Half-year Report - Part 3 of 4 - IFRS

RNS Number : 5540W

Aviva PLC

02 August 2018

START PART 3 of 4

Page 36

IFRS financial statements

In this section	Page
B IFRS financial statements and notes
Condensed consolidated financial statements
Condensed consolidated income statement	37
Condensed consolidated statement of comprehensive income	38
Condensed consolidated statement of changes in equity	39
Condensed consolidated statement of financial position	40
Condensed consolidated statement of cash flows	41

Notes to the condensed consolidated financial statements	42
B1 Basis of preparation	42
B2 Presentation changes	42
B3 Exchange rates	42
B4 Subsidiaries, joint ventures and associates	43
B5 Segmental information	46
B6 Tax	55
B7 Earnings per share	57
B8 Dividends and appropriations	58
B9 Insurance liabilities	59
B10 Liability for investment contracts	61
B11 Reinsurance assets	63
B12 Effect of changes in assumptions and estimates during the period	63
B13 Borrowings	64
B14 Pension obligations and other provisions	65
B15 Related party transactions	66
B16 Fair value	67
B17 Risk management	73
B18 Cash and cash equivalents	78
B19 Contingent liabilities and other risk factors	78
B20 Acquired value of in-force business and intangible assets	79
B21 Unallocated divisible surplus	79
B22 Subsequent events	79

Directors' responsibility statement	80
Independent review report to Aviva plc	81

# symbol denotes key performance indicators used as a base to determine or modify remuneration.

‡ denotes APMs which are key performance indicators. There have been no changes to the APMs used by the Group during period under review.

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Page 37

Condensed consolidated income statement

For the six month period ended 30 June 2018

	Note	Reviewed 6 months 2018 £m	Reviewed 6 months 2017 £m	Audited full year 2017 £m
Income
Gross written premiums	B5	15,180	13,576	27,606
Premiums ceded to reinsurers		(1,096)	(1,076)	(2,229)
Premiums written net of reinsurance		14,084	12,500	25,377
Net change in provision for unearned premiums		(299)	(365)	(153)
Net earned premiums		13,785	12,135	25,224
Fee and commission income		1,042	1,125	2,187
Net investment (expense)/income		(492)	10,754	22,066
Share of profit after tax of joint ventures and associates		24	10	41
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	B4(b)	31	202	135
		14,390	24,226	49,653
Expenses
Claims and benefits paid, net of recoveries from reinsurers		(11,506)	(12,501)	(24,113)
Change in insurance liabilities, net of reinsurance	B9(a)(ii)	1,832	(1,684)	(1,074)
Change in investment contract provisions		(1,703)	(5,584)	(13,837)
Change in unallocated divisible surplus		1,508	794	294
Fee and commission expense		(2,117)	(2,200)	(4,329)
Other expenses		(1,706)	(1,669)	(3,537)
Finance costs		(266)	(353)	(683)
		(13,958)	(23,197)	(47,279)
Profit before tax		432	1,029	2,374
Tax attributable to policyholders' returns	B6	94	(154)	(371)
Profit before tax attributable to shareholders' profits		526	875	2,003
Tax expense	B6	(56)	(313)	(728)
Less: tax attributable to policyholders' returns	B6	(94)	154	371
Tax attributable to shareholders' profits		(150)	(159)	(357)
Profit for the period		376	716	1,646

Attributable to:
Equity holders of Aviva plc		330	637	1,497
Non-controlling interests		46	79	149
Profit for the period		376	716	1,646
Earnings per share	B7
Basic (pence per share)		7.9p	14.9p	35.0p
Diluted (pence per share)		7.8p	14.7p	34.6p

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Page 38

Condensed consolidated statement of comprehensive income

For the six month period ended 30 June 2018

	Note	Reviewed 6 months 2018 £m	Reviewed 6 months 2017 £m	Audited full year 2017 £m
Profit for the period		376	716	1,646

Other comprehensive income:
Items that may be reclassified subsequently to income statement
Investments classified as available for sale
Fair value losses		(3)	(10)	(7)
Fair value gains transferred to profit on disposals		(2)	(2)	(2)
Share of other comprehensive (loss)/income of joint ventures and associates		(9)	1	6
Foreign exchange rate movements		(81)	46	68
Aggregate tax effect - shareholder tax on items that may be reclassified subsequently to income statement	B6(b)	4	5	5

Items that will not be reclassified to income statement
Owner-occupied properties - fair value losses		-	(1)	(1)
Remeasurements of pension schemes	B14	137	(36)	(5)
Aggregate tax effect - shareholder tax on items that will not be reclassified subsequently to income statement	B6(b)	(24)	12	5
Total other comprehensive income, net of tax		22	15	69
Total comprehensive income for the period		398	731	1,715

Attributable to:
Equity holders of Aviva plc		362	619	1,523
Non-controlling interests		36	112	192
		398	731	1,715

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Page 39

Condensed consolidated statement of changes in equity

For the six month period ended 30 June 2018

	Note	Reviewed 6 months 2018 £m	Reviewed 6 months 2017 £m	Audited full year 2017 £m
Balance at 1 January as reported		19,135	19,551	19,551
Profit for the period		376	716	1,646
Other comprehensive income		22	15	69
Total comprehensive income for the period		398	731	1,715
Dividends and appropriations	B8	(780)	(684)	(1,081)
Non-controlling interests share of dividends declared in the period		(46)	(55)	(103)
Transfer to profit on disposal of subsidiaries, joint ventures and associates		(31)	(31)	12
Capital contributions from non-controlling interests		2	39	36
Changes in non-controlling interests in subsidiaries		(178)	(202)	(315)
Treasury shares held by subsidiary companies		-	-	1
Reserves credit for equity compensation plans		35	46	77
Shares issued under equity compensation plans		-	5	10
Shares purchased in buy-back¹		(197)	(73)	(300)
Reclassification of tier 1 notes to financial liabilities²		-	-	(484)
Aggregate tax effect - shareholder tax		2	6	16
Balance at 30 June/31 December		18,340	19,333	19,135

1 On 1 May 2018, the Group announced a share buy-back of ordinary shares for an aggregate purchase price of up to £600 million (2017: £300 million announced on 25 May 2017). In the period ended 30 June 2018, £197 million of shares (HY17: £73 million, 2017: £300 million) had been purchased and shares with a nominal value of £10 million (HY17: £3 million, 2017: £14 million) have been cancelled, giving rise to an additional capital redemption reserve of an equivalent amount.

2 On 28 September 2017, notification was given that the Group would redeem the $650 million fixed rate tier 1 notes. At that date, the instrument was reclassified as a financial liability of £484 million, representing its fair value on translation into sterling on that date. The resulting foreign exchange loss of £92 million was charged to retained earnings.

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Page 40

Condensed consolidated statement of financial position

As at 30 June 2018

	Note	Reviewed 30 June 2018 £m	Reviewed 30 June 2017 £m	Audited 31 December 2017 £m
Assets
Goodwill		1,881	1,911	1,876
Acquired value of in-force business and intangible assets	B20	3,375	4,841	3,455
Interests in, and loans to, joint ventures		1,226	1,214	1,221
Interests in, and loans to, associates		362	472	421
Property and equipment		531	510	509
Investment property		11,151	10,719	10,797
Loans		27,717	25,452	27,857
Financial investments		309,403	309,222	311,082
Reinsurance assets	B11	13,831	18,512	13,492
Deferred tax assets		156	186	144
Current tax assets		118	80	94
Receivables		9,352	9,060	8,285
Deferred acquisition costs		2,943	2,898	2,906
Pension surpluses and other assets	B14	3,626	3,509	3,468
Prepayments and accrued income		3,129	2,929	2,860
Cash and cash equivalents	B18	44,443	42,456	43,347
Assets of operations classified as held for sale	B4(c)	9,665	6,042	10,871
Total assets		442,909	440,013	442,685
Equity
Capital
Ordinary share capital		996	1,014	1,003
Preference share capital		200	200	200
		1,196	1,214	1,203
Capital reserves
Share premium		1,210	1,201	1,207
Capital redemption reserve		24	3	14
Merger reserve		8,974	8,975	8,974
		10,208	10,179	10,195
Treasury shares		(16)	(14)	(14)
Currency translation reserve		1,028	1,212	1,141
Other reserves		(289)	(432)	(274)
Retained earnings		4,437	4,732	4,918
Equity attributable to shareholders of Aviva plc		16,564	16,891	17,169
Direct capital instrument and tier 1 notes		731	1,123	731
Equity excluding non-controlling interests		17,295	18,014	17,900
Non-controlling interests		1,045	1,319	1,235
Total equity		18,340	19,333	19,135
Liabilities
Gross insurance liabilities	B9	147,811	150,714	148,650
Gross liabilities for investment contracts	B10	208,397	203,726	203,986
Unallocated divisible surplus	B21	7,605	8,524	9,082
Net asset value attributable to unitholders		17,778	18,469	18,327
Pension deficits and other provisions	B14	1,406	1,426	1,429
Deferred tax liabilities		2,342	2,325	2,377
Current tax liabilities		128	188	290
Borrowings	B13	9,786	10,338	10,286
Payables and other financial liabilities		17,271	17,057	16,459
Other liabilities		2,949	2,733	2,791
Liabilities of operations classified as held for sale	B4(c)	9,096	5,180	9,873
Total liabilities		424,569	420,680	423,550
Total equity and liabilities		442,909	440,013	442,685

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Page 41

Condensed consolidated statement of cash flows

For the six month period ended 30 June 2018

	Note	Reviewed 6 months 2018 £m	Reviewed 6 months 2017 £m	Audited full year 2017 £m
Cash flows from operating activities¹
Cash generated from operating activities		2,572	5,255	8,361
Tax paid		(292)	(405)	(620)
Total net cash from operating activities		2,280	4,850	7,741
Cash flows from investing activities
Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired		191	25	25
Disposals of subsidiaries, joint ventures and associates, net of cash transferred		218	(36)	(49)
New loans to joint ventures and associates		-	(2)	-
Repayment of loans to joint ventures and associates		-	-	-
Net repayment of loans to joint ventures and associates		-	(2)	-
Purchases of property and equipment		(21)	(40)	(69)
Proceeds on sale of property and equipment		1	2	5
Purchases of intangible assets		(20)	(44)	(107)
Total net cash from/(used in) investing activities		369	(95)	(195)
Cash flows from financing activities
Proceeds from issue of ordinary shares		6	6	12
Shares purchased in buy-back		(197)	(73)	(300)
Treasury shares distributed from employee trusts		-	1	-
New borrowings drawn down, net of expenses		900	21	1,320
Repayment of borrowings²		(1,377)	(129)	(1,904)
Net repayment of borrowings		(477)	(108)	(584)
Interest paid on borrowings		(253)	(294)	(610)
Preference dividends paid	B8	(9)	(9)	(17)
Ordinary dividends paid	B8	(764)	(646)	(983)
Coupon payments on direct capital instrument and tier 1 notes	B8	(7)	(29)	(81)
Capital contributions from non-controlling interests of subsidiaries		2	39	36
Dividends paid to non-controlling interests of subsidiaries		(46)	(55)	(103)
Total net cash used in financing activities		(1,745)	(1,168)	(2,630)
Total net increase in cash and cash equivalents		904	3,587	4,916
Cash and cash equivalents at 1 January		43,587	38,405	38,405
Effect of exchange rate changes on cash and cash equivalents		(43)	248	266
Cash and cash equivalents at 30 June/31 December	B18	44,448	42,240	43,587

1 Cash flows from operating activities includes interest received of £2,646 million (HY17: £2,669 million, 2017: £5,302 million) and dividends received of £2,418 million (HY17: £2,054 million, 2017: £2,606 million).

2 HY18 includes redemption of €500 million 6.875% fixed/floating rate notes at their first call date of £439 million, full year 2017 includes redemption of 8.25% US $650 million fixed rate tier 1 notes of £488 million.

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Page 42

B1 - Basis of preparation

The condensed consolidated interim financial statements for the six months to 30 June 2018 have been prepared in accordance with IAS 34 Interim Financial Reporting as endorsed by the European Union (EU), and the Disclosure Rules and Transparency Rules of the Financial Conduct Authority.

Except as described below, the accounting policies applied in the condensed consolidated interim financial statements are the same as those applied in Aviva plc's 2017 Annual Report and Accounts.

The Group has adopted IFRS 15 Revenue from Contracts with Customers from 1 January 2018 which has resulted in the following minor amendments to the Group accounting policies:

· (I) Other investment contract fee revenue has been updated to clarify that fees related to investment management services are recognised as revenue over time, as performance obligations are satisfied; and variable consideration, such as performance fees and commission subject to clawback arrangements, is not recognised as revenue until it is reasonably certain that no significant reversal of amounts recognised would occur.

· (J) Other fee and commission income has been updated to clarify that all other fee and commission income is recognised over time as the services are provided.

These amendments did not have a material effect on the Group's financial statements.

IFRS 9 Financial Instruments is effective from 1 January 2018, however the Group has chosen to apply the deferral option from 2018 as its activities are predominantly connected with insurance, as defined by the amendments to IFRS 4 Insurance Contracts.

The results for the six months to 30 June 2018 are unaudited but have been reviewed by the Auditor, PricewaterhouseCoopers LLP. The interim results do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The comparative results for the full year 2017 have been taken from the Group's 2017 Annual Report and Accounts. Therefore, these interim financial statements should be read in conjunction with the 2017 Annual Report and Accounts that were prepared in accordance with IFRS as endorsed by the European Union. PricewaterhouseCoopers LLP reported on the 2017 financial statements and their report was unqualified and did not contain a Statement under section 498 (2) or (3) of the Companies Act 2006. The Group's 2017 Annual Report and Accounts have been filed with the Registrar of Companies.

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

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

B2 - Presentation changes

During 2017, following the launch of UK Insurance which brings together the UK Life, UK General Insurance and UK Health businesses, the Ireland Life and General insurance businesses have been aligned to the new management structure and reported within Europe. The UK Insurance business continues to be dealt with as two businesses, UK Life and UK General Insurance and health, under the overall leadership of Andy Briggs, CEO of UK Insurance. The Ireland Life and General insurance businesses are now part of the European operations under the overall leadership of Maurice Tulloch, CEO of International Insurance. As a result of this change, comparative information for half year 2017 has been restated.

Additionally, a number of non-insurance businesses in the UK which were previously reported within Other products and services segment are now reported within Long-term business or General insurance and health segments, as appropriate, as this is more reflective of the Group's operating segments. Comparative information in the products and services segmental note B5(b) has been restated to reflect this change. This resulted in a loss before tax of £22 million and £26 million, for half year 2017 and 2017 respectively, being transferred from the 'Other' products and services segment. The corresponding net assets amounts are £177 million and £140 million for half year 2017 and 2017 respectively. This change has no impact on the operating segmental disclosures in note B5(a).

B3 - Exchange rates

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

	6 months 2018	6 months 2017	Full year 2017
Eurozone
Average rate (€1 equals)	£0.88	£0.86	£0.88
Period end rate (€1 equals)	£0.88	£0.88	£0.89
Canada
Average rate ($CAD1 equals)	£0.57	£0.59	£0.60
Period end rate ($CAD1 equals)	£0.58	£0.59	£0.59
Poland
Average rate (PLN1 equals)	£0.21	£0.20	£0.21
Period end rate (PLN1 equals)	£0.20	£0.21	£0.21

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Page 43

B4 - Subsidiaries, joint ventures and associates

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

(a) Acquisitions

(i) Wealthify

On 8 February 2018, Aviva acquired a majority shareholding in Wealthify Group Limited, the holding company of Wealthify, for a cash consideration of £17 million. The investment is part of Aviva's strategy to build customer loyalty by providing customers with a wide range of insurance and investment services all managed through the convenience and simplicity of Aviva's digital hub, MyAviva.

