Final Results - Part 3 of 4

RNS Number : 0468H

Aviva PLC

08 March 2018

Start part 3 of 4

Page 37

IFRS financial statements

In this section		Page
Consolidated financial statements
Consolidated income statement		38
Consolidated statement of comprehensive income		39
Consolidated statement of changes in equity		40
Consolidated statement of financial position		41
Consolidated statement of cash flows		42
Notes to the consolidated financial statements
B1(i)	Basis of preparation	43
B1(ii)	New standards, interpretations and amendments to published standards that have been adopted by the Group	43
B2	Prior period adjustments	44
B3	Exchange rates	44
B4	Subsidiaries	45
B5	Segmental information	48
B6	Tax	56
B7	Earnings per share	58
B8	Dividends and appropriations	59
B9	Insurance liabilities	60
B10	Liability for investment contracts	70
B11	Reinsurance assets	72
B12	Effects of changes in assumptions and estimates during the year	74
B13	Unallocated divisible surplus	75
B14	Borrowings	76
B15	Pension obligations	77
B16	Related party transactions	79
B17	Risk management - framework	79
B18	Direct capital instrument and tier 1 notes	92
B19	Cash and cash equivalents	93
B20	Contingent liabilities and other risk factors	93
B21	Acquired value of in-force business and intangibles	94
B22	Subsequent events	94

Page 38

Consolidated income statement

For the year ended 31 December 2017

	Note	2017 £m	2016 £m
Income
Gross written premiums		27,606	25,442
Premiums ceded to reinsurers		(2,229)	(2,364)
Premiums written net of reinsurance		25,377	23,078
Net change in provision for unearned premiums		(153)	(210)
Net earned premiums		25,224	22,868
Fee and commission income		2,187	1,962
Net investment income		22,066	30,257
Share of profit after tax of joint ventures and associates		41	216
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates		135	(11)
		49,653	55,292
Expenses
Claims and benefits paid, net of recoveries from reinsurers		(24,113)	(23,782)
Change in insurance liabilities, net of reinsurance	B9 (a) (ii)	(1,074)	(6,893)
Change in investment contract provisions		(13,837)	(14,039)
Change in unallocated divisible surplus	B13	294	(381)
Fee and commission expense		(4,329)	(3,885)
Other expenses		(3,537)	(3,853)
Finance costs		(683)	(626)
		(47,279)	(53,459)
Profit before tax		2,374	1,833
Tax attributable to policyholders' returns	B6	(371)	(640)
Profit before tax attributable to shareholders' profits		2,003	1,193
Tax expense	B6	(728)	(974)
Less: tax attributable to policyholders' returns	B6	371	640
Tax attributable to shareholders' profits	B6	(357)	(334)
Profit for the year		1,646	859

Attributable to:
Equity holders of Aviva plc		1,497	703
Non-controlling interests		149	156
Profit for the year		1,646	859
Earnings per share	B7
Basic (pence per share)		35.0p	15.3p
Diluted (pence per share)		34.6p	15.1p

Page 39

Consolidated statement of comprehensive income

For the year ended 31 December 2017

	Note	2017 £m	2016 £m
Profit for the year		1,646	859

Other comprehensive income:
Items that may be reclassified subsequently to income statement
Investments classified as available for sale
Fair value (losses)/gains		(7)	12
Fair value gains transferred to profit on disposals		(2)	(2)
Share of other comprehensive income of joint ventures and associates		6	(6)
Foreign exchange rate movements		68	1,128
Aggregate tax effect - shareholder tax on items that may be reclassified subsequently to income statement		5	(34)

Items that will not be reclassified to income statement
Owner-occupied properties - fair value (losses)/gains		(1)	4
Remeasurements of pension schemes	B15	(5)	311
Aggregate tax effect - shareholder tax on items that will not be reclassified subsequently to income statement		5	(70)
Total other comprehensive income, net of tax		69	1,343
Total comprehensive income for the year		1,715	2,202

Attributable to:
Equity holders of Aviva plc		1,523	1,901
Non-controlling interests		192	301
		1,715	2,202

Page 40

Consolidated statement of changes in equity

For the year ended 31 December 2017

	Ordinary share capital £m	Preference share capital £m	Capital reserves¹ £m	Treasury shares £m	Currency translation reserve £m	Other reserves £m	Retained earnings £m	DCI and tier 1 notes £m	Total equity excluding non-controlling interest £m	Non-controlling interests £m	Total equity £m
Balance at 1 January	1,015	200	10,171	(15)	1,146	(349)	4,835	1,123	18,126	1,425	19,551
Profit for the year	-	-	-	-	-	-	1,497	-	1,497	149	1,646
Other comprehensive income	-	-	-	-	121	(93)	(2)	-	26	43	69
Total comprehensive income for the year	-	-	-	-	121	(93)	1,495	-	1,523	192	1,715
Owner-occupied properties fair value gains transferred to retained earnings on disposals	-	-	-	-	-	(2)	2	-	-	-	-
Dividends and appropriations	-	-	-	-	-	-	(1,081)	-	(1,081)	-	(1,081)
Non-controlling interests share of dividends declared in the year	-	-	-	-	-	-	-	-	-	(103)	(103)
Transfer to profit on disposal of subsidiaries, joint ventures and associates	-	-	-	-	(126)	137	1	-	12	-	12
Capital contributions from non-controlling interests	-	-	-	-	-	-	-	-	-	36	36
Changes in non-controlling interests in subsidiaries	-	-	-	-	-	-	-	-	-	(315)	(315)
Treasury shares held by subsidiary companies	-	-	-	1	-	-	-	-	1	-	1
Reserves credit for equity compensation plans	-	-	-	-	-	77	-	-	77	-	77
Shares issued under equity compensation plans	2	-	10	-	-	(44)	42	-	10	-	10
Shares purchased in buy-back	(14)	-	14	-	-	-	(300)	-	(300)	-	(300)
Reclassification of tier 1 notes to financial liabilities²	-	-	-	-	-	-	(92)	(392)	(484)	-	(484)
Aggregate tax effect - shareholder tax	-	-	-	-	-	-	16	-	16	-	16
Balance at 31 December	1,003	200	10,195	(14)	1,141	(274)	4,918	731	17,900	1,235	19,135

1 Capital reserves consist of share premium of £1,207 million, a capital redemption reserve of £14 million arising as a result of the shares purchased in buy-back and a merger reserve of £8,974 million. See note B7 for further details of the shares purchased in buy-back.

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 has been charged to retained earnings. See note B18 for further details.

For the year ended 31 December 2016

	Ordinary share capital £m	Preference share capital £m	Capital reserves¹ £m	Treasury shares £m	Currency translation reserve £m	Other reserves £m	Retained earnings £m	DCI and tier 1 notes £m	Total equity excluding non-controlling interest £m	Non-controlling interests £m	Total equity £m
Balance at 1 January	1,012	200	10,159	(29)	165	(279)	4,774	1,123	17,125	1,145	18,270
Profit for the year	-	-	-	-	-	-	703	-	703	156	859
Other comprehensive income	-	-	-	-	988	(32)	242	-	1,198	145	1,343
Total comprehensive income for the year	-	-	-	-	988	(32)	945	-	1,901	301	2,202
Owner-occupied properties fair value gains transferred to retained earnings on disposals	-	-	-	-	-	(46)	46	-	-	-	-
Dividends and appropriations	-	-	-	-	-	-	(973)	-	(973)	-	(973)
Non-controlling interests share of dividends declared in the year	-	-	-	-	-	-	-	-	-	(135)	(135)
Transfer to profit on disposal of subsidiaries, joint ventures and associates	-	-	-	-	(7)	-	-	-	(7)	-	(7)
Capital contributions from non-controlling interests	-	-	-	-	-	-	-	-	-	9	9
Changes in non-controlling interests in subsidiaries	-	-	-	-	-	-	-	-	-	105	105
Treasury shares held by subsidiary companies	-	-	-	13	-	-	-	-	13	-	13
Reserves credit for equity compensation plans	-	-	-	-	-	38	-	-	38	-	38
Shares issued under equity compensation plans	3	-	12	1	-	(30)	26	-	12	-	12
Aggregate tax effect - shareholder tax	-	-	-	-	-	-	17	-	17	-	17
Balance at 31 December	1,015	200	10,171	(15)	1,146	(349)	4,835	1,123	18,126	1,425	19,551

1 Capital reserves consists of share premium of £1,197 million and a merger reserve of £8,974 million.

Page 41

Consolidated statement of financial position

As at 31 December 2017

	Note	2017 £m	2016 £m
Assets
Goodwill		1,876	2,045
Acquired value of in-force business and intangible assets	B21	3,455	5,468
Interests in, and loans to, joint ventures		1,221	1,604
Interests in, and loans to, associates		421	481
Property and equipment		509	487
Investment property		10,797	10,768
Loans		27,857	24,784
Financial investments		311,082	299,835
Reinsurance assets	B11	13,492	26,343
Deferred tax assets		144	180
Current tax assets		94	119
Receivables		8,285	7,794
Deferred acquisition costs, pension surpluses and other assets		6,374	5,893
Prepayments and accrued income		2,860	2,882
Cash and cash equivalents		43,347	38,708
Assets of operations classified as held for sale	B4	10,871	13,028
Total assets		442,685	440,419
Equity
Capital
Ordinary share capital		1,003	1,015
Preference share capital		200	200
		1,203	1,215
Capital reserves
Share premium		1,207	1,197
Capital redemption reserve		14	-
Merger reserve		8,974	8,974
		10,195	10,171
Treasury shares		(14)	(15)
Currency translation reserve		1,141	1,146
Other reserves		(274)	(349)
Retained earnings		4,918	4,835
Equity attributable to shareholders of Aviva plc		17,169	17,003
Direct capital instrument and tier 1 notes	B18	731	1,123
Equity excluding non-controlling interests		17,900	18,126
Non-controlling interests		1,235	1,425
Total equity		19,135	19,551
Liabilities
Gross insurance liabilities	B9	148,650	151,183
Gross liabilities for investment contracts	B10	203,986	197,095
Unallocated divisible surplus	B13	9,082	9,349
Net asset value attributable to unitholders		18,327	15,638
Pension deficits and other provisions		1,429	1,510
Deferred tax liabilities		2,377	2,413
Current tax liabilities		290	421
Borrowings	B14	10,286	10,295
Payables and other financial liabilities		16,459	17,751
Other liabilities		2,791	2,719
Liabilities of operations classified as held for sale	B4	9,873	12,494
Total liabilities		423,550	420,868
Total equity and liabilities		442,685	440,419

Page 42

Consolidated statement of cash flows

For the year ended 31 December 2017

The cash flows presented in this statement cover all the Group's activities and include flows from both policyholder and shareholder activities. All cash and cash equivalents are available for use by the Group.

