Half-year Report Part 3 of 4

RNS Number : 9580M
Aviva PLC
03 August 2017
 

Part 3 of 4

 

Page 39

 

IFRS financial statements

In this section

Page

Condensed consolidated financial statements

40

Condensed consolidated income statement

40

Condensed consolidated statement of comprehensive income

41

Condensed consolidated statement of changes in equity

42

Condensed consolidated statement of financial position

43

Condensed consolidated statement of cash flows

44

 

 

Notes to the condensed consolidated financial statements

B1    Basis of preparation

45

B2    Presentation changes

45

B3    Exchange rates

45

B4    Subsidiaries, joint ventures and associates

46

B5    Segmental information

48

B6    Tax

59

B7    Earnings per share

61

B8    Dividends and appropriations

63

B9    Insurance liabilities

64

B10  Liability for investment contracts

66

B11  Reinsurance assets

67

B12  Effect of changes in assumptions and estimates during the period

67

B13  Unallocated divisible surplus

68

B14  Borrowings

69

B15  Pension obligations and other provisions

70

B16  Related party transactions

71

B17  Fair value

71

B18  Risk management

78

B19  Cash and cash equivalents

84

B20  Contingent liabilities and other risk factors

84

B21  Acquired value of in-force business and intangible assets

84

 

 

Directors' responsibility statement

85

Independent review report to Aviva plc

86

 

 

 

 

 

 

Page 40

 

 

Condensed consolidated income statement

For the six month period ended 30 June 2017

 

Note

Reviewed
 6 months
2017
£m

Reviewed
 6 months
2016
£m

Audited
Full Year
 2016
 £m

Income

 

 

 

 

Gross written premiums

 

13,576

12,593

25,442

Premiums ceded to reinsurers

 

(1,076)

(1,160)

(2,364)

Premiums written net of reinsurance

 

12,500

11,433

23,078

Net change in provision for unearned premiums

 

(365)

(348)

(210)

Net earned premiums

 

12,135

11,085

22,868

Fee and commission income

 

1,125

996

1,962

Net investment income

 

10,754

15,164

30,257

Share of profit after tax of joint ventures and associates

 

10

195

216

Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates

B4

202

(18)

(11)

 

 

24,226

27,422

55,292

Expenses

 

 

 

 

Claims and benefits paid, net of recoveries from reinsurers

 

(12,501)

(11,453)

(23,782)

Change in insurance liabilities, net of reinsurance

B9a(ii)

(1,684)

(5,926)

(6,893)

Change in investment contract provisions

 

(5,584)

(4,576)

(14,039)

Change in unallocated divisible surplus

B13

794

(792)

(381)

Fee and commission expense

 

(2,200)

(1,654)

(3,885)

Other expenses

 

(1,669)

(2,071)

(3,853)

Finance costs

 

(353)

(295)

(626)

 

 

(23,197)

(26,767)

(53,459)

Profit before tax

 

1,029

655

1,833

Tax attributable to policyholders' returns

B6

(154)

(318)

(640)

Profit before tax attributable to shareholders' profits

 

875

337

1,193

Tax expense

B6

(313)

(454)

(974)

Less: tax attributable to policyholders' returns

B6

154

318

640

Tax attributable to shareholders' profits

 

(159)

(136)

(334)

Profit for the period

 

716

201

859

 

 

 

 

 

Attributable to:

 

 

 

 

Equity holders of Aviva plc

 

637

130

703

Non-controlling interests

 

79

71

156

Profit for the period

 

716

201

859

Earnings per share

B7

 

 

 

Basic (pence per share)

 

14.9p

2.5p

15.3p

Diluted (pence per share)

 

14.7p

2.4p

15.1p

 

 

 

 

Page 41

 

Condensed consolidated statement of comprehensive income

For the six month period ended 30 June 2017

 

Note

Reviewed
6 months
2017
 £m

Reviewed
6 months
2016
 £m

Audited
Full Year
2016
£m

Profit for the period

 

716

201

859

 

 

 

 

 

Other comprehensive income:

 

 

 

 

Items that may be reclassified subsequently to income statement

 

 

 

 

Investments classified as available for sale

 

 

 

 

Fair value (losses)/gains

 

(10)

26

12

Fair value gains transferred to profit on disposals

 

(2)

-

(2)

Share of other comprehensive income of joint ventures and associates

 

1

3

(6)

Foreign exchange rate movements

 

46

866

1,128

Aggregate tax effect - shareholder tax on items that may be reclassified subsequently to income statement

 

5

(31)

(34)

 

 

 

 

 

Items that will not be reclassified to income statement

 

 

 

 

Owner-occupied properties - fair value gains/(losses)

 

(1)

2

4

Remeasurements of pension schemes

B15

(36)

776

311

Aggregate tax effect - shareholder tax on items that will not be reclassified subsequently to income statement

 

12

(170)

(70)

Total other comprehensive income, net of tax

 

15

1,472

1,343

Total comprehensive income for the period

 

731

1,673

2,202

 

 

 

 

 

Attributable to:

 

 

 

 

Equity holders of Aviva plc

 

619

1,488

1,901

Non-controlling interests

 

112

185

301

 

 

731

1,673

2,202

 

 

 

 

 

 

 

Page 42

 

 

Condensed consolidated statement of changes in equity

For the six month period ended 30 June 2017

 

Note

Reviewed
6 months
2017
 £m

Reviewed
6 months
2016
£m

Audited
Full Year
2016
 £m

Balance at 1 January as reported

 

19,551

18,270

18,270

Profit for the period

 

716

201

859

Other comprehensive income

 

15

1,472

1,343

Total comprehensive income for the period

 

731

1,673

2,202

Owner-occupied properties fair value gains transferred to retained earnings on disposals

 

-

-

-

Dividends and appropriations

B8

(684)

(605)

(973)

Non-controlling interests share of dividends declared in the period

 

(55)

(62)

(135)

Transfer to profit on disposal of subsidiaries, joint ventures and associates

 

(31)

-

(7)

Capital contributions from non-controlling interests

 

39

8

9

Changes in non-controlling interests in subsidiaries

 

(202)

(1)

105

Treasury shares held by subsidiary companies

 

-

-

13

Reserves credit for equity compensation plans

 

46

20

38

Shares issued under equity compensation plans

 

5

3

12

Shares purchased in buy-back

 

(73)

-

-

Aggregate tax effect - shareholder tax

 

6

5

17

Balance at 30 June/31 December

 

19,333

19,311

19,551

 

 

 

 

 

 

Page 43

 

 

 

Condensed consolidated statement of financial position

As at 30 June 2017

 

Note

Reviewed
30 June
2017
 £m

Reviewed
 30 June
2016
£m

Audited
31 December 2016
 £m

Assets

 

 

 

 

Goodwill

 

1,911

1,979

2,045

Acquired value of in-force business and intangible assets

B21

4,841

5,450

5,468

Interests in, and loans to, joint ventures

 

1,214

1,765

1,604

Interests in, and loans to, associates

 

472

449

481

Property and equipment

 

510

482

487

Investment property

 

10,719

11,106

10,768

Loans

 

25,452

24,305

24,784

Financial investments

 

309,222

288,460

299,835

Reinsurance assets

B11

18,512

22,983

26,343

Deferred tax assets

 

186

128

180

Current tax assets

 

80

76

119

Receivables

 

9,060

8,762

7,794

Deferred acquisition costs and other assets

 

6,407

6,293

5,893

Prepayments and accrued income

 

2,929

2,908

2,882

Cash and cash equivalents

B19

42,456

34,911

38,708

Assets of operations classified as held for sale

B4

6,042

14,193

13,028

Total assets

 

440,013

424,250

440,419

Equity

 

 

 

 

Capital

 

 

 

 

Ordinary share capital

 

1,014

1,014

1,015

Preference share capital

 

200

200

200

 

 

1,214

1,214

1,215

Capital reserves

 

 

 

 

Share premium

 

1,201

1,188

1,197

Merger reserve

 

8,975

8,974

8,974

 

 

10,176

10,162

10,171

Treasury shares

 

(14)

(28)

(15)

Other reserves

 

780

587

797

Retained earnings

 

4,735

4,978

4,835

Equity attributable to shareholders of Aviva plc

 

16,891

16,913

17,003

Direct capital instrument and tier 1 notes

 

1,123

1,123

1,123

Equity excluding non-controlling interests

 

18,014

18,036

18,126

Non-controlling interests

 

1,319

1,275

1,425

Total equity

 

19,333

19,311

19,551

Liabilities

 

 

 

 

Gross insurance liabilities

B9

150,714

147,977

151,183

Gross liabilities for investment contracts

B10

203,726

186,006

197,095

Unallocated divisible surplus

B13

8,524

9,624

9,349

Net asset value attributable to unitholders

 

18,469

13,045

15,638

Provisions

B15

1,426

1,484

1,510

Deferred tax liabilities

 

2,325

2,207

2,413

Current tax liabilities

 

188

484

421

Borrowings

B14

10,338

9,681

10,295

Payables and other financial liabilities

 

17,057

18,020

17,751

Other liabilities

 

2,733

2,795

2,719

Liabilities of operations classified as held for sale

B4

5,180

13,616

12,494

Total liabilities

 

420,680

404,939

420,868

Total equity and liabilities

 

440,013

424,250

440,419

 

 

 

 

 

 

 

Page 44

 

 

Condensed consolidated statement of cash flows

For the six month period ended 30 June 2017

 

Note

Reviewed
6 months
2017
£m

 Reviewed
6 months
 2016
 £m

Audited
 Full Year
2016
 £m

Cash flows from operating activities1

 

 

 

 

Cash generated from operating activities

 

5,255

1,347

5,394

Tax paid

 

(405)

(219)

(647)

Total net cash from operating activities

 

4,850

1,128

4,747

Cash flows from investing activities

 

 

 

 

Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired

 

25

(114)

(432)

Disposals of subsidiaries, joint ventures and associates, net of cash transferred

 

(36)

-

42

New loans to joint ventures and associates

 

(2)

-

(3)

Repayment of loans to joint ventures and associates

 

-

71

97

Net new loans to joint ventures and associates

 

(2)

71

94

Purchases of property and equipment

 

(40)

(25)

(67)

Proceeds on sale of property and equipment

 

2

44

75

Purchases of intangible assets

 

(44)

(35)

(119)

Total net cash (used in)/from investing activities

 

(95)

(59)

(407)

Cash flows from financing activities

 

 

 

 

Proceeds from issue of ordinary shares

 

6

6

15

Shares purchased in buy-back

 

(73)

-

-

Treasury shares distributed from employee trusts

 

1

1

-

New borrowings drawn down, net of expenses

 

21

1,355

3,526

Repayment of borrowings

 

(129)

(867)

(2,340)

Net (repayment)/drawdown of borrowings

 

(108)

488

1,186

Interest paid on borrowings

 

(294)

(284)

(595)

Preference dividends paid

B8

(9)

(9)

(17)

Ordinary dividends paid

B8

(646)

(570)

(871)

Coupon payments on direct capital instrument and tier 1 notes

B8

(29)

(26)

(85)

Capital contributions from non-controlling interests of subsidiaries

 

39

-

9

Dividends paid to non-controlling interests of subsidiaries

 

(55)

(62)

(135)

Changes in controlling interest in subsidiaries

 

-

(1)

105

Total net cash (used in)/from financing activities

 

(1,168)

(457)

(388)

Total net increase in cash and cash equivalents

 

3,587

612

3,952

Cash and cash equivalents at 1 January

 

38,405

33,170

33,170

Effect of exchange rate changes on cash and cash equivalents

 

248

1,053

1,283

Cash and cash equivalents at 30 June/31 December

B19

42,240

34,835

38,405

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

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

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

 

 

 

 

 

 

 

Page 45

 

 

B1 - Basis of preparation

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

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

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

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

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

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

B2 - Presentation changes

There are no presentation changes in this period.

