Aviva plc HY20 results - 3 of 4

RNS Number : 2921V

Aviva PLC

06 August 2020

START PART 3 of 4

Page 41

IFRS financial statements

In this section	Page
Condensed consolidated financial statements	42
Condensed consolidated income statement	42
Condensed consolidated statement of comprehensive income	43
Condensed consolidated statement of changes in equity	44
Condensed consolidated statement of financial position	45
Condensed consolidated statement of cash flows	46
Notes to the condensed consolidated financial statements	47
B1 Basis of preparation	47
B2 Changes to comparative amounts	47
B3 Significant events since the previous reporting period	48
B4 Exchange rates	49
B5 Subsidiaries, joint ventures and associates	49
B6 Segmental information	50
B7 Tax	57
B8 Earnings per share	59
B9 Dividends and appropriations	60
B10 Contract liabilities and associated reinsurance	61
B11 Insurance liabilities	63
B12 Liability for investment contracts	65
B13 Reinsurance assets	66
B14 Effect of changes in assumptions and estimates during the period	67
B15 Unallocated divisible surplus	68
B16 Borrowings	68
B17 Pension obligations and other provisions	69
B18 Related party transactions	70
B19 Fair value	71
B20 Risk management	79
B21 Cash and cash equivalents	85
B22 Contingent liabilities and other risk factors	85
B23 Acquired value of in-force business and intangible assets	86
B24 Subsequent events	86
Directors' responsibility statement	87
Independent review report to Aviva plc	88

Page 42

Condensed consolidated income statement

For the six month period ended 30 June 2020

	Note	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Income
Gross written premiums		15,229	15,211	31,243
Premiums ceded to reinsurers		(2,005)	(1,442)	(3,563)
Premiums written net of reinsurance		13,224	13,769	27,680
Net change in provision for unearned premiums		(199)	(273)	(209)
Net earned premiums		13,025	13,496	27,471
Fee and commission income		1,074	1,011	2,141
Net investment (expense)/income		(3,639)	28,014	40,577
Share of profit after tax of joint ventures and associates		66	62	85
Loss on the disposal and remeasurement of subsidiaries, joint ventures and associates	B5(b)	(12)	(13)	(22)
		10,514	42,570	70,252
Expenses
Claims and benefits paid, net of recoveries from reinsurers		(10,995)	(11,824)	(23,096)
Change in insurance liabilities, net of reinsurance	B10(b)	(3,520)	(5,448)	(5,702)
Change in investment contract provisions		6,945	(15,927)	(24,095)
Change in unallocated divisible surplus	B15	1,334	(2,838)	(3,985)
Fee and commission expense		(1,553)	(2,648)	(5,536)
Other expenses		(1,643)	(1,552)	(3,329)
Finance costs		(278)	(285)	(576)
		(9,710)	(40,522)	(66,319)
Profit before tax		804	2,048	3,933
Tax attributable to policyholders' returns	B7(d)	272	(525)	(559)
Profit before tax attributable to shareholders' profits		1,076	1,523	3,374
Tax income/(expense)	B7(d)	70	(868)	(1,270)
Less: tax attributable to policyholders' returns	B7(d)	(272)	525	559
Tax attributable to shareholders' profits	B7(d)	(202)	(343)	(711)
Profit for the period		874	1,180	2,663

Attributable to:
Equity holders of Aviva plc		821	1,116	2,548
Non-controlling interests		53	64	115
Profit for the period		874	1,180	2,663
Earnings per share	B8
Basic (pence per share)		20.0	28.2	63.8
Diluted (pence per share)		19.7	27.9	63.1

Page 43

Condensed consolidated statement of comprehensive income

For the six month period ended 30 June 2020

	Note	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Profit for the period		874	1,180	2,663

Other comprehensive income:
Items that may be reclassified subsequently to income statement
Investments classified as available for sale
Fair value gains		3	48	39
Fair value gains transferred to profit on disposals		(1)	(3)	(19)
Share of other comprehensive income of joint ventures and associates		7	9	22
Foreign exchange rate movements		311	79	(219)
Aggregate tax effect - shareholder tax on items that may be reclassified subsequently to income statement	B7(b)	(13)	(18)	6

Items that will not be reclassified to income statement
Owner-occupied properties - fair value gains		-	1	3
Remeasurements of pension schemes	B17(b)	711	70	(867)
Aggregate tax effect - shareholder tax on items that will not be reclassified subsequently to income statement	B7(b)	(200)	(20)	103
Total other comprehensive income, net of tax		818	166	(932)
Total comprehensive income for the period		1,692	1,346	1,731

Attributable to:
Equity holders of Aviva plc		1,591	1,282	1,655
Non-controlling interests		101	64	76
		1,692	1,346	1,731

Page 44

Condensed consolidated statement of changes in equity

For the six month period ended 30 June 2020

	Note	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Balance at 1 January as reported		18,685	18,455	18,455
Adjustment at 1 January 2019 for adoption of IFRS 16¹		-	(110)	(110)
Balance at 1 January restated¹		18,685	18,345	18,345
Profit for the period		874	1,180	2,663
Other comprehensive income		818	166	(932)
Total comprehensive income for the period		1,692	1,346	1,731
Dividends and appropriations	B9	(36)	(828)	(1,244)
Non-controlling interests share of dividends declared in the period		(18)	(50)	(63)
Reclassification of DCI and tier 1 notes to financial liabilities²		(499)	-	(210)
Reserves credit for equity compensation plans		10	30	62
Shares issued under equity compensation plans		4	6	18
Treasury shares held by subsidiary companies		-	-	13
Forfeited dividend income		-	-	4
Changes in non-controlling interests in subsidiaries		(50)	(1)	(2)
Change in equity accounted option		-	-	22
Aggregate tax effect - shareholder tax		-	2	9
Balance at 30 June/31 December		19,788	18,850	18,685

1 The Group adopted IFRS 16 Leases from 1 January 2019. In line with the transition options available, the adoption was shown as an adjustment to opening retained earnings in 2019. See note B1 for further information.

2 On 23 June 2020, notification was given that the Group would redeem the 5.9021% £500 million direct capital instrument (DCI) at its principal amount together with accrued interest to (but excluding) 27 July 2020. At the date of notification , the instrument was reclassified as a financial liability of £499 million, representing its fair value (see note B16). The difference of £1 million has been charged to retained earnings. On 27 July 2020, the instrument was redeemed in full at a cost of £500 million. On 17 October 2019, notification was given that the Group would redeem the 6.875% £210 million tier 1 notes. At that date, the instrument was reclassified as a financial liability of
£210 million, representing its fair value at that date. On 21 November 2019, the instrument was redeemed in full at a cost of £210 million. The difference between its carrying amount of £231 million and fair value of £210 million was charged to retained earnings.

Page 45

Condensed consolidated statement of financial position

As at 30 June 2020

	Note	30 June 2020 £m	30 June 2019 £m	31 December 2019 £m
Assets
Goodwill		1,850	1,871	1,855
Acquired value of in-force business and intangible assets	B23	2,649	3,024	2,800
Interests in, and loans to, joint ventures		1,163	1,226	1,227
Interests in, and loans to, associates		336	311	304
Property and equipment		926	972	889
Investment property		11,306	11,471	11,203
Loans		40,109	39,452	38,579
Financial investments		353,583	343,858	343,418
Reinsurance assets	B13	13,307	12,414	12,356
Deferred tax assets		162	171	151
Current tax assets		181	81	132
Receivables		13,003	9,767	8,995
Deferred acquisition costs		3,291	3,215	3,156
Pension surpluses and other assets		3,467	3,522	2,799
Prepayments and accrued income		3,051	3,050	3,143
Cash and cash equivalents		19,125	15,296	19,524
Assets of operations classified as held for sale	B5(c)	9,330	8,524	9,512
Total assets		476,839	458,225	460,043
Equity
Capital
Ordinary share capital		982	979	980
Preference share capital		200	200	200
		1,182	1,179	1,180
Capital reserves
Share premium		1,242	1,225	1,239
Capital redemption reserve		44	44	44
Merger reserve		8,974	8,974	8,974
		10,260	10,243	10,257
Treasury shares		(5)	(18)	(7)
Currency translation reserve		1,231	1,192	814
Other reserves		(286)	(251)	(101)
Retained earnings		6,394	4,795	5,065
Equity attributable to shareholders of Aviva plc		18,776	17,140	17,208
Direct capital instrument and tier 1 notes		-	731	500
Equity excluding non-controlling interests		18,776	17,871	17,708
Non-controlling interests		1,012	979	977
Total equity		19,788	18,850	18,685
Liabilities
Gross insurance liabilities	B11	157,598	150,413	149,338
Gross liabilities for investment contracts	B12	222,112	218,881	222,127
Unallocated divisible surplus	B15	8,748	8,841	9,597
Net asset value attributable to unitholders		18,669	16,764	16,610
Pension deficits and other provisions		1,405	1,338	1,565
Deferred tax liabilities		2,045	2,305	2,155
Current tax liabilities		163	526	569
Borrowings	B16	10,356	9,234	9,039
Payables and other financial liabilities		24,134	19,818	18,138
Other liabilities		2,888	3,065	3,094
Liabilities of operations classified as held for sale	B5(c)	8,933	8,190	9,126
Total liabilities		457,051	439,375	441,358
Total equity and liabilities		476,839	458,225	460,043

Page 46

Condensed consolidated statement of cash flows

For the six month period ended 30 June 2020

	Note	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Cash flows from operating activities¹
Cash generated from operating activities		67	824	6,517
Tax paid		(734)	(173)	(549)
Total net cash (used in)/from operating activities		(667)	651	5,968
Cash flows from investing activities
Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired		(11)	(13)	(19)
Disposals of subsidiaries, joint ventures and associates, net of cash transferred		7	12	12
Repayment of loans to joint ventures and associates		-	5	-
Purchases of property and equipment		(71)	(52)	(84)
Proceeds on sale of property and equipment		2	3	4
Purchases of intangible assets		(35)	(32)	(63)
Total net cash used in investing activities		(108)	(77)	(150)
Cash flows from financing activities
Proceeds from issue of ordinary shares		4	12	27
Treasury shares purchased for employee trusts		-	(6)	(9)
New borrowings drawn down, net of expenses		617	187	580
Repayment of borrowings²		(35)	(358)	(927)
Net drawdown/(repayment) of borrowings		582	(171)	(347)
Interest paid on borrowings		(269)	(274)	(553)
Preference dividends paid	B9	(9)	(9)	(17)
Ordinary dividends paid	B9	-	(812)	(1,184)
Forfeited dividend income		-	-	4
Coupon payments on direct capital instrument and tier 1 notes	B9	-	(7)	(43)
Dividends paid to non-controlling interests of subsidiaries		(18)	(50)	(63)
Other³		-	-	(5)
Total net cash from/(used in) financing activities		290	(1,317)	(2,190)
Total net (decrease)/increase in cash and cash equivalents		(485)	(743)	3,628
Cash and cash equivalents at 1 January		19,434	16,051	16,051
Effect of exchange rate changes on cash and cash equivalents		326	11	(245)
Cash and cash equivalents at 30 June/31 December	B21	19,275	15,319	19,434

1 Cash flows from operating activities include interest received of £2,929 million (HY19: £2,876 million, 2019: £5,834 million) and dividends received of £1,672 million (HY19: £2,748 million, 2019: £5,614 million).

2 The second half of 2019 includes the redemption of 6.875% £210 million tier 1 notes.

3 The second half of 2019 includes a £5 million donation of forfeited dividend income to a charitable foundation.

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B1 - Basis of preparation

The condensed consolidated interim financial statements for the six months to 30 June 2020 have been prepared in accordance with IAS 34 Interim Financial Reporting, as endorsed by the European Union (EU), and the Disclosure Rules and Transparency Rules of the Financial Conduct Authority.

The results for the six months to 30 June 2020 are unaudited but have been reviewed by the Auditor, PricewaterhouseCoopers LLP. The interim results do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The comparative results for the full year 2019 have been taken from the Group's 2019 annual report and accounts. Therefore, these interim financial statements should be read in conjunction with the 2019 annual report and accounts that were prepared in accordance with IFRS, as endorsed by the EU, and those parts of the Companies Act 2006 applicable to those reporting under IFRS. PricewaterhouseCoopers LLP reported on the 2019 financial statements and their report was unqualified and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The Group's 2019 annual report and accounts has been filed with the Registrar of Companies.

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

Going concern

A detailed going concern review has been undertaken as part of the 2020 interim reporting process. This review includes consideration of the Group's current and forecast solvency and liquidity positions over a minimum two-year period and the results of stress and scenario testing. The range of scenarios allow for the potential impacts of COVID-19 both directly on the operations of the Group and also on the wider macroeconomic environment.

Even in severe downside scenarios, no material uncertainty in relation to going concern has been identified, due to the Group's strong solvency and liquidity positions providing considerable resilience to external shocks, underpinned by the Group's approach to risk management (see note B20).

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

Accounting policies

The accounting policies applied in the condensed consolidated interim financial statements are the same as those applied in Aviva plc's 2019 annual report and accounts.

IFRS 16 Leases

On 1 January 2019, the Group adopted IFRS 16 Leases. The Group accounting policy is set out in the Group's 2019 annual report and accounts. The Group chose to adopt the modified retrospective approach on transition as permitted under IFRS 16. This approach did not require prior period comparatives to be restated, and the impact of adoption of the standard on retained earnings was shown as an adjustment to opening retained earnings. This resulted in a reduction of retained earnings of £110 million at 1 January 2019. This reflected the fact that the right of use assets and lease liabilities amortise to £nil at different rates over the lease term. There were corresponding increases in the value of assets (£434 million) and liabilities (£544 million), representing the right of use assets and lease liabilities, net of any associated tax impacts, not previously recognised on the balance sheet in accordance with IAS 17. There was no material impact on profit before tax.

B2 - Changes to comparative amounts

On 31 December 2019, the Group adjusted operating profit APM was amended and now includes amortisation and impairment of internally generated intangible assets to provide more relevant information by better reflecting their operational nature. These assets include advisor platforms, digital distribution channels and claims and policy administration systems which are used to support operational activities. Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations as these items principally relate to merger and acquisition activity which we view as strategic in nature. The effect of this change was to move £62 million relating to amortisation of internally generated intangible assets into Group adjusted operating profit for the first six months of 2019. The HY19 comparative figures have been restated in the Reconciliation of Group adjusted operating profit to profit for the period and the Segmental Income statement (see note B6). The relevant EPS metrics (operating EPS and diluted operating EPS) for HY19 have also been restated (see note B8). There is no impact from this change on profit before tax attributable to shareholders' profits.

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B3 - Significant events since the previous reporting period

On 11 March 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, COVID-19, a global pandemic. This represents a major development since the previous reporting period to 31 December 2019.

Governments in affected areas have imposed a number of measures designed to contain the outbreak, including business closures, travel restrictions, stay at home orders and prohibition of gatherings and events. The spread of COVID-19 has resulted in a sharp economic downturn in jurisdictions in which the Group operates and the global economy more widely, as well as causing increased volatility and declines in financial markets. The global impacts of COVID-19 have given rise to unprecedented uncertainty and could give rise to a severe economic downturn that may adversely impact the results of the Group. However, the strength of the Group's capital and liquidity means it is well positioned to manage this crisis and continue to support customers.

This note sets out the areas of significant impact of COVID-19 on the Group's results.

Business and performance

Information presented in this report represents the performance of the business in the period to 30 June 2020.

Long-term business

The Group's life insurance business is long-term in nature. As such the ultimate impact of COVID-19 has a high degree of uncertainty and will emerge over a long period of time. The reported results include a net £25 million increase in long-term insurance contract liabilities as a result of the non-economic impacts of COVID-19, noting that this includes the offsetting impacts of an increase attributable to mortality and a decrease attributable to longevity assumptions. The valuation of the Group's long-term insurance liabilities is closely linked to market movements and therefore the impact of COVID-19 on global markets has had a consequential impact on the valuation of the Group's long-term business. It is not possible however to disaggregate the impact of the pandemic from wider economic movements in the period, and as such quantification of the economic impact of COVID-19 on long term insurance contract liabilities is not possible. The effect of COVID-19 on assumptions and estimates for the long-term business is set out in note B14.

General insurance and health

The impact of COVID-19 on general insurance and health claims reported in the period is estimated as £165 million, net of reinsurance. Claims are primarily as a result of disruption to business and travel insured by the Group, partially offset by a reduction in the frequency of motor claims. Further information on the impact of COVID-19 on general insurance and health liabilities can be found within note B11 (c).

Fund management

The widespread impact of COVID-19 on financial markets has led to an observe d fall in the Group's fund management fee income. Further information on the revenue earned by the Group's fund management segment can be found within note B6(b).