	2017 £m	2016 £m
Cash flows from operating activities¹
Cash generated from operating activities	8,361	5,394
Tax paid	(620)	(647)
Total net cash from operating activities	7,741	4,747
Cash flows from investing activities
Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired	25	(432)
Disposals of subsidiaries, joint ventures and associates, net of cash transferred	(49)	42
New loans to joint ventures and associates	-	(3)
Repayment of loans to joint ventures and associates	-	97
Net repayment of loans to joint ventures and associates	-	94
Purchases of property and equipment	(69)	(67)
Proceeds on sale of property and equipment	5	75
Purchases of intangible assets	(107)	(119)
Total net cash (used in)/from investing activities	(195)	(407)
Cash flows from financing activities
Proceeds from issue of ordinary shares	12	15
Shares purchased in buy-back	(300)	-
Treasury shares distributed from employee trusts	-	-
New borrowings drawn down, net of expenses	1,320	3,526
Repayment of borrowings²	(1,904)	(2,340)
Net (repayment)/drawdown of borrowings	(584)	1,186
Interest paid on borrowings	(610)	(595)
Preference dividends paid	(17)	(17)
Ordinary dividends paid	(983)	(871)
Coupon payments on direct capital instrument and tier 1 notes	(81)	(85)
Capital contributions from non-controlling interests of subsidiaries	36	9
Dividends paid to non-controlling interests of subsidiaries	(103)	(135)
Changes in controlling interest in subsidiaries	-	105
Total net cash (used in)/from financing activities	(2,630)	(388)
Total net increase in cash and cash equivalents	4,916	3,952
Cash and cash equivalents at 1 January	38,405	33,170
Effect of exchange rate changes on cash and cash equivalents	266	1,283
Cash and cash equivalents at 31 December	43,587	38,405

1 Cash flows from operating activities include interest received of £5,302 million (2016: £5,642 million) and dividends received of £2,606 million (2016: £2,536 million).

2 Includes redemption of 8.25% US $650 million fixed rate tier 1 notes of £488 million.

Page 43

B1(i) Basis of preparation

(a) The results in this preliminary announcement have been taken from the Group's 2017 Annual report and accounts which will be available on the Company's website on 27 March 2018. The consolidated financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to those reporting under IFRS.

The basis of preparation and summary of accounting policies applicable to the Group's consolidated financial statements can be found in the Accounting policies section of the 2017 Annual report and accounts. The comparative figures have been restated for the adjustments detailed in note B2. In addition, the Group has adopted new amendments to published standards as described in B1(ii), however these had no effect on reported profit or loss or equity, the statement of financial position or the statement of cash flows.

The preliminary announcement for the year ended 31 December 2017 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The results on an IFRS basis for full year 2017 and 2016 have been audited by PricewaterhouseCoopers LLP (PwC). PwC have reported on the 2017 and 2016 consolidated financial statements. Both reports were unqualified and neither contained a statement under section 498 (2) or (3) of the Companies Act 2006. The Group's 2016 report and accounts have been filed with the Registrar of Companies.

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

(b) 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 consolidated financial statements are stated in pounds sterling, which is the Company's functional and presentational currency. Unless otherwise noted, the amounts shown in these financial statements are in millions of pounds sterling (£m).

(c) The long-term nature of much of the Group's operations means that, for management's decision-making and internal performance management of our operating segments, the Group focuses on Group adjusted operating profit, a non-GAAP alternative performance measure (APM), that incorporates an expected return on investments supporting its long-term and non-long-term businesses.

Group adjusted operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and short-term fluctuations from that level. The exclusion of short-term realised and unrealised investment gains and losses from the Group adjusted operating profit APM reflects the long-term nature of much of our business and presents separately the operating profit APM which is used in managing the performance of our operating segments from the impact of economic factors.

Group adjusted operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates. These items principally relate to mergers and acquisition activity which we view as strategic in nature, hence they are excluded from the operating profit APM as this is principally used to manage the performance of our operating segments when reporting to the Group's chief decision maker. Other items are those items that, in the Directors' view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. Details of these items, including an explanation of the rationale for their exclusion, are provided in the relevant notes.

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

B1(ii) New standards, interpretations and amendments to published standards that have been adopted by the Group

The Group has adopted the following amendments to standards which became effective for the annual reporting period beginning on 1 January 2017.

(i) Narrow scope amendments to IAS 12 - Recognition of Deferred Tax Assets for Unrealised Losses

The revisions to IAS 12 Income Taxes clarify the accounting for deferred tax assets on unrealised losses and state that deferred tax assets should be recognised when an asset is measured at fair value and that fair value is below the asset's tax base. It also provides further clarification on the estimation of probable future taxable profits that may support the recognition of deferred tax assets. The adoption of this amendment does not have an impact on the Group's consolidated financial statements as the clarifications are consistent with our existing interpretation.

(ii) Amendments to IAS 7 - Disclosure Initiative

The amendments to IAS 7 Statement of Cash Flows, which form part of the IASB's Disclosure Initiative, require disclosure of the movements in liabilities arising from financing activities with cash and non-cash changes presented separately. The adoption of this amendment does not have an impact on the Group's consolidated financial statements as the Group already voluntarily discloses this information.

(iii) Amendments to IFRS 12: Disclosure of Interests in Other Entities

The amendments to IFRS 12, which form part of the IASB's annual improvements process for the 2014-2016 cycle, clarify existing guidance. The adoption of these amendments does not have an impact on the Group's consolidated financial statements as the clarifications are consistent with our existing interpretation.

Page 44

B2 - Prior period adjustments

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 & 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 in the Reconciliation of Group adjusted operating profit to profit for the year, note B5 Segmental information have been restated. There is no impact on the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity or consolidated statement of cash flows.

B3 - Exchange rates

The Group's principal overseas operations during the year 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 year and the assets and liabilities have been translated at the year end rates as follows:

	2017	2016
Eurozone
Average rate (€1 equals)	£0.88	£0.82
Period end rate (€1 equals)	£0.89	£0.85
Canada
Average rate ($CAD1 equals)	£0.60	£0.56
Period end rate ($CAD1 equals)	£0.59	£0.60
Poland
Average rate (PLN1 equals)	£0.21	£0.19
Period end rate (PLN1 equals)	£0.21	£0.19

B4 - Subsidiaries

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

(a) Acquisitions

(i) Poland

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

(ii) Aviva Vietnam

On 21 April 2017, Aviva plc announced the acquisition of VietinBank's entire 50% shareholding in its life insurance joint venture VietinBank Aviva Life Insurance Company Limited ('Aviva Vietnam') for a consideration of £20 million and signing of a new life insurance distribution agreement. Following completion of the transaction on 22 May 2017, Aviva Vietnam is now a wholly owned subsidiary, with a change in the legal entity name to Aviva Vietnam Life Insurance Company Limited. The change from an equity accounted joint venture to consolidated subsidiary resulted in a fair value remeasurement gain of £7 million on the previous equity interest of £2 million and recognition of £18 million of goodwill and intangible assets.

(iii) Wealthify

On 5 October 2017, Aviva announced an agreement to acquire a majority shareholding in Wealthify Group Limited, the holding company of Wealthify. 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. The transaction completed on 8 February 2018.

(iv) Friends First

On 13 November 2017, Aviva announced that it has reached an agreement to acquire Irish insurer Friends First Life Assurance Company dac ('Friends First') for a cash consideration of €130 million (approximately £116 million). As a result of this acquisition, Aviva will become one of the largest composite insurers in Ireland, with its market share in life insurance increasing to 15%, alongside its existing leading 15% market share in general insurance. The transaction is subject to regulatory approval and is expected to complete in the first quarter of 2018.

Page 45

B4 - Subsidiaries continued

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

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

	2017 £m	2016 £m
Remeasurements due to change in control status
Poland (see (a) (i) above)	16	-
Asia - Vietnam (see (a) (ii) above)	7	-
Disposals
France - Antarius (see (b) (i) below)	180	-
France - health (see (b) (ii) below)	36	-
Spain (see (b) (iii) below)	28	-
Ireland - health	-	(8)
Other small operations	(7)	(3)
Held for sale remeasurements
Asia - FPI (see (c) (ii) below)	(118)	-
Asia - Taiwan (see (c) (iii) below)	(7)	-
Total profit/(loss) on disposal and remeasurement	135	(11)

This consists of £23 million of remeasurement gains in respect of the joint venture operations in Poland (see note B4 (a)(i) above) and Aviva Vietnam (see note B4 (a)(ii) above); £237 million profit on the disposals of Antarius, France health, three businesses in Spain (see note B4 (b)(i), (ii) and (iii) below for further details respectively) and other small operations; offset by £125 million of remeasurement losses in relation to FPI and Taiwan (see note B4 (c)(ii) and (c)(iii) for further details respectively).

(i) Antarius

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

	£m
Assets
Goodwill, AVIF and other intangibles	12
Investment property	49
Loans	78
Financial investments	10,873
Reinsurance assets	408
Other assets	1,499
Cash and cash equivalents	468
Total assets	13,387
Liabilities
Insurance liabilities	4,720
Liability for investment contracts	7,247
Unallocated divisible surplus	832
Other liabilities	34
Total liabilities	12,833
Net assets	554
Non-controlling interests before disposal	(277)
Group's share of net assets disposed of	277
Cash consideration	433
Less: transaction costs	(2)
Net consideration	431
Currency translation reserve and other reserves recycled to the income statement	26
Profits on disposal	180

(ii) France - health

On 1 November 2017, Aviva France disposed of a broker distributed individual health insurance portfolio to Malakoff Médéric (MM), a leading French mutual health insurer for cash consideration of €41 million (approximately £36 million), after transaction costs. Net assets disposed of were £nil, primarily relating to intangible assets not recognised by the Group under IFRS, resulting in a profit on disposal of approximately £36 million.

Page 46

B4 - Subsidiaries continued

(iii) Spain

On 15 September 2017, Aviva announced that it had completed the sale of its 50% shareholding in life insurance and pension partnerships Unicorp Vida and Caja España Vida, as well as its wholly owned retail life business Aviva Vida y Pensiones, to Santalucía for a total consideration of €475 million (approximately £400 million). The transaction resulted in a profit on disposal of £28 million, calculated as follows:

	£m
Assets
Goodwill, AVIF and other intangibles	161
Financial investments	4,402
Other assets	154
Cash and cash equivalents	440
Total assets	5,157
Liabilities
Insurance liabilities	3,777
Unallocated divisible surplus	244
Net asset value attributable to unitholders	551
Other liabilities	149
Total liabilities	4,721
Net assets	436
Non-controlling interests before disposal	(116)
Group's share of net assets disposed of	320
Cash consideration¹	400
Less: transaction costs	(10)
Net consideration	390
Currency translation reserve and other reserves recycled to the income statement	(42)
Profits on disposal	28

1 Cash consideration of £400 million above includes a loss of £22 million related to hedging the currency exposure on expected proceeds of the sale.

The assets and liabilities of operations classified as held for sale as at 31 December 2017 are as follows:

	2017 £m	2016 £m
Assets
Goodwill, AVIF and other intangibles	1,467	12
Property and equipment	5	-
Investment property	-	48
Loans	6	75
Financial investments	8,306	10,706
Reinsurance assets	123	411
Other assets	225	1,521
Cash and cash equivalents	739	255
Total assets	10,871	13,028
Liabilities
Insurance liabilities	(914)	(4,448)
Liability for investment contracts	(8,663)	(7,175)
Unallocated divisible surplus	(19)	(859)
Other liabilities	(277)	(12)
Total liabilities	(9,873)	(12,494)
Net assets	998	534

Assets and liabilities of operations classified as held for sale as at 31 December 2017 relate to the expected disposal of two businesses in Italy, the international operations of Friends Life ('FPI'), Aviva Taiwan and the remaining life insurance businesses in Spain. See below for further details. Assets and liabilities of operations classified as held for sale during 2016 relate to Antarius (see note B4 (b)(i) for further details) disposed of during 2017.