B3 - Exchange rates

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

 

6 months
2017

6 months
2016

Full Year
2016

Eurozone

 

 

 

Average rate (€1 equals)

£0.86

£0.78

£0.82

Period end rate (€1 equals)

£0.88

£0.83

£0.85

Canada

 

 

 

Average rate ($CAD1 equals)

£0.59

£0.53

£0.56

Period end rate ($CAD1 equals)

£0.59

£0.58

£0.60

Poland

 

 

 

Average rate (PLN1 equals)

£0.20

£0.18

£0.19

Period end rate (PLN1 equals)

£0.21

£0.19

£0.19

 

 

 

 

Page 46

 

B4 - Subsidiaries, joint ventures and associates

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

(a) Acquisitions

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

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

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

 

6 months
 2017
 £m

6 months
2016
£m

Full Year
 2016
 £m

France - Antarius (see (i) below)

180

-

-

Ireland - health

-

(11)

(8)

Poland (see (ii) below)

16

-

-

Asia - Vietnam (see (a) above)

6

-

-

Other small operations

-

(7)

(3)

Total profit/(loss) on disposal and remeasurement

202

(18)

(11)

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

(i) Antarius

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

 

 £m

Assets

 

Goodwill, AVIF and other intangibles

12

Investment property

49

Loans

78

Financial investments

10,873

Reinsurance assets

408

Other assets

1,499

Cash and cash equivalents

468

Total assets

13,387

Liabilities

 

Insurance liabilities

4,720

Liability for investment contract

7,247

Unallocated divisible surplus

832

Other liabilities

34

Total liabilities

12,833

Net assets

554

Non-controlling interests before disposal

(277)

Group's share of net assets disposed of

277

Cash consideration

433

Less: transaction costs

(2)

Net consideration

431

Revaluation reserves recycled to the income statement

26

Profit on disposal1

180

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

(ii) Poland

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

 

 

 

 

Page 47

 

B4 - Subsidiaries, joint ventures and associates continued

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

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

 

30 June
2017
£m

30 June
2016
£m

31 December 2016
 £m

Assets

 

 

 

Goodwill, AVIF and other intangibles

598

25

12

Property and equipment

1

-

-

Investment property

1

44

48

Loans

67

64

75

Financial investments

4,777

10,715

10,706

Reinsurance assets

101

972

411

Other assets

91

1,698

1,521

Cash and cash equivalents

406

683

255

 

6,042

14,201

13,028

Additional impairment to write down the disposal group to fair value less cost to sell

-

(8)

-

Total assets

6,042

14,193

13,028

Liabilities

 

 

 

Insurance liabilities

(4,061)

(4,717)

(4,448)

Liability for investment contracts

-

(7,655)

(7,175)

Unallocated divisible surplus

(248)

(852)

(859)

Net assets attributable to unit holders

(555)

-

-

External borrowings

(13)

-

-

Other liabilities

(303)

(392)

(12)

Total liabilities

(5,180)

(13,616)

(12,494)

Net assets

862

577

534

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


(i) Spain

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


(ii) Italy

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

(d)  Subsequent events

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

 

 

 

Page 48

 

B5 - Segmental information

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

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

United Kingdom and Ireland

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

Canada

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

France

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

Poland

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

Italy, Spain and Other

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

Asia

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

Aviva Investors

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

Other Group activities

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

Measurement basis

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

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

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

 

 

 

 

 

 

 

Page 49

 

 

 

B5 - Segmental information continued

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

 

United Kingdom & Ireland

 

Europe

 

 

 

 

 

Life
 £m

GI
£m

Canada £m

France
 £m

Poland
 £m

Italy, Spain and Other £m

Asia
£m

Aviva Investors £m

Other Group

activities2

£m

Total
 £m

Gross written premiums

3,070

2,464

1,529

3,053

286

2,657

517

-

-

13,576

Premiums ceded to reinsurers

(754)

(138)

(52)

(40)

(5)

(21)

(66)

-

-

(1,076)

Internal reinsurance revenue

(3)

-

-

-

-

(2)

(5)

-

10

-

Premiums written net of reinsurance

2,313

2,326

1,477

3,013

281

2,634

446

-

10

12,500

Net change in provision for unearned premiums

(38)

(128)

(48)

(128)

-

(9)

(14)

-

-

(365)

Net earned premiums

2,275

2,198

1,429

2,885

281

2,625

432

-

10

12,135

Fee and commission income

516

60

12

146

40

44

103

206

(2)

1,125

 

2,791

2,258

1,441

3,031

321

2,669

535

206

8

13,260

Net investment income

8,045

41

57

1,417

197

240

480

61

216

10,754

Inter-segment revenue

-

-

-

-

-

-

-

113

-

113

Share of profit of joint ventures and associates

29

-

-

12

-

4

(35)

-

-

10

Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates

-

-

-

180

16

-

6

-

-

202

Segmental income1

10,865

2,299

1,498

4,640

534

2,913

986

380

224

24,339

Claims and benefits paid, net of recoveries from reinsurers

(5,679)

(1,368)

(898)

(2,717)

(215)

(1,383)

(235)

-

(6)

(12,501)

Change in insurance liabilities, net of reinsurance

(205)

42

(94)

(442)

(93)

(605)

(306)

-

19

(1,684)

Change in investment contract provisions

(3,772)

-

-

(859)

-

(713)

(178)

(62)

-

(5,584)

Change in unallocated divisible surplus

611

-

-

133

(4)

152

(98)

-

-

794

Fee and commission expense

(290)

(672)

(367)

(354)

(68)

(166)

(58)

(21)

(204)

(2,200)

Other expenses

(611)

(152)

(97)

(146)

(44)

(54)

(146)

(206)

(213)

(1,669)

Inter-segment expenses

(101)

(4)

(3)

(1)

(2)

-

-

-

(2)

(113)

Finance costs

(131)

-

(2)

(1)

-

(1)

(2)

-

(216)

(353)

Segmental expenses

(10,178)

(2,154)

(1,461)

(4,387)

(426)

(2,770)

(1,023)

(289)

(622)

(23,310)

Profit/(loss) before tax

687

145

37

253

108

143

(37)

91

(398)

1,029

Tax attributable to policyholders' returns

(144)

-

-

-

-

-

(10)

-

-

(154)

Profit/(loss) before tax attributable to shareholders' profits

543

145

37

253

108

143

(47)

91

(398)

875

Adjusted for non-operating items:

 

 

 

 

 

 

 

 

 

 

Reclassification of corporate costs and unallocated interest

-

(6)

14

24

-

-

-

2

(34)

-

Investment return variances and economic assumption changes on long-term business

(31)

-

-

157

(3)

-

56

-

-

179

Short-term fluctuation in return on investments backing non-long-term business

-

75

(11)

4

(1)

4

1

-

133

205

Economic assumption changes on general insurance and health business

-

23

-

(9)

-

-

-

-

(2)

12

Impairment of goodwill, joint ventures and associates and other amounts expensed

-

-

-

-

-

-

19

-

-

19

Amortisation and impairment of intangibles

33

15

22

-

3

3

5

3

7

91

Amortisation and impairment of AVIF

162

-

-

1

-

1

68

-

2

234

(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates

-

-

-

(180)

(16)

-

(6)

-

-

(202)

Integration and restructuring costs

32

-

9

9

-

-

-

-

2

52

Other

-

-

-

-

-

-

-

-

-

-

Operating profit/(loss) before tax attributable to shareholders

739

252

71

259

91

151

96

96

(290)

1,465

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

2    Other Group activities include Group Reinsurance.

 

 

 

 

 

 

 

 

 

 

Page 50

 

 

 

 

B5 - Segmental information continued

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

 

 

United Kingdom & Ireland

 

 

 

Europe

 

 

 

 

 

Life
£m

GI
 £m

Canada
£m

France
£m

Poland
 £m

Italy, Spain and Other £m

Asia
 £m

Aviva

Investors2

£m

Other Group

activities3

£m

Total
£m

Gross written premiums

2,439

2,454

1,091

3,499

237

2,413

460

-

-

12,593

Premiums ceded to reinsurers

(751)

(229)

(42)

(41)

(4)

(19)

(74)

-

-

(1,160)

Internal reinsurance revenue

(3)

(2)

-

-

-

(1)

(5)

-

11

-

Premiums written net of reinsurance

1,685

2,223

1,049

3,458

233

2,393

381

-

11

11,433

Net change in provision for unearned premiums

(34)

(136)

(29)

(117)

(12)

(7)

(13)

-

-

(348)

Net earned premiums

1,651

2,087

1,020

3,341

221

2,386

368

-

11

11,085

Fee and commission income

453

78

8

115

28

50

103

162

(1)

996

 

2,104

2,165

1,028

3,456

249

2,436

471

162

10

12,081

Net investment income

13,431

132

42

704

3

416

316

39

81

15,164

Inter-segment revenue

-

-

-

-

-

-

-

117

-

117

Share of profit of joint ventures and associates

178

-

-

13

4

-

-

-

-

195

(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates

(8)

(11)

-

-

-

-

-

-

1

(18)

Segmental income1

15,705

2,286

1,070

4,173

256

2,852

787

318

92

27,539

Claims and benefits paid, net of recoveries from reinsurers

(5,637)

(1,315)

(619)

(2,423)

(153)

(1,114)

(178)

-

(14)

(11,453)

Change in insurance liabilities, net of reinsurance

(4,459)

(79)

(41)

(479)

30

(677)

(213)

-

(8)

(5,926)

Change in investment contract provisions

(3,600)

-

-

(196)

-

(564)

(176)

(40)

-

(4,576)

Change in unallocated divisible surplus

(14)

-

-

(568)

4

(168)

(46)

-

-

(792)

Fee and commission expense

(272)

(629)

(285)

(211)

(38)

(146)

(61)

(18)

6

(1,654)

Other expenses

(754)

(162)

(53)

(131)

(34)

(61)

(138)

(205)

(533)

(2,071)

Inter-segment expenses

(106)

(3)

(2)

(3)

(2)

-

-

-

(1)

(117)

Finance costs

(89)

(1)

(1)

(1)

-

(2)

(2)

-

(199)

(295)

Segmental expenses

(14,931)

(2,189)

(1,001)

(4,012)

(193)

(2,732)

(814)

(263)

(749)

(26,884)

Profit/(loss) before tax

774

97

69

161

63

120

(27)

55

(657)

655

Tax attributable to policyholders' returns

(317)

-

-

-

-

-

(1)

-

-

(318)

Profit/(loss) before tax attributable to shareholders' profits

457

97

69

161

63

120

(28)

55

(657)

337

Adjusted for non-operating items:

 

 

 

 

 

 

 

 

 

 

Reclassification of corporate costs and unallocated interest

1

(1)

4

22

-

-

-

2

(28)

-

Investment return variances and economic assumption changes on long-term business

(82)

-

-

32

-

2

42

-

-

(6)

Short-term fluctuation in return on investments backing non-long-term business

(17)

(23)

4

(1)

(1)

