Aviva plc FY20 results - part 4 of 4

RNS Number : 1060R

Aviva PLC

04 March 2021

START PART 4 of 4

Page 92

Analysis of assets

In this section		Page
C	Analysis of assets
C1	Summary of total assets by fund	93
C2	Summary of total assets by valuation bases	94
C3	Analysis of financial investments by fund	96
C4	Analysis of debt securities	97
C5	Analysis of loans	103
C6	Analysis of equity securities	105
C7	Analysis of investment property	106
C8	Analysis of other financial investments	106
C9	Analysis of available for sale investments	107
C10	Summary of exposure to peripheral European countries	107
C11	Reinsurance assets	108

Page 93

As an insurance business, the Group holds a variety of assets to match the characteristics and duration of its insurance liabilities. Appropriate and effective asset liability matching (on an economic basis) is the principal way in which Aviva manages its investments. To support this, we use a variety of hedging and other risk management strategies to mitigate any residual mismatch risk that is outside of our risk appetite.

C1 - Summary of total assets by fund

2020	Policyholder assets £m	Participating fund assets £m	Shareholder assets £m	Total assets analysed £m	Less: Assets classified as held for sale £m	Balance sheet total £m
Goodwill and acquired value of in-force business and intangible assets	-	-	4,251	4,251	(18)	4,233
Interests in, and loans to, joint ventures and associates	146	819	1,000	1,965	-	1,965
Property and equipment	-	198	639	837	(69)	768
Investment property	6,851	3,876	642	11,369	-	11,369
Loans	2,334	6,421	34,924	43,679	-	43,679
Financial investments
Debt securities	45,781	105,677	64,696	216,154	(13,317)	202,837
Equity securities	86,957	12,827	720	100,504	(100)	100,404
Other investments	34,577	12,009	5,041	51,627	(3,490)	48,137
Reinsurance assets	3,860	476	9,020	13,356	(18)	13,338
Deferred tax assets	-	-	128	128	(9)	119
Current tax assets	-	-	183	183	-	183
Receivables and other financial assets	525	1,571	7,629	9,725	(373)	9,352
Deferred acquisition costs and other assets	27	1,110	4,987	6,124	(26)	6,098
Prepayments and accrued income	372	988	1,505	2,865	(123)	2,742
Cash and cash equivalents	6,555	3,960	6,575	17,090	(190)	16,900
Assets classified as held for sale	-	-	-	-	17,733	17,733
Total	187,985	149,932	141,940	479,857	-	479,857
Total %	39.2%	31.2%	29.6%	100.0%	-	100.0%
2019 Total	186,182	146,226	127,635	460,043	-	460,043
2019 Total %	40.5%	31.8%	27.7%	100.0%	-	100.0%

Page 94

C2 - Summary of total assets by valuation bases

Total assets 2020	Fair value £m	Amortised cost £m	Equity accounted/ tax assets¹ £m	Total £m
Goodwill and acquired value of in-force business and intangible assets	-	4,251	-	4,251
Interests in, and loans to, joint ventures and associates	-	-	1,965	1,965
Property and equipment	403	434	-	837
Investment property	11,369	-	-	11,369
Loans	29,839	13,840	-	43,679
Financial Investments
Debt securities	216,154	-	-	216,154
Equity securities	100,504	-	-	100,504
Other investments	51,627	-	-	51,627
Reinsurance assets	3,859	9,497	-	13,356
Deferred tax assets	-	-	128	128
Current tax assets	-	-	183	183
Receivables and other financial assets	-	9,725	-	9,725
Deferred acquisition costs and other assets	-	6,124	-	6,124
Prepayments and accrued income	-	2,865	-	2,865
Cash and cash equivalents	17,090	-	-	17,090
Total	430,845	46,736	2,276	479,857
Total %	89.8%	9.7%	0.5%	100.0%
Less: Assets classified as held for sale	(17,165)	(559)	(9)	(17,733)
Total (excluding assets held for sale)	413,680	46,177	2,267	462,124
Total % (excluding assets held for sale)	89.5%	10.0%	0.5%	100.0%
2019 Total	415,466	42,744	1,833	460,043
2019 Total %	90.3%	9.3%	0.4%	100.0%

1 Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted items within the analysis of the Group's assets.

Policyholder assets 2020	Fair value £m	Amortised cost £m	Equity accounted/ tax assets¹ £m	Total £m
Goodwill and acquired value of in-force business and intangible assets	-	-	-	-
Interests in, and loans to, joint ventures and associates	-	-	146	146
Property and equipment	-	-	-	-
Investment property	6,851	-	-	6,851
Loans	-	2,334	-	2,334
Financial Investments
Debt securities	45,781	-	-	45,781
Equity securities	86,957	-	-	86,957
Other investments	34,577	-	-	34,577
Reinsurance assets	3,859	1	-	3,860
Deferred tax assets	-	-	-	-
Current tax assets	-	-	-	-
Receivables and other financial assets	-	525	-	525
Deferred acquisition costs and other assets	-	27	-	27
Prepayments and accrued income	-	372	-	372
Cash and cash equivalents	6,555	-	-	6,555
Total	184,580	3,259	146	187,985
Total %	98.2%	1.7%	0.1%	100.0%
Less: Assets classified as held for sale	(3,191)	(3)	-	(3,194)
Total (excluding assets held for sale)	181,389	3,256	146	184,791
Total % (excluding assets held for sale)	98.2%	1.7%	0.1%	100.0%
2019 Total	182,605	3,484	93	186,182
2019 Total %	98.1%	1.9%	-	100.0%

Page 95

C2 - Summary of total assets by valuation bases continued

Participating fund assets 2020	Fair value £m	Amortised cost £m	Equity accounted/ tax assets¹ £m	Total £m
Goodwill and acquired value of in-force business and intangible assets	-	-	-	-
Interests in, and loans to, joint ventures and associates	-	-	819	819
Property and equipment	176	22	-	198
Investment property	3,876	-	-	3,876
Loans	220	6,201	-	6,421
Financial Investments
Debt securities	105,677	-	-	105,677
Equity securities	12,827	-	-	12,827
Other investments	12,009	-	-	12,009
Reinsurance assets	-	476	-	476
Deferred tax assets	-	-	-	-
Current tax assets	-	-	-	-
Receivables and other financial assets	-	1,571	-	1,571
Deferred acquisition costs and other assets	-	1,110	-	1,110
Prepayments and accrued income	-	988	-	988
Cash and cash equivalents	3,960	-	-	3,960
Total	138,745	10,368	819	149,932
Total %	92.6%	6.9%	0.5%	100.0%
Less: Assets classified as held for sale	(13,581)	-	-	(13,581)
Total (excluding assets held for sale)	125,164	10,368	819	136,351
Total % (excluding assets held for sale)	91.8%	7.6%	0.6%	100.0%
2019 Total	136,027	9,304	895	146,226
2019 Total %	93.0%	6.4%	0.6%	100.0%

Shareholder assets 2020	Fair value £m	Amortised cost £m	Equity accounted/ tax assets¹ £m	Total £m
Goodwill and acquired value of in-force business and intangible assets	-	4,251	-	4,251
Interests in, and loans to, joint ventures and associates	-	-	1,000	1,000
Property and equipment	227	412	-	639
Investment property	642	-	-	642
Loans	29,619	5,305	-	34,924
Financial Investments
Debt securities	64,696	-	-	64,696
Equity securities	720	-	-	720
Other investments	5,041	-	-	5,041
Reinsurance assets	-	9,020	-	9,020
Deferred tax assets	-	-	128	128
Current tax assets	-	-	183	183
Receivables and other financial assets	-	7,629	-	7,629
Deferred acquisition costs and other assets	-	4,987	-	4,987
Prepayments and accrued income	-	1,505	-	1,505
Cash and cash equivalents	6,575	-	-	6,575
Total	107,520	33,109	1,311	141,940
Total %	75.8%	23.3%	0.9%	100.0%
Less: Assets classified as held for sale	(393)	(556)	(9)	(958)
Total (excluding assets held for sale)	107,127	32,553	1,302	140,982
Total % (excluding assets held for sale)	76.0%	23.1%	0.9%	100.0%
2019 Total	96,834	29,956	845	127,635
2019 Total %	75.8%	23.5%	0.7%	100.0%

Page 96

C3 - Analysis of financial investments by fund

The asset allocation as at 31 December 2020 across the Group, split according to the type of the liability the assets are backing, is shown in the table below.

	Shareholder business assets				Participating fund assets
	General insurance & health & other¹ £m	Annuity and non-profit £m	Total shareholder assets £m	Policyholder (unit-linked assets) £m	UK style with-profits £m	Continental European-style participating funds £m	Total assets analysed £m	Less: Assets classified as held for sale £m	Carrying value in the statement of financial position £m
Debt securities (note C4)
Government bonds	6,640	21,713	28,353	19,098	11,465	37,312	96,228	(8,786)	87,442
Corporate bonds	4,266	22,845	27,111	19,828	11,562	36,628	95,129	(4,525)	90,604
Other	4,280	4,952	9,232	6,855	5,518	3,192	24,797	(6)	24,791
	15,186	49,510	64,696	45,781	28,545	77,132	216,154	(13,317)	202,837
Loans (note C5)
Mortgage loans	-	22,034	22,034	-	39	-	22,073	-	22,073
Other loans	3,132	9,758	12,890	2,334	5,232	1,150	21,606	-	21,606
	3,132	31,792	34,924	2,334	5,271	1,150	43,679	-	43,679
Equity securities (note C6)	393	327	720	86,957	9,358	3,469	100,504	(100)	100,404
Investment property (note C7)	481	161	642	6,851	1,689	2,187	11,369	-	11,369
Other investments (note C8)	1,408	3,633	5,041	34,577	5,001	7,008	51,627	(3,490)	48,137
Total	20,600	85,423	106,023	176,500	49,864	90,946	423,333	(16,907)	406,426
2019 Total	16,812	76,893	93,705	172,368	53,123	81,829	401,025	(7,825)	393,200

1 Of the £20,600 million of assets 43% relates to other shareholder business assets.

Page 97

C4 - Analysis of debt securities

C4.1 Fair value hierarchy

To provide further information on the valuation techniques we use to measure assets carried at fair value, we have categorised the measurement basis for assets carried at fair value into a 'fair value hierarchy' described as follows, based on the lowest level input that is significant to the valuation as a whole:

· Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets;

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

· Inputs to Level 3 fair values are unobservable inputs for the asset. 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 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. Unobservable inputs reflect the assumptions the business unit considers that market participants would use in pricing the asset. Examples are investment property and commercial and equity release mortgage loans.