(ii) Friends First

On 14 November 2017, Aviva plc announced the acquisition of Friends First Life Assurance Company DAC (Friends First), an Irish insurer, for a consideration of €146 million (approximately £129 million). Following completion of the transaction announced on 1 June 2018, Friends First is now a wholly owned subsidiary. As a result of this acquisition, Aviva is now one of the largest composite insurers in Ireland.

The following table summarises the consideration for the acquisition, the fair value of the assets acquired, liabilities assumed and resulting allocation to goodwill. The actuarial assumptions used in the valuation of insurance liabilities have yet to be aligned with Group accounting policies due to the proximity of the acquisition date to interim reporting. The balance sheet values are subject to amendment during the measurement period of up to 12 months after the acquisition date as permitted under IFRS 3 Business Combinations.

	1 June 2018 Fair Value £m
Assets
AVIF and other intangibles	96
Financial investments	3,207
Reinsurance assets	502
Receivables	32
Net tax asset	3
Other assets	426
Cash and cash equivalents	354
Total identifiable assets	4,620
Liabilities
Insurance liabilities	1,408
Investment contract liabilities	2,922
Payables and other financial liabilities	33
Other liabilities	92
Total identifiable liabilities	4,455
Net identifiable assets acquired	165
Consideration	129
Negative goodwill arising on acquisition	36

The acquisition resulted in a gain from negative goodwill of £36 million, as the fair value of the net assets acquired of £165 million exceeded the consideration paid of £129 million. The gain arose primarily due to differences between the valuation of the pension scheme liability used to determine the transaction price and the recognition and measurement principles defined by IAS 19 Employee Benefits. The gain has been recognised immediately in the Income Statement as required by IFRS 3. The receivables balance of £32 million is made up of other receivables, prepayments and accrued income, measured at fair value and assessed as fully recoverable. Due to the timing of the acquisition, the income statement of Friends First since acquisition has had no material impact on the Group's results in the period.

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

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

	6 months 2018 £m	6 months 2017 £m	Full year 2017 £m
Remeasurements due to change in control status
Asia - Vietnam	-	6	7
Poland	-	16	16
Other small operations	2	-	-
Disposals
France - Antarius	-	180	180
France - health	1	-	36
Spain	1	-	28
Italy (see (b)(i) below)	24	-	-
Asia - Taiwan (see (b)(ii) below)	7	-	(7)
Other small operations	-	-	(7)
Held for sale remeasurements
Asia - FPIL (see (c)(i) below)	(4)	-	(118)
Total profit on disposal and remeasurements	31	202	135

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Page 44

B4 - Subsidiaries, joint ventures and associates continued

The profit on the disposal and remeasurement of subsidiaries, joint ventures and associates during the period of £31 million (HY17: profit of £202 million) consists of a £24 million gain on disposal of Italy Avipop (see note B4(b)(i)), £7 million gain on disposal of Taiwan (see note B4(b)(ii)), £2 million gains relating to France and Spain transactions which completed in 2017 and a £2 million remeasurement gain in respect of other small operations. This has been offset by £4 million remeasurement loss relating to FPIL (see note B4 (c)(i) below).

Remeasurements due to change in control status

On 13 February 2018, Aviva announced that it has completed the transaction to develop a digital insurance joint venture in Hong Kong with Hillhouse Capital Group (Hillhouse) and Tencent Holdings Limited (Tencent). The joint venture commenced operating under its new corporate structure during the first half of 2018. The transaction included the sale of 60% of the shareholding in Aviva Life Insurance Company Limited (Aviva Hong Kong) for cash consideration of HKD 301 million (approximately £29 million). The transaction resulted in a remeasurement gain of £2 million mainly arising through the recycling of reserves to the income statement and, additionally, a loss of £4 million which has been recognised directly in equity in accordance with IFRS 10 Consolidated Financial Statements as Aviva has retained control of certain activities under the sale agreement.

Disposals

(i) Italy - Avipop

On 29 March 2018, Aviva announced that it had completed the sale of its entire shareholding of Avipop Assicurazioni S.p.A and Avipop Vita S.p.A to Banco BPM for cash consideration of €265 million (approximately £232 million). The transaction resulted in a total gain on disposal of £24 million, calculated as follows:

	£m
Assets
Goodwill, AVIF and other intangibles	439
Deferred acquisition costs	15
Investments	376
Receivables and other financial assets	17
Reinsurance assets	75
Other assets	-
Cash and cash equivalents	42
Total assets	964
Liabilities
Insurance liabilities	376
Payables and other financial liabilities	2
Tax liabilities	143
Other liabilities	6
Total liabilities	527
Net assets	437
Non-controlling interests before disposal	(213)
Group's share of net assets disposed	224
Cash consideration	235
Less: transaction costs	(3)
Net consideration	232
Reserves recycled to the income statement	16
Profit on disposal	24

(ii) Taiwan

On 19 January 2018, Aviva announced the sale of its entire 49% shareholding in its joint venture in Taiwan, First Aviva Life (Aviva Taiwan) to Aviva's joint venture partner, First Financial Holding Co. Ltd (FFH) for cash consideration of $1. The transaction resulted in a gain of £7 million arising from reserves recycled to the Income Statement. Remeasurement losses arising from the classification of Aviva Taiwan as held for sale were recognised in 2017.

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Page 45

B4 - Subsidiaries, joint ventures and associates continued

The assets and liabilities of operations classified as held for sale as at 30 June 2018 are as follows:

	30 June 2018 £m	30 June 2017 £m	31 December 2017 £m
Assets
Goodwill, AVIF and other intangibles	950	598	1,467
Property and equipment	5	1	5
Investment property	-	1	-
Loans	-	67	6
Financial investments	7,747	4,777	8,306
Reinsurance assets	46	101	123
Other assets	210	91	225
Cash and cash equivalents	707	406	739
Total assets	9,665	6,042	10,871
Liabilities
Insurance liabilities	(509)	(4,061)	(914)
Liability for investment contracts	(8,437)	-	(8,663)
Unallocated divisible surplus	(19)	(248)	(19)
Net assets attributable to unit holders	-	(555)	-
External borrowings	-	(13)	-
Other liabilities	(131)	(303)	(277)
Total liabilities	(9,096)	(5,180)	(9,873)
Net assets	569	862	998

Assets and liabilities of operations classified as held for sale as at 30 June 2018 relate to the expected disposal of the international operations of FPIL and Spain. See below for further details:

(i) FPIL

On 19 July 2017, Aviva announced the sale of FPIL to RL360 Holding Company Limited, a subsidiary of International Financial Group Limited, for a total consideration of £340 million. The conditions defined in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations for a subsidiary to be classified as held for sale include the presumption that the sale will be completed within 12 months of the date of reclassification. The transaction remains subject to regulatory approvals and is now expected to complete in the second half of 2018. As such, the subsidiary continues to be classified as held for sale and has been remeasured at fair value based on the expected sales price less costs to sell, calculated as £334 million. This resulted in a total loss on remeasurement of £118 million in 2017, and an additional remeasurement adjustment of £4 million at 30 June 2018. The business remains a consolidated subsidiary of Aviva at the balance sheet date.

(ii) Spain

On 23 February 2018, Aviva announced that it has agreed to sell its entire shareholding in life insurance and pensions joint ventures Caja Murcia Vida and Caja Granada Vida to Bankia. The transaction completed on 10 July 2018 for a total consideration of €203 million (approximately £180 million). In addition, Aviva has agreed to sell its 50% shareholding in the small life insurance operation, Pelayo Vida to Santa Lucia. The transaction is expected to complete in the second half of 2018.

(d) Subsequent events

In addition to the subsequent events shown above relating to Spain, on 17 July 2018, L'Union Financiere de France Banque (UFFB), a subsidiary company of Aviva located in France, announced that it had agreed to sell its entire 30.3% shareholding in asset management company Primonial Real Estate Investment Management to Groupe Primonial for a total consideration of €91 million. The transaction is subject to regulatory approvals and is expected to complete in the second half of 2018. The investment has not been reclassified from 'interests in, and loans to, associates' to 'assets of operations classified as held for sale' on the grounds of materiality.

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Page 46

B5 - Segmental information

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

(a) Operating segments

During 2017, following the launch of UK Insurance which brings together the UK Life, UK General Insurance and UK Health businesses, the Group's operating segments were changed to align them with the new management structure (see note B2 for further details). Results for the period ended 30 June 2017 have been restated accordingly.

United Kingdom

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

Canada

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

France

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

Poland

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

Italy, Ireland, Spain and Other

These countries are not individually significant at a Group level, so have been aggregated into a single reporting segment in line with IFRS 8 Operating Segments. The principal activities of our operations in Italy and Ireland are long-term business and general insurance. The principal activity of our operation in Spain is the sale of accident and health insurance and a selection of savings products. Our 'Other' operations include our life operations in Turkey. This segment includes Friends First. See note B4(a) for more details. The results of certain entities within Spain are included up to the date of disposal on 15 September 2017 and the results of Avipop, part of our operations in Italy, have been included up to the date of disposal on 29 March 2018. See note B4(b) for more details.

Asia

Our activities in Asia principally comprise our long-term insurance business operations in China, India, Singapore, Hong Kong, Vietnam, Indonesia, Taiwan (up to 19 January 2018, see note B4(b)) and the international operations of Friends Life. This segment also includes general insurance and health operations in Singapore and health operations in Indonesia. This segment includes the results of the digital insurance joint venture in Hong Kong, which commenced operating under its new corporate structure during the first half of 2018.

Aviva Investors

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

Other Group activities

Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in 'Other Group activities', along with central core structural borrowings and certain tax balances in the segmental statement of financial position. The results of our reinsurance and digital broker operations and the Group's interest in Wealthify (see note B4(a)) are also included in this segment, as are the elimination entries for certain inter-segment transactions.

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Measurement basis

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

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

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

(a) (i) Segmental income statement for the six month period ended 30 June 2018

	United Kingdom			Europe
	Life £m	GI £m	Canada⁴ £m	France £m	Poland £m	Italy, Ireland, Spain and Other £m	Asia £m	Aviva Investors £m	Other Group activities² £m	Total £m
Gross written premiums	3,941	2,266	1,535	2,828	297	3,769	544	-	-	15,180
Premiums ceded to reinsurers	(737)	(150)	(52)	(38)	(5)	(51)	(63)	-	-	(1,096)
Internal reinsurance revenue	-	(6)	-	-	-	(1)	(4)	-	11	-
Premiums written net of reinsurance	3,204	2,110	1,483	2,790	292	3,717	477	-	11	14,084
Net change in provision for unearned premiums	(34)	(96)	(33)	(124)	6	(6)	(12)	-	-	(299)
Net earned premiums	3,170	2,014	1,450	2,666	298	3,711	465	-	11	13,785
Fee and commission income	447	59	8	137	46	45	114	186	-	1,042
	3,617	2,073	1,458	2,803	344	3,756	579	186	11	14,827
Net investment income/(expense)	166	25	22	(138)	(95)	(441)	(269)	28	210	(492)
Inter-segment revenue	-	-	-	-	-	-	-	118	-	118
Share of profit/(loss) of joint ventures and associates	25	-	-	(5)	-	3	1	-	-	24
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	-	1	-	25	5	-	-	31
Segmental income¹	3,808	2,098	1,480	2,661	249	3,343	316	332	221	14,508
Claims and benefits paid, net of recoveries from reinsurers	(5,150)	(1,357)	(962)	(2,231)	(183)	(1,333)	(271)	-	(19)	(11,506)
Change in insurance liabilities, net of reinsurance	1,915	144	(112)	124	143	(348)	(51)	-	17	1,832
Change in investment contract provisions	672	-	-	(581)	-	(1,947)	183	(30)	-	(1,703)
Change in unallocated divisible surplus	130	-	-	590	6	680	102	-	-	1,508
Fee and commission expense	(337)	(620)	(377)	(254)	(66)	(191)	(87)	(21)	(164)	(2,117)
Other expenses	(711)	(117)	(95)	(133)	(50)	(55)	(135)	(209)	(201)	(1,706)
Inter-segment expenses	(106)	(3)	(3)	-	(2)	(3)	-	-	(1)	(118)
Finance costs	(53)	(1)	(3)	-	-	(2)	(3)	-	(204)	(266)
Segmental expenses	(3,640)	(1,954)	(1,552)	(2,485)	(152)	(3,199)	(262)	(260)	(572)	(14,076)
Profit/(loss) before tax	168	144	(72)	176	97	144	54	72	(351)	432
Tax attributable to policyholders' returns	95	-	-	-	-	-	(1)	-	-	94
Profit/(loss) before tax attributable to shareholders' profits	263	144	(72)	176	97	144	53	72	(351)	526
Adjusting items:
Reclassification of corporate costs and unallocated interest	-	(8)	16	24	-	-	-	2	(34)	-
Investment return variances and economic assumption changes	401	-	-	44	2	35	-	-	-	482
Short-term fluctuation in return on investments backing	-	71	23	23	(1)	26	-	-	64	206
General insurance and health business: economic assumption changes	-	(27)	(1)	(6)	-	-	-	-	-	(34)
Impairment of goodwill, joint ventures, associates and other amounts expensed	-	-	-	-	-	-	-	-	-	-
Amortisation and impairment of intangibles	38	15	22	1	3	1	6	2	13	101
Amortisation and impairment of AVIF	143	-	-	1	-	-	64	-	2	210
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	-	(1)	-	(25)	(5)	-	-	(31)
Other³	-	-	-	-	-	(36)	-	-	14	(22)
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits after integration and restructuring costs	845	195	(12)	262	101	145	118	76	(292)	1,438
Integration and restructuring costs	-	-	-	-	-	-	-	-	-	-
Group adjusted operating profit/(loss) before tax^‡ attributable to shareholders' profits	845	195	(12)	262	101	145	118	76	(292)	1,438

1 Total reported income, excluding inter-segment revenue, includes £6,054 million from the United Kingdom (Aviva plc's country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts are written.

2 Other Group activities include Group Reinsurance.

3 Other includes a gain of £36 million relating to negative goodwill on the acquisition of Friends First (refer to note B4(a)) and a charge of £14 million relating to the goodwill payments to preference shareholders which were announced on 30 April 2018. Refer to note A11.

