Final Results - Part 2 of 4

RNS Number : 0466H

Aviva PLC

08 March 2018

Start part 2 of 4

Page 1

Contents

In this section		Page
Overview
Key financial metrics		2
1	Operating profit	3
2	Cash	5
i	Cash remitted to Group	5
ii	Excess centre cash flow	5
iii	Operating capital generation: Solvency II basis	6
iv	Solvency II future surplus emergence	7
3	Expenses	8
4	Value of new business	9
5	Combined operating ratio	10
6	Business unit performance	11
i	United Kingdom	11
ii	International	14
iii	Asia	17
iv	Aviva Investors	18
7	Profit drivers	19
i	Life business	19
ii	General insurance and health	22
iii	Fund flows	24
8	Capital & assets summary	25
i	Summary of assets	25
ii	Net asset value	26
iii	Return on equity	27
iv	Solvency II	28
Financial supplement		31
A	Income & expenses	32
B	IFRS financial statements and notes	37
C	Capital & liquidity	95
D	Analysis of assets	99
E	VNB & Sales analysis	122
Other information		130

Page 2

Foreword

All references to Operating profit^1,7 represent 'Group adjusted operating profit' as an alternative performance measure which is not bound by IFRS. Further explanation can be found in the Analyst Pack Glossary. All currency movements are calculated on unrounded numbers so minor rounding differences may exist.

Operating profit

	2017 £m	2016 £m	Sterling % change
Life business	2,882	2,642	9%
General insurance and health²	700	833	(16)%
Fund management	164	138	19%
Other³	(678)	(603)	(12)%
Total²	3,068	3,010	2%

Operating earnings per share^2,4,7

54.8p

51.1p

Cash remittances^5,7 and Operating Capital Generation (OCG): Solvency II basis^5,7

	2017		2016
	Cash Remittances £m	OCG £bn	Cash Remittances £m	OCG £bn
United Kingdom^5,6	1,800	2.8	1,187	2.8
Canada	55	(0.1)	130	0.3
Europe^5,6	485	0.9	449	1.0
Asia & Aviva Investors	58	0.1	39	-
Other⁸	-	(1.1)	-	(0.6)
Total	2,398	2.6	1,805	3.5

Expenses

	2017 £m	2016 £m	Sterling % change
Operating expenses⁷	3,778	3,408	11%
Integration & restructuring costs	141	212	(33)%
Expense Base	3,919	3,620	8%

Operating expense ratio⁷

52.7%

50.5%

2.2pp

Value of new business: Adjusted SII basis⁷

	2017 £m	2016 £m	Sterling % change⁶	Constant currency % change⁶
United Kingdom	527	429	23%	23%
Europe	533	429	24%	17%
Asia & Aviva Investors	183	134	37%	33%
Total	1,243	992	25%	21%

General insurance combined operating ratio^7,9

	2017	2016	Change
United Kingdom⁶	93.9%	106.3%	(12.4)pp
Canada	102.2%	93.0%	9.2pp
Europe⁶	93.3%	95.1%	(1.8)pp
Combined operating ratio	96.6%	100.1%	(3.5)pp

IFRS profit after tax

	2017 £m	2016 £m	Sterling % change
IFRS profit after tax	1,646	859	92%
Basic earnings per share	35.0p	15.3p	129%

Dividend

	2017	2016	Sterling % change
Final dividend per share	19.00p	15.88p	20.0%
Total dividend per share	27.40p	23.30p	18.0%

Capital position

	2017	2016	Sterling % change
Estimated Shareholder Solvency II cover ratio^7,10,11,12	198%	189%	9.0pp
Estimated Solvency II surplus^7,10,11,12	£12.2bn	£11.3bn	8%
Net asset value per share⁷	423p	414p	2%

1 Group adjusted operating profit is a non-GAAP Alternative Performance Measure (APM) which is not bound by the requirements of IFRS.

2 2016 excludes the impact of the change in the Ogden discount rate of £475 million, which has been recognised as an exceptional adjusting item. 2016 also excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

3 Other includes other operations, corporate centre costs and group debt and other interest costs, including coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax).

4 Net of tax, non-controlling interests, preference dividends, coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax). The calculation of earnings per share uses a weighted average of 4,041 million (2016: 4,051 million) ordinary shares in issue, after deducting treasury shares.

5 Cash remitted to Group and Solvency II operating capital generation are managed at legal entity level. As Ireland constitutes a branch of the United Kingdom business, cash remittances from Ireland were not aligned to the new management structure within Europe, but they were reported within United Kingdom.

6 Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

7 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

8 Other includes other Group activities and Group diversification benefit

9 The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change.

10 The estimated Solvency II position represents the shareholder view. This excludes the contribution to Group Solvency Capital Requirement (SCR) and Group Own Funds of fully ring fenced with-profits funds of £3.3 billion (2016: £2.9 billion) and staff pension schemes in surplus of £1.5 billion (2016: £1.1 billion). These exclusions have no impact on Solvency II surplus.

11 The estimated Solvency II position includes the pro forma impacts of the disposals of Friends Provident International Limited (£0.1 billion increase to surplus) and the Italian Avipop Assicurazioni S.p.A (£0.1 billion increase to surplus).

12 The 31 December 2016 Solvency II position included pro forma adjustments for the impact of the announced disposal of Antarius and the future impact of changes to UK tax rules announced by the Chancellor of the Exchequer's Autumn statement, which was removed following clarification in the 13 July 2017 Finance Bill. The 31 December 2016 Solvency II position also includes an adverse impact of a notional reset of the transitional provisions (TMTP) to reflect interest rates at 31 December 2016 £0.4 billion decrease to surplus.

Page 3

2017 overview

The Group has increased operating profit, grown cash remittances and strengthened its Solvency II capital position. Operating earnings per share rose 3.7p to 54.8p (2016: 51.1p).

This year has seen a significant amount of disposal activity as we complete our Not Everywhere strategy. In France we completed on the sale of Antarius to Sogecap, a subsidiary of Societe Generale in April 2017. In Spain we completed the sales of Unicorp Vida, Caja España Vida and Aviva Vida y Pensiones to Santalucía in September. In Italy, Banco Popolare served notice to terminate our distribution agreement and as a result on 25 August 2017 we announced that Aviva Italia Holdings has exercised an option to sell its JV Avipop Assicurazioni and its wholly owned subsidiary Aviva Vita to Banco BPM. In July, we announced the sale of Friends Provident International Limited (FPI) to RL360 Holding Company Limited followed by the announcement in October of the sale of our 49% shareholding in First Aviva Life (Aviva Taiwan) to our JV partner, First Financial Holding Co. Ltd. (FFH).

In terms of acquisitions, in April 2017 we acquired VietinBank's entire 50% shareholding in our life insurance joint venture VietinBank Aviva Life Insurance Limited (Aviva Vietnam) which is now a wholly owned subsidiary. On 14 November 2017, we announced that we had reached an agreement to acquire the Irish insurer Friends First Life Assurance Company dac (Friends First).

1 - Operating profit

Group operating profit

For the year ended 31 December 2017

	2017 £m	2016 £m
Operating profit before tax attributable to shareholders' profits
Life business
United Kingdom¹	1,758	1,523
Europe¹	873	876
Asia	235	241
Other	16	2
Total life business (note 7.i)	2,882	2,642
General insurance and health
United Kingdom	443	423
Canada	46	269
Europe¹	223	168
Asia	(8)	(13)
Other	(4)	(14)
Total general insurance and health² (note 7.ii)	700	833
Fund management
Aviva Investors	168	139
Asia	(4)	(1)
Total fund management	164	138
Other
Other operations (note A1)	(169)	(94)
Market operating profit²	3,577	3,519
Corporate centre (note A2)	(184)	(184)
Group debt costs and other interest (note A3)	(325)	(325)
Operating profit before tax attributable to shareholders' profits²	3,068	3,010
Tax attributable to shareholders' profit	(639)	(706)
Non-controlling interests	(134)	(147)
Preference dividends and other³	(82)	(85)
Operating profit attributable to ordinary shareholders²	2,213	2,072

Operating earnings per share^2,4	54.8p	51.1p

1 Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

3 Other includes coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax).

4 Net of tax, non-controlling interests, preference dividends, coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax). The calculation of earnings per share uses a weighted average of 4,047 million (2016: 4,051 million) ordinary shares in issue, after deducting treasury shares.

Page 4

1 - Operating profit continued

Operating profit was £3,068 million (2016: £3,010 million) representing an increase of 2%.

The life business operating profit increased to £2,882 million (2016: £2,642 million) mainly driven by the UK where we benefitted from growth in long-term savings, further optimisation of the annuity asset mix and an net increase of £290 million (2016: £151 million) primarily from our annual assumption review including longevity and modelling. In Europe, operating profit is flat reflecting underlying growth offset by the sale of Antarius and our Spanish operations during the year. Asia's contribution is broadly flat as it continues to invest for the future.

The general insurance and health business operating result decreased to £700 million (2016: £833 million). Overall the level of prior year reserve releases remain positive in 2017, however in Canada we have experienced increased claims severity and as a result we are strengthening reserves this year for this business. The UK and Europe results improved year on year and reported higher underwriting profits.

Fund management operating profit improved to £164 million (2016: £138 million) driven by revenue growth of 14% reflecting the full year benefit of the transfer of Friends Life assets and continued growth in the AIMS range of funds.

Other operations relate to non-insurance activities of the Group which incurred a loss of £169 million (2016: £94 million). This includes the savings platform business in the UK and reflects an increased investment in the development of the digital business, partly offset by income relating to insurance recoveries of £32 million (2016: £19 million).

Page 5

2.i - Cash remitted to Group

The flow of sustainable cash remittances from the Group's businesses is a key financial priority. We use a wholly-owned, UK domiciled reinsurer subsidiary for internal capital and cash management purposes. Some of the remittances otherwise attributable to the operating businesses arise from this internal reinsurance vehicle. The table below reflects actual remittances received by the Group.

Cash remittances for 2017 were £2,398 million (2016: £1,805 million) and include cash paid by our operating businesses to the Group, comprising dividends and interest on internal loans.

	2017 £m	2016 £m
United Kingdom^1,2	1,800	1,187
Canada	55	130
Europe²	485	449
Asia, Aviva Investors & Other	58	39
Total³	2,398	1,805

1 2017 cash remittances include £337 million received from UK General Insurance in February 2018 in respect of 2017 activity. 2016 cash remitted included £100 million from UK Life and £83 million from UK General Insurance paid in February 2017 and £159 million received from France paid in January 2017, in respect of 2016 activity.

2 Cash remitted to Group is managed at legal entity level. As Ireland constitutes a branch of the United Kingdom business, cash remittances from Ireland were not aligned to the new management structure within Europe, but they were reported within United Kingdom.

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

The increase in cash remittances to the Group was primarily driven by the UK businesses which includes an additional £500 million of Friends Life integration remittance, taking instalments to date to £750 million of the target of £1 billion. General insurance cash remitted in the UK increased to £434 million (2016: £91 million) as dividend payments in 2016 were lower due to funding the internal reinsurance arrangement.

Cash remittances from Canada decreased due to a lower operating profit. In Europe, an increase in cash remittances from France was partly offset by a reduction in cash remittances from Spain following the completion of the sale of the 50% shareholding in our life insurance and pension joint ventures. Cash remittances from Aviva Investors increased by 49% due to growth in the profitability of the business.

2.ii - Excess centre cash flow

Excess centre cash flow represents cash remitted by business units to the Group Centre less central operating expenses and debt financing costs. It represents cash and liquid assets held in the group holding companies, including Aviva plc. It is an important measure of the cash that is available to pay dividends, reduce debt, pay exceptional charges or invest back into our business units. It does not include cash movements such as disposal proceeds or capital injections.

	2017 £m	2016 £m
Dividends received	2,213	1,635
Internal interest received	185	170
Cash remitted to Group	2,398	1,805
External interest paid	(549)	(540)
Internal interest paid	(66)	(85)
Central spend	(183)	(227)
Other operating cash flows¹	56	(24)
Excess centre cash flow^2,3	1,656	929

1 Other operating cash flows include central investment income and group tax relief payments and other financial cash flows previously reported under central spend.

2 This table represents cash movements only and therefore will not reconcile to accounting based disclosures throughout the Preliminary announcement.

3 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

The increase of £727 million in excess centre cash flow is primarily driven by higher cash remittances to the Group Centre as discussed above, coupled with lower central spend and increased other operating cash inflows. Central spend cashflow partly decreased as employees paid more into Aviva's share save scheme as it came in line with new limits set by HMRC. Increased other operating cash inflows of £56 million (2016: £24 million cash outflows) were mainly driven by tax relief receipts from UK businesses and investment income offset by hedging costs and adverse margin movements.

Group Centre liquidity consists of cash and liquid assets. Group Centre liquidity at 28 February 2018 was £2.0 billion (28 February 2017: £1.8 billion).

Page 6

2.iii - Operating capital generation: Solvency II basis

The active management of the generation and utilisation of capital is a primary Group focus, balancing new business investment and shareholder distribution to deliver on our 'cash flow plus growth' initiative.

Our principal source of Group centre liquidity is cash remittances in the form of dividends and debt interest receipts from our businesses. Solvency II operating capital generation (OCG) measures the amount of Solvency II capital the Group generates from operating activities. Capital generated enhances Solvency II surplus which can be used to fund business unit remittances and, in turn, the Group dividend as well as for investment in initiatives that provide potential future growth.

Solvency II OCG was £2.6 billion during 2017 (2016: £3.5 billion), incorporating £2.4 billion (2016: £3.6 billion) from our life business and £0.2 billion (2016: £(0.1) billion) from our general insurance, health, fund management and other businesses.

	Life business SII Operating Capital Generation				Non-Life SII Operating Capital Generation
2017 £bn	Impact of New Business¹	Earnings from Existing Business	Other²	Life SII operating Capital Generation	GI, Health, FM & Other SII Operating Capital Generation	Total SII Operating Capital Generation
United Kingdom & Ireland Life³	(0.1)	0.9	1.6	2.4	-	2.4
United Kingdom & Ireland General Insurance and Health³					0.4	0.4
Canada					(0.1)	(0.1)
Europe³	-	0.6	0.1	0.7	0.2	0.9
Asia & Aviva Investors	-	0.1	-	0.1	-	0.1
Group centre costs & Other²	-	-	(0.8)	(0.8)	(0.3)	(1.1)
Total Group Solvency II operating capital generation⁴	(0.1)	1.6	0.9	2.4	0.2	2.6

1 Impact of new business (Life) as set out in note 4 Solvency II Surplus impact of new business

2 Other includes the effect of non-recurring capital actions, non-economic assumption changes and Group diversification benefit.