Page 47

B4 - Subsidiaries continued

(i) Italy

On 29 September 2017, Aviva announced that it had agreed the sale of its entire shareholding of Avipop Assicurazioni S.p.A and Avipop Vita S.p.A to Banco BPM for a consideration of €265 million (approximately £233 million) payable in cash upon completion. This agreement follows a notification received by Aviva on 29 June 2017 of Banco BPM's intention to not renew its distribution agreement with Aviva and Aviva's subsequent decision, announced on 25 August 2017, to exercise its put option. The transaction is subject to regulatory approval and is expected to complete in 2018. In accordance with IFRS 5, these businesses have been classified as held for sale from June 2017. These businesses are measured at their carrying amount and remain consolidated subsidiaries of Aviva at the balance sheet date.

(ii) FPI

On 19 July 2017, Aviva announced the sale of Friends Provident International Limited ('FPI') to RL360 Holding Company Limited, a

subsidiary of International Financial Group Limited, for a total consideration of £340 million. The transaction is subject to regulatory approvals and is expected to complete in the first half of 2018. In accordance with IFRS 5, the subsidiary has been classified as held for sale from July 2017 and has been re-measured at fair value based on the expected sales price less costs to sell, calculated as £334 million, after deducting a £6 million reinsurance recapture fee between FPI and Aviva Re Limited which is embedded in the sale agreement. This resulted in a total loss on re-measurement of £118 million in 2017. The business remains a consolidated subsidiary of Aviva at the balance sheet date.

(iii) Taiwan

On 13 October 2017, Aviva announced that it has agreed to sell 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'). In accordance with IFRS 5, the joint venture has been classified as held for sale from October 2017 and has been re-measured at fair value based on the expected sales prices less costs to sell resulting in a total loss on re-measurement of £7 million in the second half of 2017 following its classification as held for sale. The business remains a joint venture of Aviva at the balance sheet date and was subsequently disposed of on 19 January 2018 following completion of the transaction.

(iv) Spain

On 23 February 2018, Aviva announced that it has agreed to sell its entire shareholding in life insurance and pensions joint ventures Cajamurcia Vida and Caja Granada Vida to Bankia, for a total consideration of €202 million. The transaction is subject to regulatory and anti-trust approvals and is expected to complete in the second quarter of 2018. Following completion of the transaction, Aviva will retain a shareholding in a small life insurance operation, Pelayo Vida, and a residual support centre in Spain. In accordance with IFRS 5, these businesses have been classified as held for sale from December 2017, when management were committed to a plan to sell the businesses. The businesses are measured at their carrying amount and remain consolidated subsidiaries of Aviva at the balance sheet date.

(d) Subsequent events

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 has been approved by the Hong Kong Insurance Authority and is expected to start operating under its new corporate structure during the first half of 2018. This follows the announcement on 20 January 2017 by which Hillhouse and Tencent have acquired a combined 60% shareholding in Aviva Life Insurance Company Limited ('Aviva Hong Kong').

(e) Significant restrictions

In certain jurisdictions the ability of subsidiaries to transfer funds to the Group in the form of cash dividends or to repay loans and advances is subject to local corporate or insurance laws and regulations and solvency requirements. There are no protective rights of non-controlling interests which significantly restrict the Group's ability to access or use the assets and settle the liabilities of the Group.

Page 48

B5 - Segmental information

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

(a) Operating segments

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). The revised segments are set out below. Results for prior years have been restated to facilitate comparison with this new structure.

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

France

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

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. The principal activities of our Italian and Irish operations are long-term business and general insurance. Ireland also includes the results of our Ireland Health business, up to the date of disposal on 1 August 2016. The principal activity of our Spanish operation is the sale of long-term business, accident and health insurance and a selection of savings products. Our 'Other' operations include our life operations in Turkey. As set out in note B4(b), the results of certain entities within our Spanish business are included up to the date of disposal on 15 September 2017 and as set out in note B4(c), certain entities within our Italian business and the remaining entities within our Spanish business are classified as held for sale as at 31 December 2017.

Asia

Our activities in Asia principally comprise our long-term business operations in China, India, Singapore, Hong Kong, Vietnam, Indonesia, Taiwan and the international operations of Friends Life. This segment also includes general insurance and health operations in Singapore and health operations in Indonesia. As set out in note B4(c), Taiwan and the international operations of Friends Life are classified as held for sale as at 31 December 2017.

Aviva Investors

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

Other Group activities

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

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B5 - Segmental information continued

Measurement basis

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

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

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

(a) (i) 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 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 return variances and economic assumption changes on long-term business	(323)	-	-	249	(7)	12	38	-	(3)	(34)
Short-term fluctuation in return on investments backing non-long-term business	-	56	7	(26)	(3)	27	-	-	284	345
Economic assumption changes on general insurance and health business	-	18	(2)	(9)	-	-	-	-	-	7
Impairment of goodwill, joint ventures and 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 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 were written.

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

3 Other Group activities include Group Reinsurance.

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B5 - Segmental information continued

(a) (ii) Segmental income statement for the year ended 31 December 2016 - restated¹

		United Kingdom				Europe
	Life £m	GI £m	Canada £m	France £m	Poland £m	Italy, Ireland, Spain and Other £m	Asia £m	Aviva Investors³ £m	Other Group activities⁴ £m	Total £m
Gross written premiums	5,264	4,219	2,542	6,624	496	5,377	920	-	-	25,442
Premiums ceded to reinsurers	(1,469)	(394)	(89)	(86)	(9)	(183)	(134)	-	-	(2,364)
Internal reinsurance revenue	-	(2)	-	-	-	(10)	(11)	-	23	-
Premiums written net of reinsurance	3,795	3,823	2,453	6,538	487	5,184	775	-	23	23,078
Net change in provision for unearned premiums	(2)	(109)	(33)	(8)	(16)	(34)	(8)	-	-	(210)
Net earned premiums	3,793	3,714	2,420	6,530	471	5,150	767	-	23	22,868
Fee and commission income	841	117	17	258	60	148	198	326	(3)	1,962
	4,634	3,831	2,437	6,788	531	5,298	965	326	20	24,830
Net investment income	24,661	242	50	2,951	141	816	1,240	83	73	30,257
Inter-segment revenue	-	-	-	-	-	-	-	234	-	234
Share of profit of joint ventures and associates	172	-	1	16	7	3	17	-	-	216
(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	(3)	-	-	-	-	(8)	-	-	-	(11)
Segmental income²	29,464	4,073	2,488	9,755	679	6,109	2,222	643	93	55,526
Claims and benefits paid, net of recoveries from reinsurers	(10,996)	(2,409)	(1,521)	(5,397)	(315)	(2,705)	(399)	-	(40)	(23,782)
Change in insurance liabilities, net of reinsurance	(3,362)	(560)	(16)	(1,221)	(79)	(1,312)	(349)	-	6	(6,893)
Change in investment contract provisions	(9,968)	-	-	(1,636)	-	(1,281)	(1,069)	(85)	-	(14,039)
Change in unallocated divisible surplus	(294)	-	-	(276)	2	167	20	-	-	(381)
Fee and commission expense	(815)	(1,204)	(628)	(632)	(77)	(395)	(108)	(35)	9	(3,885)
Other expenses	(1,396)	(162)	(150)	(266)	(64)	(238)	(289)	(393)	(895)	(3,853)
Inter-segment expenses	(204)	(7)	(5)	(1)	(5)	(9)	-	-	(3)	(234)
Finance costs	(191)	(2)	(4)	(1)	-	(7)	(3)	-	(418)	(626)
Segmental expenses	(27,226)	(4,344)	(2,324)	(9,430)	(538)	(5,780)	(2,197)	(513)	(1,341)	(53,693)
Profit/(loss) before tax	2,238	(271)	164	325	141	329	25	130	(1,248)	1,833
Tax attributable to policyholders' returns	(633)	-	-	-	-	(5)	(2)	-	-	(640)
Profit/(loss) before tax attributable to shareholders' profits	1,605	(271)	164	325	141	324	23	130	(1,248)	1,193
Adjusting items:
Reclassification of corporate costs and unallocated interest	-	(5)	17	46	-	-	-	5	(63)	-
Investment return variances and economic assumption changes on long-term business	(497)	-	-	86	1	21	10	-	-	(379)
Short-term fluctuation in return on investments backing non-long-term business	(135)	(95)	42	(2)	(1)	29	-	-	680	518
Economic assumption changes on general insurance and health business	-	229	-	13	-	-	-	-	-	242
Impairment of goodwill, joint ventures and associates and other amounts expensed	-	-	-	-	-	-	-	-	-	-
Amortisation and impairment of intangibles	71	24	29	2	3	7	9	6	24	175
Amortisation and impairment of AVIF	387	-	-	3	2	2	142	-	4	540
Loss/(profit) on the disposal and remeasurement of subsidiaries, joint ventures and associates	3	-	-	-	-	8	-	-	-	11
Other⁵	-	498	-	-	-	-	-	-	-	498
Group adjusted operating profit before tax attributable to shareholders' profits after integration and restructuring costs	1,434	380	252	473	146	391	184	141	(603)	2,798
Integration and restructuring costs	119	15	18	8	-	1	17	19	15	212
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits	1,553	395	270	481	146	392	201	160	(588)	3,010

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

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

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

4 Other Group activities include Group Reinsurance.

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

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(a) (iii) 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	100,178	5,305	3,325	17,162	3,275	10,103	4,056	-	9	143,413
Unearned premiums	228	2,003	1,578	458	119	520	74	-	-	4,980
Other insurance liabilities	5	68	124	51	-	7	-	-	2	257
Liability 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

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(a) (iv) Segmental statement of financial position as at 31 December 2016 - 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	88	-	26	293	51	-	-	2,045
Acquired value of in-force business and intangible assets	3,152	160	292	86	12	619	1,062	9	76	5,468
Interests in, and loans to, joint ventures and associates	1,257	-	13	169	48	71	527	-	-	2,085
Property and equipment	78	27	24	240	4	5	12	5	92	487
Investment property	6,304	208	-	2,878	-	201	-	951	226	10,768
Loans	23,693	5	170	757	-	122	37	-	-	24,784
Financial investments	168,273	3,961	4,670	68,427	3,015	29,267	11,460	574	10,188	299,835
Deferred acquisition costs	1,122	478	360	280	45	213	113	3	-	2,614
Other assets	51,489	5,499	1,372	7,716	237	3,585	1,479	961	6,967	79,305
Assets of operations classified as held for sale	-	-	-	13,028	-	-	-	-	-	13,028
Total assets	256,031	11,262	6,989	93,581	3,387	34,376	14,741	2,503	17,549	440,419
Insurance liabilities
Long-term business and outstanding claims provisions	101,906	5,461	3,248	15,932	2,698	13,166	3,750	-	12	146,173
Unearned premiums	227	1,925	1,527	463	68	492	64	-	-	4,766
Other insurance liabilities	-	66	118	51	-	6	-	-	3	244
Liability for investment contracts	121,508	-	-	49,929	2	15,690	8,395	1,571	-	197,095
Unallocated divisible surplus	2,709	-	-	5,151	60	1,223	206	-	-	9,349
Net asset value attributable to unitholders	76	-	-	2,349	-	509	-	-	12,704	15,638
External borrowings	1,793	-	-	1	-	46	-	-	8,455	10,295
Other liabilities, including inter-segment liabilities	15,239	(472)	1,107	4,694	139	1,288	645	396	1,778	24,814
Liabilities of operations classified as held for sale	-	-	-	12,494	-	-	-	-	-	12,494
Total liabilities	243,458	6,980	6,000	91,064	2,967	32,420	13,060	1,967	22,952	420,868
Total equity										19,551
Total equity and liabilities										440,419

(b) Further analysis by products and services

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

Long-term business

Our long-term business comprises life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business. 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 and provides investment management services for institutional pension fund mandates. It manages a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. Clients include Aviva Group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors.

