Life & Pensions UK Limited through an insurance business transfer scheme under Part VII of the Financial Services and Markets Act 2000 (the 'Part VII Transfer'). The Part VII transfer was ratified by the High Court on 6 December 2016 and became effective on 1 January 2017.

End part 3 of 4

This information is provided by RNS

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Companies

Aviva (AV.)

Friday, 31st May 2024

COMPANIES COVERED:

JD. FLTR NWG

Flutter shares tank as primary listing moves to New York and the CFO steps aside, JD Sports struggles to impress despite sales growth in challenging market and Nat West buys £1.24bn of its own stock back from the government.

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