Risk profile

Note B20 has been updated to reflect the impact of COVID-19 on the risk environment within which the Group operates and the way in which the pandemic has had an impact on the Group's material risk exposures. This includes descriptions of key actions taken to mitigate these changes in risk exposures since the previous reporting period.

Fair value measurement

The increased volatility and declines in both the value and level of trading in financial markets arising from COVID-19 has led to changes in the value of the Group's assets and liabilities held at fair value, primarily relating to equity securities where reductions in value have been driven by market movements. Further information on the fair value of the Group's assets and liabilities and the methodology for calculating this fair value is set out in note B19.

Capital management

The Group is taking a cautious approach on capital given the uncertain economic outlook. The Group's balance sheet exposure and solvency position has been reviewed and actions taken to protect the solvency position and further reduce the sensitivity to economic shocks. The estimated Solvency II regulatory own funds is £28.4 billion at 30 June 2020 (2019: £28.3 billion) and the estimated Solvency II shareholder own funds is £24.6 billion (2019: £24.5 billion). The movement in the period to 30 June 2020 reflects adverse capital market impacts on asset valuations offset by a decrease in interest rates and capital generation in the first half of 2020. The estimated impact of COVID-19 on general insurance and long-term business liabilities have been recognised in the Group capital position.

Other

(i) Dividend

Due to the unprecedented challenges COVID-19 presents for businesses, households and customers, and the adverse and highly uncertain impact on the global economy, on 8 April 2020, the Board of Directors agreed to withdraw its recommendation to pay the 2019 final dividend to ordinary shareholders in June 2020.

Further details can be found in note B9.

Page 49

B4 - Exchange rates

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

	6 months 2020	6 months 2019	Full year 2019
Eurozone
Average rate (€1 equals)	£0.88	£0.88	£0.88
Period end rate (€1 equals)	£0.91	£0.89	£0.85
Canada
Average rate ($CAD1 equals)	£0.58	£0.58	£0.59
Period end rate ($CAD1 equals)	£0.59	£0.60	£0.58
Poland
Average rate (PLN1 equals)	£0.20	£0.20	£0.20
Period end rate (PLN1 equals)	£0.20	£0.21	£0.20

B5 - Subsidiaries, joint ventures and associates

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

(a) Acquisitions

The Group completed the acquisition of a further 40% shareholding in Wealthify, a Group subsidiary, for a consideration of £11 million. Following the transaction, Wealthify is now a wholly owned subsidiary.

(b) Disposals and remeasurements

The loss on disposal and remeasurement of subsidiaries, joint ventures and associates comprises:

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Disposals	7	6	6
Held for sale remeasurements	(19)	(19)	(28)
Total loss on disposal and remeasurements	(12)	(13)	(22)

The loss on the disposal and remeasurement of subsidiaries, joint ventures and associates during the period of £12 million (HY19: loss of £13 million) consists of £7 million of gains relating to small disposals and a £19 million remeasurement loss relating to Friends Provident International (FPI). See note B5(c).

The assets and liabilities of operations classified as held for sale as at 30 June 2020 are as follows:

	30 June 2020 £m	30 June 2019 £m	31 December 2019 £m
Assets
Acquired value of in-force business and intangible assets	447	576	526
Interests in, and loans to, joint ventures and associates	56	-	8
Property and equipment	8	5	8
Loans	1	-	1
Financial investments	7,634	6,909	7,824
Reinsurance assets	44	53	75
Other assets	278	283	290
Cash and cash equivalents	862	698	780
Total assets	9,330	8,524	9,512
Liabilities
Gross insurance liabilities	668	118	687
Gross liabilities for investment contracts	8,123	8,022	8,324
External borrowings	26	-	28
Other liabilities	116	50	87
Total liabilities	8,933	8,190	9,126
Net assets	397	334	386

Assets and liabilities of operations classified as held for sale as at 30 June 2020 relate primarily to FPI and also include Group's operations in Hong Kong and Indonesia. Assets and liabilities of operations classified as held for sale as at 30 June 2019 relate entirely to FPI. Assets and liabilities classified as held for sale at 31 December 2019 relate primarily to FPI and also include the Group's operations in Hong Kong.

Page 50

B5 - Subsidiaries, joint ventures and associates continued

FPI

On 19 July 2017, Aviva announced the sale of FPI to RL360 Holding Company Limited, a subsidiary of International Financial Group Limited, for a total consideration of £340 million, and FPI has been reported as held for sale by the Group since 31 December 2017. In 2020, a revised structure was agreed for Aviva to sell a 76.2% shareholding in FPI for a total consideration of £259 million, including £50 million of deferred consideration. The conditions defined in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations for a subsidiary to be classified as held for sale continued to be met at the balance sheet date and the subsidiary was remeasured at fair value less costs to sell of £304 million, based on the revised terms.

The classification as held for sale has resulted in a loss on remeasurement of £118 million in 2017, £13 million in 2018, £28 million in 2019 and an additional remeasurement loss of £19 million at 30 June 2020. The business remained a consolidated subsidiary of Aviva at the balance sheet date. The transaction completed on 16 July 2020.

B6 - Segmental information

The Group's results can be segmented either by activity or by geography. Our primary reporting format is along market reporting lines, with supplementary information provided by products and services. This note provides segmental information on the consolidated income statement.

(a) Operating segments

United Kingdom

The United Kingdom comprises two operating segments - Life and General Insurance. The principal activities of UK Life including Savings & Retirement are life insurance, long-term health and accident insurance, savings, pensions and annuity business. UK General Insurance provides insurance cover to individuals and businesses, for risks associated mainly with motor vehicles, property and liability (such as employers' liability and professional indemnity liability) and medical expenses.

Canada

The principal activity of our operation in Canada is general insurance. In particular it provides personal and commercial lines insurance products principally distributed through insurance brokers.

France

The principal activities of our operations in France are long-term business and general insurance. The long-term business offers a range of long-term insurance and savings products, primarily for individuals, with a focus on the unit-linked market. The general insurance business predominantly sells personal and small commercial lines insurance products through agents and a direct insurer.

Poland

Activities in Poland comprise long-term business and general insurance and includes our long-term business in Lithuania.

Italy, Ireland and Other

These countries are not individually significant at a Group level, so have been aggregated into a single reporting segment in line with IFRS 8 Operating Segments. The principal activities of our operations in Italy and Ireland are long-term business and general insurance. Our 'Other' operations include our life operations in Turkey.

Asia

Our activities in Asia principally comprise our long-term business operations in China, India, Singapore, Hong Kong (see note B5(c)), Vietnam, Indonesia (see note B5(c)) and FPI (see note B5(c)). This segment also includes general insurance and health operations in Singapore and health operations in Indonesia. FPI was disposed of on 16 July 2020.

Aviva Investors

Aviva Investors operates in most of the markets in which the Group operates, in particular the UK, France, North America and Asia Pacific. Aviva Investors manages policyholders' and shareholders' invested funds, provides investment management services for institutional pension fund mandates and manages a range of retail investment products. These include investment funds, unit trusts, open-ended investment companies and individual savings accounts.

Other Group activities

Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in 'Other Group activities'. The results of our internal reinsurance operations and the Group's interest in Wealthify are also included in this segment, as are the elimination entries for certain inter-segment transactions and group consolidation adjustments.

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B6 - Segmental information continued

Measurement basis

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

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

(ii) profit or loss from operations before tax attributable to shareholders, adjusted for non-operating items that do not reflect the ongoing performance of our operating segments, including the impact of short-term fluctuations in market performance and fiscal policy changes.

(a) (i) Segmental income statement for the six month period ended 30 June 2020

	United Kingdom					Europe
	Life £m	GI £m	Canada £m	France £m	Poland £m	Italy, Ireland and Other £m	Asia £m	Aviva Investors £m	Other Group activities £m	Total £m
Gross written premiums	5,142	2,315	1,580	2,630	297	2,504	761	-	-	15,229
Premiums ceded to reinsurers	(1,519)	(175)	(78)	(39)	(7)	(67)	(120)	-	-	(2,005)
Internal reinsurance revenue	-	-	-	-	-	-	-	-	-	-
Premiums written net of reinsurance	3,623	2,140	1,502	2,591	290	2,437	641	-	-	13,224
Net change in provision for unearned premiums	(38)	(48)	6	(126)	2	9	(4)	-	-	(199)
Net earned premiums	3,585	2,092	1,508	2,465	292	2,446	637	-	-	13,025
Fee and commission income	493	49	13	156	46	62	100	154	1	1,074
	4,078	2,141	1,521	2,621	338	2,508	737	154	1	14,099
Net investment (expense)/income	(725)	49	124	(1,731)	(62)	(600)	(244)	(15)	(435)	(3,639)
Inter-segment revenue	-	-	-	-	-	-	-	103	-	103
Share of (loss)/profit after tax of joint ventures and associates	(26)	-	-	10	-	6	19	-	57	66
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	7	-	-	-	(19)	-	-	(12)
Segmental income¹	3,327	2,190	1,652	900	276	1,914	493	242	(377)	10,617
Claims and benefits paid, net of recoveries from reinsurers	(4,354)	(1,174)	(874)	(2,649)	(191)	(1,362)	(391)	-	-	(10,995)
Change in insurance liabilities, net of reinsurance	(2,634)	(339)	(70)	14	131	(349)	(271)	-	(2)	(3,520)
Change in investment contract provisions	5,348	-	-	1,576	-	(314)	321	14	-	6,945
Change in unallocated divisible surplus	310	-	-	463	3	538	20	-	-	1,334
Fee and commission expense	(315)	(618)	(449)	(250)	(77)	(191)	(137)	(14)	498	(1,553)
Other expenses	(489)	(228)	(95)	(133)	(41)	(98)	(125)	(208)	(226)	(1,643)
Inter-segment expenses	(91)	(3)	(3)	-	(1)	(5)	-	-	-	(103)
Finance costs	(78)	(2)	(3)	(1)	-	(2)	-	-	(192)	(278)
Segmental expenses	(2,303)	(2,364)	(1,494)	(980)	(176)	(1,783)	(583)	(208)	78	(9,813)
Profit/(loss) before tax	1,024	(174)	158	(80)	100	131	(90)	34	(299)	804
Tax attributable to policyholders' returns	267	-	-	-	-	4	1	-	-	272
Profit/(loss) before tax attributable to shareholders' profits	1,291	(174)	158	(80)	100	135	(89)	34	(299)	1,076
Adjusting items:
Reclassification of unallocated interest	32	(7)	16	26	-	-	-	1	(68)	-
Life business: Investment variances and economic assumption changes	(634)	-	-	193	2	(13)	147	-	-	(305)
Non-life business: Short-term fluctuation in return on investments	-	84	(72)	72	(3)	24	-	-	66	171
General insurance and health business: Economic assumption changes	-	31	7	7	-	-	-	-	-	45
Impairment of goodwill, joint ventures, associates and other amounts expensed	-	-	16	-	-	-	1	-	-	17
Amortisation and impairment of intangibles acquired in business combinations	25	-	11	1	2	1	4	-	-	44
Amortisation and impairment of acquired value of in-force business	103	-	-	1	-	3	58	-	-	165
(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	(7)	-	-	-	19	-	-	12
Other	-	-	-	-	-	-	-	-	-	-
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits	817	(66)	129	220	101	150	140	35	(301)	1,225

1 Total reported income, excluding inter-segment revenue, includes £5,598 million from the United Kingdom (Aviva plc's country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts are written.

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(a ) (ii) Segmental income statement for the six month period ended 30 June 2019 - restated¹

	United Kingdom					Europe
	Life £m	GI £m	Canada £m	France m	Poland m	Italy, Ireland and Other £m	Asia £m	Aviva Investors £m	Other Group activities £m	Total £m
Gross written premiums	3,509	2,338	1,525	3,407	311	3,377	744	-	-	15,211
Premiums ceded to reinsurers	(814)	(180)	(67)	(40)	(5)	(70)	(266)	-	-	(1,442)
Internal reinsurance revenue	-	-	-	-	-	-	(4)	-	4	-
Premiums written net of reinsurance	2,695	2,158	1,458	3,367	306	3,307	474	-	4	13,769
Net change in provision for unearned premiums	(37)	(74)	(9)	(121)	-	(12)	(20)	-	-	(273)
Net earned premiums	2,658	2,084	1,449	3,246	306	3,295	454	-	4	13,496
Fee and commission income	450	60	10	142	50	30	109	159	1	1,011
	3,108	2,144	1,459	3,388	356	3,325	563	159	5	14,507
Net investment income	19,469	181	128	4,582	67	2,561	353	35	638	28,014
Inter-segment revenue	-	-	-	-	-	-	-	118	-	118
Share of profit/(loss) after tax of joint ventures and associates	33	-	-	4	-	6	32	-	(13)	62
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	6	-	-	-	(19)	-	-	(13)
Segmental income²	22,610	2,325	1,593	7,974	423	5,892	929	312	630	42,688
Claims and benefits paid, net of recoveries from reinsurers	(4,844)	(1,329)	(928)	(2,434)	(200)	(1,588)	(480)	-	(21)	(11,824)
Change in insurance liabilities, net of reinsurance	(3,696)	(59)	(36)	(792)	2	(814)	(60)	-	7	(5,448)
Change in investment contract provisions	(11,948)	-	-	(2,018)	1	(2,043)	116	(35)	-	(15,927)
Change in unallocated divisible surplus	311	-	-	(1,994)	(1)	(970)	(184)	-	-	(2,838)
Fee and commission expense	(255)	(624)	(401)	(418)	(77)	(164)	(114)	(15)	(580)	(2,648)
Other expenses³	(514)	(187)	(79)	(122)	(51)	(90)	(134)	(204)	(171)	(1,552)
Inter-segment expenses	(104)	(3)	(3)	(2)	(2)	(4)	-	-	-	(118)
Finance costs	(69)	(2)	(4)	(1)	-	(3)	(2)	-	(204)	(285)
Segmental expenses	(21,119)	(2,204)	(1,451)	(7,781)	(328)	(5,676)	(858)	(254)	(969)	(40,640)
Profit/(loss) before tax	1,491	121	142	193	95	216	71	58	(339)	2,048
Tax attributable to policyholders' returns	(519)	-	-	-	-	(6)	-	-	-	(525)
Profit/(loss) before tax attributable to shareholders' profits	972	121	142	193	95	210	71	58	(339)	1,523
Adjusting items:
Reclassification of unallocated interest⁴	32	(9)	17	24	-	-	-	2	(66)	-
Life business: Investment variances and economic assumption changes	(400)	-	-	86	(2)	(39)	(17)	-	-	(372)
Non-life business: Short-term fluctuation in return on investments	-	(70)	(77)	(71)	(1)	(28)	-	-	102	(145)
General insurance and health business: Economic assumption changes	-	54	3	16	-	-	-	-	-	73
Impairment of goodwill, joint ventures, associates and other amounts expensed	-	-	2	-	-	-	9	-	-	11
Amortisation and impairment of intangibles acquired in business combinations	27	-	8	1	2	1	6	-	-	45
Amortisation and impairment of acquired value of in-force business	121	-	-	1	-	5	63	-	1	191
(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	(6)	-	-	-	19	-	-	13
Other⁵	-	45	-	-	-	2	-	-	-	47
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits⁴	752	141	89	250	94	151	151	60	(302)	1,386

1 On 31 December 2019 the Group adjusted operating profit APM was revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in a reduction to the prior period Group adjusted operating profit of £62 million. There is no impact on profit before tax attributable to shareholders' profit.

2 Total reported income, excluding inter-segment revenue, includes £25,004 million from the United Kingdom (Aviva plc's country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts are written.

3 Following the alignment of the UK digital business with the United Kingdom Life and United Kingdom GI businesses and the change in definition of Group adjusted operating profit on 31 December 2019, comparative amounts for the 6 month period ended 30 June 2019 have been amended to reclassify the amortisation of internally generated intangibles included within Other expenses of £21 million from Other Group activities to United Kingdom Life (£8 million) and United Kingdom GI (£13 million).

4 Following a review of the presentation of intercompany loan interest, to achieve consistency in our reporting, comparative amounts for the 6 month period ended 30 June 2019 have been amended to reclassify net interest expense from United Kingdom Life to Other Group activities, of £32 million. The change has no impact on the Group's profit before tax attributable to shareholders' profits or Group adjusted operating profit before tax attributable to shareholders' profits.

5 Other includes a charge of £45 million in relation to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims and a charge of £2 million relating to the negative goodwill that arose on acquisition of Friends First.