	Fair value hierarchy
Debt securities - Total 2020	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
UK Government	27,645	2,324	494	30,463
Non-UK government	32,935	27,404	5,426	65,765
Europe	30,581	16,555	3,860	50,996
North America	2,155	3,819	919	6,893
Asia Pacific & Other	199	7,030	647	7,876
Corporate bonds - Public utilities	-	8,252	2,161	10,413
Other corporate bonds	-	74,322	10,394	84,716
Other	-	23,732	1,065	24,797
Total	60,580	136,034	19,540	216,154
Total %	28.1%	62.9%	9.0%	100.0%
Less: Assets classified as held for sale	(6,700)	(6,130)	(487)	(13,317)
Total (excluding assets held for sale)	53,880	129,904	19,053	202,837
Total % (excluding assets held for sale)	26.6%	64.0%	9.4%	100.0%
2019 Total¹	56,322	125,163	17,996	199,481
2019 Total %¹	28.3%	62.7%	9.0%	100.0%

1 Following a review of the fair value hierarchy for debt securities, a new framework has been implemented to improve consistency across the Group. Comparative amounts have been amended from those previously reported and the effect of this change is to move £14,681 million of debt securities from fair value hierarchy Level 1 to Level 2 and £3,167 million from Level 2 to Level 1.

	Fair value hierarchy
Debt securities - Policyholder assets 2020	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
UK Government	10,043	-	1	10,044
Non-UK government	3,670	5,383	1	9,054
Europe	2,452	2,981	-	5,433
North America	1,063	88	1	1,152
Asia Pacific & Other	155	2,314	-	2,469
Corporate bonds - Public utilities	-	1,763	-	1,763
Other corporate bonds	-	18,045	20	18,065
Other	-	6,854	1	6,855
Total	13,713	32,045	23	45,781
Total %	30.0%	69.9%	0.1%	100.0%
Less: Assets classified as held for sale	(265)	(22)	-	(287)
Total (excluding assets held for sale)	13,448	32,023	23	45,494
Total % (excluding assets held for sale)	29.6%	70.3%	0.1%	100.0%
2019 Total¹	12,592	29,045	713	42,350
2019 Total %¹	29.7%	68.6%	1.7%	100.0%

1 Following a review of the fair value hierarchy for debt securities, a new framework has been implemented to improve consistency across the Group. Comparative amounts have been amended from those previously reported and the effect of this change is to move £1,555 million of debt securities from fair value hierarchy Level 1 to Level 2 and £1,939 million from Level 2 to Level 1.

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C4 - Analysis of debt securities continued

C4.1 Fair value hierarchy continued

	Fair value hierarchy
Debt securities - Participating fund assets 2020	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
UK Government	5,261	790	87	6,138
Non-UK government	26,957	13,149	2,533	42,639
Europe	26,580	8,982	1,864	37,426
North America	377	225	349	951
Asia Pacific & Other	-	3,942	320	4,262
Corporate bonds - Public utilities	-	2,970	95	3,065
Other corporate bonds	-	38,239	6,886	45,125
Other	-	7,871	839	8,710
Total	32,218	63,019	10,440	105,677
Total %	30.5%	59.6%	9.9%	100.0%
Less: Assets classified as held for sale	(6,372)	(5,906)	(487)	(12,765)
Total (excluding assets held for sale)	25,846	57,113	9,953	92,912
Total % (excluding assets held for sale)	27.8%	61.5%	10.7%	100.0%
2019 Total¹	32,126	59,320	9,128	100,574
2019 Total %¹	31.9%	59.0%	9.1%	100.0%

1 Following a review of the fair value hierarchy for debt securities, a new framework has been implemented to improve consistency across the Group. Comparative amounts have been amended from those previously reported and the effect of this change is to move £11,676 million of debt securities from fair value hierarchy Level 1 to Level 2 and £714 million from Level 2 to Level 1.

	Fair value hierarchy
Debt securities - Shareholder assets 2020	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
UK Government	12,341	1,534	406	14,281
Non-UK government	2,308	8,872	2,892	14,072
Europe	1,549	4,592	1,996	8,137
North America	715	3,506	569	4,790
Asia Pacific & Other	44	774	327	1,145
Corporate bonds - Public utilities	-	3,519	2,066	5,585
Other corporate bonds	-	18,038	3,488	21,526
Other	-	9,007	225	9,232
Total	14,649	40,970	9,077	64,696
Total %	22.7%	63.3%	14.0%	100.0%
Less: Assets classified as held for sale	(63)	(202)	-	(265)
Total (excluding assets held for sale)	14,586	40,768	9,077	64,431
Total % (excluding assets held for sale)	22.6%	63.3%	14.1%	100.0%
2019 Total¹	11,604	36,798	8,155	56,557
2019 Total %¹	20.5%	65.1%	14.4%	100.0%

1 Following a review of the fair value hierarchy for debt securities, a new framework has been implemented to improve consistency across the Group. Comparative amounts have been amended from those previously reported and the effect of this change is to move £1,450 million of debt securities from fair value hierarchy Level 1 to Level 2 and £514 million from Level 2 to Level 1.

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C4 - Analysis of debt securities continued

C4.2 External ratings

	External ratings
Debt securities - Total 2020	AAA £m	AA £m	A £m	BBB £m	Less than BBB £m	Non-rated £m	Total £m
Government
UK Government	-	29,195	268	-	-	786	30,249
UK local authorities	-	-	151	-	-	63	214
Non-UK Government	12,684	25,054	8,040	15,489	2,941	1,557	65,765
	12,684	54,249	8,459	15,489	2,941	2,406	96,228
Corporate
Public utilities	49	866	2,936	4,582	565	1,415	10,413
Other corporate bonds	6,721	8,157	26,585	28,162	10,314	4,777	84,716
	6,770	9,023	29,521	32,744	10,879	6,192	95,129
Certificates of deposit	90	9,407	6,727	25	-	761	17,010
Structured
Residential Mortgage Backed Security non-agency prime	2	12	101	73	-	-	188
	2	12	101	73	-	-	188
Commercial Mortgage Backed Security	778	165	147	57	-	26	1,173
Asset Backed Security	246	444	148	224	52	85	1,199
Collateralised Debt Obligation (including Collateralised Loan Obligation)	294	-	-	-	-	-	294
	1,318	609	295	281	52	111	2,666
Wrapped credit	-	12	469	94	5	37	617
Other	113	185	635	1,464	1,919	-	4,316
Total	20,977	73,497	46,207	50,170	15,796	9,507	216,154
Total %	9.7%	34.0%	21.4%	23.2%	7.3%	4.4%	100.0%
Less: Assets classified as held for sale	(634)	(1,328)	(1,429)	(8,714)	(932)	(280)	(13,317)
Total (excluding assets held for sale)	20,343	72,169	44,778	41,456	14,864	9,227	202,837
Total % (excluding assets held for sale)	10.1%	35.6%	22.1%	20.4%	7.3%	4.5%	100.0%
2019 Total	21,367	67,939	39,319	45,927	15,946	8,983	199,481
2019 Total %	10.7%	34.1%	19.7%	23.0%	8.0%	4.5%	100.0%

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C4 - Analysis of debt securities continued

C4.2 External ratings continued

	External ratings
Debt securities - Policyholder assets 2020	AAA £m	AA £m	A £m	BBB £m	Less than BBB £m	Non-rated £m	Total £m
Government
UK Government	-	9,476	28	-	-	540	10,044
UK local authorities	-	-	-	-	-	-	-
Non-UK Government	2,390	651	1,915	2,079	1,908	111	9,054
	2,390	10,127	1,943	2,079	1,908	651	19,098
Corporate
Public utilities	3	36	814	713	190	7	1,763
Other corporate bonds	697	1,437	5,528	5,306	4,262	835	18,065
	700	1,473	6,342	6,019	4,452	842	19,828
Certificates of deposit	20	2,697	2,036	25	-	562	5,340
Structured
Residential Mortgage Backed Security non-agency prime	-	1	3	31	-	-	35
	-	1	3	31	-	-	35
Commercial Mortgage Backed Security	149	36	21	2	-	-	208
Asset Backed Security	55	72	46	5	7	12	197
Collateralised Debt Obligation (including Collateralised Loan Obligation)	-	-	-	-	-	-	-
	204	108	67	7	7	12	405
Wrapped credit	-	-	-	-	-	-	-
Other	28	46	158	365	478	-	1,075
Total	3,342	14,452	10,549	8,526	6,845	2,067	45,781
Total %	7.3%	31.6%	23.0%	18.6%	15.0%	4.5%	100.0%
Less: Assets classified as held for sale	(179)	(13)	(25)	(70)	-	-	(287)
Total (excluding assets held for sale)	3,163	14,439	10,524	8,456	6,845	2,067	45,494
Total % (excluding assets held for sale)	7.0%	31.7%	23.1%	18.6%	15.0%	4.6%	100.0%
2019 Total	3,634	13,913	8,979	7,990	5,746	2,088	42,350
2019 Total %	8.6%	32.8%	21.2%	18.9%	13.6%	4.9%	100.0%

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C4 - Analysis of debt securities continued

C4.2 External ratings continued

	External ratings
Debt securities - Participating fund assets 2020	AAA £m	AA £m	A £m	BBB £m	Less than BBB £m	Non-rated £m	Total £m
Government
UK Government	-	5,992	2	-	-	137	6,131
UK local authorities	-	-	7	-	-	-	7
Non-UK Government	4,030	19,806	4,332	13,178	1,011	282	42,639
	4,030	25,798	4,341	13,178	1,011	419	48,777
Corporate
Public utilities	46	664	525	1,416	359	55	3,065
Other corporate bonds	3,832	3,929	12,439	17,442	5,735	1,748	45,125
	3,878	4,593	12,964	18,858	6,094	1,803	48,190
Certificates of deposit	27	2,683	1,811	-	-	120	4,641
Structured
Residential Mortgage Backed Security non-agency prime	1	11	12	42	-	-	66
	1	11	12	42	-	-	66
Commercial Mortgage Backed Security	200	21	20	-	-	10	251
Asset Backed Security	73	55	69	63	22	16	298
Collateralised Debt Obligation (including Collateralised Loan Obligation)	294	-	-	-	-	-	294
	567	76	89	63	22	26	843
Wrapped credit	-	-	24	-	-	1	25
Other	82	134	462	1,063	1,394	-	3,135
Total	8,585	33,295	19,703	33,204	8,521	2,369	105,677
Total %	8.2%	31.5%	18.6%	31.4%	8.1%	2.2%	100.0%
Less: Assets classified as held for sale	(438)	(1,221)	(1,327)	(8,604)	(930)	(245)	(12,765)
Total (excluding assets held for sale)	8,147	32,074	18,376	24,600	7,591	2,124	92,912
Total % (excluding assets held for sale)	8.7%	34.5%	19.8%	26.5%	8.2%	2.3%	100.0%
2019 Total	9,078	32,638	16,979	29,890	9,713	2,276	100,574
2019 Total %	9.0%	32.4%	16.9%	29.7%	9.7%	2.3%	100.0%

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C4 - Analysis of debt securities continued