3 Solvency II operating capital generation is managed at legal entity level. As Ireland constitutes a branch of the United Kingdom business, Solvency II operating capital generation from Ireland was not aligned to the new management structure within Europe, but it was reported within United Kingdom.

4 As reported in the movement in Group Solvency II surplus disclosure in note 8iv.

	Life business SII Operating Capital Generation				Non-Life SII Operating Capital Generation
2016 £bn	Impact of New Business¹	Earnings from Existing Business	Other²	Life SII operating Capital Generation	GI, Health, FM & Other SII Operating Capital Generation	Total SII Operating Capital Generation
United Kingdom & Ireland Life³	(0.1)	1.4	1.2	2.5	-	2.5
United Kingdom & Ireland General Insurance and Health³					0.3	0.3
Canada					0.3	0.3
Europe³	(0.1)	0.6	0.4	0.9	0.1	1.0
Asia & Aviva Investors	-	-	-	-	-	-
Group centre costs & Other²	-	-	0.2	0.2	(0.8)	(0.6)
Total Group Solvency II operating capital generation⁴^,5	(0.2)	2.0	1.8	3.6	(0.1)	3.5

1 Impact of new business (Life) as set out in note 4 Solvency II Surplus impact of new business

2 Other includes the effect of non-recurring capital actions, non-economic assumption changes and Group diversification benefit.

4 As reported in the movement in Group Solvency II surplus disclosure in note 8iv.

5 Solvency II operating capital generation excludes the impact of the change in the Ogden discount rate of c.£0.2 billion, which has been recognised as an exceptional adjusting item.

Solvency II OCG is the Solvency II surplus movement in the period due to operating items including the impact of new business, expected investment returns on existing business, operating variances, non-economic assumption changes and non-recurring capital actions. It excludes economic variances, economic assumption changes and integration and restructuring costs which are included in non-operating capital generation. The expected investment returns are consistent with the returns used under IFRS (as set out in notes A4 and A5 in the financial supplement), except in UK Life where a risk-free curve plus an allowance for expected real-world returns (less an adjustment for credit risk, where required) is applied. Total Group OCG is a component of the movement in Group Solvency II surplus over the period as set out in note 8.iv and is not reconcilable to IFRS.

For the life business, the impact of new business is the change in Solvency II surplus resulting from new business written in the period. Life business earnings from existing business is the Solvency II surplus movement in the period due to operating items excluding the impacts of New Business and Other OCG. Other OCG for life business includes the effect of non-recurring capital actions, non-economic assumption changes and Group diversification benefit.

The life business OCG reduced by £1.2 billion in 2017 from £3.6 billion to £2.4 billion. Earnings from existing business reduced by £0.4 billion from £2.0 billion to £1.6 billion. This was mainly due to the UK & Ireland, which in 2016 benefitted from changes relating to the Friends Life portfolio, including hedging activity.

Other OCG for life business decreased by £0.9 billion in 2017 from £1.8 billion to £0.9 billion. In 2017, UK & Ireland includes the benefit of non-economic assumption changes, including longevity, and the Friends Life Part VII transfer. In 2017, Europe includes the benefit arising from a model change in France to vary the volatility adjustment in the solo SCR calculation, which is partially offset by non-economic assumption changes. However, this model change in France has not been recognised at Group resulting in an offsetting adjustment in Group centre costs and Other.

The general insurance, health, fund management and other business OCG increased by £0.3 billion in the period reflecting higher surplus generation in UK&I GI and Europe, together with a greater benefit from Group diversification. This was partially offset by lower surplus generation in Canada primarily as a result of the lower underwriting result.

Page 7

2.iv - Solvency II future surplus emergence

Emergence of future profits and release of Solvency II capital requirements - life business	2017 £bn	2016 £bn
Year 1	1.5	1.4
Year 2	1.4	1.3
Year 3	1.2	1.2
Year 4	1.1	1.1
Year 5	1.0	1.0
Year 6	1.0	0.9
Year 7	0.9	0.8
Year 8	0.8	0.8
Year 9	0.8	0.7
Year 10	0.7	0.7
Year 11-15	3.4	2.7
Year 16-20	3.6	3.3
Year 20+	9.6	8.8
Total net of non-controlling interests	27.0	24.7

The table above shows the expected future emergence of Solvency II surplus from the existing long-term in-force life business. For business subject to short contract boundaries under Solvency II, allowance has been made for the impact of renewal premiums as and when they are expected to occur. The cash flows have been split for the first ten years followed by five year tranches depending on the date when the surplus is expected to emerge.

The projected surplus, which is primarily expected to arise from the release of risk margin (net of transitional measures) and solvency capital requirement as the business runs off over time, is expected to emerge through OCG in future years. The cash flows are real-world cash flows, i.e. they are based on best estimate non-economic assumptions used in the Solvency II valuation and real-world investment returns rather than risk-free. The expected investment returns are consistent with the returns used in IFRS (as set out in note A4 in the financial supplement), except in the UK where a risk-free curve plus an allowance for expected real-world returns (less an adjustment for credit risk where required) is applied.

Solvency II future surplus emergence is a projection of the movement in Group Solvency II surplus from existing long-term in-force life business as set out in note 8.iv and is not reconcilable to IFRS. The projection is a static analysis as at a point in time and hence it does not include the potential impact of active management of the business (for example, active management of market, demographic and expense risk through investment, hedging, risk transfer and operational risk and expense management), which may affect the actual amount of OCG earned from existing business in future periods.

The total cash flows have increased by £2.3 billion over 2017, largely reflecting an increase in real-world returns in the UK following a change to the assets allocated to the calculation, model changes resulting in an increased solvency capital requirement in France and favourable foreign exchange rate movements in Europe.

Page 8

3 - Expenses

	2017 £m	2016 £m
United Kingdom¹	1,493	1,408
Canada	478	396
Europe¹	820	765
Asia	207	177
Aviva Investors	409	367
Other Group activities	371	295
Operating cost base	3,778	3,408
Integration & restructuring costs²	141	212
Expense base	3,919	3,620
Operating expense ratio³	52.7%	50.5%

2 As reported within other expenses of £3,537 million (2016: £3,853 million) in the consolidated income statement.

3 Group operating expenses expressed as a percentage of operating profit before operating expenses and group debt costs.

The table below shows the lines of the IFRS consolidated income statement in which operating expenses have been included:

	2017 £m	2016 £m
Claims handling costs¹	330	290
Non-commission acquisition costs²	892	846
Other expenses³	2,556	2,272
Operating cost base	3,778	3,408

1 Operating expenses as reported within net claims and benefits paid of £24,113 million (2016: £23,782 million) in the consolidated income statement.

2 Operating expenses as reported within fee and commission expense of £4,329 million (2016: £3,885 million) in the consolidated income statement.

3 Operating expenses as reported within other expenses of £3,537 million (2016: £3,853 million) in the consolidated income statement.

Operating expenses were £3,778 million (2016: £3,408 million). The increase in operating expenses included £98 million of adverse foreign exchange movements, a full year of RBC operating costs, and the effect of targeted investment into IT, digital and growth initiatives including strengthening our Aviva Investors and UK capabilities. This was partially offset by savings arising from the disposals referred to in note B4.

Integration and restructuring costs have decreased by 34% in constant currency terms, to £141 million (2016: £212 million) as a result of lower integration spend on the Friends Life acquisition and completion of the Solvency II project in 2016. This was partially offset by integration spend relating to the RBC acquisition and restructuring costs in the UK and Europe.

The operating expense ratio of 52.7% is up by 2.2pp, impacted by the reduction in Canada operating profit and our investment in the growth of our businesses.

Page 9

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

Following the introduction of Solvency II, the new prudential regulatory framework that came into force on 1 January 2016, the Group has calculated VNB on an adjusted Solvency II basis.

Adjusted Solvency II VNB reflects Solvency II assumptions and allowance for risk and is defined as the increase in Solvency II Own Funds resulting from business written in the period, adjusted to:

· Include business which is not included in the Solvency II Best Estimate Liability (BEL) valuation (e.g. UK and Asia Healthcare business, Retail fund management business and the UK Equity release business);

· Remove the impact of contract boundaries; and

· Include look through profits in service companies (where not included in Solvency II).

A reconciliation between adjusted Solvency II VNB and the Solvency II Own Funds impact of new business is provided below. The trend analysis of adjusted Solvency II VNB and adjusted Solvency II present value of new business premiums (PVNBP) is included in the financial supplement, section E: VNB & sales analysis.

2017	UK¹ £m	Europe¹ £m	Asia & Other £m	Group £m
Adjusted Solvency II VNB (gross of tax and non-controlling interests)²	527	533	183	1,243
Allowance for Solvency II contract boundary rules	54	(64)	4	(6)
Differences due to change in business in scope	(167)	(45)	(34)	(246)
Tax & Other³	(105)	(184)	(25)	(314)
Solvency II Own Funds impact of new business (net of tax and non-controlling interests)	309	240	128	677

2016	UK £m	Europe¹ £m	Asia & Other £m	Group £m
Adjusted Solvency II VNB (gross of tax and non-controlling interests)^2,4	429	429	134	992
Allowance for Solvency II contract boundary rules	51	(55)	(9)	(13)
Differences due to change in business in scope	(131)	(41)	(51)	(223)
Tax & Other³	(74)	(150)	(13)	(237)
Solvency II Own Funds impact of new business (net of tax and non-controlling interests)	275	183	61	519

2 The principal methodologies and assumptions underlying the calculation of adjusted Solvency II VNB are set out in section E1 and E14 respectively.

3 Other includes the impact of look through profits in service companies (where not included in Solvency II) and the reduction in value when moving to a net of non-controlling interests basis.

4 UK Life VNB includes £(12) million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund during the second half of 2016.

The Group's VNB increased by 25% to £1,243 million (2016: £992 million). This was driven by growth of new business in the UK, Europe and Asia.

The UK benefitted from strong growth in volumes across all segments partially offset but a change in product and asset mix. Following a clarification to the Solvency II rules made by the Prudential Regulation Authority (PRA) in 2017, new business written since the introduction of Solvency II has been reflected in the calculation of UK Life's transitional measures. This increased the adjusted Solvency II VNB (and Solvency II Own Funds impact of new business and Solvency II Surplus from life new business within OCG) by £96 million gross of tax and non-controlling interests as at 2017.

The increase in Europe was mainly driven by a change in business mix towards more profitable unit-linked and protection business in France and Italy and favourable foreign exchange movements, partly offset by lower volumes of with-profits business in France and the sale of Antarius. Asia benefitted from higher volumes of business in Singapore and China driven by sales growth in agency and broker channels and favourable foreign exchange movements.

The life new business written during the year has increased the Solvency II Capital Requirement by £0.8 billion (2016: £0.7 billion), split £0.4 billion (2016: £0.4 billion) for United Kingdom, £0.3 billion (2016: £0.3 billion) for Europe and £0.1 billion (2016: £nil) for Asia & Other business. This has resulted in a reduction in Solvency II Surplus from life new business of £0.1 billion (2016: £0.2 billion), split £0.1 billion (2016: £0.1 billion) for United Kingdom, £nil (2016: £0.1 billion) for Europe and £nil (2016: £nil) for Asia & Other business.

Solvency II Surplus impact of new business is set out in section 2.iii Life business Solvency II Operating Capital Generation impact of new business.

Page 10

5 - General insurance combined operating ratio (COR)¹

	Net earned premiums		Claims ratio³		Commission and expense ratio⁴		Combined operating ratio⁵
	2017 £m	2016 £m	2017 %	2016 %	2017 %	2016 %	2017 %	2016 %
United Kingdom^2,6	4,015	3,821	61.0	73.8	32.9	32.5	93.9	106.3
Canada	2,944	2,420	72.2	63.5	30.0	29.5	102.2	93.0
Europe⁶	2,001	1,747	63.1	66.0	30.2	29.1	93.3	95.1
Asia⁷	16	12	85.9	72.0	37.3	37.9	123.2	109.9
Total²	8,976	8,000	65.3	69.2	31.3	30.9	96.6	100.1

1 COR is now reported on an earned basis. Comparatives have been realigned to reflect this change.

2 2016 excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL). 2016 includes the impact of the change in the Ogden discount rate which had an impact of 5.9pp.

3 Claims ratio: incurred claims expressed as a percentage of net earned premiums.

4 Commission and expense ratio: earned commissions and expenses expressed as a percentage of net earned premiums.

5 Combined operating ratio: aggregate of claims ratio and commission and expense ratio.

7 Includes Aviva Re net earned premiums.

Group COR for the period was 96.6% (2016: 100.1%).Excluding the one-off impact of the Ogden discount rate change (5.9pp) in 2016, COR has deteriorated by 2.4pp.

The claims ratio (excluding the impact of the Ogden discount rate change) increased by 2.0pp, mainly driven by Canada, where the significantly favourable prior year reserve releases seen in previous years, arising from better than anticipated results following the 2010 Ontario reforms, were not repeated. 2017 was also impacted by an increase in claims severity and frequency on all lines in Canada.

The commission and expense ratio has increased by 0.4pp due to changes in business mix following new partnerships in the UK and the consolidation of the Polish joint venture in Europe.

We continue to apply our reserving policy consistently and to focus on understanding the cost of claims to ensure that reserves are maintained at an appropriate level. Prior year reserve movements will vary year to year but our business is predominantly short tail in nature and the loss development experience is generally stable. In 2017, prior year reserve releases in our general insurance business of £27 million (2016: £241 million) had a favourable impact of 0.3pp (2016: 2.9pp) on our Group result. The impact of Ogden on our 2017 results is not material.

Normalised accident year combined operating ratio (COR)

The normalised accident year claims ratio and normalised accident year combined operating ratio represent the claims ratio and combined operating ratio adjusted to exclude the impact of the change in the Ogden discount rate, prior year claims development⁴ and weather variations versus expectations⁵, gross of the impact of profit sharing arrangements.

Group normalised accident year COR improved by 0.2pp driven by a decrease in the claims ratio in the UK and Europe as a result of our focus on disciplined pricing and underwriting, as well as claims and indemnity management, offset by higher claims frequency and severity on all lines in Canada.