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(a ) (iii) Segmental income statement for the year ended 31 December 2019

	United Kingdom					Europe
	Life £m	GI £m	Canada £m	France £m	Poland £m	Italy, Ireland and Other £m	Asia £m	Aviva Investors £m	Other Group activities £m	Total £m
Gross written premiums	8,596	4,624	3,204	6,883	643	5,761	1,532	-	-	31,243
Premiums ceded to reinsurers	(2,271)	(406)	(143)	(86)	(12)	(264)	(381)	-	-	(3,563)
Internal reinsurance revenue	-	-	-	-	-	-	1	-	(1)	-
Premiums written net of reinsurance	6,325	4,218	3,061	6,797	631	5,497	1,152	-	(1)	27,680
Net change in provision for unearned premiums	(2)	(57)	(99)	(28)	2	(9)	(16)	-	-	(209)
Net earned premiums	6,323	4,161	2,962	6,769	633	5,488	1,136	-	(1)	27,471
Fee and commission income	951	113	24	305	99	123	205	320	1	2,141
	7,274	4,274	2,986	7,074	732	5,611	1,341	320	-	29,612
Net investment income	27,070	254	171	6,267	155	4,352	967	61	1,280	40,577
Inter-segment revenue	-	-	-	-	-	-	-	247	-	247
Share of profit/(loss) after tax of joint ventures and associates	20	-	-	48	-	12	33	-	(28)	85
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	6	-	-	-	(28)	-	-	(22)
Segmental income¹	34,364	4,528	3,163	13,389	887	9,975	2,313	628	1,252	70,499
Claims and benefits paid, net of recoveries from reinsurers	(9,569)	(2,614)	(1,938)	(4,751)	(380)	(2,820)	(1,003)	-	(21)	(23,096)
Change in insurance liabilities, net of reinsurance	(3,428)	(53)	(16)	(1,112)	(49)	(1,062)	(32)	-	50	(5,702)
Change in investment contract provisions	(16,411)	-	-	(4,041)	1	(3,365)	(216)	(63)	-	(24,095)
Change in unallocated divisible surplus	162	-	-	(2,010)	(4)	(1,764)	(369)	-	-	(3,985)
Fee and commission expense	(669)	(1,265)	(823)	(816)	(156)	(352)	(257)	(27)	(1,171)	(5,536)
Other expenses	(1,332)	(298)	(162)	(246)	(95)	(230)	(283)	(447)	(236)	(3,329)
Inter-segment expenses	(218)	(6)	(6)	(2)	(5)	(10)	-	-	-	(247)
Finance costs	(159)	(4)	(7)	(1)	(1)	(6)	(8)	-	(390)	(576)
Segmental expenses	(31,624)	(4,240)	(2,952)	(12,979)	(689)	(9,609)	(2,168)	(537)	(1,768)	(66,566)
Profit/(loss) before tax	2,740	288	211	410	198	366	145	91	(516)	3,933
Tax attributable to policyholders' returns	(487)	-	-	-	-	(14)	(58)	-	-	(559)
Profit/(loss) before tax attributable to shareholders' profits	2,253	288	211	410	198	352	87	91	(516)	3,374
Adjusting items:
Reclassification of unallocated interest²	65	(8)	33	46	-	-	-	5	(141)	-
Life business: Investment variances and economic assumption changes	(695)	-	-	84	(4)	(42)	10	-	(7)	(654)
Non-life business: Short-term fluctuation in return on investments	-	(102)	(64)	(95)	(5)	(33)	-	-	132	(167)
General insurance and health business: Economic assumption changes	-	27	2	24	-	-	-	-	1	54
Impairment of goodwill, joint ventures, associates and other amounts expensed	-	-	2	-	-	-	13	-	-	15
Amortisation and impairment of intangibles acquired in business combinations	54	-	13	2	5	2	11	-	-	87
Amortisation and impairment of acquired value of in-force business	243	-	-	2	-	33	126	-	2	406
(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	(6)	-	-	-	28	-	-	22
Other³	-	45	-	-	-	2	-	-	-	47
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits²	1,920	250	191	473	194	314	275	96	(529)	3,184

1 Total reported income, excluding inter-segment revenue, includes £39,041 million from the United Kingdom (Aviva plc's country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts are written.

2 Following a review of the presentation of intercompany loan interest, to achieve consistency in our reporting, comparative amounts for the year ended 31 December 2019 have been amended to reclassify net interest expense from United Kingdom Life to Other Group activities, of £65 million. The change has no impact on the Group's profit before tax attributable to shareholders' profits or Group adjusted operating profit before tax attributable to shareholders' profits.

3 Other includes a charge of £45 million in relation to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims and a charge of £2 million relating to the negative goodwill that arose on acquisition of Friends First.

(b) Further analysis by products and services

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

Long-term business

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

General insurance and health

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

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Fund management

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

Other

'Other' includes service companies, head office expenses, such as Group treasury and finance functions, and certain financing costs and taxes not allocated to business segments and eliminations entries for certain inter-segment transactions and group consolidation adjustments.

(b) (i) Segmental income statement - products and services for the six month period ended 30 June 2020

	Long-term business £m	General insurance and health1 £m	Fund management £m	Other £m	Total £m
Gross written premiums²	9,681	5,548	-	-	15,229
Premiums ceded to reinsurers	(1,673)	(332)	-	-	(2,005)
Premiums written net of reinsurance	8,008	5,216	-	-	13,224
Net change in provision for unearned premiums	-	(199)	-	-	(199)
Net earned premiums	8,008	5,017	-	-	13,025
Fee and commission income	817	59	154	44	1,074
	8,825	5,076	154	44	14,099
Net investment (expense)/income	(3,294)	113	-	(458)	(3,639)
Inter-segment revenue	-	-	105	-	105
Share of profit after tax of joint ventures and associates	8	1	-	57	66
(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	(19)	7	-	-	(12)
Segmental income	5,520	5,197	259	(357)	10,619
Claims and benefits paid, net of recoveries from reinsurers	(8,073)	(2,922)	-	-	(10,995)
Change in insurance liabilities, net of reinsurance	(3,065)	(455)	-	-	(3,520)
Change in investment contract provisions	6,945	-	-	-	6,945
Change in unallocated divisible surplus	1,334	-	-	-	1,334
Fee and commission expense	(663)	(1,352)	(14)	476	(1,553)
Other expenses	(721)	(416)	(210)	(296)	(1,643)
Inter-segment expenses	(99)	(6)	-	-	(105)
Finance costs	(80)	(5)	-	(193)	(278)
Segmental expenses	(4,422)	(5,156)	(224)	(13)	(9,815)
Profit/(loss) before tax	1,098	41	35	(370)	804
Tax attributable to policyholders' returns	272	-	-	-	272
Profit/(loss) before tax attributable to shareholders' profits	1,370	41	35	(370)	1,076
Adjusting items	(51)	170	1	29	149
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits	1,319	211	36	(341)	1,225

1 General insurance and health business segment includes gross written premiums of £494 million relating to health business. The remaining business relates to property and liability insurance.

2 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £37 million relating to property and liability insurance.

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(b) (ii) Segmental income statement - products and services for the six month period ended 30 June 2019 - restated¹

	Long-term business £m	General insurance and health² £m	Fund management £m	Other £m	Total £m
Gross written premiums³	9,649	5,562	-	-	15,211
Premiums ceded to reinsurers	(1,126)	(316)	-	-	(1,442)
Premiums written net of reinsurance	8,523	5,246	-	-	13,769
Net change in provision for unearned premiums	-	(273)	-	-	(273)
Net earned premiums	8,523	4,973	-	-	13,496
Fee and commission income	687	65	158	101	1,011
	9,210	5,038	158	101	14,507
Net investment income	26,973	427	-	614	28,014
Inter-segment revenue	-	-	120	-	120
Share of profit/(loss) after tax of joint ventures and associates	75	-	-	(13)	62
(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	(19)	6	-	-	(13)
Segmental income	36,239	5,471	278	702	42,690
Claims and benefits paid, net of recoveries from reinsurers	(8,613)	(3,211)	-	-	(11,824)
Change in insurance liabilities, net of reinsurance	(5,325)	(123)	-	-	(5,448)
Change in investment contract provisions	(15,927)	-	-	-	(15,927)
Change in unallocated divisible surplus	(2,838)	-	-	-	(2,838)
Fee and commission expense	(691)	(1,304)	(14)	(639)	(2,648)
Other expenses	(748)	(349)	(207)	(248)	(1,552)
Inter-segment expenses	(112)	(7)	-	(1)	(120)
Finance costs	(72)	(6)	-	(207)	(285)
Segmental expenses	(34,326)	(5,000)	(221)	(1,095)	(40,642)
Profit/(loss) before tax	1,913	471	57	(393)	2,048
Tax attributable to policyholders' returns	(525)	-	-	-	(525)
Profit/(loss) before tax attributable to shareholders' profits	1,388	471	57	(393)	1,523
Adjusting items⁴	(91)	(120)	2	72	(137)
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits⁴	1,297	351	59	(321)	1,386

1 On 31 December 2019 the Group adjusted operating profit APM was revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts for the period ended 30 June 2019 have been restated resulting in a reduction to the prior period Group adjusted operating profit of £62 million. There is no impact on profit before tax attributable to shareholders' profits.

2 General insurance and health business segment includes gross written premiums of £541 million relating to health business. The remaining business relates to property and liability insurance.

3 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £22 million (restated) relating to property and liability insurance.

4 Following a review of the presentation of intercompany loan interest, to achieve consistency in our reporting, comparative amounts for the period ended 30 June 2019 have been amended to reclassify net interest expense from Long-term business to Other, of £32 million. The change has no impact on the Group's profit before tax attributable to shareholders' profits or Group adjusted operating profit before tax attributable to shareholders' profits.

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B6 - Segmental information continued

(b) (iii) Segmental income statement - products and services for the year ended 31 December 2019

	Long-term business £m	General insurance and health¹ £m	Fund management £m	Other £m	Total £m
Gross written premiums²	20,335	10,908	-	-	31,243
Premiums ceded to reinsurers	(2,879)	(684)	-	-	(3,563)
Premiums written net of reinsurance	17,456	10,224	-	-	27,680
Net change in provision for unearned premiums	-	(209)	-	-	(209)
Net earned premiums	17,456	10,015	-	-	27,471
Fee and commission income	1,490	126	319	206	2,141
	18,946	10,141	319	206	29,612
Net investment income/(expense)	38,722	622	(1)	1,234	40,577
Inter-segment revenue	-	-	250	-	250
Share of profit/(loss) after tax of joint ventures and associates	113	-	-	(28)	85
(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	(28)	6	-	-	(22)
Segmental income	57,753	10,769	568	1,412	70,502
Claims and benefits paid, net of recoveries from reinsurers	(16,612)	(6,484)	-	-	(23,096)
Change in insurance liabilities, net of reinsurance	(5,566)	(136)	-	-	(5,702)
Change in investment contract provisions	(24,095)	-	-	-	(24,095)
Change in unallocated divisible surplus	(3,985)	-	-	-	(3,985)
Fee and commission expense	(1,546)	(2,672)	(27)	(1,291)	(5,536)
Other expenses	(1,850)	(649)	(453)	(377)	(3,329)
Inter-segment expenses	(237)	(13)	-	-	(250)
Finance costs	(170)	(10)	-	(396)	(576)
Segmental expenses	(54,061)	(9,964)	(480)	(2,064)	(66,569)
Profit/(loss) before tax	3,692	805	88	(652)	3,933
Tax attributable to policyholders' returns	(559)	-	-	-	(559)
Profit/(loss) before tax attributable to shareholders' profits	3,133	805	88	(652)	3,374
Adjusting items³	(68)	(161)	4	35	(190)
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits³	3,065	644	92	(617)	3,184

1 General insurance and health business segment includes gross written premiums of £944 million relating to health business. The remaining business relates to property and liability insurance.

2 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £62 million relating to property and liability insurance.

3 Following a review of the presentation of intercompany loan interest, to achieve consistency in our reporting, comparative amounts for the year ended 31 December 2019 have been amended to reclassify net interest expense from Long-term business to Other, of £65 million. The change has no impact on the Group's profit before tax attributable to shareholders' profits or Group adjusted operating profit before tax attributable to shareholders' profits.

Page 57

B7 - Tax

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

(a) Tax (credited)/charged to the income statement

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

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Current tax
For the period	308	532	1,062
Prior period adjustments	(23)	(54)	(179)
Total current tax	285	478	883
Deferred tax
Origination and reversal of temporary differences	(353)	393	402
Changes in tax rates or tax laws	(11)	(6)	(6)
Write down/(back) of deferred tax assets	9	3	(9)
Total deferred tax	(355)	390	387
Total tax (credited)/charged to income statement	(70)	868	1,270

(ii) The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Ireland and Singapore insurance policyholder returns is included in the tax credit. The tax credit attributable to policyholders' returns included in the credit above is £272 million (HY19: £525 million charge; 2019: £559 million charge).

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

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
UK tax	(143)	699	851
Overseas tax	73	169	419
	(70)	868	1,270

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

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

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Current tax
In respect of pensions and other post-retirement obligations	(19)	(29)	(49)
In respect of foreign exchange movements	15	4	(10)
	(4)	(25)	(59)
Deferred tax
In respect of pensions and other post-retirement obligations	219	49	(56)
In respect of fair value gains on owner-occupied properties	-	-	1
In respect of unrealised (losses)/gains on investments	(2)	14	5
	217	63	(50)
Total tax charged/(credited) to other comprehensive income	213	38	(109)

(ii) The tax charge attributable to policyholders' returns included above is £nil (HY19: £nil; 2019: £nil).

Page 58

B7 - Tax continued

Tax credited directly to equity in the period in respect of coupon payments on the direct capital instrument and tier 1 notes amounted to £nil million (HY19: £2 million; 2019: £9 million).

(d) Tax reconciliation

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

	Shareholder £m	Policyholder £m	6 months 2020 £m	Shareholder £m	Policyholder £m	6 months 2019 £m	Shareholder £m	Policyholder £m	Full year 2019 £m
Total profit before tax	1,076	(272)	804	1,523	525	2,048	3,374	559	3,933

Tax calculated at standard UK corporation tax rate of 19.00% (2019: 19.00%)	205	(52)	153	289	100	389	641	106	747
Reconciling items
Different basis of tax - policyholders	-	(221)	(221)	-	426	426	-	454	454
Adjustment to tax charge in respect of prior periods	(19)	-	(19)	(3)	-	(3)	5	-	5
Non-assessable income and items not taxed at the full statutory rate	(80)	-	(80)	6	-	6	(51)	-	(51)
Non-taxable profit on sale of subsidiaries and associates	-	-	-	-	-	-	(1)	-	(1)
Disallowable expenses	17	-	17	17	-	17	41	-	41
Different local basis of tax on overseas profits	22	1	23	42	(1)	41	98	(1)	97
Change in future local statutory tax rates	49	-	49	-	-	-	(6)	-	(6)
Movement in deferred tax not recognised	14	-	14	(3)	-	(3)	(4)	-	(4)
Tax effect of profit from joint ventures and associates	(5)	-	(5)	(6)	-	(6)	(8)	-	(8)
Other	(1)	-	(1)	1	-	1	(4)	-	(4)
Total tax charged/(credited) to income statement	202	(272)	(70)	343	525	868	711	559	1,270

The tax credit attributable to policyholders' returns is removed from the Group's total profit before tax in arriving at the Group's profit before tax attributable to shareholders' profits. As the net of tax loss attributable to with-profits and unit-linked policyholders is zero, the Group's pre-tax loss attributable to policyholders is an amount equal and opposite to the tax credit attributable to policyholders included in the total tax credit.

The rate of corporation tax in the UK was due to be reduced from 19% to 17% from 1 April 2020. In addition, the French government has introduced a stepped reduction to the French corporation tax rate from 34.43% to 25.83% from 1 January 2022. These reduced rates were used in the calculation of deferred tax assets and liabilities in the UK and France at 30 June 2019.

During 2019, changes were made in France to alter the reduction in corporation tax rates, delaying the reduction to 32.02% to 1 January 2020 and amending the rate to take effect from 1 January 2021 to 28.41%. These revised rates have been used in the calculation of France's deferred tax assets and liabilities as at 31 December 2019 and 30 June 2020.

During 2020, the reduction in the UK corporation tax rate that was due to take effect was cancelled and as a result, the rate has remained at 19%. This revised rate has been used in the calculation of the UK's deferred tax assets and liabilities as at 30 June 2020 and increased the Group's deferred tax liabilities by £93 million.

Page 59

B8 - Earnings per share

This note shows how to calculate earnings per share on profit attributable to ordinary shareholders, based both on the present shares in issue (the basic earnings per share) and the potential future shares in issue, including conversion of share options granted to employees (the diluted earnings per share). We have also shown the same calculations based on our Group adjusted operating profit as we believe this gives an important indication of operating performance. Consideration of both these measures gives a full picture of the performance of the business in the period.