C4.2 External ratings continued

	External ratings
Debt securities - Shareholder assets 2020	AAA £m	AA £m	A £m	BBB £m	Less than BBB £m	Non-rated £m	Total £m
Government
UK Government	-	13,727	238	-	-	109	14,074
UK local authorities	-	-	144	-	-	63	207
Non-UK Government	6,264	4,597	1,793	232	22	1,164	14,072
	6,264	18,324	2,175	232	22	1,336	28,353
Corporate
Public utilities	-	166	1,597	2,453	16	1,353	5,585
Other corporate bonds	2,192	2,791	8,618	5,414	317	2,194	21,526
	2,192	2,957	10,215	7,867	333	3,547	27,111
Certificates of deposit	43	4,027	2,880	-	-	79	7,029
Structured
Residential Mortgage Backed Security non-agency prime	1	-	86	-	-	-	87
	1	-	86	-	-	-	87
Commercial Mortgage Backed Security	429	108	106	55	-	16	714
Asset Backed Security	118	317	33	156	23	57	704
Collateralised Debt Obligation (including Collateralised Loan Obligation)	-	-	-	-	-	-	-
	547	425	139	211	23	73	1,418
Wrapped credit	-	12	445	94	5	36	592
Other	3	5	15	36	47	-	106
Total	9,050	25,750	15,955	8,440	430	5,071	64,696
Total %	14.0%	39.8%	24.7%	13.0%	0.7%	7.8%	100.0%
Less: Assets classified as held for sale	(17)	(94)	(77)	(40)	(2)	(35)	(265)
Total (excluding assets held for sale)	9,033	25,656	15,878	8,400	428	5,036	64,431
Total % (excluding assets held for sale)	14.1%	39.8%	24.6%	13.0%	0.7%	7.8%	100.0%
2019 Total	8,655	21,388	13,361	8,047	487	4,619	56,557
2019 Total %	15.3%	37.8%	23.6%	14.2%	0.9%	8.2%	100.0%

Within shareholder assets debt securities, 43.8% of exposure is in government holdings (2019: 42.5%). Our corporate debt securities portfolio represents 41.9% of total shareholder debt securities (2019: 45.4%). At 31 December 2020, the proportion of our shareholder debt securities that are investment grade is 91.5% (2019: 90.9%). The remaining 8.5% of shareholder debt securities that do not have an external rating of BBB or higher can be split as follows:

· 0.7% are debt securities that are rated as below investment grade; and

· 7.8% are not rated by the major rating agencies.

The majority of non-rated corporate bonds are held by our businesses in the UK. Of the securities not rated by an external rating agency most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £ 3.3 billion (2019: £3.2 billion) of debt securities held in our UK Life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade.

Page 103

C5 - Analysis of loans

(a) Overview

The Group's loan portfolio of £43,679 million (2019: £38,579 million) is principally made up of the following:

· Policy loans of £637 million (2019: £684 million), which are generally collateralised by a lien or charge over the underlying policy;

· Loans and advances to banks of £12,330 million (2019: £8,830 million), which primarily relate to loans of cash collateral received in stock lending transactions and are therefore fully collateralised by other securities;

· Mortgage loans collateralised by property assets of £22,073 million (2019: £21,549 million); and

· Healthcare, infrastructure and private financial initiative (PFI) loans of £7,283 million (2019: £6,467 million).

Loans with fixed maturities, including policy loans and loans and advances to banks, are recognised when cash is advanced to borrowers. These loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan using the effective interest rate method.

For certain mortgage loans, the Group has taken advantage of the fair value option under IAS 39 Financial Instruments: Recognition Measurement to present the mortgages, associated borrowings, other liabilities and derivative financial instruments at fair value, since they are managed together on a fair value basis. These mortgage loans are not traded in active markets and are classified within level 3 of the fair value hierarchy as the significant valuation assumptions and inputs are not deemed to be market observable. Of the Group's total loan portfolio, 50.5% (2019: 55.8%) is invested in mortgage loans. The shareholder risk relating to these loans is discussed further below.

Healthcare, infrastructure and PFI loans included within shareholder assets are £7,283 million (2019: £6,467 million). These loans are secured against the income from healthcare and education premises and as such are not considered further in this section.

Loans - Shareholder assets 31 December 2020	United Kingdom £m	Canada £m	Europe £m	Asia £m	Total £m
Policy loans	4	-	2	-	6
Loans and advances to banks	5,327	-	-	-	5,327
Healthcare, Infrastructure and PFI other loans	7,048	-	235	-	7,283
Mortgage loans	22,034	-	-	-	22,034
Other loans	141	132	1	-	274
Total	34,554	132	238	-	34,924
Total %	98.9%	0.4%	0.7%	-	100.0%
Less: Assets classified as held for sale	-	-	-	-	-
Total (excluding assets held for sale)	34,554	132	238	-	34,924
Total % (excluding assets held for sale)	98.9%	0.4%	0.7%	-	100.0%
2019 Total	30,890	125	222	1	31,238
2019 Total %	98.9%	0.4%	0.7%	-	100.0%

(b) Analysis of shareholder mortgage loans

Mortgage loans included within shareholder assets are £22,034 million (2019: £21,508 million) and are almost entirely held in the UK. The narrative below focuses on explaining the risks arising as a result of these exposures.

31 December 2020	Total £m
Non-securitised mortgage loans
- Residential (Equity release)	9,360
- Commercial	7,479
- Healthcare, Infrastructure and PFI mortgage loans	2,804
	19,643
Securitised mortgage loans	2,391
Total	22,034
Less: Assets classified as held for sale	-
Total (excluding assets held for sale)	22,034
2019 Total	21,508

Non-securitised mortgage loans

Residential

The UK non-securitised residential mortgage portfolio has a total value as at 31 December 2020 of £9,360 million (2019: £8,558 million). The movement in the year is due to £583 million of new lending and an increase in the fair value of £241 million. Additional accrued interest in the year is offset by the value of redemptions. These mortgages are all in the form of equity release, whereby homeowners mortgage their property to release cash equity. Due to the structure of equity release mortgages, whereby interest amounts due are not paid in cash but instead rolled into the amount outstanding, they predominantly have a current Loan to Value (LTV) of below 70%. The average LTV across the portfolio is 28.2% (2019: 28.2%).

Page 104

C5 - Analysis of loans continued

(b) Analysis of shareholder mortgage loans continued

Non-securitised mortgage loans continued

Commercial

Gross exposure by loan to value and arrears of UK non-securitised commercial mortgages is shown in the table below.

31 December 2020	>120% £m	115-120% £m	110-115% £m	105-110% £m	100-105% £m	95-100% £m	90-95% £m	80-90% £m	70-80% £m	<70% £m	Total £m
Not in arrears	33	-	-	316	-	57	38	245	1,042	5,714	7,445
0 - 3 months	-	-	-	-	-	34	-	-	-	-	34
Total	33	-	-	316	-	91	38	245	1,042	5,714	7,479

Of the £7,479 million (2019: £7,640 million) of mortgage loans within shareholder assets, £7,479 million are used to back annuity liabilities and are stated on a fair value basis. The UK loan exposures are calculated on a discounted cash flow basis, and include a risk adjustment through the use of a Credit Risk Adjusted Value (CRAV).

For commercial mortgages, loan service collection ratios, a key indicator of mortgage portfolio performance, reduced to 2.37x
(2019: 2.56x). Loan Interest Cover (LIC), which is defined as the annual net rental income (including rental deposits less ground rent) divided by the annual loan interest service, also reduced to 2.74x (2019: 2.90x). Average mortgage LTV increased from 55.6% in 2019 to 61.0%. As at 31 December 2020 loans with a value of £34 million have a balance in arrears (2019: £nil).

Commercial mortgages and Healthcare, Infrastructure and PFI loans are held at fair value on the asset side of the statement of financial position. The related insurance liabilities are valued using a discount rate derived from the gross yield on assets, with adjustments to allow for risk. £17,171 million of shareholder loan assets are backing annuity liabilities and comprise of commercial mortgage loans
(£7,479 million), Healthcare, Infrastructure and PFI mortgage loans (£2,804 million) and Healthcare, Infrastructure and PFI other loans (£6,888 million).

The UK portfolio remains well diversified in terms of property type, location and tenants as well as the spread of loans written over time. The risks in commercial mortgages are addressed through several layers of protection with the mortgage risk profile being primarily driven by the ability of the underlying tenant rental income to cover loan interest and amortisation. Should any single tenant default on their rental payment, rental from other tenants backing the same loan often ensures the loan interest cover does not fall below 1.0x. Where there are multiple loans to a single borrower further protection may be achieved through cross-charging (or pooling) such that any single loan is also supported by rents received within other pool loans. Additionally, there may be support provided by the borrower of the loan itself and further loss mitigation from any general floating charge held over assets within the borrower companies.

If the LIC cover falls below 1.0x and the borrower defaults then Aviva retains the option of selling the security or restructuring the loans and benefiting from the protection of the collateral. A combination of these benefits and the high recovery levels afforded by property collateral (compared to corporate debt or other uncollateralised credit exposures) results in the economic exposure being significantly lower than the gross exposure reported above. The Group continues to actively manage this position.

Healthcare, Infrastructure and PFI

Healthcare, Infrastructure and PFI mortgage loans included within shareholder assets of £2,804 million (2019: £2,878 million) are secured against healthcare premises, education, social housing and emergency services related premises. For all such loans, Government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not Government guaranteed, the nature of these businesses provides considerable comfort of an ongoing business model and low risk of default.

On a market value basis, we estimate the average LTV of these mortgages to be 73.7% (2019: 72.6%), although this is not considered to be a key risk indicator due to the Government support noted above and the social need for these premises. The Group therefore consider these loans to be lower risk relative to other mortgage loans.

Securitised mortgage loans

As at 31 December 2019, the Group has £2,391 million (2019: £2,432 million) of securitised mortgage loans within shareholder assets. Funding for the securitised residential mortgage assets was obtained by issuing loan note securities. Of these loan notes approximately £230 million (2019: £224 million) are held by Group companies. The remainder is held by third parties external to Aviva. As any cash shortfall arising once all mortgages have been redeemed is borne by the loan note holders, the majority of the credit risk of these mortgages is borne by third parties rather than by shareholders. The average LTV across the securitised mortgage loans is 49.6% (2019: 49.0%).

Valuation allowance

The Group carries a valuation allowance within insurance liabilities against the risk of default for assets backing annuities. The total valuation allowance in respect of corporate bonds was £1.4 billion (2019: £1.3 billion) over the remaining term of the portfolio at
31 December 2020. The total valuation allowance in respect of mortgages, including healthcare mortgages but excluding equity release, was £0.6 billion at 31 December 2020 (2019: £0.5 billion). The total valuation allowance in respect of equity release mortgages was
£1.7 billion at 31 December 2020 (2019: £1.5 billion). The risk allowances made for corporate bonds (including overseas government bonds and structured finance assets), mortgages (including healthcare mortgages, commercial mortgages and infrastructure assets) and equity release equated to 46 bps, 35 bps, and 118 bps respectively at 31 December 2020 (2019: 45 bps - 47 bps, 31 bps - 35 bps, and 124 bps respectively). Following a change in methodology this disclosure now includes total valuation allowances for all annuities in UK shareholder funds (2019 disclosure included total valuation allowances for annuities transferred in from Aviva Annuity UK Limited).