	UK^1,2		Canada		Europe²		Total
	2017 %	2016 %	2017 %	2016 %	2017 %	2016 %	2017 %	2016 %
Normalised accident year claims ratio³	64.0	65.7	70.7	68.2	63.9	68.6	66.5	67.1
Impact of change in Ogden discount rate	-	12.4	-	-	-	-	-	5.9
Prior year reserve release⁴	(1.0)	(2.2)	1.3	(5.4)	(0.9)	(2.3)	(0.3)	(2.9)
Weather over/(under) long-term average⁵	(2.0)	(2.1)	0.2	0.7	0.1	(0.3)	(0.9)	(0.9)
Claims ratio	61.0	73.8	72.2	63.5	63.1	66.0	65.3	69.2
Commission and expense ratio⁶	32.9	32.5	30.0	29.5	30.2	29.1	31.3	30.9
Normalised accident year combined operating ratio³	96.9	98.2	100.7	97.7	94.1	97.7	97.8	98.0
Combined operating ratio	93.9	106.3	102.2	93.0	93.3	95.1	96.6	100.1

1 2016 excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

3 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

4 Prior year reserve release represents the changes in the ultimate cost of the claims incurred in prior years, gross of the impact of profit sharing arrangements.

5 Weather over/(under) long-term average represents the difference between the reported net incurred cost of general insurance claims that have occurred as a result of weather events and the equivalent long-term average expected net costs, gross of the impact of profit sharing arrangements.

6 Commission and expense ratio includes the impact of profit sharing arrangements.

The definition of COR has been changed to an earned basis. It was previously calculated on a hybrid basis: the claims ratio was on an earned basis with the incurred claims expressed as a percentage of net earned premiums; while the commission and expense ratio was on a written basis with written commissions and written expenses expressed as a percentage of net written premiums. This did not consider the impact of deferred commissions and expenses, which are included in the underwriting result. The new method is calculated as claims incurred, earned commission and earned expenses as a percentage of net earned premiums which aligns better to our underwriting result. Comparatives have been realigned for 2016 on an earned basis.

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6.i - United Kingdom

	2017 £m	2016 £m	Sterling % change
Operating profit^1,2
Life	1,758	1,523	15%
General Insurance³	408	392	4%
Health⁴	35	31	13%
	2,201	1,946	13%
Cash remitted to Group^3,4
Life	1,366	1,096	25%
General Insurance and Health	434	91	377%
	1,800	1,187	52%
Expenses
Operating expenses	1,493	1,408	6%
Integration and restructuring costs	76	134	(43)%
	1,569	1,542	2%
Value of new business: Adjusted SII basis	527	429	23%
Combined operating ratio	93.9%	106.3%	(12.4)pp
Combined operating ratio excluding impact of change in Ogden discount rate^1,3		93.9%

General insurance net written premiums²	4,078	3,930	4%

1 2016 excludes the impact of the change in the Ogden discount rate of £475 million, which was recognised as an exceptional adjusting item.

2 2016 excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

3 2017 includes £335 million of cash received from the Group's internal reinsurance vehicle. 2017 general insurance cash remittances include amounts of £337 million received from UK General Insurance in February 2018 in respect of 2017 activity.

4 Cash remitted to Group is managed at legal entity level. As Ireland constitutes a branch of the United Kingdom business, cash remittances from Ireland were not aligned to the new management structure within Europe, but they were reported within United Kingdom.

Overview

UK Insurance (UKI) was created in 2017 by bringing our UK life, health and general insurance businesses together under a common leadership team to unlock the potential of our unique position as a large scale composite. The business delivered an increase of 13% in operating profit to £2,201 million (2016: £1,946 million), demonstrating the value of our market leading franchise.

The Friends Life Part VII transfer was completed on 1 October 2017, delivering further capital benefits. Cash remittances of £1,800 million included special cash remittances of £500 million which arose from the Friends Life integration, taking the total paid to date to £750 million. We expect further payments in 2018 towards the £1 billion target.

Operating and financial performance

Operating profit

			2017 £m			2016 £m
Operating Profit	New Business¹	Existing Business	Total £m	New Business¹	Existing Business	Total £m	Sterling % change
Long-term savings²	(74)	259	185	(77)	219	142	30%
Annuities & equity release	335	390	725	305	351	656	11%
Protection	130	97	227	118	124	242	(6)%
Legacy³	-	331	331	-	332	332	-
Other⁴	-	290	290	-	151	151	92%
Life	391	1,367	1,758	346	1,177	1,523	15%
Underwriting result			246			232	6%
Longer-term investment return			163			162	1%
Other⁶			(1)			(2)	50%
General Insurance⁵			408			392	4%
Health			35			31	13%
Total Operating Profit			2,201			1,946	13%

1 New business represents the income earned on new business written during the period reflecting premiums less initial reserves and initial expenses (including commission) less deferred costs along with any changes to existing contracts, which were not anticipated at the outset of the contract that generate additional shareholder risk.

2 Includes pensions and the savings Platforms.

3 Legacy represents products no longer actively marketed, including With-Profits and Bonds.

4 Other Life represents changes in assumptions and modelling, non-recurring items, and non-product specific items.

5 2016 excludes the impact of the change in the Ogden discount rate of £475 million, which has been recognised as an exceptional adjusting item.

6 Other General Insurance includes unwind of discount and pension scheme net finance costs.

UK Life operating profit increased by 15% to £1,758 million (2016: £1,523 million) driven by a 13% improvement in new business profits, continued growth of the long-term savings franchise, further optimisation of the annuity asset mix and an increase in the benefit arising from our annual assumptions review, including longevity.

UK General insurance operating profit increased by 4% to £408 million (2016: £392 million) due to an improvement in the underwriting result, reflecting broad-based organic premium growth of 4% and a continued focus on improving our core underwriting competencies.

UK Health operating profit increased 13% to £35 million (2016: £31 million).

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6.i - United Kingdom continued

Long-term savings

Long-term savings operating profit increased 30% to £185 million (2016: £142 million). The increase compared to 2016 is driven by assets under management (AUM)¹ increasing to £118 billion (2016: £105 billion) due to positive net flows and favourable market movements, whilst maintaining a stable in-force profit margin and strict management of acquisition costs despite increases in new business sales. Net fund flows¹ increased to £5.6 billion (2016: £2.9 billion) due to mandate wins in workplace pensions together with a sharp increase in net flows into the advisor platform, where AUM increased by 56% to £20 billion.

Annuities and Equity Release

Annuities and equity release operating profit increased 11% to £725 million (2016: £656 million). PVNBP increased by 58% to £4,287 million (2016: £2,711 million) with an increase in bulk annuities to £2,045 million (2016: £620 million). The profit impact of this was partly offset by a reduction in new business margins due to a change in product mix, with a shift towards bulks along with a change in asset mix. In addition, we have continued to optimise our asset mix by increasing the proportion of illiquid assets backing the in-force portfolio resulting in a £86 million benefit for existing business (2016: £50 million).

Protection

Protection operating profit decreased 6% to £227 million (2016: £242 million) with an increase in new business due to growth in individual protection sales, offset by a fall in existing business profits due to unfavourable claims experience in group protection.

Legacy

Legacy operating profit of £331 million was flat year on year (2016: £332 million). AUM in the legacy portfolio remained stable, with positive investment markets partially offsetting net fund outflows as policies matured. We continue to expect operating profit from the legacy business to decline by approximately 10% per annum over the medium term.

Other

Other of £290 million mainly relates to assumption changes. We recognised benefits from changes in longevity assumptions, including the impact of completing our review of the allowance for anti-selection risk of £170 million, updates reflecting our recent experience of £200 million and updates to the rate of historic and future mortality improvements, including the adoption of CMI 2016, of £340 million. These were partly offset by the impact of strengthening maintenance expense reserves by £89 million from harmonising the UK expense basis following the Friends Life Part VII transfer in 2017, recognition of future project cost reserves of £125 million and a £75 million product governance provision along with various other reserve and modelling impacts totaling £131 million. Other of £151 million in 2016 mainly related to longevity assumption change benefits partially offset by capital optimisation activity and other movements.

General insurance

The underwriting result increased by 6% to £246 million (2016: £232 million), our best underwriting result since 2006, with improvement in the underlying underwriting performance and broad based organic premium growth of 4%, partly offset overall by lower prior year reserve releases, with weather costs broadly flat.

Longer-term investment return (LTIR) increased by £1 million to £163 million (2016: £162 million), with the reduction in the internal loan return (net neutral to Group), offset by improved investment levels. Excluding the internal loan impact, the UK general insurance operating profit was up by 7%.

Cash

Cash remitted to Group was £1,800 million (2016: £1,187 million) including an additional £500 million (2016: £250 million) of Friends Life integration remittance taking instalments to date to £750 million of the target of £1 billion.

Excluding the integration remittances, UK Life remittances increased by 2% to £866 million (2016: £846 million).

UK general insurance cash remitted increased to £434 million (2016: £91 million), due to cash being used to fund an increase in the internal reinsurance arrangement in 2016.

Expenses

Operating expenses increased by 6% to £1,493 million (2016: £1,408 million), as we invested in growth and simplification initiatives in the second half of 2017, and incurred the cost of increased general insurance levies. Excluding these initiatives and levie, UKI Operating expenses were broadly flat, reflecting tight control of the direct expense base as we absorb growth.

Integration and restructuring expenses reduced by 43% to £76 million (2016: £134 million) due to lower integration spend on the Friends Life acquisition.

1 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

Page 13

6.i - United Kingdom continued

Value of new business: Adjusted SII Basis (VNB)

	2017 £m	2016 £m	Sterling % change
UK Life
Long term savings	153	108	42%
Annuities and equity release	157	141	11%
Protection	183	151	21%
Health and Other	34	29	17%
Total	527	429	23%

VNB increased by 23% to £527 million (2016: £429 million) with growth across all segments.

Long-term savings VNB increased to £153 million (2016: £108 million), driven by continued growth from the savings platform, and new workplace pension schemes.

Annuities and equity release VNB increased to £157 million (2016: £141 million). Annuities were impacted by a change in product and asset mix, offset by a £96 million benefit to VNB following a clarification of the Solvency II rules.

Protection VNB increased to £183 million (2016: £151 million), benefitting from growth in both individual and group protection new business volumes as we see the continued benefit of our digital platform and composite model.

Health and other VNB increased by 17% to £34 million (2016: £29 million), due to increased volumes in our health business.

Net written premiums and combined operating ratio (COR)

	Net written premiums			Combined operating ratio²
United Kingdom General insurance¹	2017 £m	2016 £m	Sterling % change	2017 %	2016 %	Change
Personal Motor	1,142	1,076	6%
Personal Non-Motor	1,359	1,332	2%
UK Personal Lines	2,501	2,408	4%	92.0%	92.5%	(0.5)pp

Commercial Motor	514	538	(4)%
Commercial Non-Motor	1,063	984	8%
UK Commercial Lines	1,577	1,522	4%	96.7%	96.1%	0.6pp
UK General Insurance excluding impact of change in Ogden discount rate	4,078	3,930	4%	93.9%	93.9%	-
Impact of change in Ogden discount rate					12.4%
Total	4,078	3,930	4%	93.9%	106.3%	(12.4)pp

1 2016 excludes the one-off impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

2 The Combined operating ratio is now reported on an earned basis. Comparative have been realigned to reflect this change. See note 5 for details.

General insurance net written premiums

UK general insurance net written premiums increased by 4%, reflecting growth in our chosen channels and products including Digital Motor and Commercial Non-Motor. A new partnership with HSBC UK was launched in 2017, with growth expected in 2018 and 2019.

UK Personal Motor increased by 6%, particularly in Digital which grew by 17% from both volume and rate increases. Our pricing increases were broadly in line with the market in response to increased claims inflation, including the Ogden rate change, and an insurance premium tax (IPT) increase. UK Personal Non-Motor grew by 2%.

UK Commercial lines was up by 4%, reflecting continued growth in Commercial Non-Motor, partly offset by remediation in underperforming segments of Commercial Motor. This segment includes an 8% growth in Global Corporate Specialty (GCS).

General insurance combined operating ratio (COR)

UK general insurance COR of 93.9% was stable year on year (excluding the one-off 2016 impact of the change in the Ogden discount rate), reflecting further improvement in the underlying underwriting performance and premium growth, offset by lower levels of prior year reserve releases, with weather experience broadly flat. The commission and expense ratio was slightly higher as a result of the change in business mix, including the impact from new partnerships.

UK Personal Lines COR improved by 0.5 percentage points to 92.0%, as a result of growth in Digital and a combination of rate hardening and higher levels of switching which has allowed us to improve our risk mix.

UK Commercial Lines COR was 0.6 percentage points higher at 96.7%, reflecting an improvement in underlying performance offset by lower levels of prior year reserve releases.

Page 14

6.ii - International

(a) Canada

	2017 £m	2016 £m	Sterling % change	Constant currency % change
General Insurance operating profit	46	269	(83)%	(84)%
Cash remitted to Group	55	130	(58)%	(56)%
Expenses
Operating expenses	478	396	21%	13%
Integration and restructuring costs	15	18	(17)%	(22)%
	493	414	19%	11%
Combined operating ratio¹	102.2%	93.0%	9.2pp	9.2pp
Net written premiums	3,028	2,453	23%	15%

1 The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

2017 overview

During 2017 we experienced a number of challenges in the Canadian market which have impacted on performance. These challenges include unfavourable changes in claims patterns affecting prior year reserve development across the industry and a second successive year of weather claims being adverse to the long-term average. However, we have grown net written premium by 15% with the results including a full twelve months of RBC General Insurance that we acquired in June 2016. The integration of RBC General Insurance progressed well, with the completion of a major new system implementation in 2017.

All percentage movements below are quoted in constant currency unless otherwise stated.

Operating and financial performance

Operating profit

	2017 £m	2016 £m	Sterling % change	Constant currency % change
Underwriting result	(64)	168	(138)%	(135)%
Longer-term investment return	115	105	10%	3%
Other¹	(5)	(4)	(25)%	(24)%
Total	46	269	(83)%	(84)%

1 Includes unwind of discount and pension scheme net finance costs

In 2017, operating profit decreased by 84%. The lower underwriting result was mainly driven by unfavourable prior year development, which deteriorated from £130 million favourable to £37 million unfavourable. Personal motor saw the biggest movement in prior year development as the reserve releases arising from better than anticipated results following the 2010 Ontario reform were not repeated. A number of new claim applications from prior accident years were also received in 2017. Within our commercial lines business, large losses were higher and we experienced a deterioration in our healthcare and commercial auto performance.

It was also an active year for weather events with weather exceeding the long-term average following numerous storms and the wildfires in British Columbia.

The longer-term investment result increased due to the contribution from the RBC General Insurance acquisition.

Cash

Cash remittances during the period decreased to £55 million (2016: £130 million) due to lower operating profit.

Expenses

Operating expenses increased to £478 million (2016: £396 million) mainly due to including a full twelve months of RBC General Insurance. Integration and restructuring costs relating to the RBC General Insurance acquisition were down 22%.