Other

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

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

	Long-term business £m	General insurance and health² £m	Fund management £m	Other £m	Total £m
Gross written premiums¹	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	1,334	23	369	461	2,187
	16,676	9,905	369	461	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	38,285	10,278	612	722	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	(1,140)	(2,615)	(36)	(538)	(4,329)
Other expenses	(1,807)	(572)	(425)	(733)	(3,537)
Inter-segment expenses	(226)	(15)	-	(3)	(244)
Finance costs	(240)	(6)	-	(437)	(683)
Segmental expenses	(35,610)	(9,741)	(461)	(1,711)	(47,523)
Profit/(loss) before tax	2,675	537	151	(989)	2,374
Tax attributable to policyholders' returns	(371)	-	-	-	(371)
Profit/(loss) before tax attributable to shareholders' profits	2,304	537	151	(989)	2,003
Adjusting items	578	163	13	311	1,065
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits	2,882	700	164	(678)	3,068

1 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.

2 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.

Page 54

B5 - Segmental information continued

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

	Long-term business £m	General insurance and health² £m	Fund management £m	Other £m	Total £m
Gross written premiums¹	15,748	9,694	-	-	25,442
Premiums ceded to reinsurers	(1,697)	(667)	-	-	(2,364)
Premiums written net of reinsurance	14,051	9,027	-	-	23,078
Net change in provision for unearned premiums	-	(210)	-	-	(210)
Net earned premiums	14,051	8,817	-	-	22,868
Fee and commission income	1,234	26	300	402	1,962
	15,285	8,843	300	402	24,830
Net investment income/(expense)	29,695	383	(2)	181	30,257
Inter-segment revenue	-	-	239	-	239
Share of profit of joint ventures and associates	213	3	-	-	216
(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	(3)	(8)	-	-	(11)
Segmental income	45,190	9,221	537	583	55,531
Claims and benefits paid, net of recoveries from reinsurers	(18,026)	(5,756)	-	-	(23,782)
Change in insurance liabilities, net of reinsurance	(6,249)	(644)	-	-	(6,893)
Change in investment contract provisions	(14,039)	-	-	-	(14,039)
Change in unallocated divisible surplus	(381)	-	-	-	(381)
Fee and commission expense	(1,369)	(2,299)	(33)	(184)	(3,885)
Other expenses	(1,887)	(521)	(396)	(1,049)	(3,853)
Inter-segment expenses	(222)	(12)	-	(5)	(239)
Finance costs	(183)	(5)	-	(438)	(626)
Segmental expenses	(42,356)	(9,237)	(429)	(1,676)	(53,698)
Profit/(loss) before tax	2,834	(16)	108	(1,093)	1,833
Tax attributable to policyholders' returns	(640)	-	-	-	(640)
Profit/(loss) before tax attributable to shareholders' profits	2,194	(16)	108	(1,093)	1,193
Adjusting items	448	849	30	490	1,817
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits	2,642	833	138	(603)	3,010

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

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

Page 55

B5 - Segmental information continued

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

	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	49,054	9,075	905	12,656	71,690
Assets of operations classified as held for sale	10,552	319	-	-	10,871
Total assets	395,812	24,781	972	21,120	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	18,740	1,369	376	2,861	23,346
Liabilities of operations classified as held for sale	9,694	179	-	-	9,873
Total liabilities	377,619	18,211	376	27,344	423,550
Total equity					19,135
Total equity and liabilities					442,685

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

	Long-term business £m	General insurance and health £m	Fund management £m	Other £m	Total £m
Goodwill	889	1,086	3	67	2,045
Acquired value of in-force business and intangible assets	4,845	571	9	43	5,468
Interests in, and loans to, joint ventures and associates	2,030	42	-	13	2,085
Property and equipment	264	109	5	109	487
Investment property	10,202	341	-	225	10,768
Loans	24,607	177	-	-	24,784
Financial investments	277,889	11,699	51	10,196	299,835
Deferred acquisition costs	1,574	1,037	3	-	2,614
Other assets	61,780	8,995	835	7,695	79,305
Assets of operations classified as held for sale	13,028	-	-	-	13,028
Total assets	397,108	24,057	906	18,348	440,419
Gross insurance liabilities	134,695	16,488	-	-	151,183
Gross liabilities for investment contracts	197,095	-	-	-	197,095
Unallocated divisible surplus	9,349	-	-	-	9,349
Net asset value attributable to unitholders	2,934	-	-	12,704	15,638
External borrowings	1,718	-	-	8,577	10,295
Other liabilities, including inter-segment liabilities	19,930	1,215	371	3,298	24,814
Liabilities of operations classified as held for sale	12,494	-	-	-	12,494
Total liabilities	378,215	17,703	371	24,579	420,868
Total equity					19,551
Total equity and liabilities					440,419

Page 56

B6 - Tax

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

(a) Tax charged to the income statement

(i) The total tax charge comprises:

	2017 £m	2016 £m
Current tax
For the period	651	930
Prior period adjustments	(46)	1
Total current tax	605	931
Deferred tax
Origination and reversal of temporary differences	134	72
Changes in tax rates or tax laws	(8)	(14)
Write down/(back) of deferred tax assets	(3)	(15)
Total deferred tax	123	43
Total tax charged to income statement	728	974

(ii) The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Irish and Singapore life insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholder returns included in the charge above is £371 million (2016: charge of £640 million).

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

	2017 £m	2016 £m
UK tax	528	688
Overseas tax	200	286
	728	974

(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax expense by £13 million and £nil million (2016: £10 million and £8 million), respectively.

(v) Deferred tax charged/(credited) to the income statement represents movements on the following items:

	2017 £m	2016 £m
Long-term business technical provisions and other insurance items	37	(147)
Deferred acquisition costs	(2)	(12)
Unrealised gains/(losses) on investments	(33)	144
Pensions and other post-retirement obligations	19	21
Unused losses and tax credits	19	39
Subsidiaries, associates and joint ventures	(4)	4
Intangibles and additional value of in-force long-term business	(85)	(99)
Provisions and other temporary differences	172	93
Total deferred tax charged /(credited) to income statement	123	43

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

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

	2017 £m	2016 £m
Current tax
In respect of pensions and other post-retirement obligations	(45)	(25)
In respect of foreign exchange movements	4	31
	(41)	6
Deferred tax
In respect of pensions and other post-retirement obligations	42	94
In respect of fair value (losses)/gains on owner-occupied properties	(2)	1
In respect of unrealised (losses)/gains on investments	(9)	3
	31	98
Total tax (credited)/ charged to other comprehensive income	(10)	104

(ii) The tax charge attributable to policyholders' returns included above is £nil (2016: £nil).

Page 57

B6 - Tax continued

Tax credited directly to equity in the year in respect of coupon payments on the direct capital instrument and tier 1 notes amounted to £16 million (2016: £17 million).

(d) Tax reconciliation

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

	Shareholder £m	Policyholder £m	2017 £m	Shareholder £m	Policyholder £m	2016 £m
Total profit before tax	2,003	371	2,374	1,193	640	1,833

Tax calculated at standard UK corporation tax rate of 19.25% (2016: 20.00%)	386	71	457	239	128	367
Reconciling items
Different basis of tax - policyholders	-	301	301	-	513	513
Adjustment to tax charge in respect of prior periods	(44)	-	(44)	(34)	-	(34)
Non-assessable income and items not taxed at the full statutory rate	(47)	-	(47)	39	-	39
Non-taxable (profit)/loss on sale of subsidiaries and associates	(27)	-	(27)	1	-	1
Disallowable expenses	47	-	47	49	-	49
Different local basis of tax on overseas profits	82	(1)	81	97	(1)	96
Change in future local statutory tax rates	(36)	-	(36)	(36)	-	(36)
Movement in deferred tax not recognised	(3)	-	(3)	(13)	-	(13)
Tax effect of profit from joint ventures and associates	(3)	-	(3)	(6)	-	(6)
Other	2	-	2	(2)	-	(2)
Total tax charged to income statement	357	371	728	334	640	974

The tax charge/(credit) attributable to policyholder 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 profits 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/(credit) attributable to policyholders included in the total tax charge.

Finance (No 2) Act 2015 introduced legislation reducing the UK rate of corporation tax from 20% at 1 April 2016 to 19% from 1 April 2017 and to 18% from 1 April 2020. Finance Act 2016 further reduced the corporation tax rate from 1 April 2020 to 17%. In addition, in France, the rate of corporation tax was reduced from 34.43% to 28.92% with effect from 1 January 2020. These reduced rates were used in the calculation of the Group's deferred tax assets and liabilities as at 31 December 2016.

In 2017 further changes were made in France to reduce the corporation tax rate to 32.02% from 1 January 2019 and to 27.37% from 1 January 2021 and 25.83% from 1 January 2022. These reduced rates have been incorporated in the calculation of France's deferred tax assets and liabilities as at 31 December 2017 and results in a reduction in the Group's net deferred tax liabilities of £15 million, comprising of a £8 million credit to the Income Statement and £7 million credit to the Statement of Comprehensive Income.