Page 105

C6 - Analysis of equity securities

				2020				2019
	Fair value hierarchy				Fair value hierarchy
Equity securities - Total	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Public utilities	3,099	-	-	3,099	2,883	-	-	2,883
Banks, trusts and insurance companies	17,695	-	140	17,835	20,476	-	160	20,636
Industrial miscellaneous and all other	79,044	-	275	79,319	75,496	-	600	76,096
Non-redeemable preferred shares	251	-	-	251	211	-	-	211
Total	100,089	-	415	100,504	99,066	-	760	99,826
Total %	99.6%	-	0.4%	100.0%	99.2%	-	0.8%	100.0%
Less: Assets classified as held for sale	(92)	-	(8)	(100)	(216)	-	(40)	(256)
Total (excluding assets held for sale)	99,997	-	407	100,404	98,850	-	720	99,570
Total % (excluding assets held for sale)	99.6%	-	0.4%	100.0%	99.3%	-	0.7%	100.0%

				2020				2019
	Fair value hierarchy				Fair value hierarchy
Equity securities - Policyholder assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Public utilities	2,782	-	-	2,782	2,549	-	-	2,549
Banks, trusts and insurance companies	15,409	-	-	15,409	17,070	-	6	17,076
Industrial miscellaneous and all other	68,710	-	4	68,714	63,210	-	189	63,399
Non-redeemable preferred shares	52	-	-	52	11	-	-	11
Total	86,953	-	4	86,957	82,840	-	195	83,035
Total %	100.0%	-	-	100.0%	99.8%	-	0.2%	100.0%
Less: Assets classified as held for sale	(43)	-	-	(43)	(216)	-	(40)	(256)
Total (excluding assets held for sale)	86,910	-	4	86,914	82,624	-	155	82,779
Total % (excluding assets held for sale)	100.0%	-	-	100.0%	99.8%	-	0.2%	100.0%

				2020				2019
	Fair value hierarchy				Fair value hierarchy
Equity securities - Participating fund assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Public utilities	307	-	-	307	319	-	-	319
Banks, trusts and insurance companies	2,205	-	39	2,244	3,239	-	48	3,287
Industrial miscellaneous and all other	10,019	-	253	10,272	10,973	-	380	11,353
Non-redeemable preferred shares	4	-	-	4	-	-	-	-
Total	12,535	-	292	12,827	14,531	-	428	14,959
Total %	97.7%	-	2.3%	100.0%	97.1%	-	2.9%	100.0%
Less: Assets classified as held for sale	(49)	-	(8)	(57)	-	-	-	-
Total (excluding assets held for sale)	12,486	-	284	12,770	14,531	-	428	14,959
Total % (excluding assets held for sale)	97.8%	-	2.2%	100.0%	97.1%	-	2.9%	100.0%

				2020				2019
	Fair value hierarchy				Fair value hierarchy
Equity securities - Shareholder assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Public utilities	10	-	-	10	15	-	-	15
Banks, trusts and insurance companies	81	-	101	182	167	-	106	273
Industrial miscellaneous and all other	315	-	18	333	1,313	-	31	1,344
Non-redeemable preferred shares	195	-	-	195	200	-	-	200
Total	601	-	119	720	1,695	-	137	1,832
Total %	83.5%	-	16.5%	100.0%	92.5%	-	7.5%	100.0%
Less: Assets classified as held for sale	-	-	-	-	-	-	-	-
Total (excluding assets held for sale)	601	-	119	720	1,695	-	137	1,832
Total % (excluding assets held for sale)	83.5%	-	16.5%	100.0%	92.5%	-	7.5%	100.0%

Page 106

C7 - Analysis of investment property

The Group's total investment property value is £11,369 million (2019: £11,203 million).

Within total investment properties by value, 94.4% (2019: 93.9%) are held in policyholder or participating fund assets. Shareholder exposure to investment properties is principally through investments in UK and French commercial property.

Investment properties are stated at their market values as assessed by qualified external independent valuers. The properties are valued on an income basis 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. External valuations include a capital deduction on properties in the retail and leisure sectors where tenant risk is deemed to have increased as a result of COVID-19. The uplift and discount rates are derived from rates implied by recent market transactions on similar property. These inputs are deemed unobservable.

Within total investment properties by value, 97.6% (2019: 97.6%) are leased to third parties under operating leases, with the remainder either being vacant or held for capital appreciation.

Within shareholder investment properties by value, 100% (2019: 100%) are leased to third parties under operating leases.

C8 - Analysis of other financial investments

				2020				2019
	Fair value hierarchy				Fair value hierarchy
Other investments - Total	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Unit trusts and other investment vehicles¹	33,978	970	2,997	37,945	37,322	438	4,394	42,154
Derivative financial instruments	248	8,943	531	9,722	240	6,365	492	7,097
Deposits with credit institutions	157	54	-	211	156	13	-	169
Minority holdings in property management undertakings	-	78	3,569	3,647	1	62	2,332	2,395
Other¹	2	-	100	102	120	-	-	120
Total	34,385	10,045	7,197	51,627	37,839	6,878	7,218	51,935
Total %	66.6%	19.5%	13.9%	100.0%	72.9%	13.2%	13.9%	100.0%
Less: Assets classified as held for sale	(2,904)	(48)	(538)	(3,490)	(5,374)	-	(1,545)	(6,919)
Total (excluding assets held for sale)	31,481	9,997	6,659	48,137	32,465	6,878	5,673	45,016
Total % (excluding assets held for sale)	65.4%	20.8%	13.8%	100.0%	72.1%	15.3%	12.6%	100.0%

1 Following a review of the presentation of investments held by the Singapore business, comparative amounts have been amended to reclassify £318 million of investments from Other to Unit trusts and other investment vehicles.

				2020				2019
	Fair value hierarchy				Fair value hierarchy
Other investments - Policyholder assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Unit trusts and other investment vehicles¹	31,681	684	3	32,368	34,016	390	1,549	35,955
Derivative financial instruments	21	1,014	-	1,035	17	828	-	845
Deposits with credit institutions	137	54	-	191	125	13	-	138
Minority holdings in property management undertakings	-	-	983	983	1	-	775	776
Other¹	-	-	-	-	108	-	-	108
Total	31,839	1,752	986	34,577	34,267	1,231	2,324	37,822
Total %	92.0%	5.1%	2.9%	100.0%	90.6%	3.3%	6.1%	100.0%
Less: Assets classified as held for sale	(2,757)	-	-	(2,757)	(5,166)	-	(1,545)	(6,711)
Total (excluding assets held for sale)	29,082	1,752	986	31,820	29,101	1,231	779	31,111
Total % (excluding assets held for sale)	91.4%	5.5%	3.1%	100.0%	93.5%	4.0%	2.5%	100.0%

Page 107

C8 - Analysis of other financial investments continued

				2020				2019
	Fair value hierarchy				Fair value hierarchy
Other investments - Participating fund assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Unit trusts and other investment vehicles	1,866	82	2,710	4,658	2,767	47	2,661	5,475
Derivative financial instruments	173	4,713	53	4,939	183	3,656	42	3,881
Deposits with credit institutions	20	-	-	20	26	-	-	26
Minority holdings in property management undertakings	-	30	2,362	2,392	-	28	1,312	1,340
Other	-	-	-	-	-	-	-	-
Total	2,059	4,825	5,125	12,009	2,976	3,731	4,015	10,722
Total %	17.1%	40.2%	42.7%	100.0%	27.8%	34.8%	37.4%	100.0%
Less: Assets classified as held for sale	(147)	(48)	(538)	(733)	(206)	-	-	(206)
Total (excluding assets held for sale)	1,912	4,777	4,587	11,276	2,770	3,731	4,015	10,516
Total % (excluding assets held for sale)	17.0%	42.3%	40.7%	100.0%	26.3%	35.5%	38.2%	100.0%

				2020				2019
	Fair value hierarchy				Fair value hierarchy
Other investments - Shareholder assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Unit trusts and other investment vehicles	431	204	284	919	539	1	184	724
Derivative financial instruments	54	3,216	478	3,748	40	1,881	450	2,371
Deposits with credit institutions	-	-	-	-	5	-	-	5
Minority holdings in property management undertakings	-	48	224	272	-	34	245	279
Other	2	-	100	102	12	-	-	12
Total	487	3,468	1,086	5,041	596	1,916	879	3,391
Total %	9.7%	68.8%	21.5%	100.0%	17.6%	56.5%	25.9%	100.0%
Less: Assets classified as held for sale	-	-	-	-	(2)	-	-	(2)
Total (excluding assets held for sale)	487	3,468	1,086	5,041	594	1,916	879	3,389
Total % (excluding assets held for sale)	9.7%	68.8%	21.5%	100.0%	17.5%	56.6%	25.9%	100.0%

C9 - Analysis of available for sale (AFS) investments

There were no impairment expenses during 2020 relating to AFS debt securities and other investments.

Total unrealised losses on AFS debt securities at 31 December 2020 were £1 million (2019: £2 million). There were no other unrealised losses on AFS investments.

C10 - Summary of exposure to peripheral European countries

The Group's direct sovereign exposures to Ireland, Portugal, Italy and Spain (net of non-controlling interests, excluding policyholder assets) is summarised below:

		Participating		Shareholder		Total
	2020 £bn	2019 £bn	2020 £bn	2019 £bn	2020 £bn	2019 £bn
Ireland	0.9	0.8	0.3	0.3	1.2	1.1
Portugal	0.5	0.2	0.1	0.1	0.6	0.3
Italy	10.4	7.7	-	0.2	10.4	7.9
Spain	1.0	0.6	0.2	0.2	1.2	0.8
Total	12.8	9.3	0.6	0.8	13.4	10.1

Included in our debt securities and other financial assets are exposures to peripheral European countries. All of these assets are valued on a mark-to-market basis under IAS 39, and therefore our statement of financial position and income statement already reflect any reduction in value between the date of purchase and the balance sheet date. The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds.

Page 108

C11 - Reinsurance assets

The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract.

If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises that impairment loss in the income statement. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.

For the table below, reinsurance asset credit ratings are stated in accordance with information from leading rating agencies.