Net written premiums

	Net written premiums				Combined operating ratio¹
	2017 £m	2016 £m	Sterling % change	Constant currency %	2017 %	2016 %	Change
Personal Lines	2,171	1,680	29%	21%	102.5%	93.4%	9.1pp
Commercial Lines	857	773	11%	3%	101.2%	92.2%	9.0pp
Total	3,028	2,453	23%	15%	102.2%	93.0%	9.2pp

1 The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

Net written premiums

Net written premiums were £3,028 million (2016: £2,453 million), up by 15%, primarily due to including a full twelve months of RBC General Insurance in 2017. Excluding RBC General Insurance, net written premiums increased by 5% with strong growth in both personal and commercial lines.

Combined operating ratio

The combined operating ratio (COR) was 102.2% (2016: 93.0%). Excluding prior year development and adverse weather experience, the COR was 3.0pp higher due to increased claims frequency and severity. The commission and expense ratio was slightly higher, as a result of the shift in business mix following the RBC acquisition and an increase in insurance premium tax, partially offset by lower general and administrative expenses.

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6.ii - International continued

(b) Europe¹

	2017 £m	2016² £m	Sterling % change	Constant currency % change
Operating profit
Life	873	876	-	(7)%
General insurance & health	223	168	33%	23%
	1,096	1,044	5%	(2)%

Cash remitted to Group²	485	449	8%	1%
Expenses
Operating expenses	820	765	7%	-
Integration and restructuring costs	36	9	300%	263%
	856	774	11%	3%

Value of new business: Adjusted SII basis	533	429	24%	17%
Combined operating ratio^3,4	93.3%	95.1%	(1.8)pp	(1.8)pp
Net written premiums³	2,018	1,816	11%	4%

1 Our European business includes life and general insurance business written in France, Poland and Italy, life business in Ireland, Spain and Turkey and health business in France.

2 Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated. This realignment was not implemented for cash remitted to Group, as this metric is managed at legal entity level and Ireland constitutes a branch of the United Kingdom business.

3 General insurance business only.

4 The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

2017 overview

In line with our strategy of allocating capital where we can deliver higher returns, our European businesses announced three disposals in the period. In France, we completed the sale of Antarius in April 2017, to Sogecap, a subsidiary of Société Générale. In Spain, we completed the sale of our 50% shareholding in our life insurance and pension joint ventures Unicorp Vida and Caja España Vida, as well as our retail life insurance business Aviva Vida y Pensiones to Santalucía. In Italy, we announced the termination of our distribution agreement with Banco Popolare. In 2017, we also announced our agreement to acquire Friends First Life Assurance Company in Ireland.

Total operating profit is down by 2% in constant currency compared to 2016; however, our continuing businesses have delivered an increase in operating profit, demonstrating the strength of our focussed approach.

All percentage movements below are quoted in constant currency unless otherwise stated.

Operating and financial performance

Operating profit

				Life	General insurance & health
	2017 £m	2016 £m	Sterling % change	Constant currency %	2017 £m	2016 £m	Sterling % change	Constant currency % change
France (excluding Antarius)	403	351	15%	8%	104	70	49%	37%
Poland¹	156	132	18%	8%	21	8	163%	146%
Italy	168	170	(1)%	(8)%	45	42	7%	(1)%
Ireland	33	32	3%	(3)%	53	48	10%	3%
Other Europe (excluding Unicorp, Caja España and Aviva Vida)²	40	34	18%	16%	-	-	-	-
Total (excluding Antarius and Unicorp, Caja España and Aviva Vida)	800	719	11%	4%	223	168	33%	23%
Antarius³	22	78	(72)%	(74)%	-	-	-	-
Unicorp, Caja España and Aviva Vida⁴	51	79	(35)%	(40)%	-	-	-	-
Total⁵	873	876	-	(7)%	223	168	33%	23%

1 Poland operating profit benefits from an additional £15 million due to consolidating our joint ventures with the Bank Zachodni WBK SA for the first time in 2017.

2 Includes Spain and Turkey

3 In April 2017, Aviva sold its 50% shareholding in Antarius. The Antarius figures shown represent a full year for 2016 and up to completion of the disposal in 2017.

4 In September 2017, Aviva sold its 50% shareholdings in life insurance and pension joint ventures Unicorp Vida and Caja España Vida, as well as its retail life insurance business Aviva Vida y Pensiones. The related figures shown represent a full year for 2016 and up to completion of the disposal in 2017.

5 Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

Life operating profit was down by 7% to £873 million (2016: £876 million) which reflects the impact of disposals during the year. Excluding disposals life operating profit was up by 4%. In France, operating profit excluding Antarius was £403 million (2016: £351 million), an increase of 8% due to growth in protection and unit-linked products, and higher unit-linked fee income mainly due to favourable equity market movements. In Poland, operating profit of £156 million (2016: £132 million) increased by 8% as a result of favourable equity market movements on pension assets, an increase in fee income and the benefit of consolidating the joint venture with Bank Zachodni WBK SA for the first time in 2017. In Italy, operating profit of £168 million (2016: £170 million) was down 8%, due to the strain of writing high new business volumes of capital-light unit-linked hybrid products. Life operating profit in Ireland of £33 million (2016: £32 million) was down 3%, supported by favourable assumption changes in line with prior year but offset by a slight decrease in profitability due to a change in business mix.

Page 16

6.ii - International continued

General insurance operating profit increased by 23% to £223 million (2016: £168 million). This was mainly driven by France operating profit increasing to £104 million (2016: £70 million), with lower large loss experience and growth in the direct business. In Poland, operating profit increased to £21 million (2016: £8 million) mainly due to increased rate and lower claims frequency on the motor book and the impact of consolidating the joint venture. Operating profit in Ireland of £53 million (2016: £48 million) was up by 3%. Excluding the disposal of Ireland Health, which was disposed in 2016, Ireland operating profit was up by 23%, driven primarily by growth in our direct business, robust fraud management and strong rate increases.

Cash

Cash remitted to the Group was £485 million (2016: £449 million) a 1% increase due mainly to an increased dividend in France, partly offset by a reduction in cash remitted in Spain, following the disposals.

Expenses

Operating expenses of £820 million (2016: £765 million) were flat. This includes a decrease due to the disposal of Ireland Health in 2016, offset by the consolidation of the Polish joint ventures and investment in growth in our continuing businesses.

Integration and restructuring costs of £36 million (2016: £9 million) were up, driven by restructuring spend incurred mainly in France.

Value of new business: Adjusted SII basis (VNB)

	2017 £m	2016 £m	Sterling % change	Constant currency % change
France (excluding Antarius)	216	189	14%	7%
Poland	57	54	5%	(4)%
Italy	179	83	116%	102%
Ireland	11	12	(3)%	(9)%
Other Europe (excluding Unicorp, Caja España and Aviva Vida)¹	30	26	12%	23%
Total (excluding Antarius, Unicorp, Caja España and Aviva Vida)	493	364	35%	27%
Antarius²	12	36	(67)%	(69)%
Unicorp, Caja España and Aviva Vida³	28	29	(5)%	(11)%
Total⁴	533	429	24%	17%

1 Includes Spain and Turkey.

2 In April 2017, Aviva sold its 50% shareholding in Antarius. The Antarius figures shown represent a full year for 2016 and up to completion of the disposal in 2017.

3 In September 2017, Aviva sold its 50% shareholdings in life insurance and pension joint ventures Unicorp Vida and Caja España Vida, as well as its retail life insurance business Aviva Vida y Pensiones. The related figures shown represent a full year for 2016 and up to completion of the disposal in 2017.

4 Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

VNB increased by 17%, and by 27% excluding disposed businesses, with a strong performance in Italy as a result of higher unit-linked and hybrid product volumes and an improved margin on with-profits products. VNB in France increased due to higher unit-linked and protection volumes, partly offset by lower volumes of with-profits products. Poland saw a 4% decrease, reflecting a market-wide reduction in unit-linked volumes. In Ireland, VNB was down 9% as a result of a very competitive annuity market reducing new business profitability.

Net written premium (NWP) and combined operating ratio (COR)

	Net written premiums¹				Combined operating ratio^1,2
	2017 £m	2016 £m	Sterling % change	Constant currency %	2017 %	2016 %	Change
France	1,053	957	10%	3%	94.5%	97.0%	(2.5)pp
Poland³	117	86	36%	25%	86.7%	97.8%	(11.1)pp
Italy	412	395	4%	(3)%	94.2%	92.5%	1.7pp
Ireland	436	378	15%	8%	91.4%	92.4%	(1.0)pp
Total⁴	2,018	1,816	11%	4%	93.3%	95.1%	(1.8)pp

1 General insurance business only

2 The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

3 Poland net written premium and combined operating ratio excludes the joint venture in 2016 but has been consolidated for the first time in 2017.

Net written premiums

General insurance net written premiums of £2,018 million increased by 4% with growth in all our markets except Italy. In France and Ireland, general insurance NWP grew, primarily reflecting rating actions and strong growth in our direct business. In Poland, NWP increased by 25% to £117 million (2016: £86 million) with benefits from the consolidation of the joint venture partly offset by a reduction in motor volumes as part of underwriting actions taken. In Italy net written premiums decreased by 3% to £412 million (2016: £395 million) due to underwriting actions taken on segments of the motor book.

Combined operating ratio

The European COR has improved by 1.8pp primarily due to France's COR reducing by 2.5pp to 94.5% due to lower large losses and improved claims experience. Our claims ratio has decreased by 2.9pp to 63.1 % (2016: 66.0%) with an improvement across all markets except Italy. Most notably in Poland the claims ratio has improved due to underwriting action taken on motor business and the consolidation of the joint venture. The commission and expense ratio has increased due to a change in business mix, following the joint venture consolidation in Poland.

Page 17

6.iii - Asia

	2017 £m	2016 £m	Sterling % change	Constant currency % change
Operating profit
Life	235	241	(2)%	(4)%
General insurance & health	(8)	(13)	38%	42%
	227	228	-	(2)%
Expenses
Operating expenses	207	177	17%	13%
Integration and restructuring costs	-	17	-	-
	207	194	7%	4%
Value of new business: Adjusted SII basis	162	106	53%	47%
Combined operating ratio^1,2	123.2%	109.9%	13.3pp	13.3pp
Net written premiums¹	13	11	18%	9%

1 General insurance business only.

2 The Combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

2017 overview

Investment in Asia's distribution channels and digital and analytic capabilities continued throughout 2017. Singapore grew its core distribution platform, Aviva Financial Advisers, while China expanded its agency and broker channels. In January, we announced a new joint venture with Hillhouse Capital and Tencent Holdings Limited which focuses on digital insurance in Hong Kong.

We continue to reallocate capital to focus and strengthen our footprint in Asia. In July, we announced the disposal of Friends Provident International Limited (FPI) followed by the sale of our 49% stake in our joint venture in Taiwan in October. Meanwhile, we acquired the remaining 50% shareholding from VietinBank in April and we launched Aviva Vietnam in August.

All percentage movements below are quoted in constant currency unless otherwise stated.

Operating and financial performance

Operating profit

	2017 £m	2016 £m	Sterling % change	Constant currency % change
Life operating profit
Singapore	118	112	5%	-
Other Asia (excluding FPI)	(2)	(11)	82%	91%
Total (excluding FPI)	116	101	15%	10%
FPI¹	119	140	(15)%	(15)%
Total	235	241	(2)%	(4)%
General insurance & health operating profit	(8)	(13)	38%	42%
Total operating profit	227	228	-	(2)%

1 In July 2017, Aviva announced the sale of Friends Provident International Limited ('FPI'). The subsidiary has been classified as held for sale from July 2017, when management were committed to a plan to sell the business.

Operating profit from our life and general insurance and health businesses remained broadly flat at £227 million (2016: £228 million). Excluding FPI, life operating profit increased by 10% to £116 million (2016: £101 million) driven by higher profit generated from existing business in China, coupled with new business growth in Singapore from its financial advisory channel which was partially offset by our continued investments in digital and analytics capabilities.

The general insurance and health business reported a £8 million loss (2016: £13 million loss) as a result of higher claims experience from our health business in Singapore partly offset by an input tax refund from the local authority.

Cash

No dividends were remitted to Group during the year (2016: £nil) as we continue to reallocate capital to support growth in the region.

Expenses

Operating expenses were up by 13% to £207 million (2016: £177 million) reflecting the additional half year of expenses from Vietnam, higher distribution costs to support volume growth in Singapore and investment in digital and analytics capabilities.

Value of new business: Adjusted SII basis (VNB)

	2017 £m	2016 £m	Sterling % change¹	Constant currency % change
Singapore	123	95	29%	24%
Other Asia	45	7	543%	463%
Total (excluding FPI)	168	102	65%	57%
FPI¹	(6)	4	(250)%	(248)%
Total	162	106	53%	47%

VNB increased by 47% to £162 million (2016: £106 million) reflecting higher volumes from Singapore's financial advisory channel. In China, VNB increased to £45 million (2016: £19 million) driven by sales growth in agency and broker channels and higher interest rates.

General insurance combined operating ratio (COR)

Net written premiums were £13 million (2016: £11 million). The combined operating ratio deteriorated by 13.3pp to 123.2% (2016: 109.9%) due to unfavourable claims experience and the continued softening of market premium rates for motor insurance in Singapore.

Page 18

6.iv - Aviva Investors

	2017 £m	2016 £m	Sterling % change
Revenue: Fee income	577	506	14%
Expenses
Operating expenses	409	367	11%
Integration and restructuring costs	3	19	(84)%
	412	386	7%
Operating profit
Fund management	168	139	21%
Other operations	32	19	68%
	200	158	27%
Cash remitted to Group	58	39	49%

2017 overview

We have made progress in externalising the business and developing higher value outcome-oriented propositions for our clients. We currently invest more than £353 billion of assets under management (AUM) providing the size and scale to successfully seek out opportunities across multi-asset, fixed income, equity, real estate and alternative investments to deliver specific investor outcomes.

Operating and financial performance

Revenue

Revenue has increased by 14% to £577 million due to the full year impact of on-boarding £14 billion of Friends Life assets in 2016, a 40% growth in the Aviva Investors Multi-Strategy (AIMS) AUM to £12.6 billion (2016: £9.0 billion) and a 24% increase in the origination of infrastructure assets to £4.1 billion (2016: £3.3 billion). The share of revenue from external clients increased to 34% (2016: 32%).

Expenses

Operating expenses increased to £409 million (2016: £367 million). Cost increases have been controlled and reflect the investment required to support the growth of the business. Integration and restructuring costs were £3 million (2016: £19 million).

Operating profit

Fund management operating profit increased by 21% to £168 million (2016: £139 million) driven by growth in revenue, with operating expenses increasing at a slower rate. This led to a 2pp improvement in the operating profit margin, calculated as fund management operating profit expressed as a percentage of revenue, to 29% (2016: 27%).