4

-

-

372

338

Economic assumption changes on general insurance and health business

-

123

1

-

-

-

-

-

(1)

123

Impairment of goodwill, joint ventures and associates and other amounts expensed

-

-

-

-

-

-

-

-

-

-

Amortisation and impairment of intangibles

35

11

8

-

2

7

5

3

21

92

Amortisation and impairment of AVIF

241

-

-

2

1

1

71

-

2

318

Loss/(profit) on the disposal and remeasurement of subsidiaries, joint ventures and associates

8

11

-

-

-

-

-

-

(1)

18

Integration and restructuring costs

61

8

3

4

-

1

8

10

10

105

Other

-

-

-

-

-

-

-

-

-

-

Operating profit/(loss) before tax attributable to shareholders

704

226

89

220

65

135

98

70

(282)

1,325

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

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

3    Other Group activities include Group Reinsurance.

 

 

 

 

 

 

 

 

 

 

 

Page 51

 

 

 

B5 - Segmental information continued

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

 

 

United Kingdom & Ireland

 

 

 

Europe

 

 

 

 

 

Life
 £m

GI
£m

Canada
 £m

France
£m

Poland
£m

Italy, Spain and Other £m

Asia
£m

Aviva

Investors2

£m

Other Group

activities3

£m

Total
 £m

Gross written premiums

5,458

4,750

2,542

6,624

496

4,652

920

-

-

25,442

Premiums ceded to reinsurers

(1,509)

(498)

(89)

(86)

(9)

(39)

(134)

-

-

(2,364)

Internal reinsurance revenue

(7)

(2)

-

-

-

(3)

(11)

-

23

-

Premiums written net of reinsurance

3,942

4,250

2,453

6,538

487

4,610

775

-

23

23,078

Net change in provision for unearned premiums

(2)

(132)

(33)

(8)

(16)

(11)

(8)

-

-

(210)

Net earned premiums

3,940

4,118

2,420

6,530

471

4,599

767

-

23

22,868

Fee and commission income

868

140

17

258

60

98

198

326

(3)

1,962

 

4,808

4,258

2,437

6,788

531

4,697

965

326

20

24,830

Net investment income

24,903

283

50

2,951

141

533

1,240

83

73

30,257

Inter-segment revenue

-

-

-

-

-

-

-

234

-

234

Share of profit of joint ventures and associates

172

-

1

16

7

3

17

-

-

216

(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates

(3)

(8)

-

-

-

-

-

-

-

(11)

Segmental income1

29,880

4,533

2,488

9,755

679

5,233

2,222

643

93

55,526

Claims and benefits paid, net of recoveries from reinsurers

(11,200)

(2,680)

(1,521)

(5,397)

(315)

(2,230)

(399)

-

(40)

(23,782)

Change in insurance liabilities, net of reinsurance

(3,381)

(550)

(16)

(1,221)

(79)

(1,303)

(349)

-

6

(6,893)

Change in investment contract provisions

(10,069)

-

-

(1,636)

-

(1,180)

(1,069)

(85)

-

(14,039)

Change in unallocated divisible surplus

(259)

-

-

(276)

2

132

20

-

-

(381)

Fee and commission expense

(862)

(1,277)

(628)

(632)

(77)

(275)

(108)

(35)

9

(3,885)

Other expenses

(1,427)

(263)

(150)

(266)

(64)

(106)

(289)

(393)

(895)

(3,853)

Inter-segment expenses

(212)

(8)

(5)

(1)

(5)

-

-

-

(3)

(234)

Finance costs

(195)

(2)

(4)

(1)

-

(3)

(3)

-

(418)

(626)

Segmental expenses

(27,605)

(4,780)

(2,324)

(9,430)

(538)

(4,965)

(2,197)

(513)

(1,341)

(53,693)

Profit/(loss) before tax

2,275

(247)

164

325

141

268

25

130

(1,248)

1,833

Tax attributable to policyholders' returns

(638)

-

-

-

-

-

(2)

-

-

(640)

Profit/(loss) before tax attributable to shareholders' profits

1,637

(247)

164

325

141

268

23

130

(1,248)

1,193

Adjusted for non-operating items:

 

 

 

 

 

 

 

 

 

 

Reclassification of corporate costs and unallocated interest

-

(5)

17

46

-

-

-

5

(63)

-

Investment return variances and economic assumption changes on long-term business

(503)

-

-

86

1

27

10

-

-

(379)

Short-term fluctuation in return on investments backing non-long-term business

(135)

(79)

42

(2)

(1)

13

-

-

680

518

Economic assumption changes on general insurance and health business

-

229

-

13

-

-

-

-

-

242

Impairment of goodwill, joint ventures and associates and other amounts expensed

-

-

-

-

-

-

-

-

-

-

Amortisation and impairment of intangibles

71

24

29

2

3

7

9

6

24

175

Amortisation and impairment of AVIF

387

-

-

3

2

2

142

-

4

540

Loss/(profit) on the disposal and remeasurement of subsidiaries, joint ventures and associates

3

8

-

-

-

-

-

-

-

11

Integration and restructuring costs

119

15

18

8

-

1

17

19

15

212

Other4

-

498

-

-

-

-

-

-

-

498

Operating profit/(loss) before tax attributable to shareholders

1,579

443

270

481

146

318

201

160

(588)

3,010

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

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

3    Other Group activities include Group Reinsurance.

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

 

 

 

 

 

 

 

 

 

 

Page 52

 

 

 

 

B5 - Segmental information continued

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

 

United Kingdom & Ireland

 

Europe

 

 

 

 

 

Life
£m

GI
 £m

Canada
 £m

France
£m

Poland
£m

Italy, Spain and Other
 £m

Asia
£m

Aviva Investors
£m

Other Group activities
 £m

Total
£m

Goodwill

663

1,021

87

-

28

50

62

-

-

1,911

Acquired value of in-force business and intangible assets

2,956

151

279

88

79

191

1,001

6

90

4,841

Interests in, and loans to, joint ventures and associates

937

-

14

183

-

70

482

-

-

1,686

Property and equipment

72

26

39

248

4

3

10

4

104

510

Investment property

6,427

207

-

2,998

-

-

-

909

178

10,719

Loans

24,502

5

157

741

-

11

36

-

-

25,452

Financial investments

184,945

4,174

4,552

70,211

3,493

20,959

11,934

545

8,409

309,222

Deferred acquisition costs

1,335

546

375

323

106

76

137

-

-

2,898

Other assets

42,589

6,414

1,373

10,381

310

1,375

1,704

1,056

11,530

76,732

Assets of operations classified as held for sale

-

-

-

-

-

6,042

-

-

-

6,042

Total assets

264,426

12,544

6,876

85,173

4,020

28,777

15,366

2,520

20,311

440,013

Insurance liabilities

 

 

 

 

 

 

 

 

 

 

Long-term business and outstanding claims provisions

104,987

6,039

3,233

16,622

3,158

7,091

4,130

-

6

145,266

Unearned premiums

265

2,284

1,549

607

118

293

86

-

-

5,202

Other insurance liabilities

-

72

119

53

-

-

-

-

2

246

Liability for investment contracts

128,506

-

-

52,233

2

12,993

8,509

1,483

-

203,726

Unallocated divisible surplus

2,251

-

-

5,200

69

701

303

-

-

8,524

Net asset value attributable to unitholders

76

-

-

3,141

-

-

-

-

15,252

18,469

External borrowings

1,798

-

-

1

-

34

-

-

8,505

10,338

Other liabilities, including inter-segment liabilities

14,898

(314)

981

4,797

211

511

657

457

1,531

23,729

Liabilities of operations classified as held for sale

-

-

-

-

-

5,180

-

-

-

5,180

Total liabilities

252,781

8,081

5,882

82,654

3,558

26,803

13,685

1,940

25,296

420,680

Total equity

 

 

 

 

 

 

 

 

 

19,333

Total equity and liabilities

 

 

 

 

 

 

 

 

 

440,013

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

 

United Kingdom & Ireland

 

Europe

 

 

 

 

 

Life
£m

GI
 £m

Canada
 £m

France
 £m

Poland
 £m

Italy, Spain and Other
 £m

Asia
£m

Aviva Investors
 £m

Other Group activities
£m

Total
£m

Goodwill

663

1,016

26

6

26

192

50

-

-

1,979

Acquired value of in-force business and intangible assets

3,323

149

83

83

11

604

1,135

12

50

5,450

Interests in, and loans to, joint ventures and associates

1,415

-

10

166

46

78

499

-

-

2,214

Property and equipment

89

27

15

254

3

5

9

2

78

482

Investment property

7,165

205

-

2,336

-

1

-

1,140

259

11,106

Loans

23,338

5

164

732

1

29

36

-

-

24,305

Financial investments

171,680

4,201

3,703

65,171

2,720

22,774

10,500

523

7,188

288,460

Deferred acquisition costs

1,427

496

304

274

38

82

84

4

-

2,709

Other assets

47,874

6,461

1,603

7,743

246

1,687

1,565

989

5,184

73,352

Assets of operations classified as held for sale

1,197

455

-

12,541

-

-

-

-

-

14,193

Total assets

258,171

13,015

5,908

89,306

3,091

25,452

13,878

2,670

12,759

424,250

Insurance liabilities

 

 

 

 

 

 

 

 

 

 

Long-term business and outstanding claims provisions

104,326

5,414

2,716

15,036

2,509

9,382

3,614

-

35

143,032

Unearned premiums

260

2,268

1,215

567

63

273

77

-

-

4,723

Other insurance liabilities

-

77

92

50

-

-

-

-

3

222

Liability for investment contracts

118,071

-

-

47,196

2

11,298

7,738

1,701

-

186,006

Unallocated divisible surplus

2,609

-

-

5,324

56

1,359

276

-

-

9,624

Net asset value attributable to unitholders

84

-

-

2,665

-

471

-

-

9,825

13,045

External borrowings

1,914

-

-

-

-

55

-

-

7,712

9,681

Other liabilities, including inter-segment liabilities

17,754

83

904

4,043

107

752

581

471

295

24,990

Liabilities of operations classified as held for sale

1,171

395

-

12,050

-

-

-

-

-

13,616

Total liabilities

246,189

8,237

4,927

86,931

2,737

23,590

12,286

2,172

17,870

404,939

Total equity

 

 

 

 

 

 

 

 

 

19,311

Total equity and liabilities

 

 

 

 

 

 

 

 

 

424,250

 

 

 

 

 

 

 

Page 53

 

 

B5 - Segmental information continued

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

 

United Kingdom & Ireland

 

 

 

Europe

 

 

 

 

 

Life
£m

GI
£m

Canada
£m

France
 £m

Poland
 £m

Italy, Spain and Other
 £m

Asia
£m

Aviva Investors
£m

Other Group activities
 £m

Total
£m

Goodwill

663

1,018

88

-

26

199

51

-

-

2,045

Acquired value of in-force business and intangible assets

3,152

160

292

86

12

619

1,062

9

76

5,468

Interests in, and loans to, joint ventures and associates

1,257

-

13

169

48

71

527

-

-

2,085

Property and equipment

78

27

24

240

4

5

12

5

92

487

Investment property

6,504

208

-

2,878

-

1

-

951

226

10,768

Loans

23,793

5

170

757

-

22

37

-

-

24,784

Financial investments

173,069

4,324

4,670

68,427

3,015

24,108

11,460

574

10,188

299,835

Deferred acquisition costs

1,224

507

360

280

45

82

113

3

-

2,614

Other assets

52,754

6,175

1,372

7,716

237

1,644

1,479

961

6,967

79,305

Assets of operations classified as held for sale

-

-

-

13,028

-

-

-

-

-

13,028

Total assets

262,494

12,424

6,989

93,581

3,387

26,751

14,741

2,503

17,549

440,419

Insurance liabilities

 