					Ratings
2020	AAA £m	AA £m	A £m	BBB £m	Less than BBB £m	Not rated £m	Total £m
Policyholder assets	-	2,630	628	-	-	61	3,319
Participating fund assets	-	150	273	-	-	28	451
Shareholder assets	-	8,078	1,372	-	-	136	9,586
Total	-	10,858	2,273	-	-	225	13,356
Total %	-	81.3%	17.0%	-	-	1.7%	100.0%
Less: Assets classified as held for sale	-	-	-	-	-	(18)	(18)
Total (excluding assets held for sale)	-	10,858	2,273	-	-	207	13,338
Total % (excluding assets held for sale)	-	81.4%	17.0%	-	-	1.6%	100.0%
2019 Total	412	9,428	1,139	972	-	480	12,431
2019 Total %	3.3%	75.8%	9.2%	7.8%	-	3.9%	100.0%

Page 109

Other information

In this section

Page

Alternative Performance Measures

110

Page 110

Alternative Performance Measures

In order to fully explain the performance of our business, we discuss and analyse our results in terms of financial measures which include a number of alternative performance measures (APMs). APMs are non-GAAP measures which are used to supplement the disclosures prepared in accordance with other regulations such as International Financial Reporting Standards (IFRS) and Solvency II. We believe these measures provide useful information to enhance the understanding of our financial performance. However, APMs should be viewed as complementary to, rather than as a substitute for, the figures determined according to other regulations.

Throughout, the symbol '#' denotes an APM that is also a key performance indicator used as a base to determine or modify remuneration.

The APMs utilised by Aviva may not be the same as those used by other insurers and may change over time. The calculation of APMs is consistent with previous periods unless otherwise stated.

Following the announcement of our strategic priorities on 6 August 2020, the financial performance of our 'Core markets' are presented as UK & Ireland Life, General Insurance (which brings together our UK & Ireland general insurance businesses and Canada) and Aviva Investors. Our 'Manage-for-value' markets consist of our remaining international businesses: France, Italy, Poland, Asia and Other. The 2019 comparative results for our APMs have been restated from those previously published to reclassify operations on this basis.

In addition, the 2019 comparative amounts have been re-presented from those previously published to reclassify the amounts relating to Aviva Singapore, Friends Provident International Limited (FPI), Hong Kong, Indonesia and Vietnam as discontinued operations. Where relevant, these discontinued operations are presented as 'Manage-for-value' markets.

At 31 December 2020, the estimated Solvency II shareholder cover ratio APM has been amended to no longer make adjustments for planned acquisitions and disposals when deriving the shareholder view. This change in approach is considered more relevant because prior to completion there is uncertainty in relation to the progression and final terms of such transactions. Comparative amounts have not been restated for this change as the impacts were not material at 31 December 2019.

At 30 June 2020, we removed the operating expenses APM, having disclosed this metric alongside controllable costs at 31 December 2019. The controllable costs metric aligns to our capital markets day target announced in November 2019 and excludes premium based taxes, fees and levies that vary directly with premium volumes. Therefore, controllable costs is considered more representative of operational expenses that are controllable by management and is considered more useful and relevant than the operating expenses metric.

Further details on APMs derived from IFRS measures and APMs derived from Solvency II measures are provided in the following sections. A further section describes Other APMs.

APMs derived from IFRS measures

A number of APMs relating to IFRS are utilised to measure and monitor the Group's performance. Definitions and additional information, including reconciliations to the relevant amounts in the IFRS Financial Statements and, where appropriate, commentary on the material reconciling items are included within this section.

Group adjusted operating profit^#

Group adjusted operating profit is an APM that supports decision making and internal performance management of the Group's operating segments that incorporates an expected return on investments supporting the life and non-life insurance businesses. The Group considers this measure meaningful to stakeholders as it enhances the understanding of the Group's operating performance over time by separately identifying non-operating items. The various items excluded from Group adjusted operating profit, but included in IFRS profit before tax, are:

Investment variances, economic assumption changes and short-term fluctuation in return on investments

Group adjusted operating profit for the life insurance 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. The expected rate of return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification.

For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risk. Where such securities are classified as available for sale the expected return comprises interest or dividend payments and amortisation of the premium or discount at purchase. The expected return on equities and properties is calculated by reference to the opening 10-year swap rate in the relevant currency plus an appropriate risk margin.

Group adjusted operating profit includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside Group adjusted operating profit.

Group adjusted operating profit for the non-life insurance business is based on expected investment returns on financial investments backing shareholder funds over the period. Expected investment returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the long-term rate of return. This rate of return is the same as that applied for the long-term business expected returns. The long-term return for other investments (including debt securities) is the actual income receivable for the period. Actual income and long-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities .

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Changes due to market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, are disclosed separately outside Group adjusted operating profit. The impact of changes in the discount rate applied to claims provisions is also disclosed outside Group adjusted operating profit.

The exclusion of short-term investment variances from this APM reflects the long-term nature of much of our business. The Group adjusted operating profit which is used in managing the performance of our operating segments excludes the impact of economic variances, to provide a comparable measure year on year.

Impairment, amortisation and profit or loss on disposal

Group adjusted operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangible assets acquired in business combinations; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates. These items principally relate to merger, acquisition and disposal activity which we view as strategic in nature, hence they are excluded from the Group adjusted operating profit APM as this is principally used to manage the performance of our operating segments when reporting to the Group chief operating decision maker.

Other items

These items are, in the directors' view, required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. Other items in 2020 comprise:

· A charge of £16 million relating to costs on contracts that have become onerous following the disposals of FPI, Singapore, Indonesia and Hong Kong. This was disclosed outside of Group adjusted operating profit as the onerous contracts arise as a result of disposal transactions which we consider to be strategic in nature; and

· A charge of £18 million relating to the estimated additional liability arising in the UK defined benefit pension schemes as a result of the requirement to equalise members' benefits for the effects of Guaranteed Minimum Pension (GMP) for former members. This was disclosed outside of Group adjusted operating profit as the additional liability arose as a consequence of a further High Court judgement in November 2020 in the case involving Lloyds Banking Group, and does not reflect the financial performance of the Group for the year.

Other items in 2019 comprised:

· A charge of £45 million relating to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims. Consistent with the presentation of the change in the Ogden discount rate in 2016 and 2018, this was disclosed outside of Group adjusted operating profit; and

· A charge of £2 million relating to the negative goodwill which arose on the acquisition of Friends First in 2018, which was excluded from Group adjusted operating profit for consistency with the treatment of impairment of goodwill.

The Group adjusted operating profit APM should be viewed as complementary to IFRS measures. It is important to consider Group adjusted operating profit and profit for the year together to understand the performance of the business in the period.

The table below presents a reconciliation between our consolidated operating profit and profit before tax attributable to shareholders' profits.

	2020 £m	2019 £m
UK & Ireland Life	1,907	1,974
General Insurance
UK & Ireland GI	213	297
Canada	287	191
Aviva Investors	85	96
Core markets	2,492	2,558
Manage-for-value	999	899
Other Group activities	(22)	(21)
	3,469	3,436
Corporate centre	(250)	(183)
Group debt costs and other interest	(370)	(320)
Group adjusted operating profit before tax attributable to shareholders' profits from continuing operations	2,849	2,933
Group adjusted operating profit before tax attributable to shareholders' profits from discontinued operations	312	251
Group adjusted operating profit before tax attributable to shareholders' profits	3,161	3,184
Adjusted for the following:
Life business: Investment variances and economic assumption changes	174	654
Non-life business: Short-term fluctuation in return on investments	(64)	167
General insurance and health business: Economic assumption changes	(104)	(54)
Impairment of goodwill, associates and joint ventures and other amounts expensed	(30)	(15)
Amortisation and impairment of intangibles acquired in business combinations	(76)	(87)
Amortisation and impairment of acquired value of in-force business	(278)	(406)
Profit/(loss) on the disposal and re-measurement of subsidiaries, joint ventures and associates	725	(22)
Other	(34)	(47)
Adjusting items before tax	313	190
Profit before tax attributable to shareholders' profits	3,474	3,374
Tax on Group adjusted operating profit	(634)	(668)
Tax on other activities	70	(43)
	(564)	(711)
Profit for the year	2,910	2,663

The difference between the Group adjusted operating profit before tax attributable to shareholders' profit from discontinued operations of £312 million (2019: £251 million) and profit before tax attributable to shareholders' profits from discontinued operations of £904 million
(2019: £54 million) is a net profit of £592 million (2019: £197 million loss). This is included in the total adjustments in the table above of £313 million (2019: £190 million) and comprises a net gain of £713 million (2019: £28 million loss) relating to profit on the disposal and re- measurement of subsidiaries, joint ventures and associates; offset by losses of £50 million (2019: £29 million loss) relating to investment return variances and economic assumption changes on long-term business; losses of £1 million (2019: £4 million loss) relating to impairment of goodwill, associates and joint ventures; losses of £6 million (2019: £10 million loss) in relation to amortisation and impairment of intangibles acquired in business combinations; and losses of £64 million (2019: £126 million loss) relating to amortisation and impairment of acquired in-force business.

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Combined operating ratio (COR)

COR is a useful financial measure of general insurance underwriting profitability calculated as total underwriting costs in our insurance entities expressed as a percentage of net earned premiums. It is used to monitor the profitability of lines of business. A COR below 100% indicates profitable underwriting.

The Group COR is shown below.

	2020 £m	2019 £m
Continuing operations
Incurred claims - GI & Health (as per note B6)¹	(6,267)	(6,448)
Adjusted for the following:
Incurred claims - Health	423	491
Change in discount rate assumptions	104	54
Impact of change in the discount rate used in settlement of bodily injury claims	-	45
Total Incurred claims (included in COR)²	(5,740)	(5,858)

Commission and expenses - GI & Health (as per note B6)	(3,545)	(3,275)
Adjusted for the following:
Amortisation and impairment of intangibles acquired in business combinations	23	19
Foreign exchange gains/(losses)	49	(45)
Commission income	21	20
Other	12	5
Commission and Expenses - Health & Other Non GI	252	259
Total commission and expenses (included in COR)³	(3,188)	(3,017)
Total underwriting costs from continuing operations	(8,928)	(8,875)
Total underwriting costs from discontinued operations	(12)	(17)
Total underwriting costs	(8,940)	(8,892)
Net earned premiums - GI & Health	9,914	9,805
Adjusted for:
Net earned premiums - Health	(638)	(700)
Net earned premiums (included in COR) from continuing operations	9,276	9,105
Net earned premiums (included in COR) from discontinued operations	12	15
Net earned premiums (included in COR)	9,288	9,120
Combined operating ratio - continuing operations	96.2%	97.5%
Combined operating ratio	96.2%	97.5%

1 Corresponds to the sum of claims and benefits paid, net of recoveries from reinsurers and the change in insurance liabilities, net of reinsurance per note B6.

2 Includes Aviva Re.

3 Commission and expenses (included in COR) is comprised of £2,031 million earned commission (2019: £1,900 million) and £1,157 million earned expenses (2019: £1,116 million). It includes Aviva Re.

Claims, commission, and expense ratios

Financial measures of the performance of our general insurance business which are calculated as incurred claims, earned commissions or earned expenses expressed as a percentage of net earned premiums, which can be derived from the COR table above.