4 Canada operating profit includes £1 million profit relating to non-insurance activities.

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(a) (ii) Segmental income statement for the six month period ended 30 June 2017 - restated¹

	United Kingdom			Europe
	Life £m	GI £m	Canada £m	France £m	Poland £m	Italy, Ireland, Spain and Other £m	Asia £m	Aviva Investors £m	Other Group activities³ £m	Total £m
Gross written premiums	2,889	2,235	1,529	3,053	286	3,067	517	-	-	13,576
Premiums ceded to reinsurers	(732)	(130)	(52)	(40)	(5)	(51)	(66)	-	-	(1,076)
Internal reinsurance revenue	-	-	-	-	-	(5)	(5)	-	10	-
Premiums written net of reinsurance	2,157	2,105	1,477	3,013	281	3,011	446	-	10	12,500
Net change in provision for unearned premiums	(38)	(110)	(48)	(128)	-	(27)	(14)	-	-	(365)
Net earned premiums	2,119	1,995	1,429	2,885	281	2,984	432	-	10	12,135
Fee and commission income	499	60	12	146	40	61	103	206	(2)	1,125
	2,618	2,055	1,441	3,031	321	3,045	535	206	8	13,260
Net investment income	8,018	29	57	1,417	197	279	480	61	216	10,754
Inter-segment revenue	-	-	-	-	-	-	-	113	-	113
Share of profit/(loss) of joint ventures and associates	29	-	-	12	-	4	(35)	-	-	10
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	-	180	16	-	6	-	-	202
Segmental income²	10,665	2,084	1,498	4,640	534	3,328	986	380	224	24,339
Claims and benefits paid, net of recoveries from reinsurers	(5,580)	(1,257)	(898)	(2,717)	(215)	(1,593)	(235)	-	(6)	(12,501)
Change in insurance liabilities, net of reinsurance	(193)	38	(94)	(442)	(93)	(613)	(306)	-	19	(1,684)
Change in investment contract provisions	(3,719)	-	-	(859)	-	(766)	(178)	(62)	-	(5,584)
Change in unallocated divisible surplus	604	-	-	133	(4)	159	(98)	-	-	794
Fee and commission expense	(262)	(633)	(367)	(354)	(68)	(233)	(58)	(21)	(204)	(2,200)
Other expenses	(599)	(113)	(97)	(146)	(44)	(105)	(146)	(206)	(213)	(1,669)
Inter-segment expenses	(96)	(3)	(3)	(1)	(2)	(6)	-	-	(2)	(113)
Finance costs	(129)	-	(2)	(1)	-	(3)	(2)	-	(216)	(353)
Segmental expenses	(9,974)	(1,968)	(1,461)	(4,387)	(426)	(3,160)	(1,023)	(289)	(622)	(23,310)
Profit/(loss) before tax	691	116	37	253	108	168	(37)	91	(398)	1,029
Tax attributable to policyholders' returns	(145)	-	-	-	-	1	(10)	-	-	(154)
Profit/(loss) before tax attributable to shareholders' profits	546	116	37	253	108	169	(47)	91	(398)	875
Adjusting items:
Reclassification of corporate costs and unallocated interest	-	(6)	14	24	-	-	-	2	(34)	-
Investment variances and economic assumption changes	(38)	-	-	157	(3)	7	56	-	-	179
Short-term fluctuation in return on investments backing	-	66	(11)	4	(1)	13	1	-	133	205
General insurance and health business: economic assumption changes	-	23	-	(9)	-	-	-	-	(2)	12
Impairment of goodwill, joint ventures, associates and other amounts expensed	-	-	-	-	-	-	19	-	-	19
Amortisation and impairment of intangibles	33	15	22	-	3	3	5	3	7	91
Amortisation and impairment of AVIF	162	-	-	1	-	1	68	-	2	234
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	-	(180)	(16)	-	(6)	-	-	(202)
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits after integration and restructuring costs	703	214	62	250	91	193	96	96	(292)	1,413
Integration and restructuring costs	32	-	9	9	-	-	-	-	2	52
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits	735	214	71	259	91	193	96	96	(290)	1,465

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 comparatives have been restated.

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

3 Other Group activities include Group Reinsurance.

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(a) (iii) Segmental income statement for the year ended 31 December 2017

	United Kingdom					Europe
	Life £m	GI £m	Canada £m	France £m	Poland £m	Italy, Ireland, Spain and Other £m	Asia £m	Aviva Investors² £m	Other Group activities³ £m	Total £m
Gross written premiums	6,872	4,355	3,138	5,692	594	5,923	1,032	-	-	27,606
Premiums ceded to reinsurers	(1,531)	(271)	(110)	(78)	(11)	(101)	(127)	-	-	(2,229)
Internal reinsurance revenue	-	(6)	-	-	-	(9)	(10)	-	25	-
Premiums written net of reinsurance	5,341	4,078	3,028	5,614	583	5,813	895	-	25	25,377
Net change in provision for unearned premiums	-	(63)	(84)	23	3	(21)	(11)	-	-	(153)
Net earned premiums	5,341	4,015	2,944	5,637	586	5,792	884	-	25	25,224
Fee and commission income	906	121	24	316	83	141	193	407	(4)	2,187
	6,247	4,136	2,968	5,953	669	5,933	1,077	407	21	27,411
Net investment income	16,202	138	86	2,613	292	811	1,465	136	323	22,066
Inter-segment revenue	-	-	-	-	-	-	-	239	-	239
Share of profit/(loss) of joint ventures and associates	72	-	-	14	-	12	(57)	-	-	41
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	-	216	16	28	(118)	-	(7)	135
Segmental income¹	22,521	4,274	3,054	8,796	977	6,784	2,367	782	337	49,892
Claims and benefits paid, net of recoveries from reinsurers	(10,783)	(2,547)	(1,902)	(5,145)	(397)	(2,799)	(526)	-	(14)	(24,113)
Change in insurance liabilities, net of reinsurance	1,380	78	(221)	(804)	(134)	(928)	(450)	-	5	(1,074)
Change in investment contract provisions	(9,041)	-	-	(1,591)	-	(2,121)	(947)	(137)	-	(13,837)
Change in unallocated divisible surplus	195	-	-	153	(2)	85	(137)	-	-	294
Fee and commission expense	(496)	(1,268)	(796)	(703)	(134)	(421)	(144)	(39)	(328)	(4,329)
Other expenses	(1,385)	(221)	(178)	(281)	(102)	(229)	(298)	(418)	(425)	(3,537)
Inter-segment expenses	(207)	(8)	(6)	2	(6)	(12)	-	-	(2)	(239)
Finance costs	(233)	(1)	(5)	(1)	-	(7)	(3)	-	(433)	(683)
Segmental expenses	(20,570)	(3,967)	(3,108)	(8,370)	(775)	(6,432)	(2,505)	(594)	(1,197)	(47,518)
Profit/(loss) before tax	1,951	307	(54)	426	202	352	(138)	188	(860)	2,374
Tax attributable to policyholders' returns	(330)	-	-	-	-	(4)	(37)	-	-	(371)
Profit/(loss) before tax attributable to shareholders' profits	1,621	307	(54)	426	202	348	(175)	188	(860)	2,003
Adjusting items:
Reclassification of corporate costs and unallocated interest	-	(12)	28	48	-	-	-	5	(69)	-
Investment variances and economic assumption changes	(323)	-	-	249	(7)	12	38	-	(3)	(34)
Short-term fluctuation in return on investments backing	-	56	7	(26)	(3)	27	-	-	284	345
General insurance and health business: economic assumption changes	-	18	(2)	(9)	-	-	-	-	-	7
Impairment of goodwill, joint ventures, associates and other amounts expensed	-	-	2	-	-	-	47	-	-	49
Amortisation and impairment of intangibles	74	31	50	1	7	5	9	5	15	197
Amortisation and impairment of AVIF	327	-	-	2	-	1	154	-	11	495
(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	-	(216)	(16)	(28)	118	-	7	(135)
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits after integration and restructuring costs	1,699	400	31	475	183	365	191	198	(615)	2,927
Integration and restructuring costs	65	11	15	25	-	11	-	3	11	141
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits	1,764	411	46	500	183	376	191	201	(604)	3,068

1 Total reported income, excluding inter-segment revenue, includes £26,949 million from the United Kingdom (Aviva plc's country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts are written.

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

3 Other Group activities include Group Reinsurance.

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(a) (iv) Segmental statement of financial position as at 30 June 2018

	United Kingdom					Europe
	Life £m	GI £m	Canada £m	France £m	Poland £m	Italy, Ireland, Spain and Other £m	Asia £m	Aviva Investors £m	Other Group activities £m	Total £m
Goodwill	663	924	82	-	28	123	53	-	8	1,881
Acquired value of in-force business and intangible assets	2,602	144	236	88	73	103	27	6	96	3,375
Interests in, and loans to, joint ventures and associates	928	-	9	134	-	55	462	-	-	1,588
Property and equipment	70	29	46	253	4	5	7	4	113	531
Investment property	6,160	329	-	3,339	-	643	-	774	(94)	11,151
Loans	26,571	-	199	701	-	211	35	-	-	27,717
Financial investments	179,772	3,960	4,490	72,757	3,466	32,079	5,099	384	7,396	309,403
Deferred acquisition costs	1,351	505	378	356	116	226	11	-	-	2,943
Other assets	39,074	5,524	1,355	8,961	310	4,787	754	1,193	12,697	74,655
Assets of operations classified as held for sale	-	-	-	-	-	706	8,959	-	-	9,665
Total assets	257,191	11,415	6,795	86,589	3,997	38,938	15,407	2,361	20,216	442,909
Insurance liabilities
Long-term business and outstanding claims provisions	97,888	5,188	3,447	17,031	2,982	11,973	4,125	-	16	142,650
Unearned premiums	263	2,111	1,576	581	107	417	91	-	-	5,146
Other insurance liabilities	-	15	-	-	-	-	-	-	-	15
Gross liabilities for investment contracts	130,131	-	-	53,917	4	23,176	-	1,169	-	208,397
Unallocated divisible surplus	2,383	-	-	4,625	60	300	237	-	-	7,605
Net asset value attributable to unitholders	21	-	-	2,611	-	-	-	-	15,146	17,778
External borrowings	1,574	-	-	-	-	34	-	-	8,178	9,786
Other liabilities, including inter-segment liabilities	13,669	(96)	948	5,384	255	989	664	575	1,708	24,096
Liabilities of operations classified as held for sale	-	-	-	-	-	470	8,626	-	-	9,096
Total liabilities	245,929	7,218	5,971	84,149	3,408	37,359	13,743	1,744	25,048	424,569
Total equity										18,340
Total equity and liabilities										442,909

(a) (v) Segmental statement of financial position as at 30 June 2017 - restated¹

	United Kingdom					Europe
	Life £m	GI £m	Canada £m	France £m	Poland £m	Italy, Ireland, Spain and Other £m	Asia £m	Aviva Investors £m	Other Group activities £m	Total £m
Goodwill	663	924	87	-	28	147	62	-	-	1,911
Acquired value of in-force business and intangible assets	2,956	151	279	88	79	191	1,001	6	90	4,841
Interests in, and loans to, joint ventures and associates	937	-	14	183	-	70	482	-	-	1,686
Property and equipment	72	26	39	248	4	3	10	4	104	510
Investment property	6,215	207	-	2,998	-	212	-	909	178	10,719
Loans	24,393	5	157	741	-	120	36	-	-	25,452
Financial investments	180,226	3,836	4,552	70,211	3,493	26,016	11,934	545	8,409	309,222
Deferred acquisition costs	1,233	514	375	323	106	210	137	-	-	2,898
Other assets	41,048	5,649	1,373	10,381	310	3,681	1,704	1,056	11,530	76,732
Assets of operations classified as held for sale	-	-	-	-	-	6,042	-	-	-	6,042
Total assets	257,743	11,312	6,876	85,173	4,020	36,692	15,366	2,520	20,311	440,013
Insurance liabilities
Long-term business and outstanding claims provisions	102,607	5,438	3,352	16,675	3,158	10,131	4,130	-	8	145,499
Unearned premiums	265	2,049	1,549	607	118	528	86	-	-	5,202
Other insurance liabilities	-	13	-	-	-	-	-	-	-	13
Gross liabilities for investment contracts	124,647	-	-	52,233	2	16,852	8,509	1,483	-	203,726
Unallocated divisible surplus	2,105	-	-	5,200	69	847	303	-	-	8,524
Net asset value attributable to unitholders	76	-	-	3,141	-	-	-	-	15,252	18,469
External borrowings	1,798	-	-	1	-	34	-	-	8,505	10,338
Other liabilities, including inter-segment liabilities	14,527	(393)	981	4,797	211	961	657	457	1,531	23,729
Liabilities of operations classified as held for sale	-	-	-	-	-	5,180	-	-	-	5,180
Total liabilities	246,025	7,107	5,882	82,654	3,558	34,533	13,685	1,940	25,296	420,680
Total equity										19,333
Total equity and liabilities										440,013

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(a) (vi) Segmental statement of financial position as at 31 December 2017

	United Kingdom					Europe
	Life £m	GI £m	Canada £m	France £m	Poland £m	Italy, Ireland, Spain and Other £m	Asia £m	Aviva Investors £m	Other Group activities £m	Total £m
Goodwill	663	924	84	-	29	124	52	-	-	1,876
Acquired value of in-force business and intangible assets	2,751	152	258	90	78	4	26	4	92	3,455
Interests in, and loans to, joint ventures and associates	936	-	9	184	-	68	445	-	-	1,642
Property and equipment	52	30	46	253	4	3	8	4	109	509
Investment property	6,242	324	-	3,322	-	215	-	788	(94)	10,797
Loans	26,695	5	180	739	7	197	34	-	-	27,857
Financial investments	184,428	4,184	4,592	72,886	3,775	27,403	5,007	400	8,407	311,082
Deferred acquisition costs	1,364	487	383	322	118	222	8	2	-	2,906
Other assets	38,800	5,370	1,338	8,567	244	3,591	765	1,020	11,995	71,690
Assets of operations classified as held for sale	-	-	-	-	-	1,685	9,186	-	-	10,871
Total assets	261,931	11,476	6,890	86,363	4,255	33,512	15,531	2,218	20,509	442,685
Insurance liabilities
Long-term business and outstanding claims provisions	100,183	5,360	3,449	17,213	3,275	10,110	4,056	-	11	143,657
Unearned premiums	228	2,003	1,578	458	119	520	74	-	-	4,980
Other insurance liabilities	-	13	-	-	-	-	-	-	-	13
Gross liabilities for investment contracts	130,890	-	-	53,529	2	18,335	-	1,230	-	203,986
Unallocated divisible surplus	2,514	-	-	5,239	68	922	339	-	-	9,082
Net asset value attributable to unitholders	57	-	-	2,472	-	-	-	-	15,798	18,327
External borrowings	1,566	-	-	1	-	70	-	-	8,649	10,286
Other liabilities, including inter-segment liabilities	14,234	(294)	971	4,927	253	869	618	392	1,376	23,346
Liabilities of operations classified as held for sale	-	-	-	-	-	1,021	8,852	-	-	9,873
Total liabilities	249,672	7,082	5,998	83,839	3,717	31,847	13,939	1,622	25,834	423,550
Total equity										19,135
Total equity and liabilities										442,685

(b) Further analysis by products and services

The Group's results can be further analysed by products and services which comprise long-term business, general insurance and health, fund management and other activities. Non-insurance businesses in the UK previously included within 'Other' have been reclassified to the long-term business or general insurance and health segments, as appropriate, as this presentation is consistent with how the business is managed (see note B2 for further details). Results for the periods ended 30 June 2017 and 31 December 2017 have been restated accordingly.