(a) Basic earnings per share

(i) The profit attributable to ordinary shareholders is:

			6 months 2020			Restated¹ 6 months 2019			Full year 2019
	Group adjusted operating profit £m	Adjusting items £m	Total m	Group adjusted operating profit £m	Adjusting items £m	Total £m	Group adjusted operating profit £m	Adjusting items £m	Total £m
Profit before tax attributable to shareholders' profits	1,225	(149)	1,076	1,386	137	1,523	3,184	190	3,374
Tax attributable to shareholders' profit	(224)	22	(202)	(306)	(37)	(343)	(668)	(43)	(711)
Profit for the period	1,001	(127)	874	1,080	100	1,180	2,516	147	2,663
Amount attributable to non-controlling interests	(48)	(5)	(53)	(47)	(17)	(64)	(98)	(17)	(115)
Cumulative preference dividends for the year	(9)	-	(9)	(9)	-	(9)	(17)	-	(17)
Coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax)²	(27)	-	(27)	(6)	-	(6)	(34)	-	(34)
Profit attributable to ordinary shareholders	917	(132)	785	1,018	83	1,101	2,367	130	2,497

1 On 31 December 2019 the Group adjusted operating profit APM was revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in a reduction in the prior period Group adjusted operating profit of £62 million. There is no impact on profit before tax attributable to shareholders' profit.

2 On 23 June 2020, notification was given that the Group would redeem the 5.9021% £500 million DCI at its principal amount together with accrued interest to (but excluding) 27 July 2020. Interest payable up to 23 June 2020 has been recorded as an appropriation of retained profits with the remaining interest payable from 24 June 2020 to 30 June 2020 recorded within profit before tax attributable to shareholders' profits. In prior periods, the interest on the DCI and tier 1 notes was treated as an appropriation of retained profits and accordingly, accounted for when paid.

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

			6 months 2020			Restated² 6 months 2019			Full year 2019
	Before tax £m	Net of tax, NCI, preference dividends and DCI¹ £m	Per share p	Before tax £m	Net of tax, NCI, preference dividends and DCI¹ £m	Per share p	Before tax £m	Net of tax, NCI, preference dividends and DCI¹ £m	Per share p
Group adjusted operating profit attributable to ordinary shareholders	1,225	917	23.4	1,386	1,018	26.1	3,184	2,367	60.5
Adjusting items:
Life business: Investment variances and economic assumption changes	305	290	7.4	372	292	7.5	654	535	13.7
Non-life business: Short-term fluctuation in return on investments	(171)	(179)	(4.6)	145	121	3.1	167	129	3.3
General insurance and health business: Economic assumption changes	(45)	(36)	(0.9)	(73)	(58)	(1.4)	(54)	(33)	(0.8)
Impairment of goodwill, joint ventures, associates and other amounts expensed	(17)	(15)	(0.4)	(11)	(11)	(0.3)	(15)	(15)	(0.4)
Amortisation and impairment of intangibles acquired in business combinations²	(44)	(34)	(0.9)	(45)	(42)	(1.1)	(87)	(61)	(1.6)
Amortisation and impairment of acquired value of in-force business	(165)	(145)	(3.7)	(191)	(167)	(4.3)	(406)	(356)	(9.1)
Loss on disposal and remeasurement of subsidiaries, joint ventures and associates	(12)	(13)	(0.3)	(13)	(14)	(0.4)	(22)	(23)	(0.6)
Other³	-	-	-	(47)	(38)	(1.0)	(47)	(46)	(1.2)
Profit attributable to ordinary shareholders	1,076	785	20.0	1,523	1,101	28.2	3,374	2,497	63.8

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

2 On 31 December 2019 the Group adjusted operating profit APM was revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in a reduction in the prior period Group adjusted operating profit of £62 million. There is no impact on profit before tax attributable to shareholders' profit.

3 The first half of 2019 includes a charge of £45 million in relation to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims and a charge of £2 million relating to negative goodwill which arose on the acquisition of Friends First.

(iii) The calculation of basic earnings per share uses a weighted average of 3,923 million (HY19: 3,907 million, 2019: 3,911 million) ordinary shares in issue, after deducting treasury shares. The actual number of shares in issue at 30 June 2020 was 3,928 million
(HY19: 3,917 million, 2019: 3,921 million) or 3,927 million (HY19: 3,913 million, 2019: 3,919 million) excluding treasury shares.

Page 60

B8 - Earnings per share continued

(b) Diluted earnings per share

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

			6 months 2020			6 months 2019			Full year 2019
	Total £m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share p
Profit attributable to ordinary shareholders	785	3,923	20.0	1,101	3,907	28.2	2,497	3,911	63.8
Dilutive effect of share awards and options	-	58	(0.3)	-	43	(0.3)	-	45	(0.7)
Diluted earnings per share	785	3,981	19.7	1,101	3,950	27.9	2,497	3,956	63.1

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

			6 months 2020			Restated¹ 6 months 2019			Full year 2019
	Total £m	Weighted average number of shares million	Per share p	Total m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share p
Group adjusted operating profit attributable to ordinary shareholders	917	3,923	23.4	1,018	3,907	26.1	2,367	3,911	60.5
Dilutive effect of share awards and options	-	58	(0.4)	-	43	(0.3)	-	45	(0.7)
Diluted group adjusted operating profit per share	917	3,981	23.0	1,018	3,950	25.8	2,367	3,956	59.8

1 On 31 December 2019 the Group adjusted operating profit APM was revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in a reduction in the prior period Group adjusted operating profit of £62 million and a reduction in the prior period operating earnings per share of 1.2 pence. There is no impact on profit before tax attributable to shareholders' profit.

B9 - Dividends and appropriations

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Ordinary dividends declared and charged to equity in the period
Final 2019 - 21.40 pence per share, withdrawn on 8 April 2020	-	-	-
Final 2018 - 20.75 pence per share, paid on 30 May 2019	-	812	812
Interim 2019 - 9.50 pence per share, paid on 26 September 2019	-	-	372
	-	812	1,184
Preference dividends declared and charged to equity in the period	9	9	17
Coupon payments on DCI and tier 1 notes	27	7	43
	36	828	1,244

Subsequent to 31 December 2019, the directors agreed a final dividend for 2019 of 21.40 pence per ordinary share, amounting to £839 million. On 8 April 2020 the Group announced that the Board of Directors had agreed to withdraw this recommendation.

Subsequent to 30 June 2020, the directors declared a second interim dividend in respect of 2019 of 6.00 pence per ordinary share, amounting to £250 million recognising the strong capital and centre liquidity position, enhanced by receipt of proceeds from the sale of FPI. The dividend will be paid on 24 September 2020 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2020.

On 23 June 2020, notification was given that the Group would redeem the 5.9021% £500 million DCI at their principal amount together with accrued interest to (but excluding) 27 July 2020. Interest payable up to 23 June 2020 has been recorded as an appropriation of retained profits with the remaining interest payable from 24 June 2020 to 30 June 2020 recorded within profit before tax attributable to shareholders' profit. In prior periods, the interest on the DCI and tier 1 notes was treated as an appropriation of retained profits and, accordingly, accounted for when paid.

Page 61

B10 - Contract liabilities and associated reinsurance

The Group's liabilities for insurance and investment contracts it has sold, and the associated reinsurance, is covered in the following notes:

· Note B11 covers insurance liabilities

· Note B12 covers liabilities for investment contracts

· Note B13 details the associated reinsurance assets on these liabilities

· Note B14 shows the effects of changes in the assumptions on the liabilities

(a) Carrying amount

The following is a summary of the contract liabilities and related reinsurance assets as at 30 June/31 December:

	30 June 2020			30 June 2019			31 December 2019
	Gross provisions £m	Reinsurance assets £m	Net £m	Gross provisions £m	Reinsurance assets £m	Net £m	Gross provisions £m	Reinsurance assets £m	Net £m
Long-term business
Insurance liabilities	(137,662)	7,930	(129,732)	(131,347)	6,202	(125,145)	(131,182)	6,369	(124,813)
Liabilities for participating investment contracts	(95,486)	-	(95,486)	(94,575)	1	(94,574)	(92,762)	1	(92,761)
Liabilities for non-participating investment contracts	(134,749)	3,021	(131,728)	(132,328)	4,285	(128,043)	(137,689)	4,006	(133,683)
	(367,897)	10,951	(356,946)	(358,250)	10,488	(347,762)	(361,633)	10,376	(351,257)
Outstanding claims provisions	(2,586)	111	(2,475)	(2,160)	81	(2,079)	(2,187)	93	(2,094)
	(370,483)	11,062	(359,421)	(360,410)	10,569	(349,841)	(363,820)	10,469	(353,351)
General insurance and health
Outstanding claims provisions	(8,893)	690	(8,203)	(9,130)	724	(8,406)	(8,831)	683	(8,148)
Provisions for claims incurred but not reported	(3,653)	1,306	(2,347)	(2,554)	891	(1,663)	(2,672)	1,004	(1,668)
	(12,546)	1,996	(10,550)	(11,684)	1,615	(10,069)	(11,503)	1,687	(9,816)
Provision for unearned premiums	(5,464)	293	(5,171)	(5,324)	283	(5,041)	(5,138)	275	(4,863)
Provision arising from liability adequacy tests¹	(8)	-	(8)	(16)	-	(16)	(15)	-	(15)
	(18,018)	2,289	(15,729)	(17,024)	1,898	(15,126)	(16,656)	1,962	(14,694)
Total	(388,501)	13,351	(375,150)	(377,434)	12,467	(364,967)	(380,476)	12,431	(368,045)
Less: Liabilities classified as held for sale	8,791	(44)	8,747	8,140	(53)	8,087	9,011	(75)	8,936
	(379,710)	13,307	(366,403)	(369,294)	12,414	(356,880)	(371,465)	12,356	(359,109)

1 Provision arising from liability adequacy tests relates to general insurance business only. Additional liabilities arising from the liability adequacy test for life operations, where applicable, are included in unallocated divisible surplus. At 30 June 2020 this liability is £224 million (HY19: £79 million, 2019: £nil) for life operations.

Page 62

B10 - Contract liabilities and associated reinsurance continued

(b) Change in contract liabilities, net of reinsurance, recognised as an expense

The purpose of the following table is to reconcile the change in insurance liabilities, net of reinsurance, shown on the consolidated income statement, to the change in insurance liabilities recognised as an expense in the relevant movement tables in the following notes.

6 months 2020	Gross £m	Reinsurance £m	Net £m
Long-term business
Change in insurance liabilities (note B11(b))	4,178	(1,447)	2,731
Change in provision for outstanding claims	342	(8)	334
	4,520	(1,455)	3,065
General insurance and health
Change in insurance liabilities (note B11(c) and B13(c))	743	(280)	463
Change in provision arising from liability adequacy tests	(7)	-	(7)
Less: Unwind of discount	(5)	4	(1)
	731	(276)	455
Total change in insurance liabilities	5,251	(1,731)	3,520

6 months 2019	Gross £m	Reinsurance £m	Net £m
Long-term business
Change in insurance liabilities (note B11(b))	5,517	(362)	5,155
Change in provision for outstanding claims	162	8	170
	5,679	(354)	5,325
General insurance and health
Change in insurance liabilities (note B11(c) and B13(c))¹	123	2	125
Change in provision arising from liability adequacy tests	-	-	-
Less: Unwind of discount	(7)	5	(2)
	116	7	123
Total change in insurance liabilities	5,795	(347)	5,448

1 Includes £45 million in the UK General Insurance and Health business relating to a change in the discount rate used for estimating lump sum payments of bodily injury claims from 0.00% to -0.25%.

Full year 2019	Gross £m	Reinsurance £m	Net £m
Long-term business
Change in insurance liabilities (note B11(b))	6,600	(1,030)	5,570
Change in provision for outstanding claims	4	(8)	(4)
	6,604	(1,038)	5,566
General insurance and health
Change in insurance liabilities (note B11(c) and B13(c))¹	234	(94)	140
Change in provision arising from liability adequacy tests	-	-	-
Less: Unwind of discount	(14)	10	(4)
	220	(84)	136
Total change in insurance liabilities	6,824	(1,122)	5,702

1 Includes £45 million in the UK General Insurance and Health business relating to a change in the discount rate used for estimating lump sum payments of bodily injury claims from 0.00% to -0.25%.

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

Page 63

B11 - Insurance liabilities

(a) Carrying amount

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

	30 June 2020 £m	30 June 2019 m	31 December 2019 m
Long-term business
Participating insurance liabilities	49,687	48,204	47,344
Unit-linked non-participating insurance liabilities	14,505	15,147	14,707
Other non-participating insurance liabilities¹	73,470	67,996	69,131
	137,662	131,347	131,182
Outstanding claims provisions	2,586	2,160	2,187
	140,248	133,507	133,369
General insurance and health
Outstanding claims provisions	8,893	9,130	8,831
Provision for claims incurred but not reported	3,653	2,554	2,672
	12,546	11,684	11,503
Provision for unearned premiums	5,464	5,324	5,138
Provision arising from liability adequacy tests¹	8	16	15
	18,018	17,024	16,656
Total	158,266	150,531	150,025
Less: Liabilities classified as held for sale	(668)	(118)	(687)
	157,598	150,413	149,338

(b) Movement in long-term business liabilities

The following movements have occurred in the gross long-term business liabilities during the period:

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Carrying amount at 1 January	131,182	125,829	125,829
Liabilities in respect of new business	4,288	2,816	6,988
Expected change in existing business	(3,729)	(3,628)	(6,452)
Variance between actual and expected experience	(717)	2,945	3,212
Impact of operating assumption changes	165	-	(961)
Impact of economic assumption changes	4,084	3,009	3,766
Other movements recognised as an expense¹	87	375	47
Change in liability recognised as an expense (note B10(b))	4,178	5,517	6,600
Foreign exchange rate movements	2,192	2	(1,775)
Other movements²	110	(1)	528
Carrying amount at 30 June/31 December	137,662	131,347	131,182

1 Other movements recognised as an expense in the period to 30 June 2020 relate mainly to a special bonus distribution to with-profits policyholders and model changes in UK Life. The movement in 2019 relates to: a special bonus distribution to with-profits policyholders and model changes in UK Life; the reclassification of health liabilities in Singapore; and methodology changes in Ireland.

2 Other movements include the reclassification in the UK from participating investment contracts to insurance contracts of £97 million in the period to 30 June 2020 (2019: £972 million). Full year 2019 also included £(427) million of negative reinsurance assets in the UK which were reclassified from insurance liabilities to reinsurance assets following a review of the presentation of negative reinsurance assets.

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

The variance between actual and expected experience of £(0.7) billion in the period to 30 June 2020 is primarily the result of lower than expected equity returns in the UK and France. Economic assumption changes of £4.1 billion, are driven by a reduction in valuation interest rates in response to decreasing interest rates, offset partially by widening credit spreads, primarily in respect of annuity and participating insurance contracts in the UK.

For participating insurance liabilities, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes impact profit, these are included in the effect of changes in assumptions and estimates during the period (see note B14), together with the impact of movements in related non-financial assets.

Page 64

B11 - Insurance liabilities continued

The following changes have occurred in the general insurance and health claims liabilities during the period:

	6 months 2020 £m	6 months 2019 £m	Full year 2019 m
Carrying amount at 1 January	11,503	11,406	11,406
Impact of changes in assumptions	135	115	126
Claim losses and expenses incurred in the current year	3,779	3,408	7,045
Decrease in estimated claim losses and expenses incurred in prior periods	(56)	(58)	(186)
Incurred claims losses and expenses	3,858	3,465	6,985
Less:
Payments made on claims incurred in the current year	(1,245)	(1,440)	(3,834)
Payments made on claims incurred in prior periods	(2,049)	(2,097)	(3,327)
Recoveries on claim payments	174	188	396
Claims payments made in the period, net of recoveries	(3,120)	(3,349)	(6,765)
Unwind of discounting	5	7	14
Changes in claims reserve recognised as an expense (note B10(b))	743	123	234
Foreign exchange rate movements	300	153	(138)
Other movements	-	2	1
Carrying amount at 30 June/31 December	12,546	11,684	11,503

The impact of COVID-19 on incurred claims losses is estimated as £441 million (£165 million net of reinsurance) after allowing for an estimated £216 million of offsetting favourable impacts in other product lines as a result of reduced economic activity. Claims are primarily as a result of disruption to business and travel insured by the Group; partially offset by a reduction in frequency of motor claims. Further information on the impact of COVID-19 on general insurance and health liabilities can be found within note B20.

Since the ultimate cost of claims is not known in advance, there are uncertainties involved in estimating the loss reserves including those relating to the COVID-19 pandemic. These uncertainties are allowed for in the reserving process and by the estimation of explicit reserve uncertainty distributions. The reserve estimation basis requires all non-life businesses to calculate booked claims provisions as the best estimate of the cost of future claims payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each business unit in accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties specific to each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy also seek to ensure that the allowance for risk and uncertainty is set consistently across both business units and reporting periods.