 

 

 

 

 

 

 

 

 

Long-term business and outstanding claims provisions

104,194

6,098

3,248

15,932

2,698

10,241

3,750

-

12

146,173

Unearned premiums

227

2,136

1,527

463

68

281

64

-

-

4,766

Other insurance liabilities

-

72

118

51

-

-

-

-

3

244

Liability for investment contracts

125,198

-

-

49,929

2

12,000

8,395

1,571

-

197,095

Unallocated divisible surplus

2,858

-

-

5,151

60

1,074

206

-

-

9,349

Net asset value attributable to unitholders

76

-

-

2,349

-

509

-

-

12,704

15,638

External borrowings

1,793

-

-

1

-

46

-

-

8,455

10,295

Other liabilities, including inter-segment liabilities

15,701

(404)

1,107

4,694

139

758

645

396

1,778

24,814

Liabilities of operations classified as held for sale

-

-

-

12,494

-

-

-

-

-

12,494

Total liabilities

250,047

7,902

6,000

91,064

2,967

24,909

13,060

1,967

22,952

420,868

Total equity

 

 

 

 

 

 

 

 

 

19,551

Total equity and liabilities

 

 

 

 

 

 

 

 

 

440,419

(b) Further analysis by products and services

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

Long-term business

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

General insurance and health

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

Fund management

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

Other

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

 

 

 

 

 

 

Page 54

 

 

 

B5 - Segmental information continued

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

 

Long-term business
£m

General insurance and

health2

 £m

Fund management £m

Other
£m

Total
 £m

Gross written premiums1

8,114

5,462

-

-

13,576

Premiums ceded to reinsurers

(838)

(238)

-

-

(1,076)

Premiums written net of reinsurance

7,276

5,224

-

-

12,500

Net change in provision for unearned premiums

-

(365)

-

-

(365)

Net earned premiums

7,276

4,859

-

-

12,135

Fee and commission income

710

7

178

230

1,125

 

7,986

4,866

178

230

13,260

Net investment income/(expense)

10,443

122

(1)

190

10,754

Inter-segment revenue

-

-

115

-

115

Share of profit of joint ventures and associates

10

-

-

-

10

Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates

196

6

-

-

202

Segmental income

18,635

4,994

292

420

24,341

Claims and benefits paid, net of recoveries from reinsurers

(9,418)

(3,083)

-

-

(12,501)

Change in insurance liabilities, net of reinsurance

(1,620)

(64)

-

-

(1,684)

Change in investment contract provisions

(5,584)

-

-

-

(5,584)

Change in unallocated divisible surplus

794

-

-

-

794

Fee and commission expense

(610)

(1,258)

(20)

(312)

(2,200)

Other expenses

(799)

(295)

(208)

(367)

(1,669)

Inter-segment expenses

(107)

(7)

-

(1)

(115)

Finance costs

(132)

(2)

-

(219)

(353)

Segmental expenses

(17,476)

(4,709)

(228)

(899)

(23,312)

Profit/(loss) before tax

1,159

285

64

(479)

1,029

Tax attributable to policyholder returns

(154)

-

-

-

(154)

Profit/(loss) before tax attributable to shareholders' profits

1,005

285

64

(479)

875

Adjusted for:

 

 

 

 

 

Non-operating items

314

132

5

139

590

Operating profit/(loss) before tax attributable to shareholders' profits

1,319

417

69

(340)

1,465

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

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

 

 

 

 

 

 

 

Page 55

 

 

B5 - Segmental information continued

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

 

Long-term business
£m

General insurance and

health2

£m

Fund management £m

Other
£m

Total
 £m

Gross written premiums1

7,733

4,860

-

-

12,593

Premiums ceded to reinsurers

(845)

(315)

-

-

(1,160)

Premiums written net of reinsurance

6,888

4,545

-

-

11,433

Net change in provision for unearned premiums

-

(348)

-

-

(348)

Net earned premiums

6,888

4,197

-

-

11,085

Fee and commission income

638

20

139

199

996

 

7,526

4,217

139

199

12,081

Net investment income/(expense)

14,905

209

(1)

51

15,164

Inter-segment revenue

-

-

119

-

119

Share of profit of joint ventures and associates

193

2

-

-

195

(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates

(8)

(11)

-

1

(18)

Segmental income

22,616

4,417

257

251

27,541

Claims and benefits paid, net of recoveries from reinsurers

(8,782)

(2,671)

-

-

(11,453)

Change in insurance liabilities, net of reinsurance

(5,739)

(187)

-

-

(5,926)

Change in investment contract provisions

(4,576)

-

-

-

(4,576)

Change in unallocated divisible surplus

(792)

-

-

-

(792)

Fee and commission expense

(451)

(1,102)

(17)

(84)

(1,654)

Other expenses

(976)

(261)

(206)

(628)

(2,071)

Inter-segment expenses

(113)

(6)

-

-

(119)

Finance costs

(112)

(2)

-

(181)

(295)

Segmental expenses

(21,541)

(4,229)

(223)

(893)

(26,886)

Profit/(loss) before tax

1,075

188

34

(642)

655

Tax attributable to policyholder returns

(318)

-

-

-

(318)

Profit/(loss) before tax attributable to shareholders' profits

757

188

34

(642)

337

Adjusted for:

 

 

 

 

 

Non-operating items

469

146

15

358

988

Operating profit/(loss) before tax attributable to shareholders' profits

1,226

334

49

(284)

1,325

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

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

 

 

 

 

 

 

Page 56

 

 

 

B5 - Segmental information continued

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

 

Long-term business
 £m

General insurance and

health2

£m

Fund management £m

Other
 £m

Total
£m

Gross written premiums1

15,748

9,694

-

-

25,442

Premiums ceded to reinsurers

(1,697)

(667)

-

-

(2,364)

Premiums written net of reinsurance

14,051

9,027

-

-

23,078

Net change in provision for unearned premiums

-

(210)

-

-

(210)

Net earned premiums

14,051

8,817

-

-

22,868

Fee and commission income

1,234

26

300

402

1,962

 

15,285

8,843

300

402

24,830

Net investment income/(expense)

29,695

383

(2)

181

30,257

Inter-segment revenue

-

-

239

-

239

Share of profit of joint ventures and associates

213

3

-

-

216

(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates

(3)

(8)

-

-

(11)

Segmental income

45,190

9,221

537

583

55,531

Claims and benefits paid, net of recoveries from reinsurers

(18,026)

(5,756)

-

-

(23,782)

Change in insurance liabilities, net of reinsurance

(6,249)

(644)

-

-

(6,893)

Change in investment contract provisions

(14,039)

-

-

-

(14,039)

Change in unallocated divisible surplus

(381)

-

-

-

(381)

Fee and commission expense

(1,369)

(2,299)

(33)

(184)

(3,885)

Other expenses

(1,887)

(521)

(396)

(1,049)

(3,853)

Inter-segment expenses

(222)

(12)

-

(5)

(239)

Finance costs

(183)

(5)

-

(438)

(626)

Segmental expenses

(42,356)

(9,237)

(429)

(1,676)

(53,698)

Profit/(loss) before tax

2,834

(16)

108

(1,093)

1,833

Tax attributable to policyholder returns

(640)

-

-

-

(640)

Profit/(loss) before tax attributable to shareholders' profits

2,194

(16)

108

(1,093)

1,193

Adjusted for:

 

 

 

 

 

Non-operating items

448

849

30

490

1,817

Operating profit/(loss) before tax attributable to shareholders' profits

2,642

833

138

(603)

3,010

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

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

 

 

 

 

 

 

Page 57

 

 

B5 - Segmental information continued

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

 

Long-term business
 £m

General insurance and health
 £m

Fund management £m

Other
£m

Total
 £m

Goodwill

755

1,086

3

67

1,911

Acquired value of in-force business and intangible assets

4,304

458

6

73

4,841

Interests in, and loans to, joint ventures and associates

1,663

10

-

13

1,686

Property and equipment

262

125

4

119

510

Investment property

10,197

344

-

178

10,719

Loans

25,288

164

-

-

25,452

Financial investments

289,348

11,432

51

8,391

309,222

Deferred acquisition costs

1,756

1,142

-

-

2,898

Other assets

54,045

9,529

953

12,205

76,732

Assets of operations classified as held for sale

5,733

309

-

-

6,042

Total assets

393,351

24,599

1,017

21,046

440,013

Gross insurance liabilities

133,908

16,806

-

-

150,714

Gross liabilities for investment contracts

203,726

-

-

-

203,726

Unallocated divisible surplus

8,524

-

-

-

8,524

Net asset value attributable to unitholders

3,217

-

-

15,252

18,469

External borrowings

1,702

-

-

8,636

10,338

Other liabilities, including inter-segment liabilities

19,122

1,195

440

2,972

23,729

Liabilities of operations classified as held for sale

5,006

174

-

-

5,180

Total liabilities

375,205

18,175

440

26,860

420,680

Total equity

 

 

 

 

19,333

Total equity and liabilities

 

 

 

 

440,013

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

 

Long-term business
£m

General insurance and health
 £m

Fund management £m

Other
£m

Total
 £m

Goodwill

887

1,025

-

67

1,979

Acquired value of in-force business and intangible assets

5,062

346

12

30

5,450

Interests in, and loans to, joint ventures and associates

2,167

39

-

8

2,214

Property and equipment

280

107

2

93

482

Investment property

10,479

368

-

259

11,106

Loans

24,135

170

-

-

24,305

Financial investments

270,739

10,527

32

7,162

288,460

Deferred acquisition costs

1,729

976

4

-

2,709

Other assets

56,016

9,680

901

6,755

73,352

Assets of operations classified as held for sale

13,738

455

-

-

14,193

Total assets

385,232

23,693

951

14,374

424,250

Gross insurance liabilities

132,840

15,137

-

-

147,977

Gross liabilities for investment contracts

186,006

-

-

-

186,006

Unallocated divisible surplus

9,624

-

-

-

9,624

Net asset value attributable to unitholders

3,221

-

-

9,824

13,045

External borrowings

1,872

-

-

7,809

9,681

Other liabilities, including inter-segment liabilities

20,694

1,416

455

2,425

24,990

Liabilities of operations classified as held for sale

13,221

395

-

-

13,616

Total liabilities

367,478

16,948

455

20,058

404,939

Total equity

 

 

 

 

19,311

Total equity and liabilities

 

 

 

 

424,250

 

 

 

 

 

Page 58

 

 

 

B5 - Segmental information continued

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

 

Long-term business
£m

General insurance and health
 £m

Fund management £m

Other
 £m

Total
£m

Goodwill

889

1,086

3

67

2,045

Acquired value of in-force business and intangible assets

4,845

571

9

43

5,468

Interests in, and loans to, joint ventures and associates

2,030

42

-

13

2,085

Property and equipment

264

109

5

109

487

Investment property

10,202

341

-

225

10,768

Loans

24,607

177

-

-

24,784

Financial investments

277,889

11,699

51

10,196

299,835

Deferred acquisition costs

1,574

1,037

3

-

2,614

Other assets

61,780

8,995

835

7,695

79,305

Assets of operations classified as held for sale

13,028

-

-

-

13,028

Total assets

397,108

24,057

906

18,348

440,419

Gross insurance liabilities

134,695

16,488

-

-

151,183

Gross liabilities for investment contracts

197,095

-

-

-

197,095

Unallocated divisible surplus

9,349

-

-

-

9,349

Net asset value attributable to unitholders

2,934

-

-

12,704

15,638

External borrowings

1,718

-

-

8,577

10,295

Other liabilities, including inter-segment liabilities

19,930

1,215

371

3,298

24,814

Liabilities of operations classified as held for sale

12,494

-

-

-

12,494

Total liabilities

378,215

17,703

371

24,579

420,868

Total equity

 