Long-term business

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

General insurance and health

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

Fund management

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

Other

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

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Page 52

B5 - Segmental information continued

(b) (i) Segmental income statement - products and services for the six month period ended 30 June 2018

	Long-term business £m	General insurance and health² £m	Fund management £m	Other £m	Total £m
Gross written premiums¹	9,731	5,449	-	-	15,180
Premiums ceded to reinsurers	(836)	(260)	-	-	(1,096)
Premiums written net of reinsurance	8,895	5,189	-	-	14,084
Net change in provision for unearned premiums	-	(299)	-	-	(299)
Net earned premiums	8,895	4,890	-	-	13,785
Fee and commission income	715	61	184	82	1,042
	9,610	4,951	184	82	14,827
Net investment (expense)/income	(719)	42	(2)	187	(492)
Inter-segment revenue	-	-	120	-	120
Share of profit/(loss) of joint ventures and associates	25	(1)	-	-	24
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	30	1	-	-	31
Segmental income	8,946	4,993	302	269	14,510
Claims and benefits paid, net of recoveries from reinsurers	(8,267)	(3,239)	-	-	(11,506)
Change in insurance liabilities, net of reinsurance	1,843	(11)	-	-	1,832
Change in investment contract provisions	(1,703)	-	-	-	(1,703)
Change in unallocated divisible surplus	1,508	-	-	-	1,508
Fee and commission expense	(620)	(1,275)	(20)	(202)	(2,117)
Other expenses	(912)	(307)	(213)	(274)	(1,706)
Inter-segment expenses	(113)	(7)	-	-	(120)
Finance costs	(56)	(3)	-	(207)	(266)
Segmental expenses	(8,320)	(4,842)	(233)	(683)	(14,078)
Profit/(loss) before tax	626	151	69	(414)	432
Tax attributable to policyholders' returns	94	-	-	-	94
Profit/(loss) before tax attributable to shareholders' profits	720	151	69	(414)	526
Adjusting items	672	151	5	84	912
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits^‡	1,392	302	74	(330)	1,438

1 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £51 million relating to property and liability insurance.

2 General insurance and health business segment includes gross written premiums of £507 million relating to health business. The remaining business relates to property and liability insurance.

(b) (ii) Segmental income statement - products and services for the six month period ended 30 June 2017 - restated¹

	Long-term business £m	General insurance and health³ £m	Fund management £m	Other £m	Total £m
Gross written premiums²	8,114	5,462	-	-	13,576
Premiums ceded to reinsurers	(838)	(238)	-	-	(1,076)
Premiums written net of reinsurance	7,276	5,224	-	-	12,500
Net change in provision for unearned premiums	-	(365)	-	-	(365)
Net earned premiums	7,276	4,859	-	-	12,135
Fee and commission income	778	61	178	108	1,125
	8,054	4,920	178	108	13,260
Net investment income/(expense)	10,443	122	(1)	190	10,754
Inter-segment revenue	-	-	115	-	115
Share of profit of joint ventures and associates	10	-	-	-	10
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	196	6	-	-	202
Segmental income	18,703	5,048	292	298	24,341
Claims and benefits paid, net of recoveries from reinsurers	(9,418)	(3,083)	-	-	(12,501)
Change in insurance liabilities, net of reinsurance	(1,620)	(64)	-	-	(1,684)
Change in investment contract provisions	(5,584)	-	-	-	(5,584)
Change in unallocated divisible surplus	794	-	-	-	794
Fee and commission expense	(644)	(1,285)	(20)	(251)	(2,200)
Other expenses	(856)	(321)	(208)	(284)	(1,669)
Inter-segment expenses	(107)	(7)	-	(1)	(115)
Finance costs	(132)	(2)	-	(219)	(353)
Segmental expenses	(17,567)	(4,762)	(228)	(755)	(23,312)
Profit/(loss) before tax	1,136	286	64	(457)	1,029
Tax attributable to policyholder returns	(154)	-	-	-	(154)
Profit/(loss) before tax attributable to shareholders' profits	982	286	64	(457)	875
Adjusting items	314	132	5	139	590
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits	1,296	418	69	(318)	1,465

1 Non-insurance businesses in the UK previously included within 'Other' have been reclassified to the Long-term business and General insurance and health segments as this presentation is consistent with how the business is managed.

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

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

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B5 - Segmental information continued

(b) (iii) Segmental income statement - products and services for the year ended 31 December 2017 - restated¹

	Long-term business £m	General insurance and health³ £m	Fund management £m	Other £m	Total £m
Gross written premiums²	17,083	10,523	-	-	27,606
Premiums ceded to reinsurers	(1,741)	(488)	-	-	(2,229)
Premiums written net of reinsurance	15,342	10,035	-	-	25,377
Net change in provision for unearned premiums	-	(153)	-	-	(153)
Net earned premiums	15,342	9,882	-	-	25,224
Fee and commission income	1,486	134	369	198	2,187
	16,828	10,016	369	198	27,411
Net investment income/(expense)	21,468	331	(1)	268	22,066
Inter-segment revenue	-	-	244	-	244
Share of profit of joint ventures and associates	41	-	-	-	41
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates	100	42	-	(7)	135
Segmental income	38,437	10,389	612	459	49,897
Claims and benefits paid, net of recoveries from reinsurers	(17,791)	(6,322)	-	-	(24,113)
Change in insurance liabilities, net of reinsurance	(863)	(211)	-	-	(1,074)
Change in investment contract provisions	(13,837)	-	-	-	(13,837)
Change in unallocated divisible surplus	294	-	-	-	294
Fee and commission expense	(1,210)	(2,668)	(36)	(415)	(4,329)
Other expenses	(1,919)	(626)	(425)	(567)	(3,537)
Inter-segment expenses	(226)	(15)	-	(3)	(244)
Finance costs	(240)	(6)	-	(437)	(683)
Segmental expenses	(35,792)	(9,848)	(461)	(1,422)	(47,523)
Profit/(loss) before tax	2,645	541	151	(963)	2,374
Tax attributable to policyholders' returns	(371)	-	-	-	(371)
Profit/(loss) before tax attributable to shareholders' profits	2,274	541	151	(963)	2,003
Adjusting items	578	163	13	311	1,065
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits	2,852	704	164	(652)	3,068

1 Non-insurance businesses in the UK previously included within 'Other' have been reclassified to the long-term business and General insurance and health segments as this presentation is consistent with how the business is managed.

2 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £91 million, of which £73 million relates to property and liability insurance and £18 million relates to long-term business.

3 General insurance and health business segment includes gross written premiums of £914 million relating to health business. The remaining business relates to property and liability insurance.

(b) (iv) Segmental statement of financial position - products and services as at 30 June 2018

	Long-term business £m	General insurance and health £m	Fund management £m	Other £m	Total £m
Goodwill	721	1,082	3	75	1,881
Acquired value of in-force business and intangible assets	2,869	407	6	93	3,375
Interests in, and loans to, joint ventures and associates	1,563	8	-	17	1,588
Property and equipment	258	136	4	133	531
Investment property	10,786	459	-	(94)	11,151
Loans	27,518	199	-	-	27,717
Financial investments	290,516	11,581	66	7,240	309,403
Deferred acquisition costs	1,811	1,132	-	-	2,943
Other assets	50,578	9,739	1,095	13,243	74,655
Assets of operations classified as held for sale	9,665	-	-	-	9,665
Total assets	396,285	24,743	1,174	20,707	442,909
Gross insurance liabilities	130,996	16,815	-	-	147,811
Gross liabilities for investment contracts	208,397	-	-	-	208,397
Unallocated divisible surplus	7,605	-	-	-	7,605
Net asset value attributable to unitholders	2,632	-	-	15,146	17,778
External borrowings	1,608	-	-	8,178	9,786
Other liabilities, including inter-segment liabilities	18,903	1,645	561	2,987	24,096
Liabilities of operations classified as held for sale	9,096	-	-	-	9,096
Total liabilities	379,237	18,460	561	26,311	424,569
Total equity					18,340
Total equity and liabilities					442,909

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B5 - Segmental information continued

(b) (v) Segmental statement of financial position - products and services as at 30 June 2017- restated¹

	Long-term business £m	General insurance and health £m	Fund management £m	Other £m	Total £m
Goodwill	755	1,086	3	67	1,911
Acquired value of in-force business and intangible assets	4,304	458	6	73	4,841
Interests in, and loans to, joint ventures and associates	1,663	10	-	13	1,686
Property and equipment	262	125	4	119	510
Investment property	10,197	344	-	178	10,719
Loans	25,288	164	-	-	25,452
Financial investments	289,348	11,432	51	8,391	309,222
Deferred acquisition costs	1,756	1,142	-	-	2,898
Other assets	54,158	9,732	953	11,889	76,732
Assets of operations classified as held for sale	5,733	309	-	-	6,042
Total assets	393,464	24,802	1,017	20,730	440,013
Gross insurance liabilities	133,908	16,806	-	-	150,714
Gross liabilities for investment contracts	203,726	-	-	-	203,726
Unallocated divisible surplus	8,524	-	-	-	8,524
Net asset value attributable to unitholders	3,216	-	-	15,253	18,469
External borrowings	1,702	-	-	8,636	10,338
Other liabilities, including inter-segment liabilities	19,224	1,233	440	2,832	23,729
Liabilities of operations classified as held for sale	5,006	174	-	-	5,180
Total liabilities	375,306	18,213	440	26,721	420,680
Total equity					19,333
Total equity and liabilities					440,013

(b) (vi) Segmental statement of financial position - products and services as at 31 December 2017- restated¹

	Long-term business £m	General insurance and health £m	Fund management £m	Other £m	Total £m
Goodwill	720	1,084	3	69	1,876
Acquired value of in-force business and intangible assets	2,922	439	4	90	3,455
Interests in, and loans to, joint ventures and associates	1,617	9	-	16	1,642
Property and equipment	240	136	4	129	509
Investment property	10,392	499	-	(94)	10,797
Loans	27,671	186	-	-	27,857
Financial investments	290,840	11,934	54	8,254	311,082
Deferred acquisition costs	1,804	1,100	2	-	2,906
Other assets	49,118	9,283	905	12,384	71,690
Assets of operations classified as held for sale	10,552	319	-	-	10,871
Total assets	395,876	24,989	972	20,848	442,685
Gross insurance liabilities	131,987	16,663	-	-	148,650
Gross liabilities for investment contracts	203,986	-	-	-	203,986
Unallocated divisible surplus	9,082	-	-	-	9,082
Net asset value attributable to unitholders	2,529	-	-	15,798	18,327
External borrowings	1,601	-	-	8,685	10,286
Other liabilities, including inter-segment liabilities	18,828	1,413	376	2,729	23,346
Liabilities of operations classified as held for sale	9,694	179	-	-	9,873
Total liabilities	377,707	18,255	376	27,212	423,550
Total equity					19,135
Total equity and liabilities					442,685

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Page 55

B6 - Tax

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

(a) Tax charged to the income statement

(i) The total tax charge comprises:

	6 months 2018 £m	6 months 2017 £m	Full year 2017 £m
Current tax
For the period	144	269	651
Prior period adjustments	(4)	8	(46)
Total current tax	140	277	605
Deferred tax
Origination and reversal of temporary differences	(81)	48	134
Changes in tax rates or tax laws	-	(13)	(8)
Write (back)/ down of deferred tax assets	(3)	1	(3)
Total deferred tax	(84)	36	123
Total tax charged to income statement	56	313	728

(ii) The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Ireland and Singapore insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholders' returns included in the charge above is £(94) million (HY17: £154 million charge, 2017: £371 million charge).

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

	6 months 2018 £m	6 months 2017 £m	Full year 2017 £m
UK tax	(39)	209	528
Overseas tax	95	104	200
	56	313	728

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

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

	6 months 2018 £m	6 months 2017 £m	Full year 2017 £m
Current tax
In respect of pensions and other post-retirement obligations	(26)	(29)	(45)
In respect of foreign exchange movements	(4)	3	4
	(30)	(26)	(41)
Deferred tax
In respect of pensions and other post-retirement obligations	50	18	42
In respect of fair value losses on owner-occupied properties	-	(1)	(2)
In respect of unrealised losses on investments	-	(8)	(9)
	50	9	31
Total tax charged/(credited) to other comprehensive income	20	(17)	(10)

(ii) The tax charge attributable to policyholders' returns included above is £nil (HY17: £nil, 2017 £nil).

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Page 56

B6 - Tax continued

Tax credited directly to equity in the period in respect of coupon payments on the direct capital instrument and tier 1 notes amounted to £2 million (HY17: £6 million, 2017: £16 million).

(d) Tax reconciliation

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

	Shareholder £m	Policyholder £m	6 months 2018 £m	Shareholder £m	Policyholder £m	6 months 2017 £m	Shareholder £m	Policyholder £m	Full year 2017 £m
Total profit before tax	526	(94)	432	875	154	1,029	2,003	371	2,374

Tax calculated at standard UK corporation tax rate of 19.00% (2017: 19.25%)	100	(18)	82	168	30	198	386	71	457
Reconciling items
Different basis of tax - policyholders	-	(76)	(76)	-	124	124	-	301	301
Adjustment to tax charge in respect of prior periods	(8)	-	(8)	(10)	-	(10)	(44)	-	(44)
Non-assessable income and items not taxed at the full statutory rate	8	-	8	(8)	-	(8)	(47)	-	(47)
Non-taxable profit on sale of subsidiaries and associates	(3)	-	(3)	(52)	-	(52)	(27)	-	(27)
Disallowable expenses	37	-	37	25	-	25	47	-	47
Different local basis of tax on overseas profits	20	-	20	49	-	49	82	(1)	81
Change in future local statutory tax rates	-	-	-	(13)	-	(13)	(36)	-	(36)
Movement in deferred tax not recognised	(6)	-	(6)	(3)	-	(3)	(3)	-	(3)
Tax effect of profit from joint ventures and associates	(1)	-	(1)	2	-	2	(3)	-	(3)
Other	3	-	3	1	-	1	2	-	2
Total tax charged/(credited) to income statement	150	(94)	56	159	154	313	357	371	728

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

The rate of corporation tax in the UK will be reduced from 19% to 17% from 1 April 2020. In addition, during 2017 the French government introduced a stepped reduction to the French corporation tax rate from 34.43% to 25.83% from 1 January 2022. These reduced rates were used in the calculation of deferred tax assets and liabilities in the UK and France at 31 December 2017 and 30 June 2018.