Operating earnings per share (EPS)^#

Operating EPS is calculated based on the Group adjusted operating profit attributable to ordinary shareholders net of tax, deducting non-controlling interests, preference dividends and direct capital instrument and tier 1 note coupons divided by the weighted average number of ordinary shares in issue, after deducting treasury shares. Operating EPS is considered meaningful to stakeholders because it enhances the understanding of the Group's operating performance over time by adjusting for the effects of non-operating items. A reconciliation between operating EPS and basic EPS can be found in note B8.

Controllable costs

Controllable costs is a useful measure of the controllable operational overheads associated with maintaining our businesses. These predominantly consist of staff costs, central costs, property and IT related costs and other expenses. Controllable costs also include indirect acquisition costs, such as underwriting overheads, and claims handling costs. These are considered to be controllable by the operating segments.

Controllable costs exclude impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangible assets acquired in business combinations; and amortisation and impairment of acquired value of in-force business. These items relate to merger, acquisition and disposal activity which we view as strategic in nature, hence they are excluded from controllable costs which is principally used to manage the performance of our operating segments.

Controllable costs exclude costs in relation to product governance and mis-selling. These costs represent compensation and redress payments made to policyholders and are excluded from controllable costs because they have characteristics of claims payments. In 2019 these costs included a £175 million provision in our UK Life business relating to past communications to a specific sub-set of pension policyholders that may not have adequately informed them of switching options into with-profits funds that were available to them.

Controllable costs exclude premium based taxes, fees and levies that vary directly with premiums. These costs are by their nature a direct cost incurred as a result of generating premium income, and therefore not a controllable operational overhead.

Controllable costs also excludes other amounts that, in management's view, are not representative of underlying day-to-day expenses involved in running the business, and that would distort the year on year controllable costs trend such as GI instalment income.

Following a review of the presentation of claims handling costs, to achieve consistency in our reporting, comparative amounts have been restated by £83 million for the year ended 31 December 2019 to include previously excluded claims handling costs attributable to the Life & Health businesses from the UK, Ireland and Poland in controllable costs.

A reconciliation of other expenses in the IFRS consolidated income statement to controllable costs is set out below:

	2020 £m	Restated¹ 2019 £m
Continuing operations
Other expenses (IFRS income statement)	3,037	3,057
Add: other acquisition costs	1,028	947
Add: claims handling costs¹	366	422
Less: impairment of goodwill, associates and joint ventures and other amounts expensed	(17)	(2)
Less: amortisation and impairment of intangibles acquired in business combinations	(71)	(76)
Less: amortisation and impairment of acquired value of in-force business	(214)	(280)
Less: foreign exchange (losses)/gains	(109)	109
Less: product governance and mis-selling costs²	(50)	(225)
Less: premium based income taxes, fees and levies	(192)	(180)
Add: other costs	-	57
Controllable costs from continuing operations	3,778	3,829
Controllable costs from discontinued operations	157	193
Controllable costs	3,935	4,022

1 Following a review of the presentation of claims handling costs, to achieve consistency in our reporting, comparative amounts have been restated by £83 million for the year ended 31 December 2019 to include previously excluded claims handling costs attributable to the Life & Health businesses from the UK, Ireland and Poland in controllable costs.

2 Product governance and mis-selling costs, previously included within other costs, have been presented as a discrete item in the reconciliation in order to improve transparency.

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At 30 June 2020, we have removed the operating expenses APM, having disclosed this metric alongside controllable costs at 31 December 2019. The controllable costs metric aligns to our target announced in 2019 and excludes premium based taxes, fees and levies that vary directly with premium volumes. Therefore, controllable costs is considered more representative of operational expenses that are controllable by management and is considered more useful and relevant than the operating expenses metric.

IFRS Return on Equity (RoE)^#

The IFRS RoE calculation is based on Group adjusted operating profit after tax attributable to ordinary shareholders expressed as a percentage of weighted average ordinary shareholders' equity (excluding non-controlling interests, preference share capital and direct capital instrument and tier 1 notes).

IFRS net asset value (NAV) per share

IFRS NAV per share is calculated as the equity attributable to shareholders of Aviva plc, less preference share capital (both within the consolidated statement of financial position), divided by the actual number of shares in issue at the balance sheet date. IFRS NAV per share is meaningful as a measure of the value generated by the Group in terms of the equity shareholders' face value per share investment.

	2020	2019
Equity attributable to shareholders of Aviva plc at 31 December¹ (£m)	19,354	17,008
Number of shares in issue at 31 December (in millions)	3,928	3,921
IFRS NAV per share	493p	434p

1 Excluding preference shares of £200 million (2019: £200 million).

Assets Under Management (AUM) and Assets Under Administration (AUA)

AUM represent all assets managed or administered by or on behalf of the Group, including those assets managed by Aviva Investors and by third parties. AUM include assets that are reported within the Group's statement of financial position and those assets belonging to external clients outside the Aviva Group which are therefore not included in the Group's statement of financial position.

Consistent with previous years, Aviva Investors AUA comprises AUM plus £40 billion (2019: £36 billion) of assets managed by third parties on platforms administered by Aviva Investors.

Both AUM and AUA are monitored as they reflect the potential earnings arising from investment returns and fee and commission income and measure the size and scale of the Group's fund management business.

A reconciliation of amounts appearing in the Group's statement of financial position to AUM is shown below:

	2020 £bn	2019 £bn
Assets managed on behalf of Group companies
Assets included in statement of financial position¹
Financial investments	369	351
Investment properties	11	11
Loans	44	39
Cash and cash equivalents	17	20
Other	5	1
	446	422
Less: third party funds and UK Platform included above	(26)	(17)
	420	405
Assets managed on behalf of third parties²
Aviva Investors	74	67
UK Platform³	34	29
Other	7	9
	115	105
Total AUM⁴	535	510

1 Includes assets classified as held for sale.

2 AUM managed on behalf of third parties cannot be directly reconciled to the financial statements.

3 UK Platform relates to the assets under management in the UK long-term savings business.

4 Includes AUM of £366 billion (2019: £346 billion) managed by Aviva Investors.

Net flows

Net flows is one of the measures of growth used by management and is a component of the movement in the life and platform business AUM during the period. It is the difference between the inflows (being IFRS net written premiums plus deposits received under investment contracts) and outflows (being IFRS net paid claims plus redemptions and surrenders under investment contracts). It excludes market and other movements.

In previous periods, this APM was labelled net fund flows and this has been updated for consistency.

APMs derived from Solvency II measures

The Group is a regulated entity under the Solvency II regulatory framework and therefore uses a number of APMs that are derived from Solvency II measures in addition to those that are derived from IFRS based measures.

The Solvency II regulatory framework requires insurers to hold own funds in excess of the Solvency Capital Requirement (SCR). Own funds are available capital resources determined under Solvency II. This includes the excess of assets over liabilities in the Solvency II balance sheet, calculated on best estimate, market consistent assumptions and include transitional measures on technical provisions (TMTP), subordinated liabilities that qualify as capital under Solvency II, and off-balance sheet own funds.

The SCR is calculated at Group level using a risk-based capital model which is calibrated to reflect the cost of mitigating the risk of insolvency to a 99.5% confidence level over a one-year time horizon - equivalent to a 1 in 200 year event - against financial and non-financial shocks. As a number of subsidiaries utilise the standard formula rather than a risk-based capital model to assess capital requirements, the overall Group SCR is calculated using a partial internal model, and it is shown after the impact of diversification benefit.

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The reconciliation from total Group equity on an IFRS basis to Solvency II regulatory own funds is presented below. The key differences between the two bases are as follows:

· Elimination of goodwill and other intangible assets

· Valuation adjustments to reflect insurance assets and liabilities valued on a best estimate basis using market-implied assumptions

· Valuation adjustments and the impact of the difference between consolidation methodologies under Solvency II and IFRS

· Tax effect of all other reconciling items in the table above which are shown gross of tax

· Recognition of subordinated debt capital, non-controlling interests and adjustments for ring-fenced funds restrictions.

	2020 £m	2019 £m
Total Group equity on an IFRS basis	20,560	18,685
Elimination of goodwill and other intangible assets
Goodwill	(1,805)	(1,855)
Acquired value of in-force business	(1,742)	(2,479)
Deferred acquisition costs (net of deferred income)	(3,154)	(3,221)
Other intangibles	(704)	(869)
Liability valuation differences (net of transitional deductions)	16,159	19,564
Inclusion of risk margin (net of transitional deductions)	(3,245)	(3,122)
Revaluation of subordinated liabilities	(795)	(716)
Other accounting differences	(69)	(99)
Net deferred tax	(1,191)	(1,220)
Estimated Solvency II net assets (gross of non-controlling interests)	24,014	24,668
Difference between Solvency II net assets and own funds	5,248	3,679
Estimated Solvency II own funds	29,262	28,347

A number of key performance measures relating to Solvency II are utilised to measure and monitor the Group's performance and financial strength:

· Solvency II shareholder cover ratio^#

· Value of new business on an adjusted Solvency II basis (VNB)

· Solvency II operating capital generation (OCG)^#

· Solvency II operating own funds generation

· Solvency II return on capital

· Solvency II return on equity (RoE)^#

· Solvency II net asset value (NAV) per share

· Solvency II debt leverage ratio

Solvency II shareholder cover ratio^#

The estimated Solvency II shareholder cover ratio, which is derived from own funds divided by the SCR using a 'shareholder view', is one of the indicators of the Group's balance sheet strength. The shareholder view is considered by management to be more representative of the shareholders' risk-exposure and the Group's ability to cover the SCR with eligible own funds and aligns with management's approach to dynamically manage its capital position. In arriving at the shareholder position, the following adjustments are typically made to the regulatory Solvency II position:

· The contribution to the Group's SCR and own funds of the most material fully ring fenced with-profits funds and staff pension schemes in surplus are excluded. These exclusions have no impact on Solvency II surplus as these funds are self-supporting on a Solvency II capital basis with any surplus capital above SCR not recognised.

· A notional reset of the transitional measure on technical provisions (TMTP), calculated using the same method as used for formal TMTP resets. This presentation avoids step changes to the Solvency II position that arise only when the formal TMTP reset points are triggered. The 31 December 2020 position includes a notional reset while the 31 December 2019 position included a formal, rather than notional, reset of the TMTP in line with the regulatory requirement to reset the TMTP at least every two years.

· A change in regulations announced in December 2019 allows French insurers to place a part of the Provision pour Participation aux Excédents (PPE) into Solvency II own funds. At December 2019 PPE was included in the France local regulatory own funds but was excluded from the estimated Group regulatory and shareholder own funds, subject to confirmation of the appropriate treatment at Group level. The treatment has since been confirmed and PPE is now included within Group regulatory own funds but remains excluded from the shareholder position.

· Pro forma adjustments are made if the Solvency II shareholder cover ratio does not fully reflect the effect of future regulatory changes that are known as at each reporting date. These adjustments are made in order to show a more representative view of the Group's solvency position.

· In a change to previous practice, pro forma adjustments are no longer made for planned acquisitions and disposals. This change in approach is considered more relevant because prior to completion there is uncertainty in relation to the progression and final terms of such transactions. Comparative amounts have not been restated for this change as the impacts were not material at 31 December 2019.