Operating profit from other operations of £32 million related to insurance recoveries (2016: £19 million, of which £16 million was from the Group's internal reinsurer).

Cash

Cash remitted to Group increased by 49% to £58 million (2016: £39 million) due to growth in the profitability of the business.

Net flows and assets under management

AUM represents all assets managed by Aviva Investors. These comprise Aviva (internal) assets which are included within the Group's statement of financial position and those belonging to external clients outside the Aviva Group which are therefore not included in the Group's statement of financial position. These assets under management exclude those funds that are managed by third parties.

Internal legacy are assets managed by Aviva Investors on behalf of internal Aviva Clients relating to products that are no longer actively marketed.

	Internal Legacy £m	Internal Core £m	External £m	Total £m
Aviva Investors
Assets under management¹ at 1 January 2017	97,290	190,667	56,561	344,518
Total Inflows	3,879	27,774	11,537	43,190
Total Outflows	(10,101)	(21,097)	(10,356)	(41,554)
Net Flows	(6,222)	6,677	1,181	1,636
Net Flows into Liquidity Funds	(732)	403	2,214	1,885
Retention of external mandate²	-	(13,414)	13,414	-
Disposals³	-	-	(714)	(714)
Market and foreign exchange movements	603	3,209	2,090	5,902
Assets under management at 31 December 2017	90,939	187,542	74,746	353,227

1 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

2 Retention of assets under management following sale of Antarius, resulting in a switch from Internal to External.

3 Disposal of Real Estate fund in February 2017.

Assets under management increased to £353.2 billion (2016: £344.5 billion) due to a combination of net fund inflows of £1.6 billion, favourable foreign exchange rate movements of £3.3 billion, favourable liquidity movements of £1.9 billion and the effect of market movements of £2.6 billion offset by the disposal of the Real Estate fund of £0.7 billion. As at 31 December 2017, £12.6 billion (2016: £9.0 billion) of funds under management were invested within our flagship AIMS fund range.

Page 19

7.i - Life business profit drivers

Life business operating profit before shareholder tax increased by 9% to £2,882 million (2016: £2,642 million), up 6% on a constant currency basis.

Overall, total income increased by 2% to £4,714 million (2016: £4,645 million) and total expenses increased by 8% to £2,260 million (2016: £2,096 million). This increase in net income was partly offset by a higher benefit from DAC and other items, driven by changes in actuarial assumptions in the UK, to give a total increase in life operating profit of £240 million for the year. The increase also reflects a positive foreign exchange impact of £64 million largely driven by the strengthening of the euro against sterling.

	United Kingdom¹		Europe¹		Asia⁹		Total
	2017 £m	2016 £m	2017 £m	2016 £m	2017 £m	2016 £m	2017 £m	2016 £m
New business income^2,10	868	777	335	291	252	184	1,455	1,252
Underwriting margin^3,10	280	310	215	239	85	76	580	625
Investment return⁴	1,281	1,316	1,171	1,170	227	282	2,679	2,768
Total Income	2,429	2,403	1,721	1,700	564	542	4,714	4,645
Acquisition expenses⁵	(431)	(383)	(326)	(287)	(191)	(158)	(948)	(828)
Administration expenses⁶	(655)	(616)	(558)	(556)	(99)	(96)	(1,312)	(1,268)
Total Expenses	(1,086)	(999)	(884)	(843)	(290)	(254)	(2,260)	(2,096)
DAC and other⁷	415	119	36	19	(39)	(47)	412	91
	1,758	1,523	873	876	235	241	2,866	2,640
Other business⁸							16	2
Total life business operating profit							2,882	2,642

2 Represents the income earned on new business written during the period reflecting premiums less initial reserves.

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

4 Represents the expected income on existing business (other than the underwriting margin). Life investment return comprises unit-linked margin, shareholders' return on participating business, spread margin and the expected return on shareholder assets.

5 Initial expenses and commission incurred in writing new business less deferred costs.

6 Expenses and renewal commissions incurred in managing existing business.

7 DAC and other mainly include the Deferred Acquisition Cost asset that is amortised in the period and included in operating profit for existing business, assumption changes and other one-off items.

8 Other business includes the total result for Aviva Investors Pooled Pensions and Aviva Life Reinsurance.

9 Following a change in the 2017 methodology applied by FPI, the deferred actuarial funding which forms part of the deferred expense for the Investment return business was included in the Unit-linked margin and not DAC and other. Comparatives have been restated for Investment return and DAC and other. The change resulted in an increase in the Investment return and a decrease in DAC and other for Asia by £123 million. Overall this change has nil effect in the Total life operating profit for Asia and the Group.

10 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

Income: New business income and underwriting margin

	United Kingdom¹			Europe¹		Asia		Total
	2017 £m	2016 £m	2017 £m	2016 £m	2017 £m	2016 £m	2017 £m	2016 £m
New business income (£m)	868	777	335	291	252	184	1,455	1,252
APE (£m)^2,3	2,893	2,373	1,327	1,319	358	270	4,578	3,962
As margin on APE (%)	30%	33%	25%	22%	70%	68%	32%	32%
Acquisition expenses (£m)	(431)	(383)	(326)	(287)	(191)	(158)	(948)	(828)
Net contribution	437	394	9	4	61	26	507	424
Underwriting margin (£m)	280	310	215	239	85	76	580	625
Analysed by:
Expenses	63	62	65	70	65	47	193	179
Mortality and longevity	217	247	157	152	21	27	395	426
Persistency	-	1	(7)	17	(1)	2	(8)	20

2 Used as a measure of life sales. It is calculated as the sum of new regular premiums plus 10% of new single premiums written in the period. APE excludes UK Retail Fund Management and Health business in UK & Ireland and Asia.

3 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

(a) New business income

New business income increased to £1,455 million (2016: £1,252 million), mainly driven by the UK, Asia and favourable foreign exchange movements of £25 million.

The net contribution from new business is the new business income less associated acquisition expenses (see (g) below). This increased to a profit of £507 million (2016: profit of £424 million).

In the UK, the net contribution from new business increased to £437 million (2016: £394 million) mainly driven by growth in the sales of individual protection business and annuities.

In Europe, the net contribution increased to £9 million (2016: £4 million) due to growth and margin improvements in Italy, consolidation of the joint venture with Bank Zachodni WBK SA for the first time in Poland offset by a reduced net contribution from France due to the disposal of the Antarius. New business margin on APE in Europe increased slightly to 25% (2016: 22%).

In Asia, the net contribution increased by 113% in constant currency terms to a profit of £61 million (2016: profit of £26 million) mainly as a result of higher sales in Singapore for with-profits business and higher sales volumes in China. New business margin on APE in Asia increased slightly to 70% (2016: 68%) due to higher acquisition expenses reflecting a change in product mix.

(b) Underwriting margin

The underwriting margin decreased to £580 million (2016: £625 million). This was driven by the UK , as the margin decreased to £280 million (2016: £310 million) mainly due to a reduction in mortality margins. In Europe, the underwriting margin decreased by 15% on a constant currency basis to a profit of £215 million (2016: £239 million) mainly due to lower persistency margins in Italy and Ireland.

In Asia, the underwriting margin increased by 7% in constant currency terms to £85 million (2016: £76 million) mainly due to adverse mortality margins in Singapore offset by favourable expense margins on non-participating annuities in China.

Page 20

7.i - Life business profit drivers continued

Income: Investment return

	United Kingdom¹			Europe¹		Asia⁷		Total
	2017 £m	2016 £m	2017 £m	2016 £m	2017 £m	2016 £m	2017 £m	2016 £m
Unit-linked margin^2,8 (£m)	847	798	585	546	202	235	1,634	1,579
As annual management charge on average reserves (bps)	73	75	138	148	213	276	97	104
Average reserves (£bn)⁶	116.8	106.7	42.3	36.8	9.5	8.5	168.6	152.0
Participating business³ (£m)	164	192	487	527	(4)	15	647	734
As bonus on average reserves (bps)	34	38	73	79	(10)	43	55	61
Average reserves (£bn)⁶	48.1	50.3	66.4	66.3	3.9	3.5	118.4	120.1
Spread margin^4,8 (£m)	271	267	6	13	12	9	289	289
As spread margin on average reserves (bps)	42	43	13	29	80	75	41	43
Average reserves (£bn)⁶	64.2	62.0	4.5	4.5	1.5	1.2	70.2	67.7
Expected return on shareholder assets⁵ (£m)	(1)	59	93	84	17	23	109	166
Total (£m)	1,281	1,316	1,171	1,170	227	282	2,679	2,768

2 Unit-linked margin represents the annual management charges on unit-linked business based on expected investment return.

3 The shareholders' share of the return on with-profit and other participating business.

4 Spread margin represents the return made on annuity and other non-linked business, based on the expected investment return less amounts credited to policyholders.

5 The expected investment return based on opening economic assumptions applied to expected surplus assets over the reporting period that are not backing policyholder liabilities.

6 An average of the insurance or investment contract liabilities over the reporting period, including managed pension business which is not consolidated within the statement of financial position.

7 Following a change in the 2017 methodology applied by FPI, the deferred actuarial funding which forms part of the deferred expense for the unit-linked business was included in the unit-linked margin and not DAC and other. Comparatives have been restated for Unit-linked margin and DAC and other. The change resulted in an increase in the unit-linked margin and a decrease in DAC and other for Asia by £123 million. Overall this change has nil effect in the Total life operating profit for Asia and the Group.

8 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

Unit-linked average reserves have increased to £169 million (2016: £152 million), with the movement largely driven by favourable market performance in the UK. The unit-linked margin increased to £1,634 million (2016: £1,579 million). The margin as a proportion of average unit-linked reserves decreased at 97 bps (2016: 104 bps).

The unit-linked margin in UK has increased mainly due to favourable market movements and growth in the sales of group pensions. The margin on average reserves has decreased to 73 bps (2016: 75 bps) due to the expected run-off in the higher margin back book and lower margins on group pensions. The unit-linked margin in Europe increased to £585 million (2016: £546 million), mainly driven by the benefit of consolidating the Polish joint venture for the first time offset by lower margin in Italy due to change in product mix. The decrease in unit-linked margin in Asia to £202 million (2016: £235 million) is mainly due to lower sales volumes in FPI.

(d) Participating business

Participating average reserves have decreased to £118 million (2016: £120 million). Income from participating business decreased to £647 million (2016: £734 million). In the UK, income has decreased mainly due to lower bonus return reflecting timing of maturities. In Europe, income has decreased to £487 million (2016: £527 million) due to lower income in France following the disposal of Antarius. The majority of participating business income is earned in France, where there is a fixed management charge of around 50 bps on the Association Française d'Epargne et de Retraite 'AFER' business, which is the largest single component of this business.

(e) Spread margin

Spread business income, which mainly relates to UK in-force immediate annuity and equity release business, remained stable at £289 million (2016: £289 million). The spread margin decreased to 41 bps (2016:43 bps) mainly due to lower interest rates in the UK. In Europe, spread income decreased to £6 million (2016: £13 million), due to the sale of the Spain life business in September 2017. In Asia, spread business income increased to £12 million (2016: £9 million) due to higher volumes on non-participating business in China.

(f) Expected return on shareholder assets

Expected returns, representing investment income on surplus funds, decreased to £109 million (2016: £166 million). This is mainly due to the impact of the capital optimisation (hedging) activity in Friends Life and the fall in interest rates in the UK, both reducing the expected return on shareholder assets in UK Life.

Page 21

7.i - Life business profit drivers continued

Expenses

	United Kingdom¹			Europe¹		Asia		Total
	2017 £m	2016 £m	2017 £m	2016 £m	2017 £m	2016 £m	2017 £m	2016 £m
Acquisition expenses (£m)	(431)	(383)	(326)	(287)	(191)	(158)	(948)	(828)
APE (£m)²	2,893	2,373	1,327	1,319	358	270	4,578	3,962
As acquisition expense ratio on APE (%)	15%	16%	25%	22%	53%	59%	21%	21%
Administration expenses (£m)	(655)	(616)	(558)	(556)	(99)	(96)	(1,312)	(1,268)
As existing business expense ratio on average reserves (bps)	29	28	49	52	66	73	37	37
Average reserves (£bn) ³	229.1	218.9	113.2	107.6	14.9	13.2	357.2	339.7

2 APE excludes UK Retail Fund Management and Health business in UK & Ireland and Asia.

3 An average of the insurance or investment contract liabilities over the reporting period, including managed pension business which is not consolidated within the statement of financial position.

(g) Acquisition expenses

Acquisition expenses increased to £948 million (2016: £828 million) primarily reflecting higher sales volumes in all segments. In the UK expenses increased to £431 million (2016: £383 million) driven by higher protection sales. In Europe acquisition expenses have increased by 8% on a constant currency basis, mainly driven by higher sales in Italy offset by the sale of Antarius in France.

In Asia acquisition expenses increased to £191 million (2016: £158 million) due to higher new business sales in China. The overall group-wide ratio of acquisition expenses to APE remained stable at 21% (2016: 21%).

(h) Administration expenses

Administration expenses increased to £1,312 million (2016: £1,268 million). The expense ratio remained stable at 37 bps (2016: 37 bps) on average reserves of £357 billion (2016: £340 billion). The increase in the UK is driven by increased investment in growth offset by continued cost control. Administration expenses in Europe have increased to £558 million (2016: £556 million) due to adverse exchange rate movements of £37 million, the consolidation of the joint venture in Poland, higher renewal commissions in Italy, driven by business mix, offset by the disposal of Antarius in France. Asia administration expenses increased slightly in constant currency terms by 1%.

The overall increase in life business acquisition and administration expenses was £164 million, with increased costs due to higher sales volumes in Italy, increased investment in growth and higher protection sales in the UK offset by lower expenses in France.

(i) DAC and other

DAC and other items increased to £412 million (2016: £91 million) mainly driven by assumption and modelling changes in the UK which benefitted from changes in longevity partially offset by strengthening of our expense assumptions and other reserve and modelling movements (refer 6.i - United Kingdom).