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Page 57

B7 - Earnings per share

(a) Basic earnings per share

(i) The profit attributable to ordinary shareholders is:

			6 months 2018			6 months 2017			Full year 2017
	Group adjusted operating profit £m	Adjusting items £m	Total £m	Group adjusted operating profit £m	Adjusting items £m	Total £m	Group adjusted operating profit £m	Adjusting items £m	Total £m
Profit before tax attributable to shareholders' profits	1,438	(912)	526	1,465	(590)	875	3,068	(1,065)	2,003
Tax attributable to shareholders' profit	(303)	153	(150)	(311)	152	(159)	(639)	282	(357)
Profit for the period	1,135	(759)	376	1,154	(438)	716	2,429	(783)	1,646
Amount attributable to non-controlling interests	(46)	-	(46)	(73)	(6)	(79)	(134)	(15)	(149)
Cumulative preference dividends for the year	(9)	-	(9)	(9)	-	(9)	(17)	-	(17)
Coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax)	(6)	-	(6)	(23)	-	(23)	(65)	-	(65)
Profit attributable to ordinary shareholders	1,074	(759)	315	1,049	(444)	605	2,213	(798)	1,415

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

			6 months 2018			6 months 2017			Full year 2017
	Before tax £m	Net of tax, NCI, preference dividends and DCI¹ £m	Per share p	Before tax £m	Net of tax, NCI, preference dividends and DCI¹ £m	Per share p	Before tax £m	Net of tax, NCI, preference dividends and DCI¹ £m	Per share p
Group adjusted operating profit attributable to ordinary shareholders	1,438	1,074	26.8	1,465	1,049	25.8	3,068	2,213	54.8
Integration and restructuring costs	-	-	-	(52)	(40)	(1.0)	(141)	(111)	(2.8)
Group adjusted operating profit attributable to ordinary shareholders after integration and restructuring costs	1,438	1,074	26.8	1,413	1,009	24.8	2,927	2,102	52.0
Adjusting items:
Investment variances and economic assumption changes	(482)	(419)	(10.5)	(179)	(129)	(3.2)	34	86	2.1
Short-term fluctuation in return on investments backing	(206)	(160)	(4.0)	(205)	(166)	(4.1)	(345)	(250)	(6.3)
General insurance and health business: economic assumption changes	34	27	0.7	(12)	(10)	(0.2)	(7)	(6)	(0.1)
Impairment of goodwill, joint ventures, associates and other amounts expensed	-	-	-	(19)	(19)	(0.5)	(49)	(49)	(1.2)
Amortisation and impairment of intangibles	(101)	(82)	(2.0)	(91)	(71)	(1.7)	(197)	(151)	(3.7)
Amortisation and impairment of acquired value of in-force business	(210)	(178)	(4.4)	(234)	(201)	(4.9)	(495)	(430)	(10.6)
Profit on disposal and remeasurement of subsidiaries, joint ventures and associates	31	31	0.8	202	192	4.7	135	113	2.8
Other²	22	22	0.5	-	-	-	-	-	-
Profit attributable to ordinary shareholders	526	315	7.9	875	605	14.9	2,003	1,415	35.0

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

2 Other includes a gain of £36 million relating to negative goodwill on the acquisition of Friends First (refer to Note B4(a)) and a charge of £14 million relating to goodwill payments to preference shareholders which were announced on 30 April 2018 (refer to note A2).

(iii) The calculation of basic earnings per share uses a weighted average of 4,009 million (HY17: 4,061 million, 2017: 4,041 million) ordinary shares in issue, after deducting treasury shares. The actual number of shares in issue at 30 June 2018 was 3,983 million (HY17: 4,055 million, 2017: 4,013 million) and 3,980 million (HY17: 4,052 million, 2017: 4,010 million) excluding treasury shares.

(iv) Aviva has significant excess capital and has committed to deploy £2 billion of this in 2018. The deployment includes £900 million of debt reduction, £500 million for bolt-on acquisitions and a £600 million ordinary share buy-back.

In 2017 a share buy-back of ordinary shares for an aggregate share purchase price of £300 million was carried out in full. As at 30 June 2017 £73 million had been completed of the share buy-back. The number of shares in issue reduced by 57,724,500 in 2017 in respect of shares acquired and cancelled under the buy-back programme.

On 1 May 2018 the Group announced a further share buy-back of ordinary shares for an aggregate purchase price of up to £600 million. As at 30 June 2018 a further 43,911,450 shares, had been purchased and subsequently cancelled bringing the total cancelled under the programme to 101,635,950 shares.

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Page 58

B7 - Earnings per share continued

(b) Diluted earnings per share

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

			6 months 2018			6 months 2017			Full year 2017
	Total £m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share p
Profit attributable to ordinary shareholders	315	4,009	7.9	605	4,061	14.9	1,415	4,041	35.0
Dilutive effect of share awards and options	-	54	(0.1)	-	47	(0.2)	-	48	(0.4)
Diluted earnings per share	315	4,063	7.8	605	4,108	14.7	1,415	4,089	34.6

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

			6 months 2018			6 months 2017			Full year 2017
	Total £m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share p
Group adjusted operating profit attributable to ordinary shareholders	1,074	4,009	26.8	1,049	4,061	25.8	2,213	4,041	54.8
Dilutive effect of share awards and options	-	54	(0.4)	-	47	(0.3)	-	48	(0.7)
Diluted Group adjusted operating profit per share	1,074	4,063	26.4	1,049	4,108	25.5	2,213	4,089	54.1

B8 - Dividends and appropriations

	6 months 2018	6 months 2017	Full year 2017
Ordinary dividends declared and charged to equity in the year
Final 2017 - 19.00 pence per share, paid on 17 May 2018	764	-	-
Final 2016 - 15.88 pence per share, paid on 17 May 2017	-	646	646
Interim 2017 - 8.40 pence per share, paid on 17 November 2017	-	-	337
	764	646	983
Preference dividends declared and charged to equity in the year	9	9	17
Coupon payments on DCI and tier 1 notes	7	29	81
	780	684	1,081

Subsequent to 30 June 2018, the directors declared an interim dividend for 2018 of 9.25 pence per ordinary share (HY17: 8.40 pence), amounting to £366 million (HY17: £337 million) in total based on shares in issue as at 31 July 2018. The dividend will be paid on 24 September 2018 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2018.

Interest on the DCI and tier 1 notes is treated as an appropriation of retained profits and, accordingly, is accounted for when paid. Tax relief is obtained at a rate of 19% (2017: 19.25%).

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Page 59

B9 - Insurance liabilities

(a) Carrying amount

(i) Components of insurance liabilities (gross of reinsurance)

			30 June 2018			30 June 2017	31 December 2017
	Long-term business £m	General insurance and health £m	Total £m	Long-term business £m	General insurance and health £m	Total £m	Long-term business £m	General insurance and health £m	Total £m
Long-term business provisions
Participating	47,716	-	47,716	53,134	-	53,134	49,928	-	49,928
Unit-linked non-participating	15,977	-	15,977	16,941	-	16,941	16,040	-	16,040
Other non-participating	65,754	-	65,754	65,677	-	65,677	65,004	-	65,004
	129,447	-	129,447	135,752	-	135,752	130,972	-	130,972
Outstanding claims provisions	2,058	9,127	11,185	2,090	9,041	11,131	1,798	8,964	10,762
Provision for claims incurred but not reported	-	2,527	2,527	-	2,676	2,676	-	2,837	2,837
	2,058	11,654	13,712	2,090	11,717	13,807	1,798	11,801	13,599
Provision for unearned premiums	-	5,146	5,146	-	5,203	5,203	-	4,980	4,980
Provision arising from liability adequacy tests¹	-	15	15	-	13	13	-	13	13
	131,505	16,815	148,320	137,842	16,933	154,775	132,770	16,794	149,564
Less: Amounts classified as held for sale	(509)	-	(509)	(3,934)	(127)	(4,061)	(783)	(131)	(914)
Total	130,996	16,815	147,811	133,908	16,806	150,714	131,987	16,663	148,650

1 Provision arising from liability adequacy tests relates to general insurance business only.

(ii) Change in insurance liabilities recognised as an expense

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

30 June 2018	Gross £m	Reinsurance £m	Net £m
Long-term business
Change in long-term business provisions (note B9(b))	(2,466)	390	(2,076)
Change in provision for outstanding claims	246	(13)	233
	(2,220)	377	(1,843)
General insurance and health
Change in insurance liabilities (note B9(c))	(23)	35	12
Less: Unwind of discount on reserves and other	(5)	4	(1)
	(28)	39	11
Total change in insurance liabilities	(2,248)	416	(1,832)

30 June 2017	Gross £m	Reinsurance £m	Net £m
Long-term business
Change in long-term business provisions (note B9(b))	2,000	(523)	1,477
Change in provision for outstanding claims	147	(4)	143
	2,147	(527)	1,620
General insurance and health
Change in insurance liabilities (note B9(c))	(8)	73	65
Less: Unwind of discount on reserves and other	(5)	4	(1)
	(13)	77	64
Total change in insurance liabilities	2,134	(450)	1,684

31 December 2017	Gross £m	Reinsurance £m	Net £m
Long-term business
Change in long-term business provisions (note B9(b))	624	315	939
Change in provision for outstanding claims	(65)	(11)	(76)
	559	304	863
General insurance and health
Change in insurance liabilities (note B9(c))	73	138	211
Less: Unwind of discount on reserves and other	(9)	9	-
	64	147	211
Total change in insurance liabilities	623	451	1,074

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Page 60

B9 - Insurance liabilities continued

(b) Movements in long-term business liabilities

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

	6 months 2018 £m	6 months 2017 £m	Full year 2017 £m
Carrying amount at 1 January	130,972	137,218	137,218
Provisions in respect of new business	3,353	2,959	5,731
Expected change in existing business provisions	(4,082)	(4,027)	(7,747)
Variance between actual and expected experience	(67)	1,512	1,520
Impact of operating assumption changes	(199)	(2)	(1,175)
Impact of economic assumption changes	(1,389)	1,274	2,115
Other movements recognised as an expense¹	(82)	284	180
Change in liability recognised as an expense (note B9a(ii))	(2,466)	2,000	624
Effect of portfolio transfers, acquisitions and disposals²	1,144	(4,429)	(8,124)
Foreign exchange rate movements	(197)	897	1,252
Other movements	(6)	66	2
Carrying amount at 30 June/31 December	129,447	135,752	130,972

1 Other movements during 2018 and 2017 primarily relates to a special bonus distribution to with-profits policyholders in UK Life.

2 The movement during 2018 includes the acquisition of Friends First in Ireland offset by the disposal of Avipop in Italy. The movement during the first 6 months of 2017 primarily relates to the disposal of Antarius in France, while full year 2017 also includes the disposal of a major share of the business in Spain offset by the consolidation of the Poland and Vietnam joint ventures.

For many types of long-term business, including unit-linked and participating funds, movement in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience of £(67) million in the current period is due to various demographic factors (with the prior period variances being the result of increased equity returns in the UK). The impact of operating assumption changes of £(199) million relates mainly to a release of longevity reserves in the UK (with the corresponding amounts in 2017 also arising from changes in longevity assumptions offset by an increase in expense and persistency reserves). The £(1,389) million impact of economic assumption changes reflects an increase in valuation interest rates in response to increasing interest rates and widening spreads on immediate annuity and participating insurance contracts in the UK (with the prior period variances reflecting a decrease in valuation interest rates).

For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. The impact of assumption changes on profit are included in the effect of changes in assumptions and estimates during the period shown in note B12.

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

	6 months 2018 £m	6 months 2017 £m	Full year 2017 £m
Carrying amount at 1 January	11,801	11,709	11,709
Impact of changes in assumptions¹	(66)	(12)	(7)
Claim losses and expenses incurred in the current year	3,490	3,342	6,890
Decrease in estimated claim losses and expenses incurred in prior periods	(83)	(88)	(172)
Incurred claims losses and expenses	3,341	3,242	6,711
Less:
Payments made on claims incurred in the current year	(1,461)	(1,363)	(3,642)
Payments made on claims incurred in prior periods	(2,080)	(2,014)	(3,283)
Recoveries on claim payments	172	122	278
Claims payments made in the period, net of recoveries	(3,369)	(3,255)	(6,647)
Unwind of discounting	5	5	9
Changes in claims reserve recognised as an expense (note B9a(ii))	(23)	(8)	73
Effect of portfolio transfers, acquisitions and disposals²	(29)	2	3
Foreign exchange rate movements	(96)	14	16
Other movements	1	-	-
Carrying amount at 30 June/31 December	11,654	11,717	11,801

1 Shown gross of reinsurance. The impact of reinsurance was £32 million, resulting in a net impact of £(34) million as per note B12.

2 The movement during 2018 relates to the disposal of Avipop in Italy.

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B10 - Liability for investment contracts

(a) Carrying amount

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

	30 June 2018 £m	30 June 2017 £m	31 December 2017 £m
Long-term business
Participating contracts	89,604	85,435	87,654
Non-participating contracts at fair value	127,230	118,291	124,995
	216,834	203,726	212,649
Less: Amounts classified as held for sale	(8,437)	-	(8,663)
Total	208,397	203,726	203,986

Of the non-participating investment contracts measured at fair value, £126,186 million at 30 June 2018 (HY17: £120,508 million, 2017: £123,916 million) are unit-linked in structure and the fair value liability is equal to the current fund value, including any unfunded units, plus if required additional non-unit reserves based on a discounted cash flow analysis.

(b) Movements in participating investment contracts

For participating investment contracts, the change in investment contract provisions on the income statement primarily consists of the movement in participating investment contract liabilities over the reporting period. The following movements have occurred in these provisions (gross of reinsurance) during the period:

	6 months 2018 £m	6 months 2017 £m	Full year 2017 £m
Carrying amount at 1 January	87,654	89,739	89,739
Provisions in respect of new business	3,743	2,339	5,193
Expected change in existing business provisions	(2,112)	(2,510)	(4,986)
Variance between actual and expected experience	397	1,085	2,072
Impact of operating assumption changes	-	(1)	10
Impact of economic assumption changes	(443)	92	411
Other movements recognised as an expense¹	153	132	(16)
Change in liability recognised as an expense²	1,738	1,137	2,684
Effect of portfolio transfers, acquisitions and disposals³	428	(7,243)	(7,243)
Foreign exchange rate movements	(216)	1,780	2,452
Other movements	-	22	22
Carrying amount at 30 June/31 December	89,604	85,435	87,654

1 Other movements during 2018 and 2017 primarily relates to a special bonus distribution to with-profits policyholders in UK Life.

2 Total interest expense for participating investment contracts recognised in the income statement is £189 million (HY17: £2,374 million, 2017: £2,489 million).

3 The movement during 2018 relates to the acquisition of Friends First in Ireland. The movement during 2017 relates to the disposal of Antarius in France.

For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience of £397 million in the period to 30 June 2018 is the result of various demographic factors across different product groups (with the variances shown in the prior period being mainly due to positive equity returns in the UK). The impact of assumption changes shown above, sets out the movements in the carrying value of liabilities, which for participating business is generally offset by a corresponding adjustment to the unallocated divisible surplus. Accordingly, these changes do not directly impact profit.

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Page 62

B10 - Liability for investment contracts continued

For non-participating investment contracts, deposits collected and amounts withdrawn are not shown on the income statement, but are accounted for directly through the statement of financial position as an adjustment to the gross liabilities for investment contracts. The associated change in investment contract provisions shown in the income statement relates to the attributed investment return. The following movements have occurred in these provisions (gross of reinsurance) during the period:

	6 months 2018 £m	6 months 2017 £m	Full year 2017 £m
Carrying amount at 1 January	124,995	114,531	114,531
Provisions in respect of new business	2,659	1,796	4,484
Expected change in existing business provisions	(2,567)	(2,129)	(4,427)
Variance between actual and expected experience	(394)	3,872	10,115
Impact of operating assumption changes	-	-	2
Impact of economic assumption changes	6	(1)	(1)
Other movements recognised as an expense	21	-	10
Change in liability	(275)	3,538	10,183
Effect of portfolio transfers, acquisitions and disposals¹	2,494	(4)	(4)
Foreign exchange rate movements	(7)	199	277
Other movements	23	27	8
Carrying amount at 30 June/31 December	127,230	118,291	124,995

1 The movement during 2018 relates to the acquisition of Friends First in Ireland. The movement during 2017 relates to the disposal of Antarius in France.

For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience of £(394) million in the period to 30 June 2018 is the result of various demographic factors across different product groups (with the variances shown in the prior period being primarily the result of positive equity returns in the UK). The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of the non-participating investment contract liabilities. The impacts of assumption changes on profit are included in the effect of changes in assumptions and estimates during the year as set out in note B12.