 

 

 

19,551

Total equity and liabilities

 

 

 

 

440,419

 

 

 

 

Page 59

 

 

B6 - Tax

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

(a)  Tax charged to the income statement

(i)   The total tax charge comprises:

 

6 months
 2017
 £m

6 months
2016
 £m

Full Year
2016
 £m

Current tax

 

 

 

For the period

269

602

930

Prior period adjustments

8

(6)

1

Total current tax

277

596

931

Deferred tax

 

 

 

Origination and reversal of temporary differences

48

(131)

72

Changes in tax rates or tax laws

(13)

(11)

(14)

Write down/(back) of deferred tax assets

1

-

(15)

Total deferred tax

36

(142)

43

Total tax charged to income statement

313

454

974

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

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

 

6 months
2017
£m

6 months
 2016
£m

Full Year
 2016
£m

UK tax

209

312

688

Overseas tax

104

142

286

 

313

454

974

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

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

 

6 months
2017
£m

6 months
2016
£m

Full Year
2016
£m

Current tax

 

 

 

In respect of pensions and other post-retirement obligations

(29)

(16)

(25)

In respect of foreign exchange movements

3

22

31

 

(26)

6

6

Deferred tax

 

 

 

In respect of pensions and other post-retirement obligations

18

185

94

In respect of fair value (losses)/gains on owner-occupied properties

(1)

1

1

In respect of unrealised (losses)/gains on investments

(8)

9

3

 

9

195

98

Total tax (credited)/charged to other comprehensive income

(17)

201

104

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

 

 

 

 

 

 

 

Page 60

 

 

B6 - Tax continued

(c) Tax credited to equity

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

(d) Tax reconciliation

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

 

Shareholder £m

Policyholder £m

6 months
2017
 £m

Shareholder £m

Policyholder £m

6 months
2016
 £m

Shareholder £m

Policyholder £m

Full Year
2016
 £m

Total profit before tax

875

154

1,029

337

318

655

1,193

640

1,833

 

 

 

 

 

 

 

 

 

 

Tax calculated at standard UK corporation tax rate of 19.25% (2016: 20.00%)

168

30

198

67

64

131

239

128

367

Reconciling items

 

 

 

 

 

 

 

 

 

Different basis of tax - policyholders

-

124

124

-

254

254

-

513

513

Adjustment to tax charge in respect of prior periods

(10)

-

(10)

(1)

-

(1)

(34)

-

(34)

Non-assessable income and items not taxed at the full statutory rate

(8)

-

(8)

9

-

9

39

-

39

Non-taxable (profit)/loss on sale of subsidiaries and associates

(52)

-

(52)

2

-

2

1

-

1

Disallowable expenses

25

-

25

26

-

26

49

-

49

Different local basis of tax on overseas profits

49

-

49

50

-

50

97

(1)

96

Change in future local statutory tax rates

(13)

-

(13)

(11)

-

(11)

(36)

-

(36)

Movement in deferred tax not recognised

(3)

-

(3)

(1)

-

(1)

(13)

-

(13)

Tax effect of profit from joint ventures and associates

2

-

2

-

-

-

(6)

-

(6)

Other

1

-

1

(5)

-

(5)

(2)

-

(2)

Total tax charged to income statement

159

154

313

136

318

454

334

640

974

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

 

6 months
2017
£m

6 months
2016
£m

Full Year
 2016
£m

Tax attributable to policyholder returns

154

318

640

UK corporation tax at a rate of 19.25% (2016: 20.00%) in respect of the policyholder tax deduction

(30)

(64)

(128)

Different local basis of tax of overseas profits

-

-

1

Different basis of tax - policyholders per tax reconciliation

124

254

513

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

 

 

 

Page 61

 

B7 - Earnings per share

(a) Basic earnings per share

(i)   The profit attributable to ordinary shareholders is:

 

 

 

6 months 2017

 

 

6 months 2016

 

 

Full Year 2016

 

Operating profit
£m

Non-operating items
 £m

Total
 £m

Operating profit
£m

Non-operating items
£m

Total
£m

Operating profit
£m

Non-operating items
£m

Total
£m

Profit before tax attributable to shareholders' profits

1,465

(590)

875

1,325

(988)

337

3,010

(1,817)

1,193

Tax attributable to shareholders' profit

(311)

152

(159)

(323)

187

(136)

(706)

372

(334)

Profit for the period

1,154

(438)

716

1,002

(801)

201

2,304

(1,445)

859

Amount attributable to non-controlling interests

(73)

(6)

(79)

(67)

(4)

(71)

(147)

(9)

(156)

Cumulative preference dividends for the period

(9)

-

(9)

(9)

-

(9)

(17)

-

(17)

Coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax)

(23)

-

(23)

(21)

-

(21)

(68)

-

(68)

Profit attributable to ordinary shareholders

1,049

(444)

605

905

(805)

100

2,072

(1,454)

618


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

 

6 months 2017

6 months 2016

Full Year 2016

 

Before tax £m

Net of tax, non-controlling interests, preference dividends

and DCI1

£m

Per share
 p

Before tax £m

Net of tax, non-controlling interests, preference dividends

and DCI1

£m

Per share
 p

Before tax £m

Net of tax, non-controlling interests, preference dividends

and DCI1

£m

Per share
p

Operating profit attributable to ordinary shareholders

1,465

1,049

25.8

1,325

905

22.4

3,010

2,072

51.1

Non-operating items:

 

 

 

 

 

 

 

 

 

Investment return variances and economic assumption changes on long-term business

(179)

(129)

(3.2)

6

(2)

-

379

313

7.8

Short-term fluctuation in return on investments backing non-long-term business

(205)

(166)

(4.1)

(338)

(267)

(6.6)

(518)

(398)

(9.8)

Economic assumption changes on general insurance and health business

(12)

(10)

(0.2)

(123)

(98)

(2.4)

(242)

(193)

(4.8)

Impairment of goodwill, joint ventures and associates and other amounts expensed

(19)

(19)

(0.5)

-

-

-

-

-

-

Amortisation and impairment of intangibles

(91)

(71)

(1.7)

(92)

(68)

(1.7)

(175)

(137)

(3.4)

Amortisation and impairment of acquired value of in-force business

(234)

(201)

(4.9)

(318)

(270)

(6.7)

(540)

(455)

(11.2)

Profit/(loss) on disposal and remeasurement of subsidiaries, joint ventures and associates

202

192

4.7

(18)

(18)

(0.4)

(11)

(16)

(0.4)

Integration and restructuring costs

(52)

(40)

(1.0)

(105)

(82)

(2.1)

(212)

(170)

(4.2)

Other2

-

-

-

-

-

-

(498)

(398)

(9.8)

Profit attributable to ordinary shareholders

875

605

14.9

337

100

2.5

1,193

618

15.3

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

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

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

 

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

 

 

 

 

 

 

 

Page 62

 

 

 

B7 - Earnings per share continued

(b) Diluted earnings per share

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

 

6 months 2017

6 months 2016

Full Year 2016

 

Total
£m

Weighted average number of shares million

Per share
p

Total
£m

Weighted average number of shares million

Per share
 p

Total
 £m

Weighted average number of shares million

Per share
p

Profit attributable to ordinary shareholders

605

4,061

14.9

100

4,046

2.5

618

4,051

15.3

Dilutive effect of share awards and options

-

47

(0.2)

-

39

(0.1)

-

38

(0.2)

Diluted earnings per share

605

4,108

14.7

100

4,085

2.4

618

4,089

15.1


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

 

6 months 2017

6 months 2016

Full Year 2016

 

Total
£m

Weighted average number of shares million

Per share
 p

Total
 £m

Weighted average number of shares million

Per share
p

Total
£m

Weighted average number of shares million

Per share
p

Operating profit attributable to ordinary shareholders

1,049

4,061

25.8

905

4,046

22.4

2,072

4,051

51.1

Dilutive effect of share awards and options

-

47

(0.3)

-

39

(0.2)

-

38

(0.4)

Diluted operating profit per share

1,049

4,108

25.5

905

4,085

22.2

2,072

4,089

50.7

 

 

 

 

 

Page 63

 

 

B8 - Dividends and appropriations

 

6 months
2017
£m

6 months
2016
 £m

Full Year
 2016
£m

Ordinary dividends declared and charged to equity in the period

 

 

 

Final 2016 - 15.88 pence per share, paid on 17 May 2017

646

-

-

Final 2015 - 14.05 pence per share, paid on 17 May 2016

-

570

570

Interim 2016 - 7.42 pence per share, paid on 17 November 2016

-

-

301

 

646

570

871

Dividends waived/unclaimed returned to the Company

-

-

-

Preference dividends declared and charged to equity in the period

9

9

17

Coupon payments on direct capital instrument and tier 1 notes

29

26

85

 

684

605

973

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

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

 

 

 

 

Page 64

 

 

B9 - Insurance liabilities

(a) Carrying amount

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

 

 

 

30 June 2017

 

 

30 June 2016

 

 

31 December 2016

 

Long-term business
£m

General insurance and health
£m

Total
£m

Long-term business
 £m

General insurance and health
 £m

Total
 £m

Long-term business
 £m

General insurance and health
 £m

Total
£m

Long-term business provisions

 

 

 

 

 

 

 

 

 

Participating

53,134

-

53,134

55,145

-

55,145

56,760

-

56,760

Unit-linked non-participating

16,941

-

16,941

15,031

-

15,031

16,026

-

16,026

Other non-participating

65,677

-

65,677

65,172

-

65,172

64,432

-

64,432

 

135,752

-

135,752

135,348

-

135,348

137,218

-

137,218

Outstanding claims provisions

2,090

9,041

11,131

1,980

7,780

9,760

1,925

8,749

10,674

Provision for claims incurred but not reported

-

2,676

2,676

-

2,851

2,851

-

2,960

2,960

 

2,090

11,717

13,807

1,980

10,631

12,611

1,925

11,709

13,634

Provision for unearned premiums

-

5,203

5,203

-

4,723

4,723

-

4,766

4,766

Provision arising from liability adequacy tests1

-

13

13

-

12

12

-

13

13

Total

137,842

16,933

154,775

137,328

15,366

152,694

139,143

16,488

155,631

Less: Amounts classified as held for sale

(3,934)

(127)

(4,061)

(4,488)

(229)

(4,717)

(4,448)

-

(4,448)

 

133,908

16,806

150,714

132,840

15,137

147,977

134,695

16,488

151,183

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

(ii) Change in insurance liabilities recognised as an expense

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

30 June 2017

Gross
£m

Reinsurance £m

Net
 £m

Long-term business

 

 

 

Change in long-term business provisions (note B9(b))

2,000

(523)

1,477

Change in provision for outstanding claims

147

(4)

143

 

2,147

(527)

1,620

General insurance and health

 

 

 

Change in insurance liabilities (note B9(c))

(8)