Page 22

7.ii - General insurance and health

2017	UK Personal £m	UK Commercial £m	Total UK¹ £m	Canada Personal £m	Canada Commercial £m	Total Canada £m	Europe¹ £m	Asia & Other² £m	Total £m
General insurance
Gross written premiums	2,567	1,788	4,355	2,209	929	3,138	2,104	13	9,610
Net written premiums	2,501	1,577	4,078	2,171	857	3,028	2,018	17	9,141
Net earned premiums	2,461	1,554	4,015	2,103	841	2,944	2,001	16	8,976
Net claims incurred	(1,457)	(992)	(2,449)	(1,583)	(543)	(2,126)	(1,262)	(19)	(5,856)
Of which claims handling costs			(149)			(119)	(59)	-	(327)
Earned commission	(647)	(324)	(971)	(372)	(178)	(550)	(390)	(1)	(1,912)
Earned expenses³	(161)	(188)	(349)	(201)	(132)	(333)	(213)	(6)	(901)
Underwriting result	196	50	246	(53)	(12)	(65)	136	(10)	307
Longer-term investment return⁴			163			115	79	3	360
Other⁵			(1)			(4)	-	-	(5)
Operating profit			408			46	215	(7)	662
Health insurance
Underwriting result			32			-	7	(5)	34
Longer-term investment return			3			-	1	-	4
Operating profit			35			-	8	(5)	38
Total operating profit			443			46	223	(12)	700
General insurance combined operating ratio
Claims ratio	59.2%	63.8%	61.0%	75.3%	64.5%	72.2%	63.1%		65.3%
Commission ratio	26.3%	20.8%	24.2%	17.7%	21.1%	18.7%	19.5%		21.3%
Expense ratio	6.5%	12.1%	8.7%	9.5%	15.6%	11.3%	10.7%		10.0%
Combined operating ratio⁶	92.0%	96.7%	93.9%	102.5%	101.2%	102.2%	93.3%		96.6%
Assets supporting general insurance and health business
Debt securities			3,020			4,273	2,592	169	10,054
Equity securities			492			247	33	-	772
Investment property			323			-	176	-	499
Cash and cash equivalents			546			140	399	30	1,115
Other⁷			1,763			252	481	2	2,498
Assets at 31 December 2017			6,144			4,912	3,681	201	14,938
Debt securities			3,718			4,349	2,535	197	10,799
Equity securities			7			235	25	-	267
Investment property			208			-	133	-	341
Cash and cash equivalents			757			115	267	23	1,162
Other⁷			1,464			256	309	3	2,032
Assets at 31 December 2016			6,154			4,955	3,269	223	14,601
Average assets			6,149			4,934	3,475	212	14,770
LTIR as % of average assets			2.7%			2.3%	2.3%	1.4%	2.5%

2 Asia & Other includes Aviva Re.

3 Earned expenses include claims handling costs and earned expenses included in general insurance COR above, plus operating expenses of other non-insurance operations.

4 LTIR includes UK £52 million (2016: £62 million) and Ireland £6 million (2016: £7 million) relating to the internal loan. This is lower than 2016 primarily as a result of the reduction in the balance of this loan during 2017.

5 Includes unwind of discount rate and pension scheme net finance costs.

6 COR is calculated as incurred claims, earned commission and earned expenses, expressed as a percentage of net earned premiums. COR is calculated using unrounded numbers so minor rounding differences may exist.

7 Includes loans and other financial investments.

Page 23

7.ii - General insurance and health continued

2016	UK Personal £m	UK Commercial £m	Total UK¹ £m	Canada Personal £m	Canada Commercial £m	Total Canada £m	Europe¹ £m	Asia & Other³ £m	Total £m
General insurance
Gross written premiums	2,476	1,743	4,219	1,711	831	2,542	1,891	12	8,664
Net written premiums²	2,408	1,522	3,930	1,680	773	2,453	1,816	12	8,211
Net earned premiums²	2,295	1,526	3,821	1,645	775	2,420	1,747	12	8,000
Net claims incurred²	(1,602)	(1,220)	(2,822)	(1,104)	(433)	(1,537)	(1,153)	(24)	(5,536)
Of which claims handling costs			(137)			(93)	(54)	-	(284)
Earned commission	(570)	(310)	(880)	(283)	(160)	(443)	(321)	-	(1,644)
Earned expenses⁴	(180)	(182)	(362)	(150)	(122)	(272)	(182)	(6)	(822)
Impact of change in Ogden discount rate excluded from underwriting result	230	245	475	-	-	-	-	-	475
Underwriting result²	173	59	232	108	60	168	91	(18)	473
Longer-term investment return⁵			162			105	69	3	339
Other⁶			(2)			(4)	-	-	(6)
Operating profit²			392			269	160	(15)	806
Health insurance
Underwriting result			28			-	7	(12)	23
Longer-term investment return			3			-	1	-	4
Operating profit			31			-	8	(12)	27
Total operating profit²			423			269	168	(27)	833
General insurance combined operating ratio²
Claims ratio²	69.8%	79.9%	73.8%	67.1%	55.9%	63.5%	66.0%		69.2%
Commission ratio	24.8%	20.3%	23.0%	17.2%	20.6%	18.3%	18.7%		20.6%
Expense ratio	7.8%	11.9%	9.5%	9.1%	15.7%	11.2%	10.4%		10.3%
Combined operating ratio⁷	102.4%	112.1%	106.3%	93.4%	92.2%	93.0%	95.1%		100.1%
Combined operating ratio, excluding the impact of change in Ogden discount rate⁷	92.5%	96.1%	93.9%	93.4%	92.2%	93.0%	95.1%		94.1%
Assets supporting general insurance and health business
Debt securities			3,718			4,349	2,535	197	10,799
Equity securities			7			235	25	-	267
Investment property			208			-	133	-	341
Cash and cash equivalents			757			115	267	23	1,162
Other⁸			1,464			256	309	3	2,032
Assets at 31 December 2016			6,154			4,955	3,269	223	14,601
Debt securities			3,993			2,999	2,407	209	9,608
Equity securities			8			188	21	-	217
Investment property			198			-	137	-	335
Cash and cash equivalents			639			107	197	26	969
Other⁸			2,559			135	313	1	3,008
Assets at 31 December 2015			7,397			3,429	3,075	236	14,137
Average assets			6,776			4,192	3,172	229	14,369
LTIR as % of average assets			2.4%			2.5%	2.2%	1.3%	2.4%

2 Excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL). See note A10 for further details.

3 Asia & Other includes Aviva Re.

4 Earned expenses include claims handling costs and earned expenses included in general insurance COR above, plus operating expenses of other non-insurance operations.

5 LTIR includes UK £62 million (2015: £100 million) and Ireland £7 million (2015: £15 million) relating to the internal loan. This is lower than 2015 primarily as a result of the reduction in the balance of this loan during 2016.

6 Includes unwind of discount rate and pension scheme net finance costs.

7 COR is calculated as incurred claims, earned commission and earned expenses, expressed as a percentage of net earned premiums. COR is calculated using unrounded numbers so minor rounding differences may exist.

8 Includes loans and other financial investments.

Page 24

7.iii - Fund flows

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

	Managed assets at 1 January 2017 £m	Premiums and deposits, net of reinsurance £m	Claims and redemptions, net of reinsurance £m	Net flows^1,2 £m	Market and other movements £m	Managed assets at 31 December 2017³ £m
Life and platform business
UK - non-profit:
- platform	12,963	7,701	(1,482)	6,219	1,056	20,238
- pensions and other long-term savings	91,589	7,225	(7,837)	(612)	6,993	97,970
- long-term savings	104,552	14,926	(9,319)	5,607	8,049	118,208
- annuities and equity release	57,316	2,777	(2,671)	106	3,375	60,797
- other	25,851	1,355	(2,717)	(1,362)	238	24,727
United Kingdom(excluding UK with-profits)	187,719	19,058	(14,707)	4,351	11,662	203,732
Europe⁴	119,831	11,000	(8,169)	2,831	(8,594)	114,068
Asia	13,456	737	(419)	318	752	14,526
Other	1,599	31	(483)	(452)	143	1,290
	322,605	30,826	(23,778)	7,048	3,963	333,616
UK - with-profits and other	61,796					58,200
Total life and platform business	384,401					391,816

1 Life business net flows in the table above are net of reinsurance.

2 For the period to 31 December 2017, net flows of £7.0 billion includes net flows of £3.4 billion that are included in the IFRS income statement within net written premiums and net paid claims.

3 Life and platform business managed assets at the balance sheet date includes financial investments, loans, investment property, externally reinsured non-participating investment contracts and cash and cash equivalents included on the IFRS statement of financial position, plus assets administered by the Group that are not included on the IFRS statement of financial position. At 31 December 2017, life and platform business managed assets of £392 billion (FY16: £384 billion) includes £374 billion (2016: £373 billion) that is on the IFRS statement of financial position.

4. Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

5. Includes platform and pensions business and externally reinsured non-participating investment contracts

United Kingdom & Ireland (excluding UK with-profits)

UK long-term savings managed assets have increased to £118 billion (2016: £105 billion) during the period. Within this, net inflows were £5.6 billion mainly reflecting continued growth from our platform businesses of £6.2 billion with administered assets increasing by 56% in the period to £20.2 billion (2016: £13.0 billion).

UK annuities and equity release inflows were £0.1 billion, including increased bulk purchase annuity volumes in 2017. Other non-profit outflows were £1.4 billion driven by net outflows in Bonds & Savings as the book continues to run off as expected. Market and other movements include favourable market movements driven by narrowing spreads and growth in equities.

Europe

Net inflows of £2.8 billion were mainly driven by sales of hybrid products in Italy. Market and other movements in Europe reflect the disposal of £11.4 billion of investment assets following the sale of Antarius in France and the disposal of the majority of our business in Spain (£4.9 billion). These disposals were partly offset by favourable foreign exchange movements of £4.5 billion and investment market movements of £3.2 billion.

Asia and other

Net inflows in Asia were £0.3 billion arising mainly in Singapore. Other business net outflows of £0.5 billion primarily relate to Aviva Investors' Pooled Pensions business.

Page 25

8.i - Summary of assets

The Group asset portfolio is invested to generate competitive investment returns for both policyholders and shareholders while remaining within the Group's appetite for market, credit and liquidity risk.

The Group has a low appetite for interest rate risk and currency risk which means that the asset portfolios are well matched by duration and currency to the liabilities they cover. The Group also runs a low level of liquidity risk which results in a high proportion of income generating assets and a preference for more liquid assets where there is the potential need to realise those assets before maturity.

The Group seeks to diversify its asset portfolio in order to reduce risk and provide more attractive risk-adjusted returns. In order to achieve this there is a comprehensive risk limit framework in place. There is an allowance for diversification in our capital model and we continue to broaden the investment portfolio in individual businesses.

Asset allocation decisions are taken at legal entity level and in many cases by fund within a legal entity in order to reflect the nature of the liabilities, customer expectations, the local accounting and regulatory treatment, and any local constraints. These asset allocation decisions are made in accordance with a group-wide framework that takes into account consensus investment views across the Group, prioritised Group objectives and metrics and Group risk limits and constraints. This framework is overseen by the Group Asset Liability Committee (ALCO) and facilitates a consistent approach to asset allocation across the business units in line with Group risk appetite and shareholder objectives.

The asset allocation as at 31 December 2017 across the Group, split according to the type of liability the assets are covering, is shown in the table below. Further information on these assets is given in the Analysis of Assets Section.

	Shareholder business assets			Participating fund assets
Carrying value in the statement of financial position	General Insurance & health & other¹ £m	Annuity and non-profit £m	Policyholder (unit-linked assets) £m	UK style with profits £m	Continental European-style Participating funds £m	Total assets analysed £m	Less assets of operation classified as held for sale £m	Carrying value in the statement of financial position £m
Debt securities
Government bonds	6,374	16,044	14,888	16,998	28,698	83,002	(541)	82,461
Corporate bonds	4,064	20,369	13,750	16,567	26,369	81,119	(586)	80,533
Other	343	1,992	2,349	1,041	6,102	11,827	(13)	11,814
	10,781	38,405	30,987	34,606	61,169	175,948	(1,140)	174,808
Loans
Mortgage loans	-	20,189	-	91	-	20,280	-	20,280
Other loans	187	4,139	8	2,516	733	7,583	(6)	7,577
	187	24,328	8	2,607	733	27,863	(6)	27,857
Equity securities	800	195	74,110	13,064	1,994	90,163	(195)	89,968
Investment property	406	169	6,256	2,357	1,609	10,797	-	10,797
Other investments	1,407	2,479	42,368	2,179	4,844	53,277	(6,971)	46,306
Total as at 31 December 2017	13,581	65,576	153,729	54,813	70,349	358,048	(8,312)	349,736
Total as at 31 December 2016	14,152	65,628	132,901	56,672	76,863	346,216	(10,829)	335,387

1 Of the £13.6 billion of assets 6% relates to other shareholder business assets.

There is an internal loan between Aviva Insurance Limited (AIL) and Aviva Group Holdings Limited (AGH) that has a net value of zero at a consolidated level.

General insurance and health

All the investment risk is borne by shareholders and the portfolio held to cover these liabilities contains a high proportion of fixed and variable income securities, of which 82% are rated A or above. The assets are relatively short duration reflecting the short average duration of the liabilities. Liquidity, interest rate and currency risks are maintained at a low level within risk appetite.

Annuity and other non-profit

All the investment risk is borne by shareholders. The annuity liabilities have a long duration but are also illiquid as customers cannot surrender their policies. The assets are chosen to provide stable income and cash flow. Currency and interest rate exposures are closely matched to the liabilities in line with risk appetite. We are able to invest part of the portfolio in less liquid assets in order to improve risk-adjusted returns given the illiquid nature of the liabilities. The asset portfolio is principally comprised of long maturity bonds and loans including a material book of commercial mortgage loans. The other non-profit business assets are a smaller proportion of this portfolio and are generally shorter in duration and have a high proportion invested in fixed income.

£13.9 billion of Shareholder loan assets are backing annuity liabilities in our UK Life business and comprise of commercial mortgage loans (£7.1 billion), Healthcare, Infrastructure and PFI mortgage loans (£3.4 billion) and Primary Healthcare, Infrastructure and PFI other loans (£3.4 billion). The Group carries a valuation allowance within the liabilities against the risk of default of commercial mortgages, including Healthcare and PFI mortgages, of £0.4 billion which equates to 40 bps at 31 December 2017 (2016: 50 bps).

Policyholder assets

These assets are invested in line with the fund choices made by our unit-linked policyholders and the investment risk is borne by the policyholder. This results in a high allocation to growth assets such as equity and property. Aviva's shareholder exposure to these assets arises from the fact that the income we receive is a proportion of the assets under management.

Page 26

8.i - Summary of assets continued

UK style with-profits (WP)

UK style with-profits funds hold relatively long-term contracts with policyholders participating in pooled investment performance subject to some minimum guarantees. Smoothed returns are used to declare bonuses to policyholders which increase the level of the guarantees through time. The part of the portfolio to which policyholder bonuses are linked is invested in line with their expectations and includes growth assets as well as fixed income. The remainder of the portfolio is invested to protect the funds from market movements and mitigate the resultant shareholder risk. This leads us to an overall investment portfolio that holds a higher proportion of growth assets than our other business lines although there are still material allocations to fixed income assets.