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Page 63

B11 - Reinsurance assets

The reinsurance assets comprised:

	30 June 2018 £m	30 June 2017 £m	31 December 2017 £m
Long-term business
Insurance contracts	5,494	6,278	5,469
Participating investment contracts	1	22	2
Non-participating investment contracts¹	6,356	10,170	6,094
	11,851	16,470	11,565
Outstanding claims provisions	91	67	64
	11,942	16,537	11,629
General insurance and health
Outstanding claims provisions	851	1,065	845
Provisions for claims incurred but not reported	832	741	884
	1,683	1,806	1,729
Provisions for unearned premiums	252	270	257
	1,935	2,076	1,986
	13,877	18,613	13,615
Less: Amounts classified as held for sale	(46)	(101)	(123)
Total	13,831	18,512	13,492

1 Balances in respect of all reinsurance treaties are included under reinsurance assets, regardless of whether they transfer significant insurance risk. The reinsurance assets classified as non-participating investment contracts are financial instruments measured at fair value through profit or loss. During the first half of 2018, £1,117 million of reinsurance assets (UK Life) have been reclassified as collective investments in unit-linked funds following a restructure of a reinsurance treaty. This is a continuation of activity undertaken in 2017.

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

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

	Effect on profit 6 months 2018 £m	Effect on profit 6 months 2017 £m	Effect on profit Full year 2017 £m
Assumptions
Long-term insurance business
Interest rates	907	(970)	(1,720)
Expenses	(1)	(2)	(128)
Persistency rates	-	-	(79)
Mortality for assurance contracts	-	-	113
Mortality for annuity contracts	200	-	779
Tax and other assumptions	-	-	2
Investment contracts
Expenses	-	(1)	-
General insurance and health business
Change in discount rate assumptions	34	(12)	(7)
Total	1,140	(985)	(1,040)

The impact of interest rates on long-term business relates primarily to annuities in the UK (including any change in credit default and reinvestment risk provisions), where an increase in the valuation interest rate, in response to increasing risk-free rates and widening of credit spreads, has reduced liabilities. The overall impact on profit as a result of these changes also depends on movements in the value of assets backing the liabilities, which is not included in the above disclosure.

The impact of mortality for annuity contracts on long-term business relates to the UK with a reduction in reserves of £200 million arising from changes in base mortality assumptions. These changes include a refined financial estimate of the impact of longevity experience for bulk annuities (£145 million) and the impact of completing our review of prior period longevity experience for individual annuities (£55 million). There were no equivalent impacts arising in the first half of 2017.

In the general insurance and health business, a positive impact of £34 million (HY17: £12 million adverse) has arisen as a result of a decrease in the estimated future inflation rate used to value periodic payment orders (PPOs) and an increase in the interest rates used to discount claim reserves for both PPOs and latent claims. During the first half of 2017, the effect of an increase in the estimated future inflation rate was offset by a marginal increase in interest rates.

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B13 - Borrowings

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

(a) Analysis of total borrowings:

Total borrowings comprise:

	30 June 2018 £m	30 June 2017 £m	31 December 2017 £m
Core structural borrowings, at amortised cost	8,170	8,636	8,640
Operational borrowings, at amortised cost	417	501	466
Operational borrowings, at fair value	1,199	1,214	1,180
	1,616	1,715	1,646
	9,786	10,351	10,286
Less: Amounts classified as held for sale	-	(13)	-
Total	9,786	10,338	10,286

(b) Core structural borrowings

The carrying amounts of these borrowings are:

	30 June 2018 £m	30 June 2017 £m	31 December 2017 £m
Subordinated debt
6.125% £700 million subordinated notes 2036	694	693	694
6.125% £800 million undated subordinated notes	796	795	796
6.875% £600 million subordinated notes 2058	594	594	594
6.875% €500 million subordinated notes 2038¹	-	439	444
12.000% £162 million subordinated notes 2021	197	208	202
8.250% £500 million subordinated notes 2022	572	590	581
6.625% £450 million subordinated notes 2041	448	448	448
7.875% $575 million undated subordinated notes	441	463	437
6.125% €650 million subordinated notes 2043	573	568	575
3.875% €700 million subordinated notes 2044	615	611	618
5.125% £400 million subordinated notes 2050	395	395	394
3.375% €900 million subordinated notes 2045	787	780	789
4.500% $450 million subordinated notes 2021	257	265	264
4.375% £400 million subordinated notes 2049	394	393	394
	6,763	7,242	7,230
Senior notes
0.100% €350 million senior notes 2018	309	306	310
0.625% €500 million senior notes 2023	440	436	441
	749	742	751
Commercial paper	666	661	668
	8,178	8,645	8,649
Less: Amount held by Group companies	(8)	(9)	(9)
Total	8,170	8,636	8,640

1 The 6.875% €500 million subordinated notes 2038 were redeemed in full at the first call on 22 May 2018.

The carrying amounts of these borrowings are:

	30 June 2018 £m	30 June 2017 £m	31 December 2017 £m
Amounts owed to financial institutions
Loans¹	417	501	466
Securitised mortgage loan notes
UK lifetime mortgage business²	1,199	1,214	1,180
Total	1,616	1,715	1,646

1 Includes held for sale operational borrowings of nil on 30 June 2018 (2017: £13 million).

2 The fair value of these loan notes is calculated using similar techniques to the related securitised mortgage assets discussed in notes B16.

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Page 65

B14 - Pension obligations and other provisions

(a) Carrying amounts

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

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

	30 June 2018 £m	30 June 2017 £m	31 December 2017 £m
Total IAS 19 obligations to the main staff pension schemes	662	892	764
Deficits in other staff pension schemes	63	60	64
Total IAS 19 obligations to staff pension schemes	725	952	828
Restructuring provisions	71	80	92
Other provisions	617	397	515
	1,413	1,429	1,435
Less: Amounts classified as held for sale	(7)	(3)	(6)
Total	1,406	1,426	1,429

Other provisions shown above primarily include amounts set aside throughout the Group for costs of customer compensation, litigation and staff entitlements. Other provisions have increased during the period under review mainly as a result of a further product governance provision of £90 million, which is in addition to the £75 million provision set aside at 31 December 2017. This provision relates to a historical issue with over 90% of cases identified being pre-2002 and is limited to advice given by Friends Provident tied agents and appointed representatives, where a number of external defined benefit pension policies transferred into Friends Provident pension arrangements. Initial indications are that some advice may not have been suitable. The issue does not affect any other part of our business. Affected customers will not be financially disadvantaged. The Group has notified its professional indemnity insurers and intends to make a claim on its insurance to mitigate the financial impact.

(ii) Pension obligations

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

	30 June 2018 £m	30 June 2017 £m	31 December 2017 £m
Total fair value of assets	18,994	19,225	19,308
Present value of scheme liabilities	(15,473)	(16,115)	(16,043)
Net surplus in the schemes	3,521	3,110	3,265
Less: consolidation elimination for non-transferable Group insurance policy¹	(606)	(628)	(630)
Net IAS 19 surplus in the schemes	2,915	2,482	2,635

Surplus included in other assets²	3,577	3,374	3,399
Deficits included in provisions	(662)	(892)	(764)
Net IAS 19 surplus in the schemes	2,915	2,482	2,635

1 As at 30 June 2018, the scheme assets in the Friends Provident Pension Scheme include an insurance policy of £606 million (HY17: £628 million, 2017: £630 million) issued by a Group company that is not transferable under IAS 19 and consequently is eliminated from the IAS 19 net surplus balance. The IAS 19 fair value of scheme assets at 30 June 2018, excluding this policy is £18,388 million (HY17: £18,597 million, 2017: £18,678 million).

2 Pension surpluses and other assets totalling £3,626 million (HY17: £3,509 million, 2017: £3,468 million) includes pension surpluses of £3,577 million (HY17: £3,374 million, 2017: £3,399 million) and other assets of £49 million (HY17: £135 million, 2017: £69 million).

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Page 66

B14 - Pension obligations and other provisions continued

(b) Movements in the schemes' surpluses and deficits

Movements in the pension schemes' surpluses and deficits since 31 December 2017 comprise:

	6 months 2018 £m	6 months 2017 £m	Full year 2017 £m
Net IAS 19 surplus in the schemes at 1 January	2,635	2,347	2,347
Past service costs - amendments	-	-	(1)
Administrative expenses	(10)	(8)	(18)
Total pension cost charged to net operating expenses	(10)	(8)	(19)
Net interest credited to investment income/(finance costs)¹	31	30	63
Total recognised in income statement	21	22	44

Remeasurements:
Actual return on these assets	(79)	16	740
Less: Interest income on scheme assets	(220)	(239)	(470)
Return on scheme assets excluding amounts in interest income	(299)	(223)	270
Gains/(losses) from change in economic assumptions	449	282	(182)
(Losses) from change in operating assumptions	-	(36)	(30)
Experience (losses)	(13)	(59)	(63)
Total remeasurements recognised in other comprehensive income	137	(36)	(5)

Acquisitions	(8)	-	-
Employer contributions	129	153	259
Administrative expenses paid from scheme assets	(2)	-	(3)
Foreign exchange rate movements	3	(4)	(7)
Net IAS 19 surplus in the schemes at 30 June/31 December	2,915	2,482	2,635

1 Net interest income of £43 million (HY17: £40 million, 2017: £87 million) has been credited to investment income and net interest expense of £12 million (HY17: £10 million, 2017: £24 million) has been charged to finance costs in HY18.

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

The increase in the surplus during the period is primarily due to employer contributions into the schemes and remeasurements recognised in other comprehensive income. The remeasurements recognised are principally a result of widening corporate spreads in the UK, partly offset by lower inflation in the UK.

B15 - Related party transactions

During the period, there have been no changes in the nature of the related party transactions from those described in the Group's annual report and accounts for the year ended 31 December 2017. There were no transactions with related parties that had a material effect on the result for the period ended 30 June 2018, 30 June 2017 or 31 December 2017.

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B16 - Fair value

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

(a) Basis for determining fair value hierarchy

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

Level 1

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

Level 2

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

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

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

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

· Market-corroborated inputs.

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

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

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

Level 3

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

The majority of the Group's assets and liabilities measured at fair value are based on quoted market information or observable market data. 16.2% of assets and 3.2% of liabilities measured at fair value are based on estimates and recorded as Level 3. Where estimates are used, these are based on a combination of independent third-party evidence and internally developed models, calibrated to market observable data where possible. Third-party valuations using significant unobservable inputs validated against Level 2 internally modelled valuations are classified as Level 3, where there is a significant difference between the third-party price and the internally modelled value. Where the difference is insignificant, the instrument would be classified as Level 2.

(b) Changes to valuation technique

There were no changes in the valuation techniques during the period compared to those described in the 2017 Annual Report and Accounts.

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Page 68

B16 - Fair value continued

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

		30 June 2018		30 June 2017¹	31 December 2017
	Fair value £m	Carrying amount £m	Fair value £m	Carrying amount £m	Fair value £m	Carrying amount £m
Financial assets
Loans	27,666	27,717	25,459	25,452	27,796	27,857
Financial investments	309,403	309,403	309,222	309,222	311,082	311,082
Fixed maturity securities	173,564	173,564	176,410	176,410	174,808	174,808
Equity securities	87,132	87,132	78,037	78,037	89,968	89,968
Other investments (including derivatives)	48,707	48,707	54,775	54,775	46,306	46,306

Financial liabilities
Non-participating investment contracts	118,793	118,793	118,291	118,291	116,332	116,332
Net asset value attributable to unitholders	17,778	17,778	18,469	18,469	18,327	18,327
Borrowings	10,456	9,786	11,545	10,338	11,538	10,286
Derivative liabilities	5,246	5,246	6,093	6,093	5,751	5,751

1 Following a review of the Group's investment classifications, comparative amounts have been amended from those previously reported, reflecting the fact that equity and debt securities held indirectly through majority owned investment funds in the UK managed by third parties, which at 30 June 2017 were presented as unit trusts and other investment vehicles within other investments, are now presented as debt and equity securities. The effect of this change at HY17 is to increase equity and debt securities by £4,462 million and £5,340 million respectively and decrease unit trusts and other investment vehicles within other investments by £9,802 million.

(d) Fair value hierarchy analysis

IFRS 13 Fair Value Measurement, permits assets and liabilities to be measured at fair value on either a recurring or non-recurring basis. Recurring fair value measurements are those that other IFRSs require or permit in the statement of financial position at the end of each reporting period, whereas non-recurring fair value measurements of assets or liabilities are those that other IFRSs require or permit in the statement of financial position in particular circumstances.

An analysis of assets and liabilities measured at amortised cost and fair value categorised by fair value hierarchy is given below for both recurring and non-recurring fair value measurements.

	Fair value hierarchy
At 30 June 2018	Level 1 £m	Level 2 £m	Level 3 £m	Sub-total Fair value £m	Amortised cost £m	Total carrying value £m
Recurring fair value measurements
Investment property	-	-	11,151	11,151	-	11,151
Loans	-	437	23,885	24,322	3,395	27,717
Financial investments measured at fair value
Fixed maturity securities	108,067	49,566	15,931	173,564	-	173,564
Equity securities	86,623	1	508	87,132	-	87,132
Other investments (including derivatives)	40,741	4,333	3,633	48,707	-	48,707
Financial assets of operations classified as held for sale	5,740	7	2,000	7,747	-	7,747
Total	241,171	54,344	57,108	352,623	3,395	356,018
Financial liabilities measured at fair value
Non-participating investment contracts¹	118,594	199	-	118,793	-	118,793
Net asset value attributable to unit holders	17,757	-	21	17,778	-	17,778
Borrowings	-	-	1,199	1,199	8,587	9,786
Derivative liabilities	435	4,400	411	5,246	-	5,246
Financial liabilities of operations classified as held for sale	5,283	23	3,147	8,453	-	8,453
Total	142,069	4,622	4,778	151,469	8,587	160,056

1 In addition to the balances in this table, included within reinsurance assets in the condensed consolidated statement of financial position and note B11 are £6,356 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.

	Fair value hierarchy
At 30 June 2018	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value £m
Non-recurring fair value measurement
Properties occupied by Group companies	-	-	337	337
Total	-	-	337	337

The value of owner-occupied properties measured on a non-recurring basis at 30 June 2018 was £337 million (HY17: £327 million, 2017: £333 million), stated at their revalued amounts in line with the requirements of IAS 16 Property, Plant and Equipment.

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(d) Fair value hierarchy analysis continued

	Fair value hierarchy
At 30 June 2017¹	Level 1 £m	Level 2 £m	Level 3 £m	Sub-total Fair value £m	Amortised cost £m	Total carrying value £m
Recurring fair value measurements
Investment property	-	-	10,719	10,719	-	10,719
Loans	-	3	22,225	22,228	3,224	25,452
Financial investments measured at fair value
Fixed maturity securities	98,044	61,770	16,596	176,410	-	176,410
Equity securities	77,137	-	900	78,037	-	78,037
Other investments (including derivatives)	45,270	5,164	4,341	54,775	-	54,775
Financial assets of operations classified as held for sale	4,135	705	5	4,845	-	4,845
Total	224,586	67,642	54,786	347,014	3,224	350,238
Financial liabilities measured at fair value
Non-participating investment contracts²	114,721	227	3,343	118,291	-	118,291
Net asset value attributable to unit holders	18,445	-	24	18,469	-	18,469
Borrowings	-	-	1,214	1,214	9,124	10,338
Derivative liabilities	431	5,510	152	6,093	-	6,093
Financial liabilities of operations classified as held for sale	555	-	-	555	-	555
Total	134,152	5,737	4,733	144,622	9,124	153,746

1 Following a review of the Group's investment classifications, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to table (c) above for further details of this adjustment and the financial impact arising.