Page 65

B12 - Liability for investment contracts

This note analyses our gross liabilities for investment contracts by type of product and describes the calculation of these liabilities.

(a) Carrying amount

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

	30 June 2020 £m	30 June 2019 £m	31 December 2019 £m
Long-term business
Liabilities for participating investment contracts	95,486	94,575	92,762
Liabilities for non-participating investment contracts	134,749	132,328	137,689
Total	230,235	226,903	230,451
Less: Liabilities classified as held for sale	(8,123)	(8,022)	(8,324)
	222,112	218,881	222,127

Of the non-participating investment contracts measured at fair value, £134,016 million at 30 June 2020 (HY19: £131,332 million, 2019: 137,040 million) are unit-linked in structure and the fair value liability is equal to the current fund value, including any unfunded units, plus if required additional non-unit reserves based on a discounted cash flow analysis.

(b) Movements in participating investment contracts

The following movements have occurred in the gross provisions for participating investment contracts during the period:

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Carrying amount at 1 January	92,762	90,455	90,455
Liabilities in respect of new business	2,404	3,795	6,991
Expected change in existing business	(2,867)	(2,660)	(4,857)
Variance between actual and expected experience	(2,282)	2,833	4,751
Impact of operating assumption changes	-	-	173
Impact of economic assumption changes	447	139	204
Other movements recognised as an expense¹	(4)	161	103
Change in liability recognised as an expense²	(2,302)	4,268	7,365
Foreign exchange rate movements	5,124	(148)	(4,054)
Other movements³	(98)	-	(1,004)
Carrying amount at 30 June/31 December	95,486	94,575	92,762

1 The movement in 2019 relates primarily to a special bonus distribution to with-profits policyholders and the recognition of unitised with-profits annual management charges in UK Life.

2 Total interest expense for participating investment contracts recognised in profit or loss is £(1,933) million (HY19: £3,341 million, 2019: £5,269 million).

3 Other movements include the reclassification in the UK from participating investment contracts to insurance contracts of £(97) million in the period to 30 June 2020 (2019: £(972) million). Full year 2019 also included a reclassification in the UK from participating investment contracts to outstanding claims reserves of £(32) million.

The variance between actual and expected experience of £(2.3) billion in the period to 30 June 2020 is primarily the result of adverse equity returns in the UK and France.

The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of participating investment contract liabilities. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes do impact profit, these are included in the effect of changes in assumptions and estimates during the year (see note B14), together with the impact of movements in related non-financial assets.

The following movements have occurred in the gross provisions for non-participating investment contracts during the period:

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Carrying amount at 1 January	137,689	120,354	120,354
Liabilities in respect of new business	1,760	2,552	5,520
Expected change in existing business	(3,223)	(2,110)	(3,742)
Variance between actual and expected experience	(2,294)	11,545	16,345
Impact of operating assumption changes	-	-	(22)
Impact of economic assumption changes	-	-	(1)
Other movements recognised as an expense¹	63	2	2
Change in liability	(3,694)	11,989	18,102
Foreign exchange rate movements	734	(15)	(575)
Other movements²	20	-	(192)
Carrying amount at 30 June/ 31 December	134,749	132,328	137,689

1 Other movements recognised as an expense include the recognition of a £70 million liability in the period to 30 June 2020 following a review of legacy unclaimed assets in the UK .

2 Other movements during the period to 30 June 2020 primarily relate to a reclassification from outstanding claims reserves to non-participating investment contracts in Ireland. Other movements during 2019 mainly relate to a reclassification from non-participating investment contracts to outstanding claims reserves in the UK (£(180) million) .

For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience of £(2.3) billion in the period to 30 June 2020 is primarily the result of the impact of negative global equity performance.

The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of the non-participating investment contract liabilities. The impacts of assumption changes on profit are included in the effect of changes in assumptions and estimates during the year as set out in note B14, which combines participating and non-participating investment contracts together with the impact of movements in related non-financial assets.

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B13 - Reinsurance assets

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

(a) Carrying amount

The reinsurance assets as at 30 June/31 December comprised:

	30 June 2020 £m	30 June 2019 £m	31 December 2019 m
Long-term business
Insurance contracts	7,930	6,202	6,369
Participating investment contracts	-	1	1
Non-participating investment contracts¹	3,021	4,285	4,006
	10,951	10,488	10,376
Outstanding claims provisions	111	81	93
	11,062	10,569	10,469
General insurance and health
Outstanding claims provisions	690	724	683
Provisions for claims incurred but not reported	1,306	891	1,004
	1,996	1,615	1,687
Provisions for unearned premiums	293	283	275
	2,289	1,898	1,962
	13,351	12,467	12,431
Less: Assets classified as held for sale	(44)	(53)	(75)
Total	13,307	12,414	12,356

1 Balances in respect of all reinsurance treaties are included under reinsurance assets, regardless of whether they transfer significant insurance risk. The reinsurance assets classified as non-participating investment contracts are financial instruments measured at fair value through profit or loss.

(b) Movements in long-term business liabilities

The following movements have occurred in the reinsurance assets on our long-term business insurance and investment contracts liabilities during the period:

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Carrying amount at 1 January	10,376	9,846	9,846
Assets in respect of new business	865	555	954
Expected change in existing business assets	(155)	22	(185)
Variance between actual and expected experience	(192)	(32)	274
Impact of non-economic assumption changes	140	-	(175)
Impact of economic assumption changes	535	131	193
Other movements recognised as an expense¹	(733)	(38)	(37)
Change in assets²	460	638	1,024
Foreign exchange rate movements	103	4	(73)
Other movements³	12	-	(421)
Carrying amount at 30 June/31 December	10,951	10,488	10,376

1 Other movements recognised as an expense in the period to 30 June 2020 primarily relate to the reclassification of collective investments in unit-linked funds in the UK following a restructure of a reinsurance treaty. The movement in 2019 primarily relates to the ceding of reinsurance for annuity business offset by basis methodology changes in Ireland, the reclassification of health reinsurance assets in Singapore and collective investments in unit-linked funds in the UK following a restructure of a reinsurance treaty.

2 Change in assets does not reconcile with values in note B10(b) due to the inclusion of reinsurance assets classified as non-participating investment contracts where, for such contracts, deposit accounting is applied on the income statement.

3 Other movements in 2019 included £(427) million of negative reinsurance assets in the UK which were reclassified from insurance liabilities to reinsurance assets following a review of the presentation of negative reinsurance assets.

The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets, with corresponding movements in gross insurance contract liabilities. For participating businesses, a movement in reinsurance assets is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes impact profit, these are included in the effect of changes in assumptions and estimates during the period (see note B14), together with the impact of movements in related liabilities and other non-financial assets.

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B13 - Reinsurance assets continued

The following movements have occurred in the reinsurance assets on our general insurance and health claims liabilities during the period:

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Carrying amount at 1 January	1,687	1,611	1,611
Impact of changes in assumptions	90	41	73
Reinsurers' share of claim losses and expenses
Incurred in current year	406	89	195
Incurred in prior years	(22)	(2)	96
Reinsurers' share of incurred claim losses and expenses	384	87	291
Less:
Reinsurance recoveries received on claims
Incurred in current year	(91)	(6)	(53)
Incurred in prior years	(107)	(129)	(227)
Reinsurance recoveries received in the year	(198)	(135)	(280)
Unwind of discounting	4	5	10
Change in reinsurance asset recognised as income (note B10(b))	280	(2)	94
Foreign exchange rate movements	29	6	(15)
Other movements	-	-	(3)
Carrying amount at 30 June/31 December	1,996	1,615	1,687

The impact of COVID-19 on reinsurers' share of incurred claim losses is estimated as £276 million. For further details see note B11(c).

B14 - Effect of changes in assumptions and estimates during the period

This note analyses the impact of changes in estimates and assumptions over the period, on liabilities for insurance and investment contracts, and related assets and liabilities, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and acquired value of in-force business, and does not allow for offsetting movements in the value of backing financial assets.

	Effect on profit 6 months 2020 m	Effect on profit 6 months 2019 m	Effect on profit Full year 2019 £m
Assumptions
Long-term insurance business
Interest rates	(2,184)	(2,504)	(2,978)
Expenses	-	-	(47)
Persistency rates	-	-	(124)
Mortality and morbidity for assurance contracts	-	-	(38)
Mortality for annuity contracts	-	-	830
Tax and other assumptions	(25)	-	9
General insurance and health business
Change in discount rate assumptions	(45)	(73)	(54)
Total	(2,254)	(2,577)	(2,402)

The impact of interest rates on long-term insurance business relates primarily to annuities in the UK (including any change in credit default and reinvestment risk provisions), where a reduction in the valuation interest rate, in response to decreasing interest rates, partially offset by the widening of credit spreads, has increased liabilities. The changes to default assumptions also reflect the consequential impact of changes to the future property growth rate assumptions on UK commercial and residential property and tenant default assumptions on commercial mortgages.

The impact of other assumptions relates to the UK and is to cover the estimated impact of COVID-19 related claims for our individual and group protection businesses, net of expected favourable experience for our annuity book.

In the general insurance and health business, an impact of £(45) million (HY19: £(73) million, 2019 £(54) million) has arisen primarily as a result of a decrease in the interest rates used to discount claim reserves for both periodic payment orders (PPOs) and latent claims, partly offset by a decrease in the estimated future inflation rate used to value PPOs.

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B15 - Unallocated divisible surplus

An unallocated divisible surplus (UDS) is established where the nature of policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain at the reporting date. Therefore, the expected duration for settlement of the UDS is undefined.

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

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Carrying amount at 1 January	9,597	5,949	5,949
Change in participating fund assets	47	8,954	9,411
Change in participating fund liabilities	(1,605)	(6,195)	(5,426)
Other movements¹	224	79	-
Change in liability recognised as an expense	(1,334)	2,838	3,985
Foreign exchange rate movements	485	54	(337)
Carrying amount at 30 June/ 31 December	8,748	8,841	9,597

1 Other movements relate to additional liabilities arising from the liability adequacy test for France of £224 million (HY19: £79 million, 2019: £nil).

The amount of UDS at 30 June 2020 has fallen to £8.7 billion (HY19: £8.8 billion, 2019: £9.6 billion). The decrease is mainly due to market movements in Europe as a result of widening credit spreads and falling equity returns offset partially by decreasing interest rates.

Where the aggregate amount of participating assets is less than the participating liabilities within a fund then the shortfall may be held as negative UDS, subject to recoverability testing as part of the liability adequacy requirements of IFRS 4. There are no material negative UDS balances at the participating fund-level within each life entity in the current period (HY19: £nil, 2019: no material negative UDS).

B16 - Borrowings

Our borrowings are classified as either core structural borrowings, which are included within the Group's capital employed, or operational borrowings drawn by operating subsidiaries. This note shows the carrying values of each type.

(a) Analysis of total borrowings

Total borrowings comprise:

	30 June 2020 £m	30 June 2019 £m	31 December 2019 £m
Core structural borrowings, at amortised cost	8,822	7,694	7,496
Operational borrowings, at amortised cost	371	313	338
Operational borrowings, at fair value	1,189	1,227	1,233
	1,560	1,540	1,571
	10,382	9,234	9,067
Less: Liabilities classified as held for sale	(26)	-	(28)
	10,356	9,234	9,039

(b) Core structural borrowings

The carrying amounts of these borrowings are:

	30 June 2020 £m	30 June 2019 £m	31 December 2019 £m
Subordinated debt
6.125% £700 million subordinated notes 2036	695	694	695
6.125% £800 million undated subordinated notes	798	797	797
6.875% £600 million subordinated notes 2058	595	594	594
12.000% £162 million subordinated notes 2021	173	185	179
8.250% £500 million subordinated notes 2022	536	555	545
6.625% £450 million subordinated notes 2041	449	449	449
6.125% €650 million subordinated notes 2043	589	580	549
3.875% €700 million subordinated notes 2044	634	623	591
5.125% £400 million subordinated notes 2050	395	395	395
3.375% €900 million subordinated notes 2045	811	797	756
4.500% C$450 million subordinated notes 2021	267	270	261
4.375% £400 million subordinated notes 2049	395	394	395
4.000% £500 million subordinated notes 2055	492	-	-
5.9021% £500 million direct capital instrument¹	499	-	-
	7,328	6,333	6,206
Senior notes
0.625% €500 million senior notes 2023	453	445	422
1.875% €750 million senior notes 2027	676	665	630
	1,129	1,110	1,052
Commercial paper	365	251	238
Total	8,822	7,694	7,496

1 On 23 June 2020 notification was given that the Group would redeem the 5.9021% £500 million direct capital instrument (DCI). At that date, the instrument was reclassified as a financial liability of £499 million, representing its fair value at that date. The difference of £1 million between the carrying amount of £500 million and fair value of £499 million has been charged to retained earnings. The DCI was redeemed in full on 27 July 2020 at a cost of £500 million.

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B16 - Borrowings continued

The carrying amounts of these borrowings are:

	30 June 2020 £m	30 June 2019 £m	31 December 2019 m
Amounts owed to financial institutions
Loans	371	313	338
Securitised mortgage loan notes
UK lifetime mortgage business¹	1,189	1,227	1,233
Total	1,560	1,540	1,571

1 The fair value of these loan notes is calculated using similar techniques to the related securitised mortgage assets discussed in note C5.

B17 - Pension obligations and other provisions

(a) Carrying amounts

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

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

	30 June 2020 £m	30 June 2019 £m	31 December 2019 £m
Total IAS 19 obligations to main staff pension schemes	605	692	770
Deficits in other staff pension schemes	72	66	66
Total IAS 19 obligations to staff pension schemes	677	758	836
Restructuring provisions	33	60	29
Other provisions	696	520	700
Total Provisions	1,406	1,338	1,565
Less: Liabilities classified as held for sale	(1)	-	-
Total	1,405	1,338	1,565

Other provisions shown above primarily include amounts set aside throughout the Group relating to product governance rectification and staff entitlements.

(ii) Pension obligations

The Group operates a number of defined benefit and defined contribution pension schemes. The material defined benefit schemes are in the UK, Ireland and Canada. The assets and liabilities of these schemes as at 30 June/31 December are shown below.

	30 June 2020 £m	30 June 2019 m	31 December 2019 m
Total fair value of scheme assets	20,383	19,472	18,768
Present value of defined benefit obligation	(17,581)	(16,696)	(16,792)
Net IAS 19 surplus in the schemes	2,802	2,776	1,976

Surpluses included in other assets¹	3,407	3,468	2,746
Deficits included in provisions	(605)	(692)	(770)
Net IAS 19 surplus in the schemes	2,802	2,776	1,976

1 Pension surpluses and other assets on the consolidated statement of financial position totalling £3,467 million (HY19: £3,522 million, 2019: £2,799 million) includes pension surpluses of £3,407 million (HY19: £3,468 million,
2019: £2,746 million) and other assets of £60 million (HY19: £54 million, 2019: £53 million).

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B17 - Pension obligations and other provisions continued

(b) Movements in the schemes' surpluses and deficits

Movements in the pension schemes' surpluses and deficits since 31 December comprise:

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Net IAS 19 surplus in the schemes at 1 January	1,976	2,563	2,563

Administrative expenses	(8)	(9)	(19)
Total pension cost charged to net operating expenses	(8)	(9)	(19)
Net interest credited to investment income/(finance costs)¹	20	34	73
Total recognised in income statement	12	25	54

Remeasurements:
Actual return on these assets	1,758	1,575	1,141
Less: Interest income on scheme assets	(176)	(240)	(479)
Return on scheme assets excluding amounts in interest income	1,582	1,335	662
Losses from change in financial assumptions	(850)	(1,277)	(1,824)
(Losses)/gains from change in demographic assumptions	(21)	(10)	165
Experience gains	2	22	130
Total remeasurements recognised in other comprehensive income²	713	70	(867)

Employer contributions	116	119	215
Foreign exchange rate movements	(15)	(1)	11
Net IAS 19 surplus in the schemes at 30 June/31 December	2,802	2,776	1,976

1 Net interest income of £28 million (HY19: £46 million, 2019: £96 million) has been credited to investment income and net interest expense of £8 million (HY19: £12 million, 2019: £23 million) has been charged to finance costs in HY20.

2 Net remeasurements of pension schemes recorded in the consolidated statement of comprehensive income of £711 million gain (HY19: £70 million gain, 2019: £867 million loss) includes £713 million of remeasurement gains (HY19: £70 million gain, 2019: £867 million loss) on the main pension schemes and £2 million losses in relation to other schemes (HY19: £nil, 2019: £nil)).