Continental European style participating funds

Continental European style participating funds hold relatively long-term contracts with policyholders participating in pooled investment performance subject to some minimum guarantees. Smoothed returns are used to declare bonuses to policyholders. A certain portion of the guarantees are subject to annual discretion declared at the start of the year. Other guarantees are subject to revision downwards at contractual dates. The investment portfolio holds a higher proportion of fixed income assets than the UK style equivalent. Fixed income assets also give rise to less volatility on the local statutory balance sheet than growth assets.

8.ii - Net asset value

At the end of 2017, IFRS net asset value per share was 423 pence (2016: 414 pence). The increase was driven by operating profit and profit on the disposal and remeasurement of subsidiaries, joint ventures and associates, partially offset by dividend payments to shareholders, amortisation and impairment of intangibles and acquired value of in-force business and adverse economic variances.

Total investment variances and economic assumption changes were £318 million adverse. This included £352 million adverse variances in the non-life business, primarily reflecting unfavourable short-term fluctuations due to foreign exchange losses and adverse market movements on Group centre holdings, including the centre hedging programme.

In the life businesses, investment variances and economic assumption changes were £34 million positive. The variance in 2017 is driven by positive variances in the UK, mainly due to economic modelling developments implemented in 2017, partially offset by negative variances in France which are primarily due to an increase in life annuity pension reserves (see A4 for further details).

On 25 May 2017 Aviva announced a share buy-back of ordinary shares for an aggregate purchase price of up to £300 million, which was carried out in full during the period from 25 May 2017 to 19 September 2017. The number of shares in issue has reduced by 58 million as at 31 December 2017 in respect of shares acquired and cancelled under the buy-back programme. Net of new shares issued during the period, the number of shares in issue reduced by 49 million.

IFRS	2017 £m	pence per share²	2016 £m	pence per share²
Equity attributable to shareholders of Aviva plc at 1 January¹	16,803	414p	15,802	390p
Operating profit	3,068	76p	3,010	73p
Investment return variances and economic assumption changes on life and non-life business	(318)	(8)p	(381)	(9)p
Profit/(loss) on the disposal and remeasurements of subsidiaries, joint ventures and associates	135	3p	(11)	-
Goodwill impairment and amortisation of intangibles	(246)	(6)p	(175)	(4)p
Amortisation and impairment of acquired value of in-force business	(495)	(12)p	(540)	(13)p
Integration and restructuring costs	(141)	(3)p	(212)	(5)p
Other³	-	-	(498)	(13)p
Tax on operating profit and on other activities	(357)	(9)p	(334)	(8)p
Non-controlling interests	(149)	(4)p	(156)	(4)p
Profit after tax attributable to shareholders of Aviva plc	1,497	37p	703	17p
AFS securities fair value & other reserve movements	7	-	4	-
Ordinary dividends	(983)	(25)p	(871)	(22)p
Direct capital instrument and tier 1 notes interest and preference share dividend	(82)	(2)p	(85)	(2)p
Foreign exchange rate movements	33	1p	945	23p
Remeasurements of pension schemes	(2)	-	242	6p
Shares purchased in buy-back	(300)	(7)p	-	-
Other net equity movements⁴	(4)	5p	63	2p
Equity attributable to shareholders of Aviva plc at 31 December¹	16,969	423p	16,803	414p

1 Excluding preference shares of £200 million (2016: £200 million).

2 Number of shares as at 31 December 2017: 4,013 million (2016: 4,062 million).

3 Other items in 2016 include an exceptional charge of £475 million with a post tax impact of £380 million, relating to the impact of the change in the Ogden discount rate from 2.5% set in 2001 to minus 0.75% announced by the Lord Chancellor on 27 February 2017. Other items also include a loss upon the completion of an outwards reinsurance contract by the UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks. The £23 million loss comprises £107 million in premiums ceded, less £78 million in reinsurance recoverables recognised and £6 million claims handling provisions released.

4 Other net equity movements per share include the effect of the reduction of the number of shares in issue by 57,724,500 in respect of shares acquired and cancelled under the share buy-back programme.

Page 27

8.iii - Return on equity¹

The return on equity calculation is based on operating return after tax attributable to ordinary shareholders expressed as a percentage of weighted average ordinary shareholders' equity.

During 2017, return on equity has increased to 13.2% (2016: 12.5%), mainly driven by the increase in operating profit net of taxation.

	2017 %	2016 %
United Kingdom²	13.9%	11.8%
Canada	2.4%	15.7%
Europe²	13.4%	13.5%
Asia	12.9%	14.0%
Fund management	25.7%	24.4%
Corporate and Other Business	n/a	n/a
Return on total capital employed³	9.8%	9.7%
Subordinated debt	4.3%	4.5%
Senior debt	0.2%	0.1%
Return on total equity³	12.6%	12.1%
Less: Non-controlling interest	10.1%	11.5%
Direct capital instrument and tier 1 notes	6.3%	6.1%
Preference capital	8.5%	8.5%
Return on equity shareholders' funds	13.2%	12.5%

1 Please refer to note C1 for further analysis of return on equity.

3 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

Page 28

8.iv - Solvency II

The estimated pro forma shareholder cover ratio on a Solvency II basis is 198% at 31 December 2017. The Solvency II position disclosed is based on a 'shareholder view'. This excludes the contribution to Group Solvency Capital Requirement (SCR) and Group Own Funds of fully ring fenced with-profits funds (£3.3 billion at 31 December 2017) and staff pension schemes in surplus (£1.5 billion at 31 December 2017). These exclusions have no impact on Solvency II surplus. The most material fully ring fenced with-profit funds and staff pension schemes are self-supporting on a Solvency II capital basis with any surplus capital above SCR not recognised in the Group position. The shareholder view is therefore considered by management to be more representative of the shareholders' risk-exposure and the Group's ability to cover the SCR with eligible own funds.

The Solvency II risk margin is highly sensitive to movements in interest rates, which can be offset by a reset of the transitional measure on technical provisions ('TMTP'). The 31 December 2016 Solvency II position disclosed includes a notional reset of the TMTP to reflect interest rates at 31 December 2016. This presentation is in line with the Group's approach to manage its capital position assuming a dynamic TMTP in respect of the impact of interest rate movements on the risk margin, as this avoids step changes to the Solvency II position that arise only when the formal TMTP reset points are triggered. The estimated 31 December 2017 Solvency II position includes an estimated reset of the TMTP in line with the regulatory requirement to reset the TMTP every two years. This TMTP has also been amortised on a straightline basis over 16 years from 1 January 2016 in line with the Solvency II rules.

The 31 December 2017 Solvency II position disclosed includes two pro forma adjustments, to reflect known or highly likely events materially affecting the Group's solvency position post 31 December 2017. The adjustments consist of the disposals of Friends Provident International Limited and the Italian joint venture Avipop Assicurazioni S.p.A. These adjustments have been made in order to show a more representative view of the Group's solvency position.

The 31 December 2016 Solvency II Own Funds position includes the pro forma impacts of £0.1 billion in relation to the disposal of Aviva's 50% shareholding in Antarius to Sogecap, which completed on 5 April 2017, and a then anticipated future change to UK tax rules restricting the tax relief that could be claimed in respect of tax losses announced in the Chancellor of the Exchequer's Autumn statement of 23 November 2016, which was removed following clarification in the 13 July 2017 Finance Bill.

Summary of Solvency II position

	2017 £bn	2016 £bn
Own Funds^1,2,3	24.7	24.0
Solvency Capital Requirement^1,2,3,4	(12.5)	(12.7)
Estimated Solvency II Surplus at 31 December^2,3	12.2	11.3
Estimated Shareholder Cover Ratio^1,2,3	198%	189%

1 The estimated Solvency II position represents the shareholder view. This excludes the contribution to Group Solvency Capital Requirement (SCR) and Group Own Funds of fully ring fenced with-profits funds £3.3 billion (2016: £2.9 billion) and staff pension schemes in surplus £1.5 billion (2016: £1.1 billion) - these exclusions have no impact on Solvency II surplus.

2 The estimated Solvency II position includes the pro forma impacts of the disposals of Friends Provident International Limited (£0.1 billion increase to surplus) and the Italian joint venture Avipop Assicurazioni S.p.A (£0.1 billion increase to surplus).

3 The 31 December 2016 Solvency II position includes the pro forma impacts of the disposal of Aviva's 50% shareholding in Antarius to Sogecap, which completed on 5 April 2017 (£0.2 billion increase to surplus) and an anticipated future change to UK tax rules restricting the tax relief that can be claimed in respect of tax losses (£0.4 billion decrease to surplus). However, under the amended tax rules published on 13 July 2017, this restriction will not be material, and as a result no corresponding pro forma impact is included in the estimated 31 December 2017 Solvency II position. The 31 December 2016 Solvency II position also includes an adverse impact of a notional reset of the transitional measure on technical provisions ('TMTP') to reflect interest rates (£0.4 billion decrease to surplus).

4 The Solvency Capital Requirement above represents the Solvency Capital Requirement after the impact of diversification benefit.

Movement in Group Solvency II Surplus

	2017 £bn	2016 £bn
Group Solvency II Surplus at 1 January	11.3	9.7
Operating Capital Generation	2.6	3.5
Non-operating Capital Generation	(0.3)	(1.8)
Dividends	(1.1)	(1.0)
Share buy-back	(0.3)	-
Foreign exchange variances	0.1	0.6
Hybrid debt issuance/repayment	(0.5)	0.4
Acquired/divested business	0.4	(0.1)
Estimated Solvency II Surplus at 31 December	12.2	11.3

The estimated Solvency II surplus at 31 December 2017 is £12.2 billion, with a shareholder cover ratio of 198%. This is an increase of £0.9 billion compared to the 31 December 2016 surplus. In 2017 the beneficial impacts of operating capital generation, disposals and foreign exchange variances have been partially offset by hybrid debt repayment, share buy-back and the impact of the Aviva plc dividend. The 2017 operating capital generation includes the beneficial impact of the transfer of the Friends Life business into the main UK life insurance fund. The beneficial impact from divested businesses in 2017 includes the disposal of the Spanish joint ventures Unicorp Vida and Caja Espana Vida and its retail life insurance business Aviva Vida y Pensiones. Also included are pro-forma impacts of the disposals of Friends Provident International Limited and the Italian joint venture Avivpop Assicurazioni S.p.A.

Page 29

8.iv - Solvency II continued

Summary of diversified Solvency Capital Requirement

	2017 £bn	2016 £bn
Credit risk¹	3.4	3.3
Equity risk²	1.6	1.3
Interest rate risk³	0.4	0.4
Other market risk⁴	1.4	1.6
Life insurance risk⁵	2.8	3.3
General insurance risk⁶	0.7	0.6
Operational risk	1.1	1.1
Other risk⁷	1.1	1.1
Total	12.5	12.7

1 Capital held in respect of credit risk recognises the Group's shareholder exposure to changes in the market value of assets and defaults. A range of specific stresses are applied reflecting the difference in assumed risk relative to investment grade and duration.

2 Capital held in respect of equity risk recognises the Group's shareholder exposure to changes in the market value of assets.

3 Capital held in respect of interest rate risk recognises the Group's shareholder exposure to changes in the value of net assets as a result of movements in interest rates.

4 Capital held in respect of other market risk recognises the Group's shareholder exposure to changes in the market value of commercial mortgages and property, but also captures risk in association with inflation and foreign exchange

5 Capital held in respect of life insurance risk recognises the Group's shareholder exposure to life insurance specific risks, such as longevity and lapse.

6 Capital held in respect of general insurance risk recognises the Group's shareholder exposure to general insurance specific risks, such as claims volatility and catastrophe.

7 Capital held in respect of other risk recognises the Group's shareholder exposure to specific risks unique to particular business units and other items.

Equity risk increased over 2017 due to a combination of exposure changes and market movements. Other market risk decreased due to a model change to currency risk. Life insurance risk decreased as a result of longevity assumption changes in the UK and the impact of disposals.

Sensitivity analysis of Solvency II surplus

The following table shows the sensitivity of the Group's Solvency II surplus to:

Economic assumptions:

· 25 basis point increase and decrease, 50 basis point decrease and 100 basis point increase in the risk-free rate, including all consequential changes (including assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);

· 50 basis point increase and decrease and 100 basis point increase in credit spreads for corporate bonds with credit rating A at 10 year duration, with the other ratings and durations stressed by the same proportion relative to the stressed capital requirement;

· an immediate full letter downgrade on 20% of the annuity portfolio bonds (e.g. from AAA to AA, from AA to A);

· 10% increase and decrease and 25% decrease in market values of equity assets.

Non-Economic assumptions:

· 10% increase in maintenance and investment expenses (a 10% sensitivity on a base expense assumption of £10 p.a. would represent an expense assumption of £11 p.a.);

· 10% increase in lapse rates (a 10% sensitivity on a base assumption of 5% p.a. would represent a lapse rate of 5.5% p.a.);

· 5% increase in both mortality and morbidity rates for life assurance;

· 5% decrease in mortality rates for annuity business;

· 5% increase in gross loss ratios for general insurance and health business.

Page 30

8.iv - Solvency II continued

The sensitivity allows for any consequential impact on the assets and liability valuations. All other assumptions remain unchanged for each sensitivity, except where these are directly affected by the revised economic conditions or where a management action that is allowed for in the Solvency Capital Requirement calculation is applicable for that sensitivity. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns.

Transitional Measures on Technical Provisions is assumed to be recalculated in all sensitivities where its impact would be material.

The table below shows the absolute change in cover ratio under each sensitivity, e.g. a 4% positive impact would result in a cover ratio of 202%.

Sensitivities		Impact on cover ratio %
Changes in Economic assumptions	25 bps increase in interest rate	4%
	100 bps increase in interest rate	15%
	25 bps decrease in interest rate	(6%)
	50 bps decrease in interest rate	(12%)
	50 bps increase in corporate bond spread	1%
	100 bps increase in corporate bond spread	(2%)
	50 bps decrease in corporate bond spread	(1%)
	Credit downgrade on annuity portfolio	(4%)
	10% increase in market value of equity	2%
	10% decrease in market value of equity	(2%)
	25% decrease in market value of equity	(6%)
Changes in Non-Economic assumptions	10% increase in maintenance and investment expenses	(6%)
	10% increase in lapse rates	(1%)
	5% increase in mortality/morbidity rates - Life assurance	(1%)
	5% decrease in mortality rates - annuity business	(11%)
	5% increase in gross loss ratios	(3%)

Limitations of sensitivity analysis

The table above demonstrates 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 analysis does not take into consideration that the Group's assets and liabilities are actively managed. Additionally, the Solvency II 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 allocations, adjusting bonuses credited to policyholders, and taking other protective action.

Other limitations in the above sensitivity analysis 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.