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

	Fair value hierarchy
At 30 June 2017	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value £m
Non-recurring fair value measurement
Properties occupied by Group companies	-	-	327	327
Total	-	-	327	327

	Fair value hierarchy
At 31 December 2017	Level 1 £m	Level 2 £m	Level 3 £m	Sub-total Fair value £m	Amortised cost £m	Total carrying value £m
Recurring fair value measurements
Investment property	-	-	10,797	10,797	-	10,797
Loans	-	443	23,949	24,392	3,465	27,857
Financial investments measured at fair value
Fixed maturity securities	107,771	51,900	15,137	174,808	-	174,808
Equity securities	89,192	-	776	89,968	-	89,968
Other investments (including derivatives)	38,249	5,194	2,863	46,306	-	46,306
Financial assets of operations classified as held for sale	6,192	27	2,093	8,312	-	8,312
Total	241,404	57,564	55,615	354,583	3,465	358,048
Financial liabilities measured at fair value
Non-participating investment contracts¹	116,123	209	-	116,332	-	116,332
Net asset value attributable to unit holders	18,314	-	13	18,327	-	18,327
Borrowings	-	-	1,180	1,180	9,106	10,286
Derivative liabilities	521	4,872	358	5,751	-	5,751
Financial liabilities of operations classified as held for sale	5,346	26	3,306	8,678	-	8,678
Total	140,304	5,107	4,857	150,268	9,106	159,374

1 In addition to the balances in this table, included within reinsurance assets in the statement of condensed consolidated financial position and note B11 are £6,094 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.

	Fair value hierarchy
At 31 December 2017	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value £m
Non-recurring fair value measurement
Properties occupied by Group companies	-	-	333	333
Total	-	-	333	333

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(e) Transfers between Levels of the fair value hierarchy

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

Transfers between Level 1 and Level 2

There were no significant transfers between Level 1 and Level 2 investments during the six month period ended 30 June 2018.

Transfers to/from Level 3

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

Transfers into Level 3 assets of £1.6 billion relate principally to £1.3 billion of debt securities held in the UK, France and Italy which were transferred from Level 1 and Level 2 due to the unavailability of significant observable market data or where there were sufficiently significant differences between the valuation provided by the counterparty and broker quotes and the validation models.

Transfers out of Level 3 assets of £1.0 billion relate principally to £0.8 billion of debt securities which were transferred to Level 2 by our UK business as observable inputs became available, or where the valuation provided by the counterparty and broker quotes are corroborated using valuation models with observable inputs.

						Assets					Liabilities
At 30 June 2018	Investment property £m	Loans £m	Debt securities £m	Equity securities £m	Other investments (including derivatives) £m	Financial assets of operations classified as held for sale £m	Non-participating investment contracts £m	Net asset value attributable to unitholders £m	Derivative liabilities £m	Borrowings £m	Financial liabilities of operations classified as held for sale £m
Opening balance at 1 January 2018	10,797	23,949	15,137	776	2,863	2,093	-	(13)	(358)	(1,180)	(3,306)
Total net gains/(losses) recognised in the income statement¹	163	(309)	(80)	(11)	(6)	(37)	-	-	(89)	(20)	37
Purchases	531	631	798	124	940	56	-	-	-	-	(56)
Issuances	-	51	-	-	-	-	-	-	-	-	-
Disposals	(319)	(437)	(411)	(544)	(157)	(78)	-	(8)	36	1	144
Settlements²	-	-	-	-	-	-	-	-	-	-	-
Transfers into Level 3	5	-	1,322	165	158	15	-	-	-	-	(15)
Transfers out of Level 3	-	-	(802)	(2)	(161)	(49)	-	-	-	-	49
Reclassification to held for sale	-	-	-	-	-	-	-	-	-	-	-
Foreign exchange rate movements	(26)	-	(33)	-	(4)	-	-	-	-	-	-
Balance at 30 June 2018	11,151	23,885	15,931	508	3,633	2,000	-	(21)	(411)	(1,199)	(3,147)

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

2 Settlements include effective settlements of Group holdings.

						Assets					Liabilities
At 30 June 2017	Investment property £m	Loans £m	Debt securities £m	Equity securities £m	Other investments (including derivatives) £m	Financial assets of operations classified as held for sale £m	Non-participating investment contracts £m	Net asset value attributable to unitholders £m	Derivative liabilities £m	Borrowings £m	Financial liabilities of operations classified as held for sale £m
Opening balance at 1 January 2017	10,768	20,923	16,447	913	4,001	980	(3,408)	(20)	(1,600)	(1,110)	-
Total net gains/(losses) recognised in the income statement¹	223	536	154	(64)	(75)	-	(25)	(4)	(52)	(121)	-
Purchases	217	505	358	57	699	-	(70)	-	(40)	-	-
Issuances	-	72	-	-	-	-	-	-	-	-	-
Disposals	(577)	(96)	(495)	(12)	(319)	(988)	171	-	156	17	-
Settlements²	-	(6)	(9)	-	-	-	9	-	-	-	-
Transfers into Level 3	-	288	1,203	4	61	-	(17)	-	(2)	-	-
Transfers out of Level 3	-	-	(1,262)	-	(105)	-	4	-	1,387	-	-
Reclassification to held for sale	(1)	-	-	-	(4)	5	-	-	-	-	-
Foreign exchange rate movements	89	3	200	2	83	8	(7)	-	(1)	-	-
Balance at 30 June 2017	10,719	22,225	16,596	900	4,341	5	(3,343)	(24)	(152)	(1,214)	-

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

2 Settlements include effective settlements of Group holdings.

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						Assets					Liabilities
At 31 December 2017	Investment property £m	Loans £m	Debt securities £m	Equity securities £m	Other investments (including derivatives) £m	Financial assets of operations classified as held for sale £m	Non- participating investment contracts £m	Net asset value attributable to unitholders £m	Derivative liabilities £m	Borrowings £m	Financial liabilities of operations classified as held for sale £m
Opening balance at 1 January 2017	10,768	20,923	16,447	913	4,001	980	(3,408)	(20)	(1,600)	(1,110)	-
Total net gains/(losses) recognised in the income statement¹	511	643	(795)	(179)	55	162	-	7	(105)	(97)	(165)
Purchases	672	3,252	1,745	66	944	267	(153)	-	(9)	-	(113)
Issuances	-	151	-	-	-	(1)	-	-	-	-	-
Disposals	(1,289)	(1,025)	(1,771)	(12)	(439)	(1,383)	153	-	180	27	377
Settlements²	-	-	-	-	-	-	-	-	-	-	-
Transfers into Level 3	-	-	899	2	10	132	-	-	(164)	-	(132)
Transfers out of Level 3	-	-	(1,399)	-	(83)	(135)	-	-	1,342	-	135
Reclassification to held for sale	-	-	(340)	(19)	(1,682)	2,041	3,408	-	-	-	(3,408)
Foreign exchange rate movements	135	5	351	5	57	30	-	-	(2)	-	-
Balance at 31 December 2017	10,797	23,949	15,137	776	2,863	2,093	-	(13)	(358)	(1,180)	(3,306)

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

2 Settlements include effective settlements of Group holdings.

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

Total net losses recognised in the income statement in the first half of 2018 in respect of Level 3 assets measured at fair value amounted to £0.3 billion (HY17: net gains of £0.8 billion) with net losses in respect of liabilities of £0.1 billion (HY17: net losses of £0.2 billion).

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

(i) Investment property

Investment property amounting to £11.2 billion (2017: £10.8 billion) is valued in the UK at least annually by external chartered surveyors in accordance with guidance issued by The Royal Institution of Chartered Surveyors, and using estimates during the intervening period. Outside the UK, valuations are produced by external qualified professional appraisers in the countries concerned. Investment properties are valued on an income approach that is based on current rental income plus anticipated uplifts at the next rent review, lease expiry, or break option taking into consideration lease incentives and assuming no further growth in the estimated rental value of the property. The uplift and discount rates are derived from rates implied by recent market transactions on similar properties. These inputs are deemed unobservable.

(ii) Loans

· Commercial mortgage loans and Primary Healthcare loans held by our UK Life business amounting to £11.6 billion (2017: £12.2 billion), were valued using a Portfolio Credit Risk Model (PCRM). This model calculates a Credit Risk Adjusted Value (CRAV) for each loan. The risk-adjusted cash flows are discounted using a yield curve, taking into account the term dependent gilt yield curve, and global assumptions for the liquidity premium. Loans valued using this model have been classified as Level 3 as the liquidity premium is deemed to be non-market observable. The liquidity premium used in the discount rate ranges between 45 bps to 240 bps.

· Equity release and securitised mortgage loans held by our UK Life business amounting to £9.1 billion (2017: £9.3 billion) are valued using an internal model. Inputs to the model include primarily property growth rates, mortality and morbidity assumptions, cost of capital and liquidity premium which are not deemed to be market observable.

· Infrastructure and Private Finance Initiative (PFI) loans held by our UK Life business amounting to £2.2 billion (2017: £1.8 billion) are valued using a discounted cash flow model. This adds spreads for credit and illiquidity to a risk-free discount rate. Credit spreads used in the discount rate are calculated using an internally developed methodology which depends on the credit rating of each loan, credit spreads on publicly traded bonds and an estimated recovery rate in event of default and are deemed to be unobservable.

(iii) Debt securities

· Privately placed notes, commercial real estate loans, PFI loans and infrastructure loans held by our UK Life business of £1.4 billion (2017: £1.5 billion) are not traded in active markets. Valuations are obtained from third party evaluated pricing services which represent the vendor's opinion of the asset values or discounted cash flow models which incorporate significant unobservable inputs.

· Structured bond-type and non-standard debt products held by our business in France amounting to £6.4 billion (2017: £5.9 billion) and bonds held by our UK business of £1.0 billion (2017: £1.2 billion) have no active market. These debt securities are valued either using counterparty or broker quotes and validated against internal or third-party models. These bonds have been classified as Level 3 because either (i) the third-party models included a significant unobservable liquidity adjustment, or (ii) differences between the valuation provided by the counterparty and broker quotes and the validation model were sufficiently significant to result in a Level 3 classification.

· Corporate debt securities held by our French business of £2.3 billion (2017: £2.7 billion) and debt securities of £3.8 billion held by our UK and Asia businesses (2017: £3.0 billion) which are not traded in an active market have been valued using third party or counterparty valuations. These prices are considered to be unobservable due to infrequent market transactions.

(iv) Equity securities

· Equity securities which primarily comprise private equity holdings of £0.5 billion (2017: £0.8 billion) held predominantly in the UK are valued by a number of third party specialists. These are valued using a range of techniques, including earnings multiples, forecast cash flows and price/earnings ratios which are deemed to be unobservable.

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(v) Other investments

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

- Private equity investment funds amounting to £1.0 billion (2017: £0.6 billion);

- Other investment funds including property funds amounting to £1.8 billion (2017: £1.8 billion);

- External hedge funds held principally by businesses in France amounting to £0.5 billion (2017: £0.4 billion); and

- Discretionary funds held in Asia amounting to £1.4 billion (2017: £1.6 billion) which are currently held for sale.

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

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

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

On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for £56 billion of the Group's Level 3 assets. For these Level 3 assets, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by +£2.3 billion / -£2.0 billion. Of the £1.1 billion Level 3 assets for which sensitivity analysis is not provided, it is estimated that a 10% change in valuation assumptions downwards of these assets would result in a change in fair value of approximately £110 million.

(vi) Liabilities

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

· £3.1 billion (2017: £3.3 billion) of non-participating investment contract liabilities, classified as held for sale, are classified as Level 3, either because the underlying unit funds are classified as Level 3 assets or because the liability relates to unfunded units or other non-unit adjustments which are based on a discounted cash flow analysis using unobservable market data and assumptions.

· £1.2 billion (2017: £1.3 billion) of securitised mortgage loan notes, presented within Borrowings, are valued using a similar technique to the related Level 3 securitised mortgage assets.

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

On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for £4.6 billion of the Group's Level 3 liabilities. For these Level 3 liabilities, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by approximately ±£0.6 billion. Of the £0.2 billion Level 3 liabilities for which sensitivity analysis is not provided, it is estimated that a 10% change in valuation assumptions downwards of these assets would result in a change in fair value of approximately £15 million.

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B17 - Risk management

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

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

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

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

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

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

Risk environment

The first half of 2018 witnessed continued normalisation of US monetary policy with two further increases in the US Federal Reserve rates, while the ECB has indicated that it plans to end its asset purchase programme in December 2018. In the UK, constrained consumer spending, continued central government fiscal restraint and subdued investment spend due to uncertainty over the outcome of Brexit negotiations have resulted in lacklustre economic growth. While growth in the US and Eurozone has been buoyed by fiscal stimulus and accommodative monetary policy respectively, concerns remain over its sustainability given the rising threat of trade protectionism and inflation pressures. Although interest rates are likely to remain below pre-2008 financial crisis levels, in the EU and UK in particular, for some time to come, there is a risk that a rapid increase in rates as a response to inflationary pressures could result in a collapse in bond prices and widening spreads. These uncertainties have resulted in increased equity market volatility in the first six months of the year.

Looking forward, uncertainty over the outcome of Brexit negotiations and future trading arrangements with the European Union are likely to continue to weigh negatively on UK macroeconomic growth and possibly sterling. Meanwhile the new Italian government's proposed loosening of fiscal policy threatens to create tensions with the EU and a re-emergence of the Eurozone sovereign debt and banking crisis. Likely further increases in interest rates by the US Federal reserve raises the prospect of increasing divergence in US and European monetary policy. Other possible shocks to global growth in the second half of 2018 include a credit crunch in China, where indebtedness remains at record levels, and increasing trade protectionism and retaliatory response to it.

During the first six months of 2018, as in 2017, there were several high profile cyber security breaches for corporates in the UK and elsewhere and nefarious attempts to access the Group's systems and data have increased. This risk is expected to continue to increase in the future. We continue to invest to reduce our residual exposure to the increasing cyber security threat through ongoing investment in our Security Transformation programme.

We continue to progress our operational plans, which address the likely loss of the ability for UK firms to passport business into the EU, to ensure continuous service to our customers in the EU after the UK's withdrawal from the EU on 29 March 2019, independent of the final outcome of Brexit negotiations between the UK and EU.

The Group has taken action to ensure it will be compliant with the Markets in Financial Instruments Directive (MiFID II) and the General Data Protection Regulations, which became effective in the EU during the first half of 2018, and the Insurance Distribution Directive which will become effective on 1 October 2018. Going forward we expect increased focus in the EU on the fair treatment of customers, in particular how the insurance and fund management industry sells and administers insurance and investment products. EIOPA has recently set out its intentions to focus on the convergence of supervision within the EU with the aim of achieving comparable levels of consumer protection. In April 2018, a further consultation was published by the FCA as part of its thematic work related to the Asset Management Market Study to ensure the fair treatment of customers across the sector.

The International Association of Insurance Supervisors (IAIS) continues to develop higher loss absorbency capital requirements, which may become effective in 2020, should the Group remain a Global Systemically Important Insurer (G-SII). The Group is in the process of implementing the new international accounting standards for insurance contracts, IFRS 17 Insurance Contracts. The standard applies to reporting periods beginning on or after 1 January 2021 and has not yet been endorsed by the EU. Given the current stage of the Group's implementation of IFRS17, and given that industry practice and interpretation of the standard is still developing, the likely full impact of implementing the standard remains uncertain.