Under the IAS 19 valuation basis, the Group applies the principles of IFRIC 14, IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, whereby a surplus is only recognised to the extent that the Company is able to access the surplus either through an unconditional right of refund to the surplus or through reduced future contributions relating to ongoing service, which have been substantively enacted or contractually agreed. The Group has determined that it can derive economic benefit from the surplus in the Aviva Staff Pension Scheme (ASPS) via a reduction to future employer contributions for defined contribution members, which could theoretically be paid from the surplus funds in the ASPS. In the RAC 2003 Pension Scheme (RAC) and Friends Provident Pension Scheme (FPPS), the Group has determined that the rules set out in the schemes' governing documentation provide for an unconditional right to a refund from any future surplus funds in the schemes.

The increase in the surplus in the period to 30 June 2020 is primarily due to employer contributions into the schemes and remeasurements recognised in other comprehensive income. The remeasurements recognised are principally a result of falling interest rates and widening corporate spreads over the period; as well as an update to the classification of the corporate bond portfolio used to derive the discount rate which reduces the liabilities under IAS 19. This updated classification is recognised as an actuarial gain on change in financial assumptions within other comprehensive income. This has been partly offset by adverse equity and property performance.

For the period ended 31 December 2019, the ASPS completed a bulk annuity buy-in transaction with Aviva Life & Pensions UK Limited, a Group Company. Due to different measurement bases applying for accounting purposes, the premium paid by the scheme exceeded the valuation of the plan asset recognised. This was the primary reason for the reduction in the surplus in 2019 and was recognised as an actuarial loss in the actual return on assets within other comprehensive income. The plan asset recognised is transferable and so has not been subject to consolidation within the Group's financial statements.

B18 - Related party transactions

During the period, there have been no changes in the nature of the related party transactions from those described in the Group's annual report and accounts for the year ended 31 December 2019. There were no transactions with related parties that had a material effect on the result for the period ended 30 June 2020 or 30 June 2019. For the period ended 31 December 2019, the ASPS completed a bulk annuity
buy-in transaction with Aviva Life & Pensions UK Limited, which does not eliminate on consolidation.

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B19 - Fair value

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

(a) Basis for determining fair value hierarchy

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

Level 1

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

Level 2

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

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

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

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

· Market-corroborated inputs.

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

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

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

Level 3

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

The majority of the Group's assets and liabilities measured at fair value are based on quoted market information or observable market data. 17.4% of assets and 3.1% of liabilities measured at fair value are based on estimates and recorded as Level 3. Where estimates are used, these are based on a combination of independent third-party evidence and internally developed models, calibrated to market observable data where possible. Third-party valuations using significant unobservable inputs validated against Level 2 internally modelled valuations are classified as Level 3, where there is a significant difference between the third-party price and the internally modelled value. Where the difference is insignificant, the instrument would be classified as Level 2.

(b) Changes to valuation technique

There were no changes in the valuation techniques during the period compared to those described in the Group's 2019 annual report and accounts.

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B19 - Fair value continued

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

	30 June 2020		30 June 2019		31 December 2019
	Fair value £m	Carrying amount £m	Fair value £m	Carrying amount £m	Fair value £m	Carrying amount £m
Financial assets
Loans¹	40,090	40,109	39,417	39,452	38,559	38,579
Financial investments	353,583	353,583	343,858	343,858	343,418	343,418
Fixed maturity securities²	211,264	211,264	201,566	201,566	198,832	198,832
Equity securities	91,308	91,308	94,743	94,743	99,570	99,570
Other investments (including derivatives)²	51,011	51,011	47,549	47,549	45,016	45,016

Financial liabilities
Non-participating investment contracts	126,626	126,626	124,306	124,306	129,365	129,365
Net asset value attributable to unitholders	18,669	18,669	16,764	16,764	16,610	16,610
Borrowings¹	11,366	10,356	10,213	9,234	10,268	9,039
Derivative liabilities	9,563	9,563	7,041	7,041	6,517	6,517

1 Within the fair value total, the estimated fair value has been provided for the portion of the loans and borrowings that are carried at amortised cost.

2 Following a review of the classification of financial assets, HY19 comparative amounts have been amended from those previously reported. The effect of this change is to reclassify £2,741 million of assets from fixed maturity securities to other investments.

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

· Receivables

· Cash and cash equivalents

· Loans at amortised cost

· Payables and other financial liabilities

(d) Fair value hierarchy analysis

An analysis of assets and liabilities measured at amortised cost and fair value categorised by fair value hierarchy is given below.

	Fair value hierarchy
At 30 June 2020	Level 1 £m	Level 2 £m	Level 3 m	Sub-total Fair value £m	Amortised cost £m	Total carrying value £m
Recurring fair value measurements
Investment property	-	-	11,306	11,306	-	11,306
Loans	-	-	29,330	29,330	10,779	40,109
Financial investments measured at fair value
Fixed maturity securities	58,068	132,987	20,209	211,264	-	211,264
Equity securities	90,572	-	736	91,308	-	91,308
Other investments (including derivatives)	35,164	9,487	6,360	51,011	-	51,011
Financial assets classified as held for sale	5,567	199	1,868	7,634	1	7,635
Total	189,371	142,673	69,809	401,853	10,780	412,633
Financial liabilities measured at fair value
Non-participating investment contracts¹	126,586	40	-	126,626	-	126,626
Net asset value attributable to unit holders	18,546	-	123	18,669	-	18,669
Borrowings	-	-	1,189	1,189	9,167	10,356
Derivative liabilities	422	8,369	772	9,563	-	9,563
Financial liabilities classified as held for sale	5,174	21	2,928	8,123	26	8,149
Total	150,728	8,430	5,012	164,170	9,193	173,363

1 In addition to the balances in this table, included within reinsurance assets in the condensed statement of financial position and note B13 are £3,021 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.

	Fair value hierarchy
At 30 June 2020	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value £m
Non-recurring fair value measurement
Properties occupied by group companies	-	-	349	349
Total	-	-	349	349

IFRS 13, Fair Value Measurement, permits assets and liabilities to be measured at fair value on either a recurring or non-recurring basis. Recurring fair value measurements are those that other IFRSs require or permit in the statement of financial position at the end of each reporting period, whereas non-recurring fair value measurements of assets or liabilities are those that other IFRSs require or permit in the statement of financial position in particular circumstances. The value of owner-occupied properties measured on a non-recurring basis at 30 June 2020 was £349 million (HY19: £362 million; 2019: £320 million), stated at their revalued amounts in line with the requirements of IAS 16, Property, Plant and Equipment.

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B19 - Fair value continued

(d) Fair value hierarchy analysis continued

	Fair value hierarchy
At 30 June 2019	Level 1 £m	Level 2 m	Level 3 £m	Sub-total Fair value £m	Amortised cost £m	Total carrying value m
Recurring fair value measurements
Investment property	-	-	11,471	11,471	-	11,471
Loans	-	-	27,279	27,279	12,173	39,452
Financial investments measured at fair value
Fixed maturity securities^1,2	58,063	125,495	18,008	201,566	-	201,566
Equity securities	94,267	-	476	94,743	-	94,743
Other investments (including derivatives)²	35,936	6,130	5,483	47,549	-	47,549
Financial assets classified as held for sale	5,075	20	1,814	6,909	-	6,909
Total	193,341	131,645	64,531	389,517	12,173	401,690
Financial liabilities measured at fair value
Non-participating investment contracts³	124,260	46	-	124,306	-	124,306
Net asset value attributable to unit holders	16,742	-	22	16,764	-	16,764
Borrowings	-	-	1,227	1,227	8,007	9,234
Derivative liabilities	304	6,054	683	7,041	-	7,041
Financial liabilities classified as held for sale	5,075	20	2,927	8,022	-	8,022
Total	146,381	6,120	4,859	157,360	8,007	165,367

1 Following a review of the fair value hierarchy for fixed maturity 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 £14,442 million of fixed maturity securities from fair value hierarchy Level 1 to Level 2 and £2,267 million from Level 2 to Level 1.

2 Following a review of the classification of financial assets, comparative amounts have been amended from those previously reported. The effect of this change is to reclassify £2,741 million of assets from fixed maturity securities to other investments and £3,640 million of assets from fair value hierarchy Level 2 to Level 1.

3 In addition to the balances in this table, included within reinsurance assets in the condensed statement of financial position and note B13 are £4,285 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.

	Fair value hierarchy
At 30 June 2019	Level 1 m	Level 2 £m	Level 3 £m	Total fair value £m
Non-recurring fair value measurement
Properties occupied by group companies	-	-	362	362
Total	-	-	362	362

	Fair value hierarchy
At 31 December 2019	Level 1 £m	Level 2 £m	Level 3 £m	Sub-total Fair value £m	Amortised cost £m	Total carrying value £m
Recurring fair value measurements
Investment property	-	-	11,203	11,203	-	11,203
Loans	-	-	28,319	28,319	10,260	38,579
Financial investments measured at fair value
Fixed maturity securities¹	56,124	125,113	17,595	198,832	-	198,832
Equity securities	98,850	-	720	99,570	-	99,570
Other investments (including derivatives)	32,465	6,878	5,673	45,016	-	45,016
Financial assets classified as held for sale	5,788	50	1,986	7,824	1	7,825
Total	193,227	132,041	65,496	390,764	10,261	401,025
Financial liabilities measured at fair value
Non-participating investment contracts²	129,323	42	-	129,365	-	129,365
Net asset value attributable to unit holders	16,498	-	112	16,610	-	16,610
Borrowings	-	-	1,233	1,233	7,806	9,039
Derivative liabilities	418	5,444	655	6,517	-	6,517
Financial liabilities classified as held for sale	5,259	20	3,045	8,324	28	8,352
Total	151,498	5,506	5,045	162,049	7,834	169,883

1 Following a review of the fair value hierarchy for fixed maturity 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 fixed maturity securities from fair value hierarchy Level 1 to Level 2 and £3,167 million from Level 2 to Level 1.

2 In addition to the balances in this table, included within reinsurance assets in the condensed statement of financial position and note B13 are £4,006 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.

	Fair value hierarchy
At 31 December 2019	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value m
Non-recurring fair value measurement
Properties occupied by group companies	-	-	320	320
Total	-	-	320	320

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B19 - Fair value continued

(e) Transfers between Levels of the fair value hierarchy

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

Transfers between Level 1 and Level 2

There were no significant transfers between Level 1 and Level 2 investments during the six month period ended 30 June 2020.

Transfers to/from Level 3

Transfers into Level 3 assets of £1.7 billion and transfers out of Level 3 assets of £0.5 billion relate principally to debt securities held in the UK. These are transferred between Levels 2 and 3 depending on the availability of observable inputs and whether the counterparty and broker quotes are corroborated using valuation models with observable inputs.

(f) Further information on Level 3 assets and liabilities

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

	Assets								Liabilities
At 30 June 2020	Investment Property £m	Loans £m	Fixed maturity securities £m	Equity securities £m	Other investments (including derivatives) m	Financial assets classified as held for sale £m	Non participating investment contracts £m	Net asset value attributable to unitholders £m	Derivative liabilities £m	Borrowings £m	Financial liabilities classified as held for sale £m
Opening balance at 1 January 2020	11,203	28,319	17,595	720	5,673	1,986	-	(112)	(655)	(1,233)	(3,045)
Total net gains/(losses) recognised in the income statement¹	(396)	507	145	(37)	93	(170)	-	-	(197)	34	170
Total net gains/(losses) recognised in other comprehensive income	(3)	-	-	-	2	-	-	-	-	-	-
Purchases	624	753	1,486	122	585	146	(63)	(11)	(13)	-	(147)
Issuances	-	46	-	-	-	-	-	-	-	-	-
Disposals	(476)	(311)	(836)	(107)	(296)	(75)	63	-	84	10	75
Settlements	-	-	-	-	-	-	-	-	18	-	-
Transfers into Level 3	-	-	1,700	11	-	31	-	-	-	-	(31)
Transfers out of Level 3	-	-	(540)	-	-	(50)	-	-	-	-	50
Foreign exchange rate movements	354	16	659	27	303	-	-	-	(9)	-	-
Balance at 30 June 2020	11,306	29,330	20,209	736	6,360	1,868	-	(123)	(772)	(1,189)	(2,928)

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

	Assets								Liabilities
At 30 June 2019	Investment Property m	Loans m	Fixed maturity securities¹ £m	Equity securities £m	Other investments (including derivatives)¹ £m	Financial assets classified as held for sale £m	Non participating investment contracts m	Net asset value attributable to unitholders £m	Derivative liabilities m	Borrowings £m	Financial liabilities classified as held for sale £m
Opening balance at 1 January 2019	11,482	25,008	16,503	414	5,182	1,992	-	(25)	(534)	(1,225)	(3,100)
Total net gains/(losses) recognised in the income statement²	34	688	604	3	76	34	-	-	(168)	(10)	(34)
Total net gains/(losses) recognised in other comprehensive income	-	-	-	-	-	8	-	-	-	-	-
Purchases	753	1,802	1,116	95	577	36	(68)	-	(62)	-	(40)
Issuances	-	80	-	-	-	-	-	-	-	-	-
Disposals	(788)	(818)	(849)	(29)	(324)	(163)	68	3	83	8	162
Settlements	-	-	-	-	-	-	-	-	-	-	-
Transfers into Level 3	-	519	848	(8)	8	1	-	-	-	-	(8)
Transfers out of Level 3	-	-	(197)	-	(32)	(94)	-	-	-	-	93
Foreign exchange rate movements	(10)	-	(17)	1	(4)	-	-	-	(2)	-	-
Balance at 30 June 2019	11,471	27,279	18,008	476	5,483	1,814	-	(22)	(683)	(1,227)	(2,927)

1 Following a review of the classification of financial assets, comparative amounts have been amended from those previously reported. The effect of this change is to reclassify £1,132 million of Level 3 assets from fixed maturity securities to other investments.

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

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(f) Further information on Level 3 assets and liabilities continued

	Assets						Liabilities
At 31 December 2019	Investment Property £m	Loans £m	Fixed maturity securities £m	Equity securities £m	Other investments (including derivatives) £m	Financial assets classified as held for sale £m	Non participating investment contracts m	Net asset value attributable to unitholders £m	Derivative liabilities £m	Borrowings £m	Financial liabilities classified as held for sale m
Opening balance at 1 January 2019	11,482	25,008	16,503	414	5,182	1,992	-	(25)	(534)	(1,225)	(3,100)
Total net gains/(losses) recognised in the income statement¹	151	844	505	(66)	6	134	-	-	(86)	(52)	(134)
Purchases	1,131	3,461	2,090	427	1,350	185	(100)	(56)	(128)	-	(134)
Issuances	-	190	12	-	-	-	-	-	-	-	-
Disposals	(1,294)	(1,170)	(1,454)	(39)	(532)	(262)	100	(31)	88	44	261
Settlements	-	-	(50)	-	-	-	-	-	-	-	-
Transfers into Level 3	-	-	1,449	1	-	49	-	-	-	-	(49)
Transfers out of Level 3	-	-	(919)	-	(142)	(112)	-	-	-	-	111
Foreign exchange rate movements	(267)	(14)	(541)	(17)	(191)	-	-	-	5	-	-
Balance at 31 December 2019	11,203	28,319	17,595	720	5,673	1,986	-	(112)	(655)	(1,233)	(3,045)

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

Total net gains recognised in the income statement in the first half of 2020 in respect of Level 3 assets measured at fair value amounted to £142 million (HY19: net gains of £1,439 million) with net gains in respect of liabilities of £7 million (HY19: net losses of £212 million).

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

(i) Investment property

Investment property is valued in the UK at least annually by external chartered surveyors in accordance with guidance issued by The Royal Institution of Chartered Surveyors, and using estimates during the intervening period. Valuations have been performed more frequently since the onset of COVID-19 and have taken place at least quarterly, with a particular focus on sectors deemed to be exposed to higher risk of default as a result of the pandemic, such as retail. Valuations have been performed for all UK properties since the onset of COVID-19. Outside the UK, valuations are produced by external qualified professional appraisers in the countries concerned. Investment properties are valued on an income approach that is based on current rental income plus anticipated uplifts at the next rent review, lease expiry, or break option taking into consideration lease incentives and assuming no further growth in the estimated rental value of the property. External valuations include a capital deduction on properties in the retail and leisure sectors to reflect the increased tenant risk arising from COVID-19. The uplift and discount rates are derived from rates implied by recent market transactions on similar properties. These inputs are deemed unobservable.

(ii) Loans

· Commercial mortgage loans and Primary Healthcare loans held by our UK Life business are valued using a Portfolio Credit Risk Model. This model calculates a Credit Risk Adjusted Value for each loan. The risk adjusted cash flows are discounted using a yield curve, taking into account the term dependent gilt yield curve and global assumptions for the liquidity premium. Loans valued using this model have been classified as Level 3 as the liquidity premium is deemed to be non-market observable. The liquidity premium used in the discount rate ranges between 75 bps to 110 bps (2019: 65 bps to 80 bps).