73

65

Less: Unwind of discount on GI reserves and other

(5)

4

(1)

 

(13)

77

64

Total change in insurance liabilities

2,134

(450)

1,684

 

30 June 2016

Gross
 £m

Reinsurance £m

Net
£m

Long-term business

 

 

 

Change in long-term business provisions (note B9(b))

6,144

(564)

5,580

Change in provision for outstanding claims

171

(12)

159

 

6,315

(576)

5,739

General insurance and health

 

 

 

Change in insurance liabilities (note B9(c))

498

(310)

188

Less: Unwind of discount on GI reserves and other

(5)

4

(1)

 

493

(306)

187

Total change in insurance liabilities

6,808

(882)

5,926

 

31 December 2016

Gross
£m

Reinsurance1

£m

Net
£m

Long-term business

 

 

 

Change in long-term business provisions (note B9(b))

7,164

(993)

6,171

Change in provision for outstanding claims

91

(13)

78

 

7,255

(1,006)

6,249

General insurance and health

 

 

 

Change in insurance liabilities (note B9(c))2

867

(222)

645

Less: Unwind of discount on GI reserves and other

(11)

10

(1)

 

856

(212)

644

Total change in insurance liabilities

8,111

(1,218)

6,893

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

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

 

 

 

 

 

 

 

Page 65

 

 

B9 - Insurance liabilities continued

(b) Movements in long-term business liabilities 

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

 

6 months
2017
£m

6 months
 2016
£m

Full Year
 2016
£m

Carrying amount at 1 January

137,218

125,348

125,348

Provisions in respect of new business

2,959

2,596

5,224

Expected change in existing business provisions

(4,027)

(3,778)

(8,235)

Variance between actual and expected experience

1,512

942

4,752

Impact of operating assumption changes

(2)

(125)

(536)

Impact of economic assumption changes

1,274

6,529

5,930

Other movements1

284

(20)

29

Change in liability recognised as an expense (note B9 a(ii))

2,000

6,144

7,164

Effect of portfolio transfers, acquisitions and disposals2

(4,429)

-

-

Foreign exchange rate movements

897

3,861

4,761

Other movements

66

(5)

(55)

Carrying amount at 30 June/31 December

135,752

135,348

137,218

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

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

(c) Movements in general insurance and health liabilities

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

 

6 months
 2017
 £m

6 months
2016
 £m

Full Year
 2016
£m

Carrying amount at 1 January

11,709

9,446

9,446

Impact of changes in assumptions

(12)

239

324

Claim losses and expenses incurred in the current period

3,342

3,266

6,703

Decrease in estimated claim losses and expenses incurred in prior periods

(88)

(179)

(7)

Incurred claims losses and expenses

3,242

3,326

7,020

Less:

 

 

 

Payments made on claims incurred in the current period

(1,363)

(1,260)

(3,505)

Payments made on claims incurred in prior periods

(2,014)

(1,716)

(2,893)

Recoveries on claim payments

122

143

234

Claims payments made in the period, net of recoveries

(3,255)

(2,833)

(6,164)

Unwind of discounting

5

5

11

Changes in claims reserve recognised as an expense (note B9 a(ii))

(8)

498

867

Effect of portfolio transfers, acquisitions and disposals

2

(38)

430

Foreign exchange rate movements

14

725

966

Other movements

-

-

-

Carrying amount at 30 June/31 December

11,717

10,631

11,709

 

 

 

 

 

 

 

 

Page 66

 

 

 

B10 - Liability for investment contracts

(a) Carrying amount

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

 

30 June
2017
£m

30 June
2016
£m

31 December
2016
£m

Long-term business

 

 

 

Participating contracts

85,435

87,709

89,739

Non-participating contracts at fair value

118,291

105,952

114,531

Total

203,726

193,661

204,270

Less: Amounts classified as held for sale

-

(7,655)

(7,175)

 

203,726

186,006

197,095

(b) Movements in participating investment contracts 

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

 

6 months
2017
£m

6 months
2016
£m

Full Year
2016
£m

Carrying amount at 1 January

89,739

78,048

78,048

Provisions in respect of new business

2,339

2,332

4,584

Expected change in existing business provisions

(2,510)

(2,176)

(4,893)

Variance between actual and expected experience

1,085

1,011

3,084

Impact of operating assumption changes

(1)

-

36

Impact of economic assumption changes

92

236

450

Other movements1

132

(5)

(347)

Change in liability recognised as an expense2

1,137

1,398

2,914

Effect of portfolio transfers, acquisitions and disposals3

(7,243)

-

-

Foreign exchange rate movements

1,780

6,992

8,721

Other movements4

22

1,271

56

Carrying amount at 30 June/31 December

85,435

87,709

89,739

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

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

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

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

(c) Movements in non-participating investment contracts

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

 

6 months
 2017
£m

6 months
2016
 £m

Full Year
2016
£m

Carrying amount at 1 January

114,531

103,034

103,034

Provisions in respect of new business

1,796

1,455

3,222

Expected change in existing business provisions

(2,129)

(1,775)

(3,481)

Variance between actual and expected experience

3,872

3,660

11,105

Impact of operating assumption changes

-

-

17

Impact of economic assumption changes

(1)

1

2

Other movements

-

(2)

334

Change in liability

3,538

3,339

11,199

Effect of portfolio transfers, acquisitions and disposals1

(4)

-

(757)

Foreign exchange rate movements

199

850

1,065

Other movements2

27

(1,271)

(10)

Carrying amount at 30 June/31 December

118,291

105,952

114,531

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

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

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

 

 

 

 

 

 

 

 

Page 67

 

 

B11 - Reinsurance assets

The reinsurance assets at 30 June/31 December comprised:

 

30 June
2017
£m

30 June
2016
 £m

31 December 2016
£m

Long-term business

 

 

 

Insurance contracts

6,278

5,712

6,186

Participating investment contracts

22

12

2

Non-participating investment contracts1

10,170

15,859

18,366

 

16,470

21,583

24,554

Outstanding claims provisions

67

66

65

 

16,537

21,649

24,619

General insurance and health

 

 

 

Outstanding claims provisions2

1,065

1,055

1,090

Provisions for claims incurred but not reported2

741

911

795

 

1,806

1,966

1,885

Provisions for unearned premiums

270

340

250

 

2,076

2,306

2,135

 

18,613

23,955

26,754

Less: Amounts classified as held for sale

(101)

(972)

(411)

Total

18,512

22,983

26,343

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

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

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

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

 

Effect on profit 6 months
2017
£m

Effect on profit 6 months
2016
£m

Effect on profit Full Year
 2016
£m

Assumptions

 

 

 

Long-term insurance business

 

 

 

Interest rates

(970)

(4,269)

(4,490)

Expenses

(2)

-

48

Persistency rates

-

-

(80)

Mortality for assurance contracts

-

-

(11)

Mortality for annuity contracts

-

63

294

Tax and other assumptions

-

89

97

Investment contracts

 

 

 

Expenses

(1)

-

-

General insurance and health business

 

 

 

Change in discount rate assumptions

(12)

(123)

(242)

Change in expense ratio and other assumptions

-

-

-

Total

(985)

(4,240)

(4,384)

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

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

 

 

 

 

 

 

 

Page 68

 

 

 

B13 - Unallocated divisible surplus

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

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

 

6 months
2017
£m

Restated1

6 months
2016
£m

Full Year
 2016
 £m

Carrying amount at 1 January

10,208

8,811

8,811

Change in participating fund assets

554

4,497

4,977

Change in participating fund liabilities

(1,348)

(3,705)

(4,596)

Change in liability recognised as an expense

(794)

792

381

Effect of portfolio transfers, acquisitions and disposals2

(832)

-

-

Foreign exchange rate movements

190

873

1,016

Carrying amount at 30 June/31 December

8,772

10,476

10,208

Less: Amounts classified as held for sale

(248)

(852)

(859)

 

8,524

9,624

9,349

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

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

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

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

 

 

 

 

 

 

Page 69

 

 

B14 - Borrowings

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

(a) Analysis of total borrowings:

Total borrowings comprise:

 

30 June
2017
£m

30 June
2016
 £m

31 December 2016
 £m

Core structural borrowings, at amortised cost

8,636

7,809

8,577

Operational borrowings, at amortised cost

501

566

608

Operational borrowings, at fair value

1,214

1,306

1,110

 

1,715

1,872

1,718

 

10,351

9,681

10,295

Less: Amounts classified as held for sale

(13)

-

-

Total

10,338

9,681

10,295

(b) Core structural borrowings

The carrying amounts of these borrowings are:

 

30 June
 2017
£m

30 June
2016
£m

31 December 2016
 £m

Subordinated debt

 

 

 

6.125% £700 million subordinated notes 2036

693

693

694

6.125% £800 million undated subordinated notes

795

795

795

6.875% £600 million subordinated notes 2058

594

594

594

6.875% €500 million subordinated notes 2038

439

415

427

12.00% £162 million subordinated notes 2021

208

219

213

8.25% £500 million subordinated notes 2022

590

607

598

6.625% £450 million subordinated notes 2041

448

447

448

8.25% $400 million subordinated notes 2041

-

298

-

7.875% $575 million undated subordinated notes

463

463

494

6.125% €650 million subordinated notes 2043

568

538

552

3.875% €700 million subordinated notes 2044

611

577

593

5.125% £400 million subordinated notes 2050

395

394

394

3.375% €900 million subordinated notes 2045

780

738

758

4.50% C$450 million subordinated notes 2021

265

256

269

4.375% £400 million subordinated notes 2049

393

-

393

 

7,242

7,034

7,222

Senior notes

 

 

 

0.100% €350 million senior notes 2018

306

-

298

0.625% €500 million senior notes 2023

436

-

424

 

742

-

722

Commercial paper

661

815

642

 

8,645

7,849

8,586

Less: Amount held by Group companies

 (9)

 (40)

 (9)

Total

8,636

7,809

8,577

 

(c) Operational borrowings

The carrying amounts of these borrowings are:

 

30 June
 2017
£m

30 June
2016
£m

31 December 2016
 £m

Amounts owed to financial institutions

 

 

 

Loans1

501

566

608

Securitised mortgage loan notes

 

 

 

UK lifetime mortgage business

1,214

1,306

1,110

Total

1,715

1,872

1,718

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

 

 

 

 

Page 70

 

B15 - Pension obligations and other provisions

(a)  Carrying amounts

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

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

 

30 June
 2017
£m

30 June
2016
£m

31 December 2016
£m

Total IAS 19 obligations to the main staff pension schemes

892

786

843

Deficits in other staff pension schemes

60

52

56

Total IAS 19 obligations to staff pension schemes

952

838

899

Restructuring provisions

80

170

111

Other provisions

397

476

501

Total provisions

1,429

1,484

1,511

Less: Amounts classified as held for sale

(3)

-

(1)

 

1,426

1,484

1,510

(ii) Pension obligations

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

 

30 June
 2017
£m

30 June
2016
£m

31 December 2016
£m

Total fair value of assets

19,225

19,726

20,327

Present value of scheme liabilities

(16,115)

(16,399)

(17,347)

Net surplus in the schemes

3,110

3,327

2,980

Less: consolidation elimination for non-transferable Group insurance policy1

(628)

(605)

(633)

Net IAS 19 surplus in the schemes

2,482

2,722

2,347

 

 

 

 

Surplus included in other assets

3,374

3,508

3,190

Deficits included in provisions

(892)

(786)

(843)

Net IAS 19 surplus in the schemes

2,482

2,722

2,347

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

(b)  Movements in the schemes' surpluses and deficits

Movements in the pension schemes' surpluses and deficits comprise:

 

6 months
2017

6 months
2016

Full Year
2016

 

£m

£m

£m

Net IAS 19 surplus in the schemes at 1 January

2,347

1,837

1,837

 

 

 

 

Past service costs - amendments

-

(1)

(1)

Administrative expenses1

(8)

(7)

(13)

Total pension cost charged to net operating expenses

(8)

(8)

(14)

Net interest credited/(charged) to investment income/(finance costs)2

30

37

73

Total recognised in income statement

22

29

59

 

 

 

 

Remeasurements:

 

 

 

Actual return on these assets

16

3,090

4,044

Less: Interest income on scheme assets

(239)

(298)

(590)

Return on scheme assets excluding amounts in interest income

(223)

2,792

3,454

Gains/(losses) from change in financial assumptions

282

(2,022)

(3,944)

(Losses)/gains from change in demographic assumptions

(36)

-

363

Experience (losses)/gains

(59)

6

438

Total remeasurements recognised in other comprehensive income

(36)

776

311

 

 

 

 

Employer contributions

153

123

190

Administrative expenses paid from scheme assets1

-

-

(2)

Foreign exchange rate movements

(4)

(43)

(48)

Net IAS 19 surplus in the schemes at 30 June/31 December

2,482

2,722

2,347

1    Administrative expenses are expensed as incurred.

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

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

 

 

 

 

 

Page 71

 

 

B16 - Related party transactions

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

B17 - Fair value

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

(a) Basis for determining fair value hierarchy

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

Level 1

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

Level 2

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

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

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

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

· Market-corroborated inputs.