Page 58

B7 - Earnings per share

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

(a) Basic earnings per share

(i) The profit attributable to ordinary shareholders is:

			2017			2016
	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	3,068	(1,065)	2,003	3,010	(1,817)	1,193
Tax attributable to shareholders' profit	(639)	282	(357)	(706)	372	(334)
Profit for the year	2,429	(783)	1,646	2,304	(1,445)	859
Amount attributable to non-controlling interests	(134)	(15)	(149)	(147)	(9)	(156)
Cumulative preference dividends for the year	(17)	-	(17)	(17)	-	(17)
Coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax)	(65)	-	(65)	(68)	-	(68)
Profit attributable to ordinary shareholders	2,213	(798)	1,415	2,072	(1,454)	618

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

			2017			2016
	Before tax £m	Net of tax, non-controlling interests, preference dividends and DCI¹ £m	Per share p	Before tax £m	Net of tax, non- controlling interests, preference dividends and DCI¹ £m	Per share p
Group adjusted operating profit attributable to ordinary shareholders	3,068	2,213	54.8	3,010	2,072	51.1
Integration and restructuring costs	(141)	(111)	(2.8)	(212)	(170)	(4.2)
Group adjusted operating profit attributable to ordinary shareholders after integration and restructuring costs	2,927	2,102	52.0	2,798	1,902	46.9
Adjusting items:
Investment return variances and economic assumption changes on long-term business	34	86	2.1	379	313	7.8
Short-term fluctuation in return on investments backing non-long-term business	(345)	(250)	(6.3)	(518)	(398)	(9.8)
Economic assumption changes on general insurance and health business	(7)	(6)	(0.1)	(242)	(193)	(4.8)
Impairment of goodwill, joint ventures and associates and other amounts expensed	(49)	(49)	(1.2)	-	-	-
Amortisation and impairment of intangibles	(197)	(151)	(3.7)	(175)	(137)	(3.4)
Amortisation and impairment of acquired value of in-force business	(495)	(430)	(10.6)	(540)	(455)	(11.2)
Profit/(loss) on disposal and remeasurement of subsidiaries, joint ventures and associates	135	113	2.8	(11)	(16)	(0.4)
Other²	-	-	-	(498)	(398)	(9.8)
Profit attributable to ordinary shareholders	2,003	1,415	35.0	1,193	618	15.3

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

2 Other items include an exceptional charge of £nil (2016: £475 million), £nil net of tax (2016: £380 million), relating to the impact of the change in the Ogden discount rate from 2.5% set in 2001 to minus 0.75% announced by the Lord Chancellor on 27 February 2017.

(iii) The calculation of basic earnings per share uses a weighted average of 4,041 million (2016: 4,051 million) ordinary shares in issue, after deducting treasury shares. The actual number of shares in issue at 31 December 2017 was 4,013 million (2016: 4,062 million) and 4,010 million (2016: 4,058 million) excluding treasury shares.

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

Page 59

B7 - Earnings per share continued

(b) Diluted earnings per share

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

			2017			2016
	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	1,415	4,041	35.0	618	4,051	15.3
Dilutive effect of share awards and options	-	48	(0.4)	-	38	(0.2)
Diluted earnings per share	1,415	4,089	34.6	618	4,089	15.1

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

			2017			2016
	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	2,213	4,041	54.8	2,072	4,051	51.1
Dilutive effect of share awards and options	-	48	(0.7)	-	38	(0.4)
Diluted Group adjusted operating profit per share	2,213	4,089	54.1	2,072	4,089	50.7

B8 - Dividends and appropriations

This note analyses the total dividends and other appropriations we paid during the year. The table below does not include the final dividend proposed after the year end because it is not accrued in these financial statements.

	2017 £m	2016 £m
Ordinary dividends declared and charged to equity in the year
Final 2016 - 15.88 pence per share, paid on 17 May 2017	646	-
Final 2015 - 14.05 pence per share, paid on 17 May 2016	-	570
Interim 2017 - 8.40 pence per share, paid on 17 November 2017	337	-
Interim 2016 - 7.42 pence per share, paid on 17 November 2016	-	301
	983	871
Preference dividends declared and charged to equity in the year	17	17
Coupon payments on direct capital instrument and tier 1 notes	81	85
	1,081	973

Subsequent to 31 December 2017, the directors proposed a final dividend for 2017 of 19.00 pence per ordinary share (2016: 15.88 pence), amounting to £763 million (2016: £646 million) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 17 May 2018 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2018.

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

Page 60

B9 - Insurance liabilities

This note analyses the Group insurance contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used.

(a) Carrying amount

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

			2017			2016
	Long-term business £m	General insurance and health £m	Total £m	Long-term business £m	General insurance and health £m	Total £m
Long-term business provisions
Participating	49,928	-	49,928	56,760	-	56,760
Unit-linked non-participating	16,040	-	16,040	16,026	-	16,026
Other non-participating	65,004	-	65,004	64,432	-	64,432
	130,972	-	130,972	137,218	-	137,218
Outstanding claims provisions	1,798	8,964	10,762	1,925	8,749	10,674
Provision for claims incurred but not reported	-	2,837	2,837	-	2,960	2,960
	1,798	11,801	13,599	1,925	11,709	13,634
Provision for unearned premiums	-	4,980	4,980	-	4,766	4,766
Provision arising from liability adequacy tests¹	-	13	13	-	13	13
Total	132,770	16,794	149,564	139,143	16,488	155,631
Less: Amounts classified as held for sale	(783)	(131)	(914)	(4,448)	-	(4,448)
	131,987	16,663	148,650	134,695	16,488	151,183

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

(ii) Change in insurance liabilities recognised as an expense

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

2017	Gross £m	Reinsurance £m	Net £m
Long-term business
Change in long-term business provisions	624	315	939
Change in provision for outstanding claims	(65)	(11)	(76)
	559	304	863
General insurance and health
Change in insurance liabilities	73	138	211
Less: Unwind of discount on GI reserves and other	(9)	9	-
	64	147	211
Total change in insurance liabilities (note 6)	623	451	1,074

2016	Gross £m	Reinsurance¹ £m	Net £m
Long-term business
Change in long-term business provisions	7,164	(993)	6,171
Change in provision for outstanding claims	91	(13)	78
	7,255	(1,006)	6,249
General insurance and health
Change in insurance liabilities²	867	(222)	645
Less: Unwind of discount on GI reserves and other	(11)	10	(1)
	856	(212)	644
Total change in insurance liabilities (note 6)	8,111	(1,218)	6,893

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

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

Page 61

B9 - Insurance liabilities continued

(b) Long-term business liabilities

(i) Business description

The Group underwrites long-term business in a number of countries as follows:

· In the UK, in Aviva Life & Pensions UK (UKLAP) mainly in:

- New With-Profits Sub-Fund (NWPSF) where the with-profits policyholders are entitled to at least 90% of the distributed profits, with the shareholders receiving the balance. Any surplus or deficit emerging in NWPSF that is not distributed as bonus will be transferred from this sub-fund to the Reattributed Inherited Estate External Support Account (RIEESA) (see below).

- Old With-Profits Sub-Fund (OWPSF), UKLAP With-Profits Sub-Fund (UKLAP WPSF) and Provident Mutual Sub-Fund (PMSF) of UKLAP, where the with-profits policyholders are entitled to at least 90% of the distributed profits, with the shareholders receiving the balance.

- The FP With-Profits Sub-Fund (FP WPSF), which was formally closed to new business during 2017 and where shareholders are entitled to 10% of the distributed profits, plus 60% of the surplus arising on pre-demutualisation non-profit and unitised business and non-investment sources of surplus on policies held by post-demutualisation policyholders. The Friends Provident demutualisation occurred in 2001.

- The FLC New With-Profits Sub-Fund (FLC New WPSF), the FLC Old With-Profits Sub-Fund (FLC Old WPSF), the WL With-Profits Sub-Fund (WL WPSF) and FLAS With-Profits Sub-Fund (FLAS WPSF) which are closed to new business and where policyholders are entitled to 90% of the distributed profits aside from certain policies in the FLC New WPSF and the FLC Old WPSF with guaranteed bonus rates, and certain policies in the WL WPSF which are reinsured into the fund where the shareholders do not receive one-ninth of the bonus.

- FPLAL With-Profits Sub-Fund (FPLAL WPSF) and Secure Growth Fund (SGF), which are closed to new business and where policyholders are entitled to 100% of the distributed profits.

- The 'Non-profit' fund, where shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profits business written in UKLAP WPSF and on stakeholder unitised with-profits business written in NWPSF and OWPSF are derived from management fees and policy charges, and emerge in the non-profit funds.

- RIEESA is a non-profit fund where shareholders are entitled to 100% of the distributed profits, but these cannot be distributed until the 'lock-in' criteria set by the Reattribution Scheme have been met. RIEESA is used to provide capital support to NWPSF, and has been used in the past to write non-participating business.

· In France, the majority of policyholders' benefits are determined by investment performance, subject to certain guarantees, and shareholders' profits are derived largely from management fees. In addition, a substantial number of policies participate in investment returns, with the balance being attributable to shareholders.

· In other operations in Europe and Asia, a range of long-term insurance and savings products are written.

(ii) Group practice

The long-term business provision is calculated separately for each of the Group's life operations. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, modified where necessary to reflect the requirements of the Companies Act 2006.

Material judgement is required in calculating the provisions and is exercised particularly through the choice of assumptions where discretion is permitted. In turn, the assumptions used depend on the circumstances prevailing in each of the life operations. Provisions are most sensitive to assumptions regarding discount rates and mortality/morbidity rates. Where discount rate assumptions are based on current market yields on fixed interest securities, allowance is made for default risk implicit in the yields on the underlying assets.

Bonuses paid during the year are reflected in claims paid, whereas those allocated as part of the bonus declaration are included in the movements in the long-term business provision.

For UK with-profits life funds falling within the scope of FRS 27, which was grandfathered from UK regulatory requirements under IFRS 4 prior to the adoption of Solvency II, an amount may be recognised for the present value of future profits (PVFP) on non-participating business written in a with-profits fund where the determination of the realistic value of liabilities in that with-profits fund takes account, directly or indirectly, of this value. For NWPSF, OWPSF, UKLAP WPSF and PMSF no adjustment for this value is made to the participating insurance and investment contract liabilities or the unallocated divisible surplus. For FP WPSF, FPLAL WPSF, FLC New WPSF, FLC Old WPSF, FLAS WPSF, WL WPSF and SGF the non-participating liabilities are measured on a realistic basis with implicit recognition of the present value of future profits and hence no additional explicit adjustment is required for this value.

(iii) Methodology and assumptions

The main method of actuarial valuation of liabilities arising under long-term insurance contracts is the gross premium method which involves the discounting of projected premiums and claims.

The gross premium method uses the amount of contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future expenses. These assumptions can vary by contract type and reflect current and expected future experience.

Page 62

B9 - Insurance liabilities continued

(a) UK

With-profits business

The Group's UK with-profit liabilities are evaluated by reference to FRS27, which was grandfathered under IFRS 4, prior to the adoption of Solvency II. Under these rules, provision for guarantees and options within realistic liabilities are measure at fair value, using market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising from uncertainty surrounding future economic conditions.

The key elements of the realistic liabilities are the with-profits benefit reserve (WPBR) and the present value of the expected cost of any payments in excess of the WPBR (referred to as the cost of future policy-related liabilities). The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities, which includes the value of any 'planned enhancements' to benefits agreed by the Company.

The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract. For a small proportion of business, a prospective valuation approach is used, including allowance for anticipated future regular and final bonuses.

The cost of future policy-related liabilities include:

· Maturity Guarantees;

· Guarantees on surrender, including no-MVR (Market Value Reduction) Guarantees and Guarantees linked to inflation;

· Guaranteed Annuity Options;

· GMP (Guaranteed Minimum Pension) underpin on Section 32 transfers; and

· Expected payments under Mortgage Endowment Promise.