· Equity release mortgage loans held by our UK Life business are valued using an internal model, with fair value initially being equal to the transaction price. The value of these loans is dependent on the expected term of the mortgage and the forecast property value at the end of the term, and is calculated by adjusting future cash flows for credit risk and discounting using a yield curve plus an allowance for illiquidity. At 30 June 2020 the illiquidity premium used in the discount rate was 195 bps (2019: 160 bps).

The mortgages have a no negative equity guarantee (NNEG) such that the cost of any potential shortfall between the value of the loan and the realised value of the property, at the end of the term, is recognised by a deduction to the value of the loan. Property valuations at the reporting date are obtained by taking the most recent valuation for the property and indexing using market observable regional house price indices.

NNEG is calculated using base property growth rates reduced for the cost of potential dilapidations, using a stochastic model. In addition, a cost of capital charge is applied to reflect the variability in these cash flows. The base property growth rate assumption is RPI +0.75% which equates to a long-term average growth rate of 3.9% pa at 30 June 2020 (2019: 4.0% pa). After applying the cost of capital charge, dilapidations and the stochastic distribution, the effective net long-term growth rate equates to 0.4% pa (2019: 0.5% pa).

· At 30 June 2019 and 31 December 2019, mortgage loan assumptions for future property growth included a specific allowance for the possible adverse impact of the decision for the UK to leave the European Union, which has now been removed. Future property growth assumptions are now updated on a quarterly basis and as at 30 June 2020, mortgage loan assumptions for future property growth include a reduction in the cumulative 5-year growth rate assumption (from 2020-24) followed by the long-term growth rate.

· Infrastructure and Private Finance Initiative (PFI) loans held by our UK Life business are valued using a discounted cash flow model. This adds spreads for credit and illiquidity to a risk-free discount rate. Credit spreads used in the discount rate are calculated using an internally developed methodology which depends on the credit rating of each loan, credit spreads on publicly traded bonds and an estimated recovery rate in event of default and are deemed to be unobservable.

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(f) Further information on Level 3 assets and liabilities continued

(iii) Fixed maturity securities

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

· Non-standard debt products and privately placed bonds held by our businesses in the UK do not trade in an active market. These debt securities are valued using discounted cash flow models, designed to appropriately reflect the credit and illiquidity risk of the instrument. These bonds have been classified as Level 3 because the valuation approach includes significant unobservable inputs and an element of subjectivity in determining appropriate credit and illiquidity spreads.

· Debt securities held by our French, UK and Asia businesses, which are not traded in an active market, have been valued using third party or counterparty valuations. These prices are considered to be unobservable due to infrequent market transactions.

(iv) Equity securities

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

(v) Other investments (including derivatives)

· Other investments are held for index-linked, unit-linked and with-profit funds and are valued based on external valuation reports received from fund managers. The investments consist of:

- Unit trusts;

- Other investment funds including property funds;

- External hedge funds held principally by business in the UK and France; and

- Derivatives.

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

(vi) Financial assets of operations classified as held for sale

· Financial assets of operations classified as held for sale are held by our Asia business and consist primarily of discretionary managed funds of £1,401 million (2019: £1,404 million) and debt securities which are not traded in an active market and have been valued using third party or counterparty valuations of £309 million (2019: £401 million). These assets are included within the relevant asset category within the sensitivity table below.

(vii) Liabilities

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

· £2,928 million (2019: £3,045 million) of non-participating investment contract liabilities, classified as held for sale, are classified as Level 3, either because the underlying unit funds are classified as Level 3 assets or because the liability relates to unfunded units or other non-unit adjustments which are based on a discounted cash flow analysis using unobservable market data and assumptions.

· Securitised mortgage loan notes, presented within Borrowings, are valued using a similar technique to the related Level 3 securitised mortgage assets.

Where these valuations are at a date other than the balance sheet date, as in the case of some private equity funds, adjustments are made to reflect items such as subsequent drawdowns and distributions and the fund manager's carried interest.

Sensitivities

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

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

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

Valuation uncertainty on assets which rely on either unobservable long-term assumptions or comparable market transactions as valuation inputs has been impacted by the economic disruption resulting from the COVID-19 pandemic. In particular assets, relying on comparable market transactions for a valuation have been more difficult to value due to a reduction in the level of available market evidence. A number of property valuers have included 'material uncertainty declarations' in their valuation reports to reflect this. The pandemic has also increased uncertainty in relation to long term economic assumptions such as residential and commercial property growth rate assumptions.

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(f) Further information on Level 3 assets and liabilities continued

The tables below show the sensitivity of the fair value of Level 3 assets and liabilities to changes in unobservable inputs to a reasonable alternative:

				Sensitivities
	30 June 2020 Fair value £bn	Most significant unobservable input	Reasonable alternative	Positive Impact £bn	Negative Impact £bn
Investment property	11.3	Equivalent rental yields	+/- 5-10%	0.9	(0.9)
Loans
Commercial mortgage loans and Primary Healthcare loans	12.9	Illiquidity premium	+/- 20 bps	0.2	(0.2)
		Base property growth rate	+/- 100bps p.a.	0.1	(0.1)
Equity release mortgage loans	11.5	Base property growth rate	+/- 40bps p.a.	0.2	(0.2)
		Current property market values	+/- 10%	0.4	(0.4)
Infrastructure and Private Finance Initiative (PFI) loans	4.6	Illiquidity premium	+/- 25 bps¹	0.2	(0.2)
Other	0.4	Illiquidity premium	+/- 25 bps¹	-	-
Fixed maturity securities
Structured bond-type and non-standard debt products	6.3	Market spread (credit, liquidity and other)	+/- 25 bps	0.1	(0.1)
Privately placed notes	1.7	Credit spreads	+/- 25 bps¹	0.1	(0.1)
Other debt securities	12.5	Credit and liquidity spreads	+/- 20-25 bps	0.5	(0.5)
Equity securities	0.8	Market spread (credit, liquidity and other)	+/- 25 bps	0.1	(0.1)
Other investments
Property Funds	0.8	Market multiples applied to net asset values	+/- 15-20%	0.1	(0.1)
Other investments (including derivatives)	7.0	Market multiples applied to net asset values	+/- 10-40%²	0.8	(0.7)
Liabilities
Non-participating investment contract liabilities	(2.9)	Fair value of the underlying unit funds	+/- 20-25%	0.4	(0.4)
Borrowings	(1.2)	Illiquidity premium	+/- 50 bps	-	-
Other liabilities (including derivatives)	(0.9)	Independent valuation vs counterparty	N/A	-	-
Total Level 3 investments	64.8			4.1	(4.0)

1 On discount spreads.

2 Dependent on investment category.

				Sensitivities
	30 June 2019 Fair value £bn	Most significant unobservable input	Reasonable alternative	Positive Impact £bn	Negative Impact £bn
Investment property	11.5	Equivalent rental yields	+/- 5-10%	0.9	(0.9)
Loans
Commercial mortgage loans and Primary Healthcare loans	12.3	Illiquidity premium	+/- 20 bps	0.2	(0.2)
		Base property growth rate	+/- 100bps p.a.	0.2	(0.2)
Equity release mortgage loans	10.5	Base property growth rate	+/- 40bps p.a.	0.2	(0.2)
		Current property market values	+/- 10%	0.3	(0.4)
Infrastructure and Private Finance Initiative (PFI) loans	4.1	Illiquidity premium	+/- 25 bps¹	0.2	(0.2)
Other	0.4	Illiquidity premium	+/- 25 bps¹	-	-
Fixed maturity securities
Structured bond-type and non-standard debt products	6.8	Market spread (credit, liquidity and other)	+/- 25 bps	0.1	(0.1)
Privately placed notes	1.5	Credit spreads	+/- 25 bps¹	-	-
Other debt securities³	10.1	Credit and liquidity spreads	+/- 20-25 bps	0.4	(0.5)
Equity securities	0.5	Market spread (credit, liquidity and other)	+/- 25 bps	-	-
Other investments
Property Funds	0.8	Market multiples applied to net asset values	+/- 15-20%	0.1	(0.1)
Other investments (including derivatives)³	6.0	Market multiples applied to net asset values	+/- 10-40%²	0.7	(0.5)
Liabilities
Non-participating investment contract liabilities	(2.9)	Fair value of the underlying unit funds	+/- 20-25%	0.4	(0.4)
Borrowings	(1.2)	Illiquidity premium	+/- 50 bps	-	-
Other liabilities (including derivatives)	(0.7)	Independent valuation vs counterparty	N/A	-	-
Total Level 3 investments	59.7			3.7	(3.7)

1 On discount spreads.

2 Dependent on investment category.

3 Following a review of the classification of financial assets, comparative amounts have been amended from those previously reported. The effect of this change is to reclassify £1,132 million of Level 3 assets from fixed maturity securities to other investments.

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(f) Further information on Level 3 assets and liabilities continued

				Sensitivities
	31 December 2019 Fair value £bn	Most significant unobservable input	Reasonable alternative	Positive Impact £bn	Negative Impact £bn
Investment property	11.2	Equivalent rental yields	+/- 5-10%	0.9	(0.9)
Loans
Commercial mortgage loans and Primary Healthcare loans	12.9	Illiquidity premium	+/- 20 bps	0.2	(0.2)
		Base property growth rate	+/- 100bps p.a.	0.2	(0.1)
Equity release mortgage loans	11.0	Base property growth rate¹	+/- 40bps p.a.	0.2	(0.2)
		Current property market values¹	+/- 10%	0.3	(0.4)
Infrastructure and Private Finance Initiative (PFI) loans	4.0	Illiquidity premium	+/- 25 bps²	0.2	(0.2)
Other	0.4	Illiquidity premium	+/- 25 bps²	-	-
Fixed maturity securities
Structured bond-type and non-standard debt products	6.4	Market spread (credit, liquidity and other)	+/- 25 bps	0.1	(0.1)
Privately placed notes	1.7	Credit spreads	+/- 25 bps²	0.1	(0.1)
Other debt securities	9.9	Credit and liquidity spreads	+/- 20-25 bps	0.5	(0.5)
Equity securities	0.8	Market spread (credit, liquidity and other)	+/- 25 bps	-	(0.1)
Other investments
Property Funds	0.8	Market multiples applied to net asset values	+/- 15-20%	0.1	(0.1)
Other investments (including derivatives)	6.4	Market multiples applied to net asset values	+/- 10-40%³	0.8	(0.6)
Liabilities
Non-participating investment contract liabilities	(3.0)	Fair value of the underlying unit funds	+/- 20-25%	0.4	(0.4)
Borrowings	(1.2)	Illiquidity premium	+/- 50 bps	-	-
Other liabilities (including derivatives)	(0.8)	Independent valuation vs counterparty	N/A	-	-
Total Level 3 investments	60.5			4.0	(3.9)

1 The sensitivity impacts for base property growth rate and current property market values for equity release mortgage loans were incorrectly transposed at 31 December 2019 and have been amended from the impacts previously reported.

2 On discount spreads.

3 Dependent on investment category.

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

Page 79

B20 - Risk management

Risk management is key to Aviva's success. We accept the risks inherent to our core business lines of life, health and general insurance and asset management. We mitigate these risks through our scale, geographic spread, the variety of the products and services we offer and the channels through which we sell them. We receive premiums which we invest to maximise risk-adjusted returns, so that we can fulfil our promises to customers while providing a return to our shareholders. In doing so we have a preference for retaining those risks we believe we are capable of managing to generate a return.

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

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

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

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

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

The Group's overarching risk management and internal control system is actively responding to the challenges of the COVID-19 outbreak and remains intact. Work remains ongoing to ensure that the control environment remains robust in the current operating environment.

Risk environment

During the first half of 2020 the Group has been impacted by the COVID-19 pandemic through its insurance products and asset holdings as well as ongoing difficult conditions in the global financial markets and the economy generally. General insurance products are impacted as a result of disruption to business and travel insured by the Group; life protection products as a result of increased mortality; savings and asset management revenues which are sensitive to asset values; and income protection, critical illness and health insurance products as a result of increased morbidity, offset by a potential reduction in annuity payments.

We have seen COVID-19 have a significant impact on the global economy and markets. Key impacts have been observed from large equity market falls and falls in interest rates. We have taken a number of actions to reduce our exposure to equity and interest rate risk across all our markets. We have also taken a number of actions to reduce our exposure to credit spread and counterparty default risk across our major markets. The Group's balance sheet exposure has been reviewed and actions are being taken to further reduce the sensitivity to economic shocks.

Risks associated with business conduct and financial crime have heightened in the period with COVID-19 becoming a pretext for phishing activity, leading to pension and investment fraud. An increase in switching, churning and exaggerated or fraudulent claims is expected, particularly if the economic impact is prolonged. Our controls have been effectively monitoring this situation.

In the current climate, areas of increased conduct risk have been identified across the Group in relation to the financial vulnerability of our customers, product suitability and fair value. In response, our businesses have taken action to support the needs of different customer groups and we continue to work with local regulators. Steps have been taken to support our customers and their local communities, whether that be through extension of covers, additional support to customers and charitable donations.

In addition, we continue to closely monitor the UK-EU Free Trade Agreement (FTA) negotiations and the risk that the UK and EU fail to reach a deal or agree an extension by 31 December 2020, the end of the transition period. The Group continues to maintain its contingency plans from 2019 in relation to which would have meant it was prepared for a 'No Deal' scenario. Through the Association of British Insurers (ABI) and directly, we are actively engaged to achieve a satisfactory outcome to Solvency II equivalence. We will also continue to monitor and ensure we are prepared for other potential, yet to be determined consequences of the UK's exit of the European Union.

Looking forward, technology and innovation, cyber resilience, conduct, financial inclusion and completion of post crisis reforms (such as the Insurance Capital Standard (ICS)) are all receiving regulatory focus. Climate change continues to gain increasing focus from regulators and government bodies, Aviva remains committed to supporting a low carbon economy that will improve the resilience of our economy, society and the financial system in line with the 2015 Paris Agreement target on climate change.

The biggest immediate threat to the Group's capital and liquidity positions is the macroeconomic implications of COVID-19 pandemic. Key potential exposures come from deterioration in investment credit quality, changes in the profile of insurance losses and the impact of market movements. We continue to closely track these developments in our businesses and take appropriate actions to ensure that the impact on our businesses and our customers is limited. The Group continues to maintain strong solvency and liquidity positions through a range of scenarios and stress testing. These scenarios allow for the potential impacts of COVID-19 both directly on operations of the Group and also the wider macroeconomic environment, and the Group has considerable resilience to external shocks, even in severe downside scenarios.

The Group is in the process of implementing the new international accounting standards for insurance contracts, IFRS 17 Insurance Contracts. The impact of the adoption of IFRS 17 significantly impacts the measurement and presentation of the contracts in scope of the standard. It is expected that the standard will apply to annual reporting periods beginning on or after 1 January 2023 at the earliest. The final standard was published in June and remains subject to endorsement by the EU and the UK. We note the UKs endorsement procedure, following departure from the EU, remains under development through the transition period to the end of December 2020.

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Risk profile

We continue to manage our risk profile to reflect Aviva's objective of maintaining financial strength and reducing capital volatility, and reallocating capital in line with the Group's strategy. At Group and business unit level, there is a capital risk appetite which requires that sufficient capital resources be maintained to cover a stress scenario. In the period, the Group position remained within appetite. Measures to maintain the resilience of the Group's capital position include putting in place a number of foreign exchange, credit and equity hedges. These are used to mitigate the Group's foreign exchange, credit and equity risk exposure, and enable the Group to accept other credit risks offering better risk adjusted returns while remaining within risk appetite. In addition, we renewed our Group-wide catastrophe reinsurance programme to reduce the Group's potential loss to an extreme insurance loss event.

Material risks and uncertainties

In accordance with the requirements of the Financial Conduct Authority (FCA) Handbook (DTR 4.2.7) we provide an update here on the material risks and uncertainties facing the Group. The types of risks to which the Group is exposed have not changed significantly during the first half of the year and remain credit, market, liquidity, life and health insurance, general insurance, asset management and operational risks. These risks are described below. Further detail on these risks is given within note 60 of the Aviva plc Annual Report and Accounts 2019.

(a) Credit risk

Credit risk is the risk of financial loss as a result of the default or failure of third parties to meet their payment obligations to Aviva, or variations in market values as a result in changes in expectations related to these risks. Aviva has a strong record of managing credit risk and we see credit as an area where we can make a good return for the benefit of both our policyholders and shareholders.

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

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

As a result of the financial market impact of COVID-19 we have taken a number of actions to reduce our exposure to credit spread and counterparty default risk across our major markets. Actions include purchasing tactical derivative hedges, asset disposals and reallocation and reducing new business sales in certain markets and products. We continue to monitor credit quality in our commercial mortgage and equity release mortgage portfolios, specific de-risking actions include phased sales and credit hedging.