Reconciliation of IFRS total equity to Solvency II Own Funds

The reconciliation from total Group equity on an IFRS basis to Solvency II Own Funds is presented below. The valuation differences reflect moving from IFRS valuations to a Solvency II shareholder view of Own Funds.

	2017 £bn	2016 £bn
Total Group equity on an IFRS basis	19.1	19.6
Elimination of goodwill and other intangible assets¹	(9.8)	(10.0)
Liability valuation differences (net of transitional deductions)²	22.0	22.1
Inclusion of risk margin (net of transitional deductions)	(3.3)	(4.4)
Net deferred tax³	(1.3)	(1.6)
Revaluation of subordinated liabilities	(0.7)	(0.9)
Estimated Solvency II Net Assets (gross of non-controlling interests)⁴	26.0	24.8
Difference between Solvency II Net Assets and Own Funds⁵	(1.3)	(0.8)
Estimated Solvency II Own Funds^6,7	24.7	24.0

1 Includes £1.9 billion (2016: £2.0 billion) of goodwill and £7.9 billion (2016: £8.0 billion) of other intangible assets comprising acquired value of in-force business of £3.3 billion (2016: £3.9 billion), deferred acquisition costs (net of deferred income) of £2.9 billion (2016: £2.5 billion) and other intangibles of £1.7 billion (2016: £1.6 billion).

2 Includes the adjustments required to reflect market consistent principles under Solvency II whereby non-insurance assets and liabilities are measured using market value and liabilities arising from insurance contracts are valued on a best estimate basis using market-implied assumptions.

3 Net deferred tax includes the tax effect of all other reconciling items in the table above which are shown gross of tax.

4 The 31 December 2016 Solvency II position includes the pro forma impacts of the disposal of Aviva's 50% shareholding in Antarius to Sogecap, which completed on 5 April 2017 (£0.1 billion) and an anticipated future change to UK tax rules restricting the tax relief that can be claimed in respect of tax losses (£0.1 billion). However, under the amended tax rules published on 13 July 2017, this restriction will not be material, and as a result no corresponding pro forma impact is included in the estimated 31 December 2017 Solvency II position. The 31 December 2016 Solvency II position also includes an adverse impact of a notional reset of the transitional measure on technical provisions ('TMTP') to reflect interest rates at 31 December 2016 of £0.4 billion. The net pro forma impact on Own Funds arising from disposals of Friends Provident International Limited and the Italian joint venture Avipop Assicurazioni S.p.A in 2017 is £nil.

5 Regulatory adjustments to bridge from Solvency II Net Assets to Own Funds include recognition of subordinated debt capital and non-controlling interests.

6 The estimated Solvency II position represents the shareholder view. It excludes the contribution to Group SCR and Group Own Funds of fully ring-fenced with-profits funds £3.3 billion (2016: £2.9 billion) and staff pension schemes in surplus £1.5 billion (2016: £1.1 billion) - these exclusions have no impact on Solvency II surplus.

7 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

Page 31

Financial supplement

		Page
A	Income & expenses	32
B	IFRS financial statements and notes	37
C	Capital & liquidity	95
D	Analysis of assets	99
E	VNB & Sales analysis	122
In this section
A	Income & expenses	32
Reconciliation of Group adjusted operating profit to profit for the year		32
A1	Other operations	33
A2	Corporate centre	33
A3	Group debt costs and other interest	33
A4	Life business: Investment return variances and economic assumption changes	34
A5	Non-life business: Short-term fluctuation in return on investments	35
A6	General insurance and health business: Economic assumption changes	36
A7	Impairment of goodwill, associates, joint ventures and other amounts expensed	36
A8	Amortisation and impairment of acquired value of in-force business	36
A9	Profit/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates	36
A10	Other	36

Page 32

Reconciliation of Group adjusted operating profit to profit for the year

For the year ended 31 December 2017

	2017 £m	2016 £m
Group adjusted operating profit before tax attributable to shareholders' profits
Life business
United Kingdom¹	1,758	1,523
Europe¹	873	876
Asia	235	241
Other	16	2
Total life business	2,882	2,642
General insurance and health
United Kingdom general insurance¹	408	392
United Kingdom health	35	31
Canada	46	269
Europe¹	223	168
Asia	(8)	(13)
Other	(4)	(14)
Total general insurance and health	700	833
Fund management
Aviva Investors	168	139
Asia	(4)	(1)
Total fund management	164	138
Other
Other operations (note A1)	(169)	(94)
Market operating profit	3,577	3,519
Corporate centre (note A2)	(184)	(184)
Group debt costs and other interest (note A3)	(325)	(325)
Group adjusted operating profit before tax attributable to shareholders' profits	3,068	3,010
Integration and restructuring costs	(141)	(212)
Group adjusted operating profit before tax attributable to shareholders' profits after integration and restructuring costs	2,927	2,798
Adjusted for the following:
Investment return variances and economic assumption changes on long-term business (note A4)	34	379
Short-term fluctuation in return on investments backing non-long-term business (note A5)	(345)	(518)
Economic assumption changes on general insurance and health business (note A6)	(7)	(242)
Impairment of goodwill, joint ventures and associates and other amounts expensed (note A7)	(49)	-
Amortisation and impairment of intangibles	(197)	(175)
Amortisation and impairment of acquired value of in-force business (note A8)	(495)	(540)
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates (note A9)	135	(11)
Other (note A10)	-	(498)
Adjusting items before tax	(924)	(1,605)
Profit before tax attributable to shareholders' profits	2,003	1,193
Tax on Group adjusted operating profit	(639)	(706)
Tax on other activities	282	372
	(357)	(334)
Profit for the year	1,646	859

Page 33

Other Group operating profit items

A1 - Other operations

	2017 £m	2016 £m
United Kingdom¹	(26)	3
Europe¹	(37)	(26)
Asia	(32)	(26)
Other Group operations²	(74)	(45)
Total	(169)	(94)

2 Other Group operations include Group and head office costs, expenditure on UK digital business and non-insurance operating profit relating to Aviva Re.

Other operations relate to non-insurance activities and include costs associated with our Group and regional head offices, pension scheme expenses, as well as non-insurance income. Total costs in relation to non-insurance activities were £169 million (2016: £94 million).

'Other Group operations' includes increased investment in the development of the UK digital business, partly offset by income relating to insurance recoveries of £32 million (2016: £19 million).

A2 - Corporate centre

	2017 £m	2016 £m
Project spend	(29)	(30)
Central spend and share award costs	(155)	(154)
Total	(184)	(184)

A3 - Group debt costs and other interest

	2017 £m	2016 £m
External debt
Subordinated debt	(391)	(387)
Other	(2)	(1)
Total external debt	(393)	(388)
Internal lending arrangements	(7)	(23)
Net finance income on main UK pension scheme	75	86
Total	(325)	(325)

Page 34

Non-operating profit items

A4 - Life Business: Investment variances and economic assumption changes

(a) Definitions

Group adjusted operating profit for life business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Group adjusted operating profit includes the effect of variance in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions, where not treated as other items. Changes due to economic items, such as market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside Group adjusted operating profit.

(b) Economic volatility

The investment variances and economic assumption changes excluded from the life Group adjusted operating profit are as follows:

Life business	2017 £m	2016 £m
Investment variances and economic assumption changes	34	379

Investment variances and economic assumption changes were £34 million positive (2016: £379 million positive). The variance in 2017 is driven by positive variances in the UK, which are partially offset by negative variances in France.

Positive variances in the UK are mainly due to economic modelling developments implemented in 2017. These include a one-off development to align the approach to calculating the valuation interest rate across the heritage Aviva and Friends Life portfolios and also a development to the approach to calculating the valuation interest rate for certain deferred annuity business. Positive variances also reflect fewer than expected defaults and downgrades on corporate bonds, better than expected experience on equity release mortgages (in terms of losses related to no negative equity guarantees) and a reduction in the default allowances for commercial mortgages.

The negative variance in France is primarily due to an increase in life annuity pension reserves, resulting from a reduction to the discount rate cap used in the calculation of these reserves. This economic assumption change reflects the current environment of prolonged low interest rates. A further negative variance stems from losses realised in 2017 on derivative-based funds.

During 2017 the Group has kept its long-term assumptions for future property prices and rental income under review to allow for the possible future adverse impact of the decision for the UK to leave the European Union. The aim has been to maintain the same allowance in these assumptions in 2017 as was included in 2016, as the impact of the Brexit process on the UK economy remains uncertain.

In 2016, investment variances and economic assumption changes were £379 million positive. Positive variances in the UK reflected lower interest rates and narrowing credit spreads, which increased asset values more than liabilities. In the first half of 2016 the Group revised its expectation of future property prices and rental income in light of the UK referendum vote for the UK to leave the European Union. The adverse impact of this adjustment on the Group's equity release and commercial mortgage portfolios was broadly offset in the second half of the year as expectations for future property price and rental growth increased. In addition, in the UK the investment variance reflected a refined approach of assuming best estimate expected credit defaults on corporate bonds, with a resulting increase in Group adjusted operating profit in the period. The positive variance in the UK was partially offset by negative variances in France and Italy. The negative variance in France reflected losses on equity hedges managed on an economic basis rather than an IFRS basis and falling interest rates, while the negative variance in Italy reflected widening credit spreads.

The expected rate of investment return is determined using consistent assumptions at the start of the period between operations, having regard to local economic and market forecasts of investment return and asset classification under IFRS.

The principal assumptions underlying the calculation of the expected investment return for equities and properties are:

		Equities		Properties
	2017 %	2016 %	2017 %	2016 %
United Kingdom	4.8%	5.5%	3.3%	4.0%
Eurozone	4.2%	4.5%	2.7%	3.0%

The expected return on equities and properties has been calculated by reference to the 10 year mid-price swap rate for an AA-rated bank in the relevant currency plus a risk premium. The use of risk premium reflects management's long-term expectations of asset return in excess of the swap yield from investing in different asset classes. The asset risk premiums are set out in the table below:

All territories	2017 %	2016 %
Equity risk premium	3.5%	3.5%
Property risk premium	2.0%	2.0%

The 10 year mid-price swap rates as at the start of the period are set out in the table below:

Territories	2017 %	2016 %
United Kingdom	1.3%	2.0%
Eurozone	0.7%	1.0%

Page 35

A4 - Life Business: Investment variances and economic assumption changes continued

For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risk (assessed on a best estimate basis); this includes an adjustment for credit risk on all eurozone sovereign debt. Where such securities are classified as available for sale, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.

A5 - Non-life General insurance and health business: Short-term fluctuation in return on investments

	2017 £m	2016 £m
Analysis of investment income:
- Net investment income	331	383
- Foreign exchange gains/losses and other charges	(24)	(35)
	307	348
Analysed between:
- Longer-term investment return, reported within operating profit	364	343
- Short-term fluctuations in investment return, reported outside operating profit	(57)	5
	307	348
Short-term fluctuations:
- General insurance and health	(57)	5
- Other operations¹	(288)	(523)
Total short-term fluctuations	(345)	(518)

1 Represents short-term fluctuation on assets backing non-life business in Group centre investments, including the centre hedging programme.

The longer-term investment return is calculated separately for each principal non-life business unit. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of investment return. The longer-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer-term return for other investments is the actual income receivable for the year. Actual income and longer-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities.

Market value movements which give rise to variances between actual and longer-term investment returns are disclosed separately in short-term fluctuations outside operating profit.

The impact of realised and unrealised gains and losses on Group centre investments, including the centre hedging programme which is designed to economically protect the total Group's capital against adverse equity and foreign exchange movements, is included in short-term fluctuations on other operations.

The adverse short-term fluctuations during 2017 are mainly due to foreign exchange losses and adverse market movements on Group centre holdings, including the centre hedging programme.

Total assets supporting the general insurance and health business, which contribute towards the longer-term return, are:

	2017 £m	2016 £m
Debt securities	10,054	10,799
Equity securities	772	267
Properties	499	341
Cash and cash equivalents	1,115	1,162
Other¹	2,498	2,032
Assets supporting general insurance and health business	14,938	14,601
Assets supporting other non-long term-business²	685	724
Total assets supporting non-long term-business	15,623	15,325

1 Includes the internal loan to Group from UKI.

2 Represents assets backing non-life business in Group centre investments, including the centre hedging programme.

The principal assumptions underlying the calculation of the longer-term investment return are:

	Longer-term rates of return on equities		Longer-term rates of return on property
	2017 %	2016 %	2017 %	2016 %
United Kingdom	4.8%	5.5%	3.3%	4.0%
Eurozone	4.2%	4.5%	2.7%	3.0%
Canada	5.5%	5.4%	4.0%	3.9%

The longer-term rates of return on equities and properties have been calculated by reference to the 10 year mid-price swap rate for an AA-rated bank in the relevant currency plus a risk premium. The underlying reference rates and risk premiums are shown in note A4(c).

Page 36

A6 - General insurance and health business: Economic assumption changes

In the general insurance and health business, an adverse impact of £7 million (2016: £242 million adverse) mainly arises as a result of a slight decrease in the estimated future inflation rate used to value periodic payment orders offset by a slight decrease in the interest rates used to discount claim reserves for periodic payment orders and latent claims. During 2016 market interest rates used to discount periodic payment orders and latent claims reduced and the estimated future inflation rate used to value periodic payment orders was increased to be consistent with market expectations. This was, in part, offset by a change in estimate for the interest rate used to discount periodic payment orders to allow for the illiquid nature of these liabilities.

A7 - Impairment of goodwill, joint ventures, associates and other amounts expensed

Impairment of goodwill, associates and joint ventures expensed in the period comprised of £2 million in respect of an impairment of goodwill at Elite Insurance Company of Canada and £47 million in respect of the full impairment of goodwill in our investment in associate Aviva India (2016: £nil).

A8 - Amortisation and impairment of acquired value of in-force business

Amortisation and impairment of acquired value of in-force business ('AVIF') in the year is a charge of £495 million (2016: £540 million charge). The charge for the year includes £469 million of amortisation in respect of the Group's subsidiaries and joint-ventures and impairment charges of £26 million in relation to the FPI's reinsured book of business and Aviva India.

A9 - Profit/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates

The total Group profit on disposal and remeasurement of subsidiaries, joint ventures and associates is £135 million (2016: £11 million loss). This consists of £23 million of remeasurement gains in respect of the joint venture operations in Poland and Aviva Vietnam; £237 million profit on the disposals of Antarius, France health, three businesses in Spain and other small operations; offset by £125 million of remeasurement losses in relation to FPI and Taiwan. Further details are provided in note B4.

A10 - Other

Other items are those items that, in the directors' view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. There were no other items during 2017 (2016: £498 million).

This information is provided by RNS

The company news service from the London Stock Exchange

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