The cost of future policy-related liabilities is determined using a market-consistent approach and, in the main, this is based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market-related assumptions (for example, persistency, mortality and expenses) are assessed on a best estimate basis with reference to Company and wider industry experience, adjusted to take into account future trends.

On 1 January 2016 the Solvency I Pillar 1 regulatory regime was replaced with Solvency II, under which realistic liabilities were replaced with Best Estimate Liabilities (BEL). Key differences between the realistic liabilities and the Solvency II BEL are that BEL excludes the shareholder's share of future bonuses, excludes certain planned and approved enhancements to benefits (part of Solvency II surplus funds) and uses a higher yield (EIOPA specified) for future investment returns and discounting. Adjusting the yield used in the calculation of the BEL by removing the volatility and credit risk adjustments, including planned enhancements that are part of Solvency II surplus funds and making other less significant adjustments, results in a valuation in accordance with FRS 27.

For periods subsequent to 31 December 2015, the with-profits business is valued based on an adjusted Solvency II BEL assessment. The principal assumptions underlying the cost of future policy-related liabilities are as follows:

Future investment return

A 'risk-free' rate equal to the spot yield on UK swaps is used for the valuation of with-profits business. The rates vary according to the outstanding term of the policy, with a typical rate as at 31 December 2017 of 1.29% (2016: 1.25%) for a policy with ten years outstanding.

Volatility of investment return

Volatility assumptions are set with reference to implied volatility data on traded market instruments, where available, or on a best estimate basis where not.

Volatility	2017	2016
Equity returns	20.9%	23.9%
Property returns	16.4%	16.4%

The equity volatility used depends on term, money-ness and region. The figure shown is for a sample UK equity, at the money, with a ten-year term.

Future regular bonuses

Annual bonus assumptions for 2018 have been set consistently with the year-end 2017 declaration. Future annual bonus rates reflect the principles and practices of each fund. In particular, the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent with past practice.

Mortality

Mortality assumptions for with-profits business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below:

Mortality table used	2017	2016
Assurances, pure endowments and deferred annuities before vesting	Nil or Axx00 adjusted	Nil or Axx00 adjusted

Pensions business after vesting and pensions annuities in payment	PCMA00/PCFA00 adjusted plus allowance for future mortality improvement	PCMA00/PCFA00 adjusted plus allowance for future mortality improvement

Allowance for future mortality improvement is in line with the rates shown for non-profit business below.

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Expenses

Maintenance charge assumptions for with-profits business are generally expressed as a fixed 'per policy' charge in line with agreements between Aviva Life Services UK (UKLS) and Aviva Life & Pensions UK (UKLAP). The assumptions increase by future charge inflation over the lifetime of each contract, which is 50% RPI, 100% RPI or 100% RPI + 1% depending on product type. Any excess of expenses charged by UKLS to UKLAP over the charges specified by the agreements is borne by the non-profits business.

Non-profit business

The valuation of non-profit business is based on grandfathered regulatory requirements under IFRS 4 prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. Conventional non-profit contracts, including those written in the with-profits funds, are valued using gross premium methods which discount projected future cash flows. The cash flows are calculated using the amount of contractual premiums payable, together with explicit assumptions for investment returns, inflation, discount rates, mortality, morbidity, persistency and future expenses. These assumptions vary by contract type and reflect current and expected future experience with an allowance for prudence. For FP WPSF, FPLAL WPSF, FLC New WPSF, FLC Old WPSF, FLAS WPSF, WL WPSF and SGF the non-participating liabilities are measured on a realistic basis with implicit recognition of the present value of future profits.

For unit-linked and some unitised with-profits business, the provisions are valued by adding a prospective non-unit reserve to the bid value of units. The prospective non-unit reserve is calculated by projecting the future non-unit cash flows using prudent assumptions and on the assumption that future premiums cease, unless it is more onerous to assume that they continue. Where appropriate, allowance for persistency is based on actual experience.

Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term interest rates as measured by gilt yields. An explicit allowance for risk is included by making an explicit deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. A further margin for risk is then deducted for all asset classes.

The provisions held in respect of guaranteed annuity options are a prudent assessment of the additional liability incurred under the option on a basis and method consistent with that used to value basic policy liabilities, and includes a prudent assessment of the proportion of policyholders who will choose to exercise the option.

Maintenance expense assumptions for non-profit business are generally expressed as a 'per policy' charge set with regards to an allocation of current year expense levels by broad category of business and using the policy counts for in-force business. The assumptions also include an allowance for prudence and increase by future expense inflation over the lifetime of each contract. Expense inflation is assumed to be in line with RPI. An additional liability is held if projected per-policy expenses in future years are expected to exceed current assumptions. Further, explicit project expense liabilities are held for non-discretionary project costs that typically relate to mandatory regulatory requirements. Expense-related liabilities are only held where expenses are not covered by anticipated future profits in the liability methodology, notably for unit-linked contracts.

Valuation discount rates for business in the non-profit funds are as follows:

Valuation discount rates (Gross of investment expenses)	2017	2016
Assurances
Life conventional non-profit	0.8% to 2.5%	0.5% to 2.6%
Pensions conventional non-profit	1.0% to 2.4%	0.8% to 2.1%
Annuities
Conventional immediate and deferred annuities	1.0% to 2.8%	0.6% to 2.8%
Non-unit reserves on Unit Linked business
Life	0.8% to 1.2%	0.7% to 1.3%
Pensions	0.8% to 1.5%	0.7% to 1.6%
Income Protection¹
Active lives	1.0% to 2.5%	1.0 to 2.6%
Claims in payment (level and index linked)	1.0% to 1.5%	(0.2)% to 1.6%

1 Income protection business (pre-existing UKLAP) now uses a nominal swaps curve for all sub-classes and has been shown as an equivalent flat rate in the table above. Previously, a real interest rate was used for the index linked claims in payment.

The above valuation discount rates are after reduction for risk, but before allowance for investment expenses. For conventional immediate annuity business the allowance for risk comprises long-term assumptions for defaults or (in the case of equity release assets) expected losses arising from the No-Negative-Equity guarantee. These allowances vary by asset category and for some asset classes by rating. The risk allowances made for corporate bonds, mortgages (including healthcare mortgages, commercial mortgages and infrastructure assets), and Equity Release for business transferred in from Aviva Annuity UK Ltd in 2017 equated to 48 bps, 40 bps, and 102 bps respectively at 31 December 2017 (2016: 47 bps, 48 bps, and 102 bps respectively). The risk allowances made for corporate bonds and mortgages for business transferred in from Friends Life Limited in 2017 equated to 47 bps and 33 bps respectively at 31 December 2017 (2016: 37 bps and 42 bps respectively).

For corporate bonds, the allowance represented approximately 37% and 39% respectively of the average credit spread for the portfolios transferred in from Aviva Annuity UK Limited and from Friends Life Limited (2016: 31% and 31% respectively)

The total valuation allowance for business transferred from Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including healthcare mortgages but excluding equity release, was £1.3 billion (2016: £1.3 billion) over the remaining term of the portfolio while for Friends Life Limited it was £0.5 billion (2016: £0.5 billion). The total valuation allowance for business transferred from Aviva Annuity UK Limited in respect of equity release assets was £1.2 billion (2016: £1.1 billion). Total liabilities for the annuity business were £52 billion at 31 December 2017 (2016: £50 billion).

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Mortality assumptions for non-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below:

Mortality tables used	2017	2016
Assurances
Non-profit	AM00/AF00 or TM08/TF08 adjusted for smoker status and age/sex specific factors	AM00/AF00 or TM00/TF00 adjusted for smoker status and age/sex specific factors

Pure endowments and deferred annuities before vesting	AM00/AF00 adjusted	AM00/AF00 adjusted
Annuities in payment
Pensions business and general annuity business	PCMA00/PCFA00 adjusted plus allowance for future mortality improvement	PCMA00/PCFA00 adjusted plus allowance for future mortality improvement

For the largest portfolio of pensions annuity business transferred from Aviva Annuity UK Limited, the underlying mortality assumptions for Males are 104.0% of PCMA00 (2016: 98.0% of PCMA00) with base year 2000; for Females the underlying mortality assumptions are 94.5% of PCFA00 (2016: 91.0% of PCFA00) with base year 2000. A negative provision of £0.1billion is also held to allow for higher mortality at old ages being experienced in our portfolio relative to the above assumptions. For the largest portfolio of pensions annuity business transferred from Friends Life Limited, the underlying mortality assumptions for Males are 103.4% of PCMA00 (2016: 98.5% of PCMA00) with base year 2000; for Females the underlying mortality assumptions are 104.4% of PCFA00 (2016: 98.5% of PCFA00) with base year 2000.

For all the main portfolios of annuities, improvements are based on 'CMI_2016 (S=7.5) Advanced with adjustments' (2016: CMI_2015) with a long-term improvement rate of 1.75% (2016: 1.75%) for males and 1.5% (2016: 1.5%) for females, both with an addition for prudence of 0.5% (2016: 0.5%) to all future annual improvement adjustments. The CMI_2016 tables have been adjusted by adding 0.25% and 0.35% to the initial rate of mortality improvements for males and females respectively (to allow for greater mortality improvements in the annuitant population relative to the general population on which CMI_2016 is based), and uses the advanced parameters to taper the long-term improvement rates to zero between ages 90 and 115 (the 'core' parameters taper the long-term improvement rates to zero between ages 85 and 110). For pension annuity business transferred in from Aviva Annuity UK limited, year-specific adjustments are made to allow for potential selection effects due to the development of the Enhanced Annuity market and covering possible selection effects from pension freedom reforms.

(b) France

The majority of reserves arise from single premium savings products and are based on the accumulated fund values, adjusted to maintain consistency with the value of the assets backing the policyholder liabilities. For traditional business, the net premium method is used for prospective valuations, in accordance with local regulation, where the valuation assumptions depend on the date of issue of the contract. The valuation discount rate also depends on the original duration of the contract and mortality rates are based on industry tables.

	Valuation discount rates		Mortality tables used
	2017	2016	2017 and 2016
			TD73-77,TD88-90,TH00-02
			TF00-02,H_AVDBS,F_AVDBS
Life assurances	0% to 4.5%	0% to 4.5%	H_SSDBS, F_SSDBS
Annuities	0% to 2%	0% to 4.5%	TGF05/TGH05

In all other countries, local generally accepted interest rates and published standard mortality tables are used for different categories of business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people.

(iv) Movements

The following movements have occurred in the gross long-term business provisions during the year

	2017 £m	2016 £m
Carrying amount at 1 January	137,218	125,348
Provisions in respect of new business	5,731	5,224
Expected change in existing business provisions	(7,747)	(8,235)
Variance between actual and expected experience	1,520	4,752
Impact of non-economic assumption changes	(1,175)	(536)
Impact of economic assumption changes	2,115	5,930
Other movements recognised as an expense¹	180	29
Change in liability recognised as an expense	624	7,164
Effect of portfolio transfers, acquisitions and disposals²	(8,124)	-
Foreign exchange rate movements	1,252	4,761
Other movements	2	(55)
Carrying amount at 31 December	130,972	137,218

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

2 The movement during 2017 primarily relates to the disposal of Antarius in France and a major share of the business in Spain offset by the consolidation of the Poland and Vietnam joint ventures.