We have analysed our sector exposures to industries we consider most impacted by COVID-19. These sectors are aviation, retail, leisure, oil and gas. At 30 June 2020, our exposure to these sectors was approximately 5% of which over 90% is externally rated investment grade.

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

As at 30 June 2020	AAA	AA	A	BBB	Below BBB	Not rated	Carrying value including held for sale £m	Less: Assets classified as held for sale £m	Carrying value m
Fixed maturity securities	11.1%	35.4%	20.7%	22.6%	6.2%	4.0%	211,848	(584)	211,264
Reinsurance assets	4.6%	74.0%	15.0%	4.2%	-	2.1%	13,351	(44)	13,307
Other investments	0.2%	0.1%	0.3%	0.1%	-	99.3%	57,854	(6,843)	51,011
Loans	12.3%	10.0%	0.2%	0.4%	-	77.1%	40,110	(1)	40,109
Total							323,163	(7,472)	315,691

As at 31 December 2019	AAA	AA	A	BBB	Below BBB	Not rated	Carrying value including held for sale £m	Less: Assets classified as held for sale £m	Carrying value £m
Fixed maturity securities	10.7%	34.1%	19.7%	23.0%	8.0%	4.5%	199,481	(649)	198,832
Reinsurance assets	3.3%	75.8%	9.2%	7.8%	-	3.9%	12,431	(75)	12,356
Other investments	0.2%	-	0.3%	0.1%	-	99.4%	51,935	(6,919)	45,016
Loans	18.3%	3.8%	0.1%	-	-	77.8%	38,580	(1)	38,579
Total							302,427	(7,644)	294,783

At 30 June 2020, a significant proportion of assets remain investment grade in line with 2019. We have remained focused on high quality assets.

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(b) Market risk

Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations in interest rates, inflation, foreign currency exchange rates, equity and property prices.

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

Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of risk models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. An equity hedging strategy remains in place to help control the Group's overall direct and indirect exposure to equities. At 30 June 2020 the Group continues to hold a series of macro equity hedges to reduce the overall shareholder equity risk exposure.

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

Some of the Group's products, principally participating contracts, expose us to the risk that changes in interest rates will impact on profits through a change in the interest spread (the difference between the amounts that we are required to pay under the contracts and the investment income we are able to earn on the investments supporting our obligations under those contracts). In the macro-economic environment, decreasing rates have been detrimental for a number of our businesses in Europe and Asia.

As a result of the significant financial market impact of COVID-19, particularly to equity markets and interest rates, we have taken a number of actions to reduce our exposure to equity and interest rate risk across all our markets. Actions include purchasing tactical derivative hedges, asset disposals and reallocations and reducing new business sales in certain markets and products. We are also exposed to the potential impact of increased defaults and downgrades on our commercial mortgage loans although we maintain conservative loan-to-value across this portfolio. Our capital position includes an allowance for the expected potential impacts from downgrades and defaults.

At a Group level we actively seek to manage currency risk primarily by matching assets and liabilities in functional currencies at the business unit level. Planned foreign currency remittances from subsidiaries and disposal proceeds are often hedged using foreign exchange forwards to provide certainty regarding the sterling value to be received by the Group, while foreign exchange swaps are in place to hedge certain non-sterling borrowings. Hedges may also be used to protect the Group's capital against a significant depreciation in local currency versus sterling. At 30 June 2020, hedges with notional values of £1,695 million (Canadian dollar £685 million, Euro £336 million and US dollar £674 million) were in place.

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

The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid assets such as commercial mortgages. The Group seeks to ensure that it maintains sufficient liquid financial resources to meet its obligations as they fall due through the application of a Group liquidity risk policy and business standard. At Group and business unit level, there is a liquidity risk appetite which requires that sufficient liquid resources be maintained to cover net outflows in a stress scenario. In the period, the Group position remained within appetite. The Group centre's main sources of liquidity are liquid assets held within Aviva plc and its subsidiary, AGH, and dividends received from the Group's insurance and asset management businesses.

Sources of liquidity in normal markets also include a variety of short and long-term instruments including commercial papers and medium and long-term debt. In addition to the existing liquid resources and expected inflows, the Group and Company maintain significant undrawn committed borrowing facilities (30 June 2020: £1.70 billion) from a range of leading international banks to further mitigate this risk. The Group centre's main sources of liquidity are liquid assets held within Aviva plc and its subsidiary, Aviva Group Holdings Limited (AGH), and dividends received from the Group's insurance and asset management businesses.

A cautious approach on cash remittances is being taken across the Group with markets retaining cash rather than remitting to Group in the wake of the unprecedented challenges COVID-19 presents for businesses, households and customers, and the adverse and highly uncertain impact on the global economy.

(d) Life insurance risk

The impact of COVID-19 on the profile of our life insurance risks, primarily longevity, persistency, mortality and expense risk, has been limited during the first half of 2020. Longevity risk remains the Group's most significant life insurance risk due to the Group's annuity portfolio and is amplified by the current low level of interest rates.

We are also exposed to longevity risk through the Aviva Staff Pension Scheme, to which our economic exposure has been reduced since 2014 by entering into a longevity swap covering currently approximately £5 billion of pensioner in payment scheme liabilities. We purchase reinsurance for longevity risk for our annuity business and in 2019 this included the bulk annuity buy-in transaction with the Aviva Staff Pension scheme

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

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(d) Life insurance risk continued

We have reinsurance in place across all our markets to reduce our net exposure to potential losses. In the UK we have extensive quota share reinsurance in place on Individual Protection business and for large UK Group Life protection we have surplus reinsurance for individual claims. In Individual Protection we have also introduced additional underwriting questions, adjusted pricing and will refer more cases to manual underwriting.

In all of our markets, underwriting procedures on Individual Life Protection products limit our exposure to cohorts of the population at highest risk of COVID-19. While we have greater potential net exposure through Group Life Protection, we have taken pricing actions to limit our potential exposure from new business. We expect there to be some offset to increased protection claims as a result of COVID-19 from technical provision releases on our UK annuity portfolio

(e) General insurance and health insurance risk

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

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

Provisions made for insurance liabilities are inherently uncertain. Due to this uncertainty, general and health insurance reserves are regularly reviewed by qualified and experienced actuaries at the business unit and Group level in accordance with the Group's reserving framework. These and other key risks, including the occurrence of unexpected claims from a single source or cause and inadequate reinsurance protection/risk transfer, are subject to an overarching risk management framework and various mechanisms to govern and control our risks and exposures. We recognise that the severity and frequency of weather-related events has the potential to adversely impact provisions for insurance liabilities and our earnings, with the result that there is some seasonality in our results from period to period. Large catastrophic (CAT) losses arising as a result of these events are explicitly considered in our economic capital modelling to ensure we are resilient to such CAT scenarios.

As at 30 June 2020, Aviva's general insurance and health insurance risk profile continues to be closely monitored. Our key General insurance and health exposures, together with mitigants, are:

· Business Interruption: For the significant majority of the Group's UK General Insurance commercial policies, where policy wordings are determined by the Company, cover is based on a specified list of diseases. These policies exclude business interruption due to new and emerging diseases, like COVID-19. Business interruption losses stemming from the current COVID-19 outbreak are therefore not covered under the significant majority of policies but there is a risk that litigation will be required to provide legal clarity in terms of the events and the cover provided under broker determined business interruption policy wordings where we are the lead or follow insurer and many of the issues are now subject to the outcome of the FCA test case. There is also an exposure to business interruption policies in Canada, where we have agreed there is cover under a specific pandemic risk cover for Canadian dentists, and in Ireland. There is a similar risk of litigation being required in these jurisdictions to provide legal clarity on other business interruption policy wordings.

· Travel Insurance: We are potentially exposed to claims due to travel cancellation, disruption and sickness where this is insured by the Group, primarily in the UK. We are only exposed to losses after recoveries have been made from travel providers (e.g. tour operators or airlines) and agents. Travel disruption is not part of our Aviva UK Direct cover and was removed as a policy option on 9 March but is included as standard in the majority of the added value accounts with our banking partners. We ceased accepting new Aviva UK Direct business, except annual cover renewals from 13 March. Prior to these actions we took pricing actions to limit our potential exposure to new business. Any potential losses are partially mitigated through profit commission and future pricing agreements with distribution partners.

· Reinsurance: The Group purchases reinsurance protections on its property portfolio that includes coverage for business interruption. The Group is seeking reinsurance recoveries of business interruption losses which the Group has paid and which it believes to be covered under the terms of that reinsurance, but there is a risk of reinsurer challenge to coverage that would require dispute resolution procedures to resolve and a consequent risk to recovery.

These exposures are partially offset by favourable impacts in other product lines (e.g. frequency benefits on motor lines). The continuing nature of the event means that our final exposure is subject to a significant degree of uncertainty. Further information on the quantitative impact on our businesses is disclosed in section B3.

(f) Asset management risk

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

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

Due to the adverse impact of COVID-19 on the UK commercial property sectors, and in particular the difficulty in being able to assign values to our commercial property portfolios, we have temporarily suspended our commercial property funds to redemptions. We perform stress tests to ensure that our portfolios are managed within client mandates.

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(g) Operational risk

The Group continues to operate, validate and enhance its key operational controls and purchase insurance to minimise losses arising from inadequate or ineffective internal processes, people and systems or from external events. The Group maintains constructive relationships with its regulators around the world and developments in relation to key regulatory changes, such as requirements for Global Systemically Important Insurers (G-SII), are monitored closely.

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

COVID-19 has resulted in increased level of inherent operational risk through new practices including enforced remote working, staff absences for sickness and childcare, market volatility and through our outsourcing arrangements. Additional risks relating to extensive working from home; include cyber, data loss and occupational health. We have adapted and strengthened our processes and controls to ensure operational risks remain at an acceptable level. Since the onset of the pandemic the Group has remained operationally resilient, with key activities such as cash payments and transaction processing being maintained, IT systems remaining operational, and employees including frontline customer facing staff being supported to ensure that that we are there to support our customers when they need us most.

Aviva has not seen a material increase in the volume of cyber incidents/attacks as a result of COVID-19 but has seen external threat actors exploiting the COVID-19 pandemic within such attacks e.g. phishing, texts and phone calls. In response to this Aviva has put in place a programme of communications to ensure Aviva employees are aware of such scams, published safe homeworking guides and run online training for our employees and their families. Support has also been given to our customers, including the launch of an online reporting facility to help combat fraud.

(h) Sensitivity test analysis

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

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

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

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(h) Sensitivity test analysis continued

Long-term business sensitivities

30 June 2020 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	(55)	65	(15)	(25)	25	(60)	10	(5)
Insurance non-participating	(1,135)	1,390	(695)	(90)	65	(225)	(185)	(940)
Investment participating	(80)	100	(15)	(15)	(5)	(35)	-	-
Investment non-participating	(5)	5	-	5	(10)	(10)	-	-
Assets backing life shareholders' funds	75	(55)	(45)	(60)	60	-	-	-
Total	(1,200)	1,505	(770)	(185)	135	(330)	(175)	(945)

30 June 2020 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	(55)	65	(15)	(25)	25	(60)	10	(5)
Insurance non-participating	(1,135)	1,390	(695)	(90)	65	(225)	(185)	(940)
Investment participating	(80)	100	(15)	(15)	(5)	(35)	-	-
Investment non-participating	(5)	5	-	5	(10)	(10)	-	-
Assets backing life shareholders' funds	30	(15)	(40)	(60)	60	-	-	-
Total	(1,245)	1,545	(765)	(185)	135	(330)	(175)	(945)

31 December 2019 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	-	5	(10)	(65)	60	(50)	10	(5)
Insurance non-participating	(985)	1,265	(800)	(120)	105	(240)	(145)	(955)
Investment participating	(85)	55	(5)	(5)	5	(25)	-	-
Investment non-participating	-	5	-	5	(5)	(5)	-	-
Assets backing life shareholders' funds	(150)	170	(35)	(35)	30	-	-	-
Total	(1,220)	1,500	(850)	(220)	195	(320)	(135)	(960)

31 December 2019 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	-	5	(10)	(65)	60	(50)	10	(5)
Insurance non-participating	(985)	1,265	(800)	(120)	105	(240)	(145)	(955)
Investment participating	(85)	55	(5)	(5)	5	(25)	-	-
Investment non-participating	-	5	-	5	(5)	(5)	-	-
Assets backing life shareholders' funds	(190)	205	(30)	(30)	30	-	-	-
Total	(1,260)	1,535	(845)	(215)	195	(320)	(135)	(960)

Changes in sensitivities between 31 December 2019 and 30 June 2020 reflect underlying movements in the value of assets and liabilities, the relative duration of assets and liabilities and asset liability management actions. The sensitivities to economic and demographic movements relate mainly to business in the UK.

General insurance and health business sensitivities

30 June 2020 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(345)	335	(105)	135	(125)	(80)	(175)
Net of reinsurance	(410)	400	(105)	135	(125)	(80)	(155)

30 June 2020 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(345)	335	(105)	140	(125)	(25)	(175)
Net of reinsurance	(410)	400	(105)	140	(125)	(25)	(155)

31 December 2019 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(210)	165	(115)	185	(175)	(140)	(315)
Net of reinsurance	(270)	215	(115)	185	(175)	(140)	(300)

31 December 2019 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(210)	165	(115)	185	(175)	(25)	(315)
Net of reinsurance	(270)	215	(115)	185	(175)	(25)	(300)

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

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(h) Sensitivity test analysis continued

Fund management and non-insurance business sensitivities

30 June 2020 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	-	-	50	(25)	50

30 June 2020 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	-	-	50	(25)	40

31 December 2019 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	(20)	15	40	(10)	15

31 December 2019 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	(15)	15	40	(10)	15

Limitations of sensitivity analysis

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

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

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

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

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

B21 - Cash and cash equivalents

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

	30 June 2020 £m	30 June 2019 £m	31 December 2019 £m
Cash and cash equivalents	19,125	15,296	19,524
Cash and cash equivalents of operations classified as held for sale	862	698	780
Bank overdrafts	(712)	(675)	(870)
Net cash and cash equivalents at 30 June/31 December	19,275	15,319	19,434

B22 - Contingent liabilities and other risk factors

Note 56 of the Group's 2019 Annual report and accounts sets out the main areas of uncertainty over the calculation of claims provisions. Further to these disclosures, since the period end COVID-19 has given rise to an increase in the uncertainty over general insurance business outstanding claims provisions and long-term business provisions. The impact on the Group's insurance liabilities as a result of the global pandemic has been recognised (see note B14 for long-term business, see note B11(c) for general insurance and health business), however, due to the inherent uncertainty around the long-term impacts of COVID-19, actual experience may differ from that expected and hence there is uncertainty in respect of these liabilities.

There have been no material changes in the other areas of uncertainty over the calculation of our liabilities from those described in Note 56 of the Group's 2019 Annual report and accounts. An update on material risks is provided in note B20 Risk management.

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B23 - Acquired value of in-force business and intangible assets

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

	6 months 2020 £m	6 months 2019 £m	Full year 2019 £m
Acquired value of in-force business on insurance contracts¹	1,172	1,339	1,235
Acquired value of in-force business on investment contracts²	1,127	1,367	1,244
Intangible assets	797	894	847
	3,096	3,600	3,326
Less: Assets classified as held for sale	(447)	(576)	(526)
Total	2,649	3,024	2,800

1 On insurance and participating investment contracts.

2 On non-participating investment contracts.

The AVIF on insurance and investment contracts has reduced in the period primarily due to an amortisation charge of £165 million
(HY19: 191 million charge, 2019: £406 million charge). There was also an impairment of AVIF on investment contracts of £19 million in the period relating to FPI (HY19: £19 million, 2019: £28 million) recorded as a remeasurement loss, as FPI is held for sale. See note B5(b).

The decrease in intangible assets is mainly due to the amortisation charge of £92 million (HY19: £107 million charge, 2019: £212 million charge), partly offset by additions to intangible assets relating to the capitalisation of software costs.

B24 - Subsequent events

For details of subsequent events relating to:

· the disposal of Friends Provident International Limited on 16 July 2020 - see note B5(c)

· redemption of the 5.9021% £500 million direct capital instrument on 27 July 2020 - see note B16(b)

Page 87

Directors' responsibility statement

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

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

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

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

By order of the Board

Amanda Blanc Jason Windsor

Group Chief Executive Officer Group Chief Financial Officer

5 August 2020

Page 88

Independent review report to Aviva plc

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed Aviva plc's condensed consolidated financial statements (the "interim financial statements") in the half year report of Aviva plc for the 6 month period ended 30 June 2020. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

· the condensed consolidated statement of financial position as at 30 June 2020;

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

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

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

· the explanatory notes to the interim financial statements.

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

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

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

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

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

What a review of interim financial statements involves

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

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

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

PricewaterhouseCoopers LLP

Chartered Accountants

London

5 August 2020

END PART 3 of 4

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