On 2 July 2018, the PRA published Consultation Paper CP13/18 Solvency II Equity release mortgages with the intention of providing a clarification to Supervisory Statement SS3/17, published last year. The CP focuses on whether firms are making appropriate allowance for the risks retained when including equity release mortgages (ERM) within their Solvency II matching adjustment (MA) portfolios. The key updates proposed by the CP relate to the Effective Value Test (EVT), which was introduced by the PRA to assess the property risk introduced by the no-negative-equity-guarantee (NNEG) and other risks inherent in ERM. These updates may have an adverse impact on the solvency position of insurers. The PRA are accepting feedback on CP13/18 until 30 September 2018 and have proposed an implementation date of 31 December 2018. We remain committed to ERM as a component of our MA framework and we will engage positively in the PRA consultation process. At this stage, it remains too early to assess the full impact of the updates on our solvency position and the extent to which these impacts can be mitigated by management actions.

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Risk profile

We continue to manage our risk profile to reflect Aviva's objective of maintaining financial strength and reducing capital volatility, and reallocating capital in line with the Group's strategy. During the half year we continued to progress the disposals of most of our remaining business in Spain (completed on 11 July 2018) and of FPIL, while completing our acquisition of Friends First in Ireland and investing in new organic growth opportunities. Measures to maintain the resilience of the Group's capital position include putting in place a number of foreign exchange, credit and equity hedges. These are used to mitigate the Group's foreign exchange, credit and equity risk exposure, and enable the Group to accept other credit risks offering better risk adjusted returns while remaining within appetite. In addition, we renewed our catastrophe reinsurance programme to reduce the Group's potential loss to an extreme insurance loss event.

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

Material risks and uncertainties

In accordance with the requirements of the FCA Handbook (DTR 4.2.7) we provide an update here on the material risks and uncertainties facing the Group. The types of risks to which the Group is exposed have not changed significantly over the half year to 30 June 2018 and remain credit, market, life insurance, general insurance (including health insurance), liquidity, asset management, operational and reputational risks. These risks are described below.

(a) Credit risk

Aviva has a strong record of managing credit risk and we see credit as an area where we can make a good return for the benefit of both our policyholders and shareholders. The Group continues to hold a series of macro credit hedges to reduce the overall credit risk exposure.

During the first half of 2018 restrictions to our sovereign and corporate debt exposure to Greece, Italy and Portugal remained in place, while restrictions on Spain were lifted as a result of our reduced exposure following disposal of most of our business in the country and Spain's improved economic and fiscal prospects. We have in place a comprehensive Group-wide reporting system that consolidates credit exposures across geographies, business lines and exposure types. We have a robust framework of limits and controls to diversify the portfolio and enable the early identification of potential issues. Refer to section C9 of this report for details of our sovereign exposures to Greece, Ireland, Portugal, Spain and Italy.

During the first half of 2018 the credit rating profile of our debt securities portfolio has remained strong. At 30 June 2018, the proportion of our shareholder debt securities that are investment grade has decreased slightly to 92.8% (2017: 93.5%). Of the remaining 7.2% of shareholder debt securities that do not have an external rating of BBB or higher, 73.1% have been internally assessed as being of investment grade quality applying an internal rating methodology largely consistent with that adopted by an external rating agency.

The Group's largest reinsurance counterparty is BlackRock Life Ltd (including subsidiaries) as a result of the BlackRock funds offered to UK Life customers via unit-linked contracts. However, the risk of default is considered remote due to the nature of the arrangement and the counterparty. The Group's credit exposure to BlackRock Life Ltd has increased slightly to £5.5 billion at 30 June 2018 (2017: £5.3 billion). The Group is currently restructuring its agreements with BlackRock Life Ltd to reduce this exposure going forward.

(b) Market risk

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

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

At a Group level we actively seek to manage currency risk by matching assets and liabilities in functional currencies at the business unit level. Planned foreign currency remittances from subsidiaries and disposal proceeds are often hedged using foreign exchange forwards to provide certainty regarding the sterling value to be received by the Group, while foreign exchange swaps are in place to hedge certain non-sterling borrowings. Hedges can be used to protect the Group's capital against a significant depreciation in local currency versus sterling. At 30 June 2018, hedges with notional values of £1.5 billion (Canadian dollar £0.7 billion, Euro £0.4 billion and US dollar £0.4 billion) were in place.

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B17 - Risk management continued

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

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

Sources of liquidity in normal markets also include a variety of short and long-term instruments including commercial papers and medium and long-term debt. In addition to the existing liquid resources and expected inflows, the Group and Company maintain significant undrawn committed borrowing facilities (HY18: £1.65 billion) from a range of leading international banks to further mitigate this risk.

(d) Life insurance risk

The profile of our life insurance risks, primarily longevity, persistency, mortality and expense risk, has remained stable in the first half of 2018. Longevity risk remains the Group's most significant life insurance risk due to the Group's annuity portfolio and is amplified by the current low level of interest rates. We are also exposed to longevity risk through the Aviva Staff Pension Scheme, to which our economic exposure has been reduced since 2014 by entering into a longevity swap covering approximately £5 billion of pensioner in payment scheme liabilities. Persistency risk remains significant and continues to have a volatile outlook, with underlying performance linked to economic conditions. Businesses across the Group mitigate this risk through a range of customer retention activities. The Group has continued to write substantial volumes of life protection business, and to utilise reinsurance to reduce exposure to potential mortality losses. All life insurance risks benefit from significant diversification against other risks in the portfolio, limiting the impact on the Group's aggregate risk profile.

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

(e) General insurance and health insurance risk

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

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

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

Lump sum payments in settlement of bodily injury claims decided by the UK courts are calculated in accordance with the Ogden Tables and discount rate. The Ogden discount rate is set by the Lord Chancellor in accordance with the Damages Act 1996 and is applied when calculating the present value of future care costs and loss of earnings for claims settlement purposes. Due to the uncertainty around the Ogden discount rate, the claim reserves in the UK have been calculated using the current Ogden discount rate of -0.75%, as this is the enacted legislative rate that was announced by the Lord Chancellor in 2017. In March 2018 the Lord Chancellor announced the introduction of the Civil Liability Bill (the Bill) which includes provisions to amend the discount rate to be used in the Ogden Tables. It is expected that the Bill will go through the parliamentary process during 2018 and the first half of 2019. The Government expect the revised approach for setting the discount rate to result in a higher discount rate than the current rate of -0.75%. By way of illustration, should the Ogden discount rate increase in the future by 1%, then this would be expected to reduce reserves by approximately £250 million with an equivalent impact on profit before tax.

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B17 - Risk management continued

(e) General insurance and health insurance risk continued

During the first half of 2018, Aviva's general insurance and health insurance risk profile has remained stable. As with life insurance risks, general and health insurance risks also benefit from the significant diversification that arises from being part of a large and diverse portfolio, limiting the impact on the Group's aggregate risk profile.

Aviva successfully completed the renewal of its Group-wide catastrophe protection on 1 January 2018, maintaining the level of reinsurance it purchases which includes both event and aggregate catastrophe protection on a Group-wide basis. Processes are in place to manage catastrophe risk in individual business units and at a Group level.

(f) Asset management risk

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

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

(g) Operational risk

The Group continues to operate, validate and enhance its key operational controls and purchase insurance to minimise losses arising from inadequate or ineffective internal processes, people and systems or from external events. The age and complexity of the Group's IT infrastructure creates a significant operational risk for the Group, which at times during the first half of 2018 has resulted in disruption to continuous service to our customers, while our UK long-term savings business has also experienced some functionality issues during its update of its platform capability. The Group continues to invest significant sums to both simplify and upgrade its IT estate to minimise the risk of disruption to customer service in the future. The Group maintains constructive relationships with its regulators around the world and developments in relation to key regulatory changes, such as requirements for Global Systemically Important Insurers (G-SII), are monitored closely.

(h) Brand and reputation risk

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

(i) Sensitivity test analysis

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

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

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

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Page 77

B17 - Risk management continued

(i) Sensitivity test analysis continued

Long-term business sensitivities

30 June 2018 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	(80)	75	(15)	(40)	25	(30)	-	(5)
Insurance non-participating	(645)	690	(610)	(110)	90	(200)	(105)	(890)
Investment participating	(90)	35	(5)	(5)	(10)	(10)	-	-
Investment non-participating	-	(20)	-	10	(30)	(40)	-	-
Assets backing life shareholders' funds	(85)	95	(25)	20	(20)	-	-	-
Total	(900)	875	(655)	(125)	55	(280)	(105)	(895)

30 June 2018 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	(80)	75	(15)	(40)	25	(30)	-	(5)
Insurance non-participating	(645)	690	(610)	(110)	90	(200)	(105)	(890)
Investment participating	(90)	35	(5)	(5)	(10)	(10)	-	-
Investment non-participating	-	(20)	-	10	(30)	(40)	-	-
Assets backing life shareholders' funds	(140)	135	(30)	20	(20)	-	-	-
Total	(955)	915	(660)	(125)	55	(280)	(105)	(895)

31 December 2017 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality - 5%
Insurance participating	(45)	25	(15)	(20)	(40)	(25)	(5)	(10)
Insurance non-participating	(475)	485	(790)	(135)	115	(215)	(105)	(905)
Investment participating	-	10	(5)	(5)	-	(15)	-	-
Investment non-participating	-	(10)	(5)	10	(10)	(30)	-	-
Assets backing life shareholders' funds	(90)	115	(25)	20	(20)	-	-	-
Total	(610)	625	(840)	(130)	45	(285)	(110)	(915)

31 December 2017 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	(45)	25	(15)	(20)	(40)	(25)	(5)	(10)
Insurance non-participating	(475)	485	(790)	(135)	115	(215)	(105)	(905)
Investment participating	-	10	(5)	(5)	-	(15)	-	-
Investment non-participating	-	(10)	(5)	10	(10)	(30)	-	-
Assets backing life shareholders' funds	(150)	175	(35)	20	(20)	-	-	-
Total	(670)	685	(850)	(130)	45	(285)	(110)	(915)

Changes in sensitivities between HY18 and 2017 reflect underlying movements in the value of assets and liabilities, the relative duration of assets and liabilities and asset liability management actions. The sensitivities to economic and demographic movements relate mainly to business in the UK.

General insurance and health business sensitivities

30 June 2018 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(275)	265	(125)	150	(150)	(70)	(160)
Net of reinsurance	(340)	325	(125)	150	(150)	(70)	(155)

30 June 2018 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property - 10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(275)	265	(125)	150	(150)	(25)	(160)
Net of reinsurance	(340)	325	(125)	150	(150)	(25)	(155)

31 December 2017 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(285)	300	(130)	165	(165)	(120)	(335)
Net of reinsurance	(345)	355	(130)	165	(165)	(120)	(325)

31 December 2017 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(285)	300	(130)	165	(165)	(25)	(335)
Net of reinsurance	(345)	355	(130)	165	(165)	(25)	(325)

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Page 78

B17 - Risk management continued

(i) Sensitivity test analysis continued

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

Fund management and non-insurance business sensitivities

30 June 2018 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	(25)	25	80	(5)	10

30 June 2018 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	(20)	20	80	(5)	10

31 December 2017 Impact on profit before tax £m

Interest rates +1%

Interest rates
-1%

Credit spreads

+0.5%¹

Equity/ property
+10%

Equity/ property
-10%

Total

(30)

(10)

31 December 2017 Impact on shareholders' equity before tax £m

Interest rates +1%

Interest rates
-1%

Credit spreads

+0.5%¹

Equity/ property
+10%

Equity/ property
-10%

Total

(25)

(10)

Limitations of sensitivity analysis

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

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

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

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

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

B18 - Cash and cash equivalents

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

	30 June 2018 £m	30 June 2017 £m	31 December 2017 £m
Cash and cash equivalents	44,443	42,456	43,347
Cash and cash equivalents of operations classified as held for sale	707	406	739
Bank overdrafts	(702)	(622)	(499)
Net cash and cash equivalents at 30 June/31 December	44,448	42,240	43,587

B19 - Contingent liabilities and other risk factors

During the period, there have been no material changes in the main areas of uncertainty over the calculation of our liabilities from those described in note 52 of the Group's 2017 Annual Report and Accounts. An update on material risks is provided in note B17 Risk management.

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Page 79

B20 - Acquired value of in-force business and intangible assets

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

	30 June 2018 £m	30 June 2017 £m	31 December 2017 £m
Acquired value of in-force business on insurance contracts¹	1,510	1,646	1,533
Acquired value of in-force business on investment contracts²	1,631	1,967	1,725
Intangible assets	1,160	1,672	1,628
	4,301	5,285	4,886
Less: Amounts classified as held for sale	(926)	(444)	(1,431)
Total	3,375	4,841	3,455

1 On insurance and participating investment contracts.

2 On non-participating investment contracts.

The acquired value of in-force (AVIF) business on insurance and investment contracts has reduced in the period primarily due to an amortisation charge of £210 million (HY17: £232 million charge, 2017: £468 million charge), partially offset by the addition of £96 million of AVIF through the acquisition of Friends First (see note B4 (a)(ii)). There was also an impairment of AVIF on investment contracts of £4 million in the period relating to FPIL (HY17: £nil, 2017: £118 million) recorded as a remeasurement loss as FPIL is held for sale (see note B4 (c)(i)).

The decrease in intangible assets primarily relates to the disposal of the Avipop business in Italy (see note B4 (b)(i)) and the amortisation charge of £101 million (HY17: £91 million charge, 2017: £197 million charge).

B21 - Unallocated divisible surplus

An unallocated divisible surplus (UDS) is established where the nature of policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain at the reporting date. The amount of UDS at 30 June 2018 has decreased to £7.6 billion (HY17: £8.5 billion, 2017: £9.1 billion), excluding amounts classified as held for sale. The decrease is primarily due to realised and unrealised losses in France and Italy and a distribution by UK Life in anticipation of a special bonus being paid to policyholders.

Where the aggregate amount of participating assets is less than the participating liabilities within a fund then the shortfall may be held as a negative UDS, subject to recoverability testing as part of the liability adequacy requirements of IFRS 4. At 30 June 2018 there are negative UDS balances within one fund in UK Life (£15 million) and three funds in Italy (aggregate of £30 million). These balances were tested for recoverability and considered to be recoverable by comparing the excess of IFRS participating liabilities over the adjusted Solvency II best estimate liabilities. There were no negative UDS balances at 30 June 2017 or 31 December 2017.

B22 - Subsequent events

For details of subsequent events relating to subsidiaries, refer to note B4.

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Page 80

Directors' responsibility statement

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

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

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

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

By order of the Board

Mark Wilson Thomas D. Stoddard

Group chief executive officer Chief financial officer

1 August 2018

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Page 81

Independent review report to Aviva plc

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed Aviva plc's condensed consolidated financial statements (the "interim financial statements") in the half year report of Aviva plc for the 6 month period ended 30 June 2018. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

· the condensed consolidated statement of financial position as at 30 June 2018;

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

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

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

· the explanatory notes to the interim financial statements.

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

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

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

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

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

What a review of interim financial statements involves

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

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

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

PricewaterhouseCoopers LLP

Chartered Accountants

London

1 August 2018

END PART 3 of 4

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END

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