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

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

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

Level 3

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

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

(b)  Changes to valuation technique

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

 

 

 

 

 

 

Page 72

 

 

 

B17 - Fair value continued

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

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

 

 

30 June
 2017

 

30 June
 2016

 

31 December 2016

 

Fair value

Carrying amount

Fair value

Carrying amount

Fair value

Carrying amount

 

£m

£m

£m

£m

£m

£m

Financial assets

 

 

 

 

 

 

Loans1

25,459

25,452

24,259

24,305

24,705

24,784

Financial Investments

309,222

309,222

288,460

288,460

299,835

299,835

Fixed maturity securities

171,070

171,070

173,798

173,798

175,536

175,536

Equity securities

73,575

73,575

63,331

63,331

68,348

68,348

Other investments (including derivatives)

64,577

64,577

51,331

51,331

55,951

55,951

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

Non-participating investment contracts2

118,291

118,291

105,243

105,243

114,527

114,527

Net asset value attributable to unitholders

18,469

18,469

13,045

13,045

15,638

15,638

Borrowings1

11,545

10,338

9,866

9,681

10,926

10,295

Derivative liabilities3

6,093

6,093

8,127

8,127

6,795

6,795

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

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

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

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

· Receivables

· Cash and cash equivalents

· Payables and other financial liabilities

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

(d) Fair value hierarchy analysis

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

 

Fair value hierarchy

 

 

 

 

Level 1

Level 2

Level 3

Sub-total Fair value

Amortised cost

Total carrying value

At 30 June 2017

£m

£m

£m

£m

£m

£m

Recurring fair value measurements

 

 

 

 

 

 

Investment Property

-

-

10,719

10,719

-

10,719

Loans

-

3

22,225

22,228

3,224

25,452

Financial investments measured at fair value

 

 

 

 

 

 

Fixed maturity securities

98,044

56,430

16,596

171,070

-

171,070

Equity securities

72,675

-

900

73,575

-

73,575

Other investments (including derivatives)

55,072

5,164

4,341

64,577

-

64,577

Financial assets of operations classified as held for sale

4,135

705

5

4,845

-

4,845

Total

229,926

62,302

54,786

347,014

3,224

350,238

Financial liabilities measured at fair value

 

 

 

 

 

 

Non-participating investment contracts1

114,721

227

3,343

118,291

-

118,291

Net asset value attributable to unit holders

18,445

-

24

18,469

-

18,469

Borrowings

-

-

1,214

1,214

9,124

10,338

Derivative liabilities2

431

5,510

152

6,093

-

6,093

Financial liabilities of operations classified as held for sale

555

-

-

555

-

555

Total

134,152

5,737

4,733

144,622

9,124

153,746

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

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

 

Fair value hierarchy

 

 

Level 1

Level 2

Level 3

Total fair value

At 30 June 2017

£m

£m

£m

£m

Non-recurring fair value measurement1

 

 

 

 

Properties occupied by group companies

-

-

327

327

Total

-

-

327

327

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

 

 

 

 

 

 

Page 73

 

 

 

B17 - Fair value continued

 

Fair value hierarchy

 

 

 

 

Level 1

Level 2

Level 3

Sub-total
fair value

Amortised
cost

Total
carrying
value

At 30 June 2016

£m

£m

£m

£m

£m

£m

Recurring fair value measurements

 

 

 

 

 

 

Investment Property

-

-

11,106

11,106

-

11,106

Loans

-

1,000

19,781

20,781

3,524

24,305

Financial investments measured at fair value

 

 

 

 

 

 

Fixed maturity securities

94,715

63,214

15,869

173,798

-

173,798

Equity securities

62,341

-

990

63,331

-

63,331

Other investments (including derivatives)

39,265

8,043

4,023

51,331

-

51,331

Financial assets of operations classified as held for sale

9,462

445

852

10,759

64

10,823

Total

205,783

72,702

52,621

331,106

3,588

334,694

Financial liabilities measured at fair value

 

 

 

 

 

 

Non-participating investment contracts1

101,612

300

3,331

105,243

-

105,243

Net asset value attributable to unit holders

13,022

-

23

13,045

-

13,045

Borrowings

-

809

497

1,306

8,375

9,681

Derivative liabilities2

274

5,722

2,131

8,127

-

8,127

Financial liabilities of operations classified as held for sale

705

4

-

709

-

709

Total

115,613

6,835

5,982

128,430

8,375

136,805

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

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

 

Fair value hierarchy

 

 

Level 1

Level 2

Level 3

Total
fair value

At 30 June 2016

£m

£m

£m

£m

Non-recurring fair value measurement1

 

 

 

 

Properties occupied by group companies

-

-

347

347

Total

-

-

347

347

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

 

Fair value hierarchy

 

 

 

 

Level 1

Level 2

Level 3

Sub-total
 Fair value

Amortised
cost

Total
carrying value

At 31 December 2016

£m

£m

£m

£m

£m

£m

Recurring fair value measurements

 

 

 

 

 

 

Investment Property

-

-

10,768

10,768

-

10,768

Loans

-

360

20,923

21,283

3,501

24,784

Financial investments measured at fair value

 

 

 

 

 

 

Fixed maturity securities

96,102

62,987

16,447

175,536

-

175,536

Equity securities

67,435

-

913

68,348

-

68,348

Other investments (including derivatives)

45,710

6,240

4,001

55,951

-

55,951

Financial assets of operations classified as held for sale

9,408

366

980

10,754

75

10,829

Total

218,655

69,953

54,032

342,640

3,576

346,216

Financial liabilities measured at fair value

 

 

 

 

 

 

Non-participating investment contracts1

110,900

219

3,408

114,527

-

114,527

Net asset value attributable to unit holders

15,618

-

20

15,638

-

15,638

Borrowings

-

-

1,110

1,110

9,185

10,295

Derivative liabilities2

401

4,794

1,600

6,795

-

6,795

Financial liabilities of operations classified as held for sale

-

4

-

4

-

4

Total

126,919

5,017

6,138

138,074

9,185

147,259

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

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

 

Fair value hierarchy

 

 

Level 1

Level 2

Level 3

Total
fair value

At 31 December 2016

£m

£m

£m

£m

Non-recurring fair value measurement1

 

 

 

 

Properties occupied by group companies

-

-

321

321

Total

-

-

321

321

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

 

 

 

 

 

 

Page 74

 

 

 

B17 - Fair value continued

(e) Transfers between Levels of the fair value hierarchy

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

Transfers between Level 1 and Level 2

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

Transfers to/from Level 3

Transfers into Level 3 assets of £1.6 billion included:

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

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

 

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

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


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

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

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

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

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

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

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

 

 

 

 

 

 

Assets

 

 

 

Liabilities

 

Investment
 Property

Loans

Debt securities

Equity securities

Other investments (including derivatives)

Financial assets of operations classified as held
for sale

Non participating investment contracts

Net asset value attributable to unitholders

Derivative liabilities

Borrowings

At 30 June 2017

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

Opening balance at 1 January 2017

10,768

20,923

16,447

913

4,001

980

(3,408)

(20)

(1,600)

(1,110)

Total net gains/(losses) recognised in the income statement1

223

536

154

(64)

(75)

-

(25)

(4)

(52)

(121)

Purchases

217

505

358

57

699

-

(70)

-

(40)

-

Issuances

-

72

-

-

-

-

-

-

-

-

Disposals

(577)

(96)

(495)

(12)

(319)

(988)

171

-

156

17

Settlements2

-

(6)

(9)

-

-

-

9

-

-

-

Transfers into Level 3

-

288

1,203

4

61

-

(17)

-

(2)

-

Transfers out of Level 3

-

-

(1,262)

-

(105)

-

4

-

1,387

-

Reclassification to held for sale

(1)

-

-

-

(4)

5

-

-

-

-

Foreign exchange rate movements

89

3

200

2

83

8

(7)

-

(1)

-

Balance at 30 June 2017

10,719

22,225

16,596

900

4,341

5

(3,343)

(24)

(152)

(1,214)

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

2    Settlements include effective settlements of Group holdings.

 

 

 

 

 

 

 

 

 

Page 75

 

 

 

 

 

B17 - Fair value continued

 

 

 

 

 

 

Assets

 

 

 

Liabilities

 

Investment Property

Loans

Debt securities

Equity securities

Other investments (including derivatives)

Financial assets of operations classified as held for sale

Non participating investment contracts

Net asset value attributable to unitholders

Derivative liabilities

Borrowings

At 30 June 2016

£m

£m

£m

£m

£m

£m

£m

 

£m

£m

Opening balance at 1 January 2016

11,301

18,129

14,603

936

4,153

-

(3,421)

(22)

(1,093)

(527)

Total net gains/(losses) recognised in the income statement1

38

1,043

517

51

19

(76)

104

(1)

(952)

28

Purchases

99

46

860

66

240

65

(61)

-

(107)

-

Issuances

-

1,004

4

-

-

-

(22)

-

-

-

Disposals

(604)

(272)

(590)

(85)

(421)

(12)

43

-

25

-

Settlements2

-

(171)

(5)

-

-

-

3

-

-

2

Transfers into Level 3

-

-

1,213

6

22

123

(22)

-

-

-

Transfers out of Level 3

-

-

(1,036)

(1)

(80)

(5)

51

-

-

-

Reclassification to held for sale

(40)

-

(590)

-

(36)

666

-

-

-

-

Foreign exchange movements

312

2

893

17

126

91

(6)

-

(4)

-

Balance at 30 June 2016

11,106

19,781

15,869

990

4,023

852

(3,331)

(23)

(2,131)

(497)

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

2    Settlements include effective settlements of Group holdings.

 

 

 

 

 

 

Assets

 

 

 

Liabilities

 

Investment Property

Loans

Debt securities

Equity securities

Other investments (including derivatives)