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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 £1.5 billion impact of variance between actual and expected experience in 2017 is mainly due to higher than expected equity returns in the UK increasing with-profits and unit-linked liabilities.

The impact of non-economic assumption changes of £(1.2) billion in 2017 reduces the carrying value of insurance liabilities and relates mainly to release of reserves for longevity which is partially offset by increase in expense and persistency reserves for the UK business (with the impact on profit partially offset by a corresponding reduction in reinsurance assets).

The £2.1 billion impact of economic assumption changes in 2017 reflects a decrease in valuation interest rates in response to increasing interest rates and narrowing spreads, primarily in respect of immediate annuity and participating insurance contracts in the UK.

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. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year, together with the impact of movements in related non-financial assets.

(i) Provisions for outstanding claims

Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the statement of financial position date. The reserves for general insurance and health business are based on information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.

Provisions for outstanding claims are established to cover the outstanding expected ultimate liability for losses and loss adjustment expenses (LAE) in respect of all claims that have already occurred. The provisions established cover reported claims and associated LAE, as well as claims incurred but not yet reported and associated LAE.

The Group only establishes loss reserves for losses that have already occurred. The Group therefore does not establish catastrophe equalisation reserves that defer a share of income in respect of certain lines of business from years in which a catastrophe does not occur to future periods in which catastrophes may occur. When calculating reserves, the Group takes into account estimated future recoveries from salvage and subrogation, and a separate asset is recorded for expected future recoveries from reinsurers after considering their collectability.

The table below shows the split of total general insurance and health outstanding claim provisions and IBNR provisions, gross of reinsurance, by major line of business.

	As at 31 December 2017			As at 31 December 2016
	Outstanding claim provisions £m	IBNR provisions £m	Total claim provisions £m	Outstanding claim provisions £m	IBNR provisions £m	Total claim provisions £m
Motor	5,039	1,339	6,378	4,690	1,623	6,313
Property	1,734	114	1,848	1,711	57	1,768
Liability	1,814	1,270	3,084	1,907	1,257	3,164
Creditor	24	11	35	23	20	43
Other	353	103	456	418	3	421
	8,964	2,837	11,801	8,749	2,960	11,709

(ii) Discounting

Outstanding claims provisions are based on undiscounted estimates of future claim payments, except for the following classes of business for which discounted provisions are held:

		Rate		Mean term of liabilities
Class	2017	2016	2017	2016
Reinsured London Market business	0.7% to 2.6%	2.0%	9 years	9 years
Latent claims	0.7% to 1.9%	0.00% to 2.31%	8 to 17 years	6 to 15 years
Structured settlements	0.5% to 3.0%	0.15% to 2.98%	7 to 39 years	13 to 39 years

The gross outstanding claims provision before discounting was £11,346 million (2016: £12,196 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.

The discount rate that has been applied to latent claims reserves and reinsured London Market business is based on the relevant swap curve in the relevant currency having regard to the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between 6 and 15 years depending on the geographical region.

Any change in discount rates between the start and the end of the accounting period is reflected outside of Group adjusted Operating profit as an economic assumption change.

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(iii) Assumptions

Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are set by skilled claims technicians and established case setting procedures. Claims technicians apply their experience and knowledge to the circumstances of individual claims. They take into account all available information and correspondence regarding the circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians set case estimates according to documented claims department policies and specialise in setting estimates for certain lines of business or types of claim. Claims above certain limits are referred to senior claims handlers for estimate authorisation.

No adjustments are made to the claims technicians' case estimates included in booked claim provisions, except for rare occasions when the estimated ultimate cost of individual large or unusual claims may be adjusted, subject to internal reserve committee approval, to allow for uncertainty regarding, for example, the outcome of a court case. The ultimate cost of outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. The main assumption underlying these techniques is that a company's past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where this is considered appropriate.

Claim development is separately analysed for each geographic area, as well as by each line of business. Certain lines of business are also further analysed by claim type or type of coverage. In addition, large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development.

The assumptions used in most non-life actuarial projection techniques, including future rates of claims inflation or loss ratio assumptions, are implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in the future, for example, to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures in order to arrive at a point estimate for the ultimate cost of claims that represents the likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved. The range of possible outcomes does not, however, result in the quantification of a reserve range. The following explicit assumptions are made which could materially impact the level of booked net reserves:

(a) UK mesothelioma claims

The level of uncertainty associated with latent claims is considerable due to the relatively small number of claims and the long-tail nature of the liabilities. UK mesothelioma claims account for a large proportion of the Group's latent claims. The key assumptions underlying the estimation of these claims include claim numbers, the base average cost per claim, future inflation in the average cost of claims and legal fees.

The best estimate of the liabilities reflects the latest available market information and studies. Many different scenarios can be derived by flexing these key assumptions and applying different combinations of the different assumptions. An upper and lower scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate £35 million (2016: £25 million) greater than the best estimate, or £40 million (2016: £45 million) lower than the best estimate. These scenarios do not, however, constitute an upper or lower bound on these liabilities.

(b) Interest rates used to discount latent claim liabilities and structured settlements

The discount rates used in determining our latent claim liabilities and structured settlements are based on the relevant swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement of claims. The range of discount rates used is shown in section (ii) above and depends on the duration of the claim and the reporting date. At 31 December 2017, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £110 million (2016: £220 million), excluding the offsetting effect on asset values as assets are not hypothecated across classes of business. The impact has fallen during 2017 due to a reduction in bodily injury claims in the UK settled by periodic payment orders (PPOs) or structured settlements as a result of a reduction in the Ogden rate from 2.5% to -0.75% making them less attractive compared to a lump sum settlement.

The uncertainties involved in estimating loss reserves are allowed for in the reserving process and by the estimation of explicit reserve uncertainty distributions. The reserve estimation basis for non-life claims requires all non-life businesses to calculate booked claim provisions as the best estimate of the cost of future claim payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each business unit in accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties specific to each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy also seek to ensure that the allowance for risk and uncertainty is set consistently across both business units and reporting periods.

Changes to claims development patterns can materially impact the results of actuarial projection techniques. However, allowance for the inherent uncertainty in the assumptions underlying reserving projections is automatically allowed for in the explicit allowance for risk and uncertainty included when setting booked reserves.

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.

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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 last year. However, the discount rate used in the Ogden Tables is currently being reviewed by the Lord Chancellor and draft legislation has been proposed (but not yet enacted) which, at the time it was published, indicated a discount rate in the range of 0% to 1%. 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.

(iv) Movements

The following changes have occurred in the general insurance and health claims provisions during the year:

	2017 £m	2016 £m
Carrying amount at 1 January	11,709	9,446
Impact of changes in assumptions	(7)	324
Claim losses and expenses incurred in the current year	6,890	6,703
Decrease in estimated claim losses and expenses incurred in prior periods	(172)	(7)
Incurred claims losses and expenses	6,711	7,020
Less:
Payments made on claims incurred in the current year	(3,642)	(3,505)
Payments made on claims incurred in prior periods	(3,283)	(2,893)
Recoveries on claim payments	278	234
Claims payments made in the period, net of recoveries	(6,647)	(6,164)
Unwind of discounting	9	11
Changes in claims reserve recognised as an expense	73	867
Effect of portfolio transfers, acquisitions and disposals	3	430
Foreign exchange rate movements	16	966
Carrying amount at 31 December	11,801	11,709

The effect of changes in the main assumptions is given in note B12.

(d) Loss development tables

(i) Description of tables

The tables that follow present the development of claim payments and the estimated ultimate cost of claims for the accident years 2008 to 2017. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year. For example, with respect to the accident year 2008, by the end of 2017 £9,033 million had actually been paid in settlement of claims. In addition, as reflected in the lower section of the table, the original estimated ultimate cost of claims of £9,508 million was re-estimated to be £9,195 million at 31 December 2017.

The original estimates will be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity.

The Group aims to maintain reserves in respect of its general insurance and health business that protect against adverse future claims experience and development. The Group establishes reserves in respect of the current accident year (2017), where the development of claims is less mature, that allow for the greater uncertainty attaching to the ultimate cost of current accident year claims. As claims develop and the ultimate cost of claims become more certain, the absence of adverse claims experience will result in a release of reserves from earlier accident years, as shown in the loss development tables and movements table (c)(iv) above. Releases from prior accident year reserves are also due to an improvement in the estimated cost of claims.

Key elements of the release from prior accident year general insurance and health net provisions during 2017 were:

· £107 million release from UK due to favourable claims experience in Personal Motor offset by the less favourable experience in 2017 of Commercial Liability claims and large claims in Personal and Commercial Property.

· £2 million strengthening from Canada due to the better than expected claims experience following the 2010 Ontario auto reforms tailing off, unfavourable development in the Ontario Accident Benefits coverage in the RBC book in 2017, deterioration of experience in Alberta Auto Bodily Injury and Newfoundland Auto Bodily Injury.

· £79 million release from Europe (including Ireland) mainly due to continued favourable development in France and Italy.

Key elements of the release from prior accident year general insurance and health net provisions during 2016 were:

· £208 million strengthening from UK & Ireland due to the impact of the change in the Ogden discount rate in the UK partly offset by other favourable developments on personal motor and commercial liability claims.

· £154 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes in Ontario.

· £90 million release from Europe mainly due to favourable development in France and Italy.

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There was also a £78 million reduction in net claim reserves relating to an outwards reinsurance contract completed by the UK General Insurance business.

(ii) Gross figures

Before the effect of reinsurance, the loss development table is:

Accident year	All prior years £m	2008 £m	2009 £m	2010 £m	2011 £m	2012 £m	2013 £m	2014 £m	2015 £m	2016 £m	2017 £m	Total £m
Gross cumulative claim payments
At end of accident year		(4,915)	(3,780)	(3,502)	(3,420)	(3,055)	(3,068)	(3,102)	(2,991)	(3,534)	(3,517)
One year later		(7,350)	(5,464)	(5,466)	(4,765)	(4,373)	(4,476)	(4,295)	(4,285)	(4,972)
Two years later		(7,828)	(6,102)	(5,875)	(5,150)	(4,812)	(4,916)	(4,681)	(4,710)
Three years later		(8,304)	(6,393)	(6,163)	(5,457)	(5,118)	(5,221)	(4,974)
Four years later		(8,607)	(6,672)	(6,405)	(5,712)	(5,376)	(5,467)
Five years later		(8,781)	(6,836)	(6,564)	(5,864)	(5,556)
Six years later		(8,906)	(6,958)	(6,649)	(5,978)
Seven years later		(8,986)	(7,043)	(6,690)
Eight years later		(9,012)	(7,078)
Nine years later		(9,033)
Estimate of gross ultimate claims
At end of accident year		9,508	7,364	6,911	6,428	6,201	6,122	5,896	5,851	6,947	6,894
One year later		9,322	7,297	7,006	6,330	6,028	6,039	5,833	5,930	6,931
Two years later		9,277	7,281	6,950	6,315	6,002	6,029	5,865	5,912
Three years later		9,272	7,215	6,914	6,292	5,952	6,067	5,842
Four years later		9,235	7,204	6,912	6,262	6,002	6,034
Five years later		9,252	7,239	6,906	6,265	5,979
Six years later		9,213	7,217	6,926	6,265
Seven years later		9,207	7,256	6,913
Eight years later		9,202	7,228
Nine years later		9,195
Estimate of gross ultimate claims		9,195	7,228	6,913	6,265	5,979	6,034	5,842	5,912	6,931	6,894
Cumulative payments		(9,033)	(7,078)	(6,690)	(5,978)	(5,556)	(5,467)	(4,974)	(4,710)	(4,972)	(3,517)
	2,516	162	150	223	287	423	567	868	1,202	1,959	3,377	11,734
Effect of discounting	(397)	(14)	(14)	(25)	(2)	-	(1)	-	-	-	-	(453)
Present value	2,119	148	136	198	285	423	566	868	1,202	1,959	3,377	11,281
Cumulative effect of foreign exchange movements	-	(4)	-	(1)	3	8	18	48	145	2	-	219
Effect of acquisitions	13	1	3	5	19	22	31	55	78	74	-	301
Present value recognised in the statement of financial position	2,132	145	139	202	307	453	615	971	1,425	2,035	3,377	11,801