A reconciliation of the Solvency II regulatory surplus to the Solvency II shareholder surplus is provided below:

2020	Own funds £m	SCR £m	Surplus £m
Estimated Solvency II regulatory surplus	29,262	(16,441)	12,821
Adjustments for:
Fully ring-fenced with-profit funds	(2,492)	2,492	-
Staff pension schemes in surplus	(1,179)	1,179	-
Notional reset of TMTP	564	-	564
PPE	(385)	-	(385)
Pro forma adjustments	-	-	-
Estimated Solvency II shareholder surplus	25,770	(12,770)	13,000

2019	Own funds £m	SCR £m	Surplus £m
Estimated Solvency II regulatory surplus	28,347	(15,517)	12,830
Adjustments for:
Fully ring-fenced with-profit funds	(2,501)	2,501	-
Staff pension schemes in surplus	(1,181)	1,181	-
Notional reset of TMTP	-	-	-
Pro forma adjustments¹	(117)	(75)	(192)
Estimated Solvency II shareholder surplus	24,548	(11,910)	12,638

1 The 31 December 2019 Solvency II position includes three pro forma adjustments that relate to the disposal of FPI (£nil impact on surplus), the disposal of Hong Kong (£nil impact on surplus) and the potential impact of an expected change to Solvency II regulations on the treatment of equity release mortgages (£0.2 billion decrease in surplus as a result of an increase in SCR). The 31 December 2020 Solvency II position does not include proforma adjustments. Note that from 31 December 2020 no pro forma adjustments will be made for planned disposals.

A summary of the shareholder view of the Group's Solvency II position is shown in the table below:

	2020 £m	2019 £m
Own Funds	25,770	24,548
Solvency Capital Requirement	(12,770)	(11,910)
Estimated Solvency II Shareholder Surplus at 31 December	13,000	12,638
Estimated Shareholder Cover Ratio	202%	206%

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Value of new business on an adjusted Solvency II basis (VNB)

VNB measures the additional value to shareholders created through the writing of new life business in the period. It reflects Solvency II assumptions and allowance for risk, and is defined as the increase in Solvency II own funds resulting from life business written in the period, including the impact of interactions between in-force and new business, adjusted to:

· remove the impact of the contract boundary restrictions under Solvency II;

· include businesses which are not within the scope of Solvency II own funds (e.g. UK and Asia Healthcare, Retail fund management and UK equity release); and

· reflect a gross of tax and non-controlling interests basis, and other differences as set out in the footnote to the table below.

A reconciliation between VNB and the Solvency II own funds impact of new business is provided below:

Full year 2020	UK & Ireland Life £m	Aviva Investors £m	Manage-for-value £m	Group £m
VNB (gross of tax and non-controlling interests)	675	9	576	1,260
Solvency II contract boundary restrictions - new business	(108)	-	(209)	(317)
Solvency II contract boundary restrictions - increments/renewals on in-force business	113	-	96	209
Businesses which are not in the scope of Solvency II own funds	(106)	(9)	(5)	(120)
Tax and Other¹	(125)	-	(209)	(334)
Solvency II own funds impact of new business (net of tax and non-controlling interests)	449	-	249	698

Full year 2019	UK & Ireland Life £m	Aviva Investors £m	Manage-for-value £m	Group £m
VNB (gross of tax and non-controlling interests)	600	12	612	1,224
Solvency II contract boundary restrictions - new business	(83)	-	(181)	(264)
Solvency II contract boundary restrictions - increments/renewals on in-force business	97	-	99	196
Businesses which are not in the scope of Solvency II own funds	(138)	(12)	(8)	(158)
Tax and Other¹	(103)	-	(236)	(339)
Solvency II own funds impact of new business (net of tax and non-controlling interests)	373	-	286	659

1 Other includes the impact of 'look through profits' in service companies (where not included in Solvency II) of £(69) million (2019: £(78) million), the reduction in value when moving to a net of non-controlling interests basis of £(37) million (2019: £(57) million), the difference between locally applicable capital requirements for the smaller Asian markets (Indonesia, Vietnam, Hong Kong) and the value of new business on an adjusted Solvency II basis of £(47) million (2019: £(37) million), and the assumed take up of tax-free lump sum payments at retirement (not included in Solvency II Own Funds) on BPAs of £(4) million (2019: £nil )

VNB is calculated using economic assumptions as at the point of sale, taken as those appropriate to the start of each quarter. For contracts that are repriced more frequently, weekly or monthly economic assumptions have been used. The economic assumptions follow Solvency II rules for risk-free rates, volatility adjustment and matching adjustment.

The operating assumptions are consistent with the Solvency II balance sheet, when these assumptions are updated, the
year-to-date VNB will capture the impact of the assumption change on all business sold that year.

Matching Adjustment (MA)

The matching adjustment is an addition to the rate used to discount Solvency II best-estimate liabilities, to reflect the return on the matching assets used. An MA is applied to certain obligations based on the expected allocation of assets backing new business at each year-end date. This allocation may be different to the MA applied at the portfolio level. Aviva applies an MA to certain obligations in UK Life, using methodology which is set out in the Solvency and Financial Condition Report (SFCR).

The matching adjustment used for 2020 UK new business (where applicable) was 98 bps (2019: 95 bps).

New business margin

New business margin is calculated as value of new business on an adjusted Solvency II basis (VNB) divided by the present value of new business premiums (PVNBP) and expressed as a percentage.

Present value of new business premiums (PVNBP)

PVNBP measures sales in the Group's life insurance business. PVNBP is derived from the present value of new regular premiums expected to be received over the term of the new contracts plus 100% of single premiums from new business written in the financial period and is expressed at the point of sale. The discounted value of regular premiums is calculated using the same methodology as for VNB. PVNBP also includes any changes to existing contracts which were not anticipated at the outset of the contract that generate additional shareholder risk and associated premium income of the nature of a new policy.

The table below presents a reconciliation of sales to IFRS net written premiums.

	2020 £m	2019 £m
Present value of new business premiums	43,358	45,665
Investment sales	5,270	4,621
General insurance and health net written premiums	10,232	10,224
Long-term health and collectives business	(3,647)	(3,563)
Total sales	55,213	56,947
Effect of capitalisation factor on regular premium long-term business¹	(14,686)	(15,294)
JVs and associates²	(226)	(286)
Annualisation impact of regular premium long-term business³	(399)	(327)
Deposits⁴	(9,936)	(10,917)
Investment sales⁵	(5,270)	(4,621)
IFRS gross written premiums from existing long-term business⁶	5,066	5,057
Long-term insurance and savings business premiums ceded to reinsurers	(3,101)	(2,879)
Total IFRS net written premiums	26,661	27,680
Analysed as:
IFRS net written premiums from continuing business	25,377	26,527
IFRS net written premiums from discontinued operations	1,284	1,153
	26,661	27,680
Analysed as:
Long-term insurance and savings net written premiums	16,429	17,456
General insurance and health net written premiums	10,232	10,224
	26,661	27,680

1 Discounted value of regular premiums expected to be received over the term of the new contract, adjusted for expected levels of persistency.

2 Total long-term new business sales include our share of sales from joint ventures and associates. Under IFRS, premiums from these sales are excluded.

3 The impact of annualisation is removed in order to reconcile the non-GAAP new business sales to IFRS premiums.

4 Under IFRS, only the margin earned from non-participating investment contracts is recognised in the IFRS income statement.

5 Investment sales included in total sales represent the cash inflows received from customers investing in mutual fund type products such as unit trusts and OEICs.

6 The non-GAAP measure of sales focuses on new business written in the period under review while the IFRS income statement includes premiums received from all business, both new and existing.

Page 116

Solvency II operating capital generation (OCG)^#

Solvency II OCG measures the amount of Solvency II capital the Group generates from operating activities and incorporates an expected return on investments supporting the life and non-life insurance businesses. The Group considers this measure meaningful to stakeholders as it enhances the understanding of the Group's operating performance over time by separately identifying non-operating items.

The expected investment returns assumed within Solvency II OCG are consistent with the returns used for Group adjusted operating profit.

Solvency II OCG includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, the effect of changes in non-economic assumptions (for example, longevity), model changes that are non-economic in nature and the impact of capital actions, for example, strategic changes in asset mix including changes in hedging exposure. Consistent with the Group adjusted operating profit APM, Solvency II OCG is determined on start of period economic assumptions and therefore excludes economic variances and economic assumption changes.

An analysis of the components of Solvency II OCG is presented below, including an analysis of Solvency II operating own funds generation which is the own funds component of Solvency II OCG (see the section below):

	2020 £m	2019 £m
Solvency II own funds impact of new business (net of tax and non-controlling interests)	698	659
Operating own funds generation from life existing business	721	507
Operating own funds generation from non-life	562	431
Operating own funds generation from other¹	6	944
Group debt costs	(296)	(284)
Solvency II operating own funds generation	1,691	2,257
Solvency II operating SCR impact	241	2
Solvency II OCG	1,932	2,259

1 Other includes the impact of capital actions, non-economic assumption changes and other non-recurring items.

Solvency II OCG is a key component of the movement in Solvency II shareholder surplus. The tables below provide an analysis of the change in Solvency II shareholder surplus.

2020 Shareholder view	Own funds £m	SCR £m	Surplus £m
Group Solvency II shareholder surplus at 1 January	24,548	(11,910)	12,638
Opening restatements¹	78	(202)	(124)
Operating capital generation	1,691	241	1,932
Non-operating capital generation	(741)	(963)	(1,704)
Dividends²	(549)	-	(549)
Hybrid debt	257	-	257
Acquisitions and disposals	486	64	550
Estimated Solvency II shareholder surplus at 31 December	25,770	(12,770)	13,000

1 Opening restatements allows for adjustments to the estimated position presented in the preliminary announcement and the final position in the Solvency and Financial Condition Report (SFCR).

2 Dividends includes £17 million of Aviva plc preference dividends and £21 million of General Accident plc preference dividends, and £511 million for the interim dividends in respect of the 2019 and 2020 financial years.

2019 Shareholder view	Own funds £m	SCR £m	Surplus £m
Group Solvency II shareholder surplus at 1 January	23,551	(11,569)	11,982
Opening restatements¹	58	6	64
Operating capital generation	2,257	2	2,259
Non-operating capital generation	120	(368)	(248)
Dividends²	(1,222)	-	(1,222)
Share buy-back	-	-	-
Hybrid debt repayments	(210)	-	(210)
Acquisitions and disposals	(6)	19	13
Estimated Solvency II shareholder surplus at 31 December	24,548	(11,910)	12,638

1 Opening restatements allows for differences between the shareholder view presented in the 2018 preliminary announcement and the 2018 SFCR.

2 Dividends includes £17 million of Aviva plc preference dividends and £21 million of General Accident plc preference dividends.