Financial assets of operations classified
as held
 for sale

Non participating investment contracts

Net asset value attributable to unitholders

Derivative liabilities

Borrowings

At 31 December 2016

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

Opening balance at 1 January 2016

11,301

18,129

14,603

936

4,153

-

(3,421)

(22)

(1,093)

(527)

Total net gains/(losses) recognised in the income statement1

(75)

483

586

55

161

13

(111)

2

(575)

217

Purchases

721

116

1,587

94

718

228

(184)

-

(302)

-

Issuances

-

2,612

-

-

-

-

(41)

-

-

-

Disposals

(1,534)

(1,140)

(1,528)

(194)

(1,144)

(75)

358

-

196

-

Settlements2

-

-

67

-

-

-

21

-

-

17

Transfers into Level 3

-

718

1,893

-

40

50

(40)

-

-

(817)

Transfers out of Level 3

-

-

(1,284)

(1)

(111)

(15)

81

-

179

-

Reclassification to held for sale

(40)

-

(590)

-

(36)

666

-

-

-

-

Foreign exchange rate movements

395

5

1,113

23

220

113

(71)

-

(5)

-

Balance at 31 December 2016

10,768

20,923

16,447

913

4,001

980

(3,408)

(20)

(1,600)

(1,110)

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

2    Settlements include effective settlements of Group holdings.

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

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

(i) Investment property

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

(ii) Loans

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

 

 

 

 

 

 

 

 

Page 76

 

 

 

B17 - Fair value continued

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

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

(iii) Debt securities

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

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

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

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

(iv) Equity securities

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

(v) Other investments

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

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

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

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

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

 

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

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

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

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

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

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

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

 

 

 

 

 

 

 

Page 77

 

 

 

B17 - Fair value continued

(vi) Liabilities

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

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

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

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

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

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

 

 

 

 

Page 78

 

B18 - Risk management

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

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

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

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

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

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

Risk environment

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

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

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

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

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

Risk profile

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

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

 

 

 

 

 

 

Page 79

 

 

 

B18 - Risk management continued

Material risks and uncertainties

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

(a) Credit risk

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

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

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

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

(b) Market risk

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

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

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

(c) Liquidity risk

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

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

 

 

 

 

 

Page 80

 

 

 

B18 - Risk management continued

(d) Life insurance risk

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

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

(e) General insurance and health insurance risk

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

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

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

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

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

(f) Asset management risk

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

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

(g) Operational risk

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

(h) Brand and reputation risk

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

 

 

 

 

 

 

Page 81

 

 

 

B18 - Risk management continued

(i) Risk and capital management

(i) Sensitivity test analysis

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

(ii) Life insurance and investment contracts

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

(iii) General insurance and health business

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

(iv) Sensitivity test results

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

Sensitivity factor

Description of sensitivity factor applied

Interest rate and investment return

The impact of a change in market interest rates by a 1% increase or decrease. The test allows consistently for similar changes to investment returns and movements in the market value of backing fixed interest securities.

Credit Spreads

The impact of a 0.5% increase in credit spreads over risk-free interest rates on corporate bonds and other non-sovereign credit assets. The test allows for any consequential impact on liability valuations.

Equity/property market values

The impact of a change in equity/property market values by ±10%.

Expenses

The impact of an increase in maintenance expenses by 10%.

Assurance mortality/morbidity (long-term insurance only)

The impact of an increase in mortality/morbidity rates for assurance contracts by 5%.

Annuitant mortality (long-term insurance only)

The impact of a reduction in mortality rates for annuity contracts by 5%.

Gross loss ratios (non-long-term insurance only)

The impact of an increase in gross loss ratios for general insurance and health business by 5%.

Long-term business

Sensitivities as at 30 June 2017

30 June 2017 Impact on profit before tax £m

Interest rates +1%

Interest rates
-1%

Credit spreads +0.5%

Equity/ property
 +10%

Equity/ property
 -10%

Expenses +10%

Assurance mortality
+5%

Annuitant mortality
 -5%

Insurance participating

(20)

-

(15)

(165)

20

(40)

(5)

(15)

Insurance non-participating

(165)

60

(720)

(70)

45

(195)

(95)

(925)

Investment participating

(10)

5

-

(5)

-

(10)

-

-

Investment non-participating

25

(35)

-

45

(60)

(65)

-

-

Assets backing life shareholders' funds

(115)

170

5

(85)

85

-

-

-

Total

(285)

200

(730)

(280)

90

(310)

(100)

(940)

 

 

30 June 2017 Impact on shareholders' equity before tax £m

Interest rates +1%

Interest rates
 -1%

Credit spreads +0.5%

Equity/ property
+10%

Equity/ property
 -10%

Expenses +10%

Assurance mortality
+5%

Annuitant mortality
 -5%

Insurance participating

(20)

-

(15)

(165)

20

(40)

(5)

(15)

Insurance non-participating

(165)

60

(720)

(70)

45

(195)

(95)

(925)

Investment participating

(10)

5

-

(5)

-

(10)

-

-

Investment non-participating

25

(35)

-

45

(60)

(65)

-

-

Assets backing life shareholders' funds

(155)

215

-

(85)

85

-

-

-

Total

(325)

245

(735)

(280)

90

(310)

(100)

(940)

 

 

 

 

 

Page 82

 

 

B18 - Risk management continued

Sensitivities as at 31 December 2016

31 December 2016 Impact on profit before tax £m

Interest rates +1%

Interest rates
 -1%

Credit spreads +0.5%

Equity/ property
+10%

Equity/ property
-10%

Expenses
+10%

Assurance mortality
+5%

Annuitant mortality
-5%

Insurance participating

(50)

30

(10)

(130)

65

(30)

(5)

(15)

Insurance non-participating

(190)

20

(775)

(35)

10

(190)

(90)

(920)

Investment participating

(10)

5

(5)

-

-

(5)

-

-

Investment non-participating

10

(15)

-

50

(70)

(65)

-

-

Assets backing life shareholders' funds

(115)

190

10

(85)

85

-

-

-

Total

(355)

230

(780)

(200)

90

(290)

(95)

(935)

 

31 December 2016 Impact on shareholders' equity before tax £m

Interest rates +1%

Interest rates
-1%

Credit spreads +0.5%

Equity/ property
 +10%

Equity/ property
-10%

Expenses
+10%

Assurance mortality
 +5%

Annuitant mortality
 -5%

Insurance participating

(50)

30

(10)

(130)

65

(30)

(5)

(15)

Insurance non-participating

(190)

20

(775)

(35)

10

(190)

(90)

(920)

Investment participating

(10)

5

(5)

-

-

(5)

-

-

Investment non-participating

10

(15)

-

50

(70)

(65)

-

-

Assets backing life shareholders' funds

(155)

230

5

(85)

85

-

-

-

Total

(395)

270

(785)

(200)

90

(290)

(95)

(935)

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

General insurance and health business sensitivities as at 30 June 2017

30 June 2017 Impact on profit before tax £m

Interest rates +1%

Interest rates
 -1%

Credit spreads +0.5%

Equity/ property
+10%

Equity/ property
 -10%

Expenses +10%

Gross loss ratios
+5%

Gross of reinsurance

(315)

315

(145)

90

(90)

(75)

(150)

Net of reinsurance

(385)

375

(145)

90

(90)

(75)

(145)

 

30 June 2017 Impact on shareholders' equity before tax £m

Interest rates +1%

Interest rates
 -1%

Credit spreads +0.5%

Equity/ property
+10%

Equity/ property
-10%

Expenses +10%

Gross loss ratios
 +5%

Gross of reinsurance

(315)

315

(145)

90

(90)

(25)

(150)

Net of reinsurance

(385)

375

(145)

90

(90)

(25)

(145)

Sensitivities as at 31 December 2016

31 December 2016 Impact on profit before tax £m

Interest rates +1%

Interest rates
 -1%

Credit spreads +0.5%

Equity/ property
+10%

Equity/ property
 -10%

Expenses
+10%

Gross loss ratios
+5%

Gross of reinsurance

(315)

320

(145)

85

(85)

(115)

(340)

Net of reinsurance

(385)

375

(145)

85

(85)

(115)

(320)

 

31 December 2016 Impact on shareholders' equity before tax £m

Interest rates +1%

Interest rates
 -1%

Credit spreads +0.5%

Equity/ property
+10%

Equity/ property
 -10%

Expenses
+10%

Gross loss ratios
+5%

Gross of reinsurance

(315)

320

(145)

85

(85)

(25)

(340)

Net of reinsurance

(385)

375

(145)

85

(85)

(25)

(320)

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

 

 

 

 

 

 

Page 83

 

 

 

B18 - Risk management continued

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

30 June 2017 Impact on profit before tax £m

Interest rates +1%

Interest rates
-1%

Credit spreads +0.5%

Equity/ property
+10%

Equity/ property
 -10%

Total

(35)

30

10

-

5

 

30 June 2017 Impact on shareholders' equity before tax £m

Interest rates +1%

Interest rates
 -1%

Credit spreads +0.5%

Equity/ property
 +10%

Equity/ property
 -10%

Total

(25)

25

10

-

5

 

Sensitivities as at 31 December 2016

31 December 2016 Impact on profit before tax £m

Interest rates +1%

Interest rates
-1%

Credit spreads +0.5%

Equity/ property
 +10%

Equity/ property
-10%

Total

-

-

10

(10)

15

 

31 December 2016 Impact on shareholders' equity before tax £m

Interest rates +1%

Interest rates -1%

Credit spreads +0.5%

Equity/ property +10%

Equity/ property -10%

Total

-

-

10

(10)

15

Limitations of sensitivity analysis

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

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

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

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

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

 

 

 

 

 

Page 84

 

 

 

B19 - Cash and cash equivalents

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

 

30 June
2017
£m

30 June
2016
 £m

31 December 2016
 £m

Cash and cash equivalents

42,456

34,911

38,708

Cash and cash equivalents of operations classified as held for sale

406

683

255

Bank overdrafts

(622)

(759)

(558)

Net cash and cash equivalents at 30 June/31 December

42,240

34,835

38,405

B20 - Contingent liabilities and other risk factors

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

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

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

 

30 June
2017
£m

30 June
 2016
£m

31 December 2016
 £m

Acquired value of in-force business on insurance contracts1

1,646

1,870

1,750

Acquired value of in-force business on investment contracts2

1,967

2,199

2,097

Intangible assets

1,672

1,394

1,633

 

5,285

5,463

5,480

Less: Amounts classified as held for sale

(444)

(13)

(12)

Total

4,841

5,450

5,468

1    On insurance and participating investment contracts.

2    On non-participating investment contracts.

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

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

 

 

 

 

 

Page 85

 

 

Directors' responsibility statement

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

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

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

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

 

 

By order of the Board

 

 

 

 

 

Mark Wilson                                                                            Thomas D. Stoddard

Group chief executive officer                                                  Chief financial officer

2 August 2017

 

 

 

 

 

 

 

Page 86

 

 

Independent review report to Aviva plc

Report on the condensed consolidated interim financial statements

Our conclusion

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

 

What we have reviewed

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

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

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

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

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

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

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

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

Responsibilities for the condensed consolidated interim financial statements and the review

Our responsibilities and those of the directors

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

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

What a review of condensed consolidated interim financial statements involves

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

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

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

 

 

 

 

 

 

 

PricewaterhouseCoopers LLP

Chartered Accountants

2 August 2017

London

 

 

Notes:

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

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

 


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