Solvency II future surplus emergence

Solvency II future surplus emergence is a projection of the capital generation from existing long-term in-force life business. The projection is a static analysis as at a point in time and hence it does not include the potential impact of future new business or the potential impact of active management of the business (for example, active management of market, demographic and expense risk through investment, hedging, risk transfer, operational risk and expense management), which may affect the actual amount of Solvency II OCG earned from existing business in future periods.

For business subject to short contract boundaries under Solvency II, allowance has been made for the impact of renewal premiums as and when they are expected to occur.

The projected surplus, which is primarily expected to arise from the release of risk margin (including transitional measures) and solvency capital requirement as the business runs off over time, is expected to emerge through Solvency II OCG in future years. The calculation approach is consistent with prior periods.

The cash flows are real-world cash flows, i.e. they are based on best estimate non-economic assumptions used in the Solvency II valuation and real-world investment returns rather than risk-free. The expected investment returns are consistent with the methodology used in the Group adjusted operating profit.

Solvency II operating own funds generation

Solvency II operating own funds generation measures the amount of Solvency II own funds generated from operating activities. Solvency II operating own funds generation is the own funds component of Solvency II OCG and follows the methodology and assumptions outlined in Solvency II OCG.

Solvency II Return on Equity (RoE)^#

Solvency II RoE is calculated as:

· Operating own funds generation less preference dividends, DCI and tier 1 note coupons divided by;

· Opening value of unrestricted tier 1 shareholder own funds

Unrestricted tier 1 shareholder own funds represents the highest quality tier of capital and includes instruments with principal loss absorbing features such as permanence, subordination, undated, absence of redemption incentives, mandatory costs and encumbrances.

Page 117

The tables below provide a summary of the Group's regulatory Solvency II own funds by tier and a reconciliation between unrestricted tier 1 regulatory own funds and unrestricted tier 1 shareholder own funds:

Regulatory view	2020 £m	2019 m
Unrestricted regulatory tier 1 own funds	20,850	20,377
Restricted Tier 1	1,317	1,839
Tier 2	6,740	5,794
Tier 3¹	355	337
Estimated Solvency II regulatory own funds	29,262	28,347

1 Tier 3 regulatory own funds at 31 December 2020 consists of £259 million subordinated debt (2019: 259 million) plus £96 million net deferred tax assets (2019: £78 million).

Shareholder view	2020 £m	2019 m
Unrestricted regulatory tier 1 own funds	20,850	20,377
Adjustments for:
Fully ring-fenced with-profit funds	(2,492)	(2,501)
Staff pension schemes in surplus	(1,179)	(1,181)
Notional reset of TMTP	564	-
PPE²	(385)	-
Pro forma adjustments¹	-	(117)
Unrestricted shareholder tier 1 own funds	17,358	16,578

1 The 31 December 2019 Solvency II position includes two pro forma adjustments that relate to the disposal of FPI (£0.1 billion reduction in own funds) and the disposal of Hong Kong (£nil impact on own funds).

2 Regulation was introduced in France that allows French insurers to place the Provision pour Participation aux Excedents (PPE) into Solvency II own funds. The PPE has been included in the Group regulatory own funds in 2020 but it is not included in the Group shareholder own funds.

Solvency II RoE provides useful information as it is used as an economic value measure by the Group to assess growth and performance.

The Solvency II RoE is shown below:

	2020 £m	2019 m
Solvency II operating own funds generation	1,691	2,257
Less: preference share dividends	(38)	(38)
Less: DCI and tier 1 note coupons	(27)	(34)
	1,626	2,185
Opening unrestricted shareholder tier 1 own funds	16,578	15,296
Solvency II Return on Equity	9.8%	14.3%

Solvency II return on capital

Solvency II return on capital is calculated as Solvency II operating own funds generation excluding the costs of servicing external debt (including direct capital instrument coupons and preference share dividends) divided by opening shareholder Solvency II own funds. It is an unlevered economic value measure as it is used to assess growth and performance in our markets before taking debt into account.

For UK general insurance only, capital held for internal risk appetite purposes is used instead of opening shareholder Solvency II own funds. This removes any distortions arising from our general insurance legal entity structure and therefore ensures consistency in measuring performance across markets. This is only applicable to UK general insurance Solvency II return on capital and not to the aggregated Group Solvency II return on capital and Solvency II return on equity measures.

A reconciliation of Solvency II return on capital by market to the Group level Solvency II return on capital and Solvency II return on equity is provided below.

2020	Solvency II operating own funds generation £m	Opening shareholder own funds £m	Return on capital/equity %
UK & Ireland Life	1,057	14,241	7.4%
UK & Ireland General Insurance²	329	2,509	13.1%
Canada	287	1,442	19.9%
Aviva Investors	67	488	13.7%
Manage-for-value markets	497	8,010	6.2%
Group centre costs and Other²	(250)	(2,142)	N/A
Solvency II return on capital 31 December	1,987	24,548	8.1%
Less: Senior debt	(12)	-	-
Less: Subordinated debt	(284)	(6,942)	-
Solvency II operating own funds generation at 31 December	1,691
Direct capital instrument	(27)	(500)	-
Preference shares³	(38)	(450)	-
Net deferred tax assets	-	(78)	-
Solvency II return on equity at 31 December	1,626	16,578	9.8%
Less: Management actions and other¹	(6)	-	-
Solvency II return on equity (excluding management actions)	1,620	16,578	9.8%

1 Other includes the impact of capital actions, non-economic assumption changes and other non-recurring items.

2 For UK general insurance only, capital held for internal risk appetite purposes is used instead of opening shareholder Solvency II own funds to ensure consistency in measuring performance across markets. This is only applicable to UK general insurance Solvency II return on capital and not to the aggregated Group Solvency II return on capital and Solvency II return on equity measures, with the reversal of the impact included in Group centre costs and Other opening own funds.

3 Preference shares includes £21 million of dividends and £250 million of capital in respect of General Accident plc.

2019	Solvency II operating own funds generation £m	Opening shareholder own funds £m	Return on capital/equity %
UK & Ireland Life	1,247	13,733	9.1%
UK & Ireland General Insurance²	333	2,326	14.3%
Canada	203	1,330	15.3%
Aviva Investors	70	509	13.7%
Manage-for-value markets	850	7,453	11.4%
Group centre costs and Other²	(162)	(1,800)	N/A
Solvency II return on capital at 31 December	2,541	23,551	10.8%
Less: Senior debt	(12)	-	-
Less: Subordinated debt	(272)	(6,979)	-
Solvency II operating own funds generation at 31 December	2,257
Direct capital instrument and Tier 1 notes	(34)	(731)	-
Preference shares³	(38)	(450)	-
Net deferred tax assets	-	(95)	-
Solvency II return on equity at 31 December	2,185	15,296	14.3%
Less: Management actions and other¹	(944)	-	(6.2)%
Solvency II return on equity (excluding management actions)	1,241	15,296	8.1%

1 Other includes the impact of capital actions, non-economic assumption changes and other non-recurring items.

3 Preference shares includes £21 million of dividends and £250 million of capital in respect of General Accident plc.

Page 118

Solvency II net asset value (NAV) per share

Solvency II NAV per share is used to monitor the value generated by the Group in terms of the equity shareholders' face value per share investment. This is calculated as the closing unrestricted tier 1 Solvency II shareholder own funds, divided by the actual number of shares in issue as at the balance sheet date. Consistent with Solvency II RoE, it is an economic value measure used by the Group to assess growth.

The Solvency II NAV per share is shown below:

	2020	2019
Unrestricted tier 1 shareholder Solvency II own funds (£m)	17,358	16,578
Number of shares in issue at 31 December (in millions)	3,928	3,921
Solvency II NAV per share	442p	423p

Solvency II debt leverage ratio

Solvency II debt leverage ratio is calculated as total debt expressed as a percentage of Solvency II regulatory own funds plus senior debt and commercial paper. Where Solvency II debt includes subordinated debt, preference share capital and direct capital instrument. The Solvency II debt leverage ratio provides a measure of the Group's financial strength.

	2020 £m	2019 m
Solvency II regulatory debt	8,316	7,892
Senior notes	1,112	1,052
Commercial paper	108	238
Total debt	9,536	9,182
Estimated Solvency II regulatory own funds, senior debt and commercial paper	30,482	29,637
Solvency II debt leverage ratio	31%	31%

A reconciliation from IFRS subordinated debt to Solvency II regulatory debt is provided below:

	2020 £m	2019 m
IFRS borrowings	9,727	9,067
Less borrowings not classified as Solvency II regulatory debt
Senior notes	(1,112)	(1,052)
Commercial paper	(108)	(238)
Operational borrowings	(1,474)	(1,571)
IFRS subordinated debt	7,033	6,206
Revaluation of subordinated liabilities	795	716
Other movements	38	20
Solvency II subordinated debt	7,866	6,942
Preference share capital and direct capital instrument	450	950
Solvency II regulatory debt	8,316	7,892

Other APMs

Cash remittances^#

Cash paid by our operating businesses to the Group, for the period between March and the end of the month preceding preliminary results announcements, comprised of dividends and interest on internal loans. Dividend payments by operating businesses may be subject to insurance regulations that restrict the amount that can be paid. The business monitors total cash remittances at a Group level and in each of its markets. Cash remittances are considered a useful measure as they support the payments of external dividends.

Cash remittances eliminate on consolidation and hence are not directly reconcilable to the Group's IFRS consolidated statement of cash flows.

Excess centre cash flow

This represents the cash remitted by business units to the Group centre less central operating expenses and debt financing costs. Excess centre cash flow is a measure of the cash available to pay dividends, reduce debt or invest back into our business. Excess centre cash flow does not include cash movements such as disposal proceeds or capital injections.

These amounts eliminate on consolidation and hence are not directly reconcilable to the Group's IFRS consolidated statement of cash flows.

Centre liquidity

Centre liquidity comprises cash and liquid assets and represents amounts as at the end of the month preceding preliminary results announcements. It provides meaningful information because it shows the liquidity at the Group centre available to meet debt interest and central costs and to pay dividends to shareholders.

Annual Premium Equivalent (APE)

APE is a measure of sales in our life insurance business. APE is calculated as the sum of new regular premiums plus 10% of new single premiums written in the period. This provides useful information on sales and new business when considered alongside VNB.

Spread margin

The spread margin represents the return made on the Group's annuity and other non-linked business, based on the expected investment return, less amounts credited to policyholders. The expected investment returns assumed within the spread margin are consistent with the returns used for Group adjusted operating profit. The spread margin is a useful indicator of the expected investment return arising on this business.

Underwriting margin

The underwriting margin represents the release of reserves held to cover claims, surrenders and administrative expenses less the cost of actual claims and surrenders in the period.

Unit-linked margin

The unit-linked margin represents the annual management charges on unit-linked business. This is an indicator of the return arising on this business.

Aviva Investors revenue

Aviva Investors revenue represents segmental profit before tax excluding controllable expenses. It is a useful measure of the revenue earned from fund management activities, adjusted for fee and commission expenses.

END PART 4 of 4

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