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(iii) Net of reinsurance

After the effect of reinsurance, the loss development table is:

Accident year	All prior years £m	2008 £m	2009 £m	2010 £m	2011 £m	2012 £m	2013 £m	2014 £m	2015 £m	2016 £m	2017 £m	Total £m
Net cumulative claim payments
At end of accident year		(4,808)	(3,650)	(3,386)	(3,300)	(2,925)	(2,905)	(2,972)	(2,867)	(3,309)	(3,483)
One year later		(7,165)	(5,286)	(5,242)	(4,578)	(4,166)	(4,240)	(4,079)	(4,061)	(4,591)
Two years later		(7,638)	(5,885)	(5,637)	(4,963)	(4,575)	(4,649)	(4,432)	(4,452)
Three years later		(8,094)	(6,177)	(5,905)	(5,263)	(4,870)	(4,918)	(4,720)
Four years later		(8,356)	(6,410)	(6,137)	(5,485)	(5,110)	(5,159)
Five years later		(8,515)	(6,568)	(6,278)	(5,626)	(5,289)
Six years later		(8,626)	(6,657)	(6,361)	(5,740)
Seven years later		(8,682)	(6,708)	(6,411)
Eight years later		(8,714)	(6,744)
Nine years later		(8,735)
Estimate of net ultimate claims
At end of accident year		9,262	7,115	6,650	6,202	5,941	5,838	5,613	5,548	6,489	6,714
One year later		9,104	7,067	6,751	6,103	5,765	5,745	5,575	5,635	6,458
Two years later		9,028	7,036	6,685	6,095	5,728	5,752	5,591	5,608
Three years later		9,007	6,978	6,644	6,077	5,683	5,733	5,559
Four years later		8,962	6,940	6,634	6,034	5,717	5,689
Five years later		8,949	6,977	6,614	6,005	5,680
Six years later		8,926	6,908	6,624	6,003
Seven years later		8,894	6,897	6,615
Eight years later		8,898	6,896
Nine years later		8,886
Estimate of net ultimate claims		8,886	6,896	6,615	6,003	5,680	5,689	5,559	5,608	6,458	6,714
Cumulative payments		(8,735)	(6,744)	(6,411)	(5,740)	(5,289)	(5,159)	(4,720)	(4,452)	(4,591)	(3,483)
	954	151	152	204	263	391	530	839	1,156	1,867	3,231	9,738
Effect of discounting	(150)	(10)	(12)	(21)	3	-	5	-	-	-	-	(185)
Present value	804	141	140	183	266	391	535	839	1,156	1,867	3,231	9,553
Cumulative effect of foreign exchange movements	-	(4)	-	(1)	2	7	18	47	141	3	-	213
Effect of acquisitions	17	1	3	5	19	22	31	56	79	73	-	306
Present value recognised in the statement of financial position	821	138	143	187	287	420	584	942	1,376	1,943	3,231	10,072

In the loss development tables shown above, the cumulative claim payments and estimates of cumulative claims for each accident year are translated into sterling at the exchange rates that applied at the end of that accident year. The impact of using varying exchange rates is shown at the bottom of each table. Disposals are dealt with by treating all outstanding and IBNR claims of the disposed entity as 'paid' at the date of disposal.

The loss development tables above include information on asbestos and environmental pollution claims provisions from business written before 2008. The undiscounted claim provisions, net of reinsurance, in respect of this business at 31 December 2017 were £95 million (2016: £134 million). The movement in the year reflects a reduction of £14 million due to favourable claims development, claim payments net of reinsurance recoveries and foreign exchange rate movements.

(e) Provision for unearned premiums

Movements

The following changes have occurred in the provision for unearned premiums (UPR) during the year:

	2017 £m	2016 £m
Carrying amount at 1 January	4,766	4,048
Premiums written during the year	10,523	9,694
Less: Premiums earned during the year	(10,365)	(9,503)
Changes in UPR recognised as an (income)/expense	158	191
Gross portfolio transfers and acquisitions¹	46	124
Foreign exchange rate movements	10	403
Carrying amount at 31 December	4,980	4,766

1 The £46 million in respect of 2017 relates to the full consolidation of the Poland Joint Venture. The £124 million in respect of 2016 relates to the acquisition of Royal Bank of Canada General Insurance Company.

Page 70

B10 - Liability for investment contracts

This note analyses our investment contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used.

(a) Carrying amount

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

	2017 £m	2016 £m
Long-term business
Participating contracts	87,654	89,739
Non-participating contracts at fair value	124,995	114,531
Total	212,649	204,270
Less: Amounts classified as held for sale	(8,663)	(7,175)
	203,986	197,095

(b) Long-term business investment liabilities

Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer, and are therefore treated as financial instruments under IFRS.

Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according to the methodology and Group practice for long-term business liabilities. They are not measured at fair value as there is currently no agreed definition of fair valuation for discretionary participation features under IFRS. In the absence of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB deferred consideration of participating contracts to Phase II of its insurance contracts project. This is addressed in the insurance contract standard (i.e. IFRS 17).

For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus.

Investment contracts that do not contain a discretionary participation feature are referred to as non-participating contracts and the liability is measured at either fair value or amortised cost. We currently have no non-participating investment contracts measured at amortised cost.

Of the non-participating investment contracts measured at fair value, £123,916 million in 2017 are unit-linked in structure and the fair value liability is equal to the current unit fund value, including any unfunded units, plus if required, additional non-unit reserves based on a discounted cash flow analysis. These contracts are generally classified as 'Level 1' in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied by the number of units in issue, and any non-unit reserve is insignificant.

For unit-linked business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term.

For non-participating investment contracts acquired in a business combination, an acquired value of in-force business asset is recognised in respect of the fair value of the investment management services component of the contracts, which is amortised on a systematic basis over the useful lifetime of the related contracts.

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

The following movements have occurred in the gross provisions for investment contracts in the year:

(i) Participating investment contracts

	2017 £m	2016 £m
Carrying amount at 1 January	89,739	78,048
Provisions in respect of new business	5,193	4,584
Expected change in existing business provisions	(4,986)	(4,893)
Variance between actual and expected experience	2,072	3,084
Impact of non-economic assumption changes	10	36
Impact of economic assumption changes	411	450
Other movements recognised as an expense¹	(16)	(347)
Change in liability recognised as an expense²	2,684	2,914
Effect of portfolio transfers, acquisitions and disposals³	(7,243)	-
Foreign exchange rate movements	2,452	8,721
Other movements	22	56
Carrying amount at 31 December	87,654	89,739

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

2 Total interest expense for participating investment contracts recognised in profit or loss is £2,489 million (2016: £3,111 million).

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

Page 71

B10 - Liability for investment contracts continued

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 in 2017 of £2.1 billion is primarily driven by favourable equity returns in the UK.

The impact of assumption changes in the analysis shows the resulting movement in the carrying value of participating investment contract liabilities. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit.

(ii) Non-participating investment contracts

	2017 £m	2016 £m
Carrying amount at 1 January	114,531	103,034
Provisions in respect of new business	4,484	3,222
Expected change in existing business provisions	(4,427)	(3,481)
Variance between actual and expected experience	10,115	11,105
Impact of non-economic assumption changes	2	17
Impact of economic assumption changes	(1)	2
Other changes in liabilities	10	334
Change in liability	10,183	11,199
Effect of portfolio transfers, acquisitions and disposals¹	(4)	(757)
Foreign exchange rate movements	277	1,065
Other movements	8	(10)
Carrying amount at 31 December	124,995	114,531

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

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 in 2017 of £10 billion is primarily driven by the impact 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 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, which combines participating and non-participating investment contracts together with the impact of movements in related non-financial assets.

Page 72

B11 - Reinsurance assets

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

(a) Carrying amounts

The reinsurance assets at 31 December comprised:

	2017 £m	2016 £m
Long-term business
Insurance contracts	5,469	6,186
Participating investment contracts	2	2
Non-participating investment contracts¹	6,094	18,366
	11,565	24,554
Outstanding claims provisions	64	65
	11,629	24,619
General insurance and health
Outstanding claims provisions²	845	1,090
Provisions for claims incurred but not reported²	884	795
	1,729	1,885
Provisions for unearned premiums	257	250
	1,986	2,135
	13,615	26,754
Less: Amounts classified as held for sale	(123)	(411)
Total	13,492	26,343

1 Balances in respect of all reinsurance treaties are included under reinsurance assets, regardless of whether they transfer significant insurance risk. The reinsurance assets classified as non-participating investment contracts are financial instruments measured at fair value through profit or loss. During 2017, £14,353 million of reinsurance assets (UK Life) have been reclassified as collective investments in unit-linked funds following a restructure of a reinsurance treaty.

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

Of the above total, £12,302 million (2016: £22,919 million) is expected to be recovered more than one year after the statement of financial position date.

(b) Assumptions

The assumptions, including discount rates, used for reinsurance contracts follow those used for insurance contracts. Reinsurance assets are valued net of an allowance for their recoverability.

The following movements have occurred in the reinsurance assets during the year:

(i) In respect of long-term business provisions

	2017 £m	2016 £m
Carrying amount at 1 January	24,554	18,996
Assets in respect of new business	1,004	941
Expected change in existing business assets	(786)	300
Variance between actual and expected experience	2,264	3,149
Impact of non-economic assumption changes	(634)	(182)
Impact of economic assumption changes	94	171
Other movements¹	(14,529)	1,003
Change in assets²	(12,587)	5,382
Effect of portfolio transfers, acquisitions and disposals³	(410)	8
Foreign exchange rate movements	8	168
Carrying amount at 31 December	11,565	24,554

1 The movement during 2016 includes the reclassification of UK Life investments in certain life insurance funds from unit trusts and other investment vehicles (financial instruments) to reinsurance assets. The movement during 2017 includes £14,353 million of reinsurance assets (UK Life) being reclassified as collective investments in unit-linked funds following a restructure of a reinsurance treaty.

2 Change in assets does not reconcile with values in note B9(a)(ii) due to the inclusion of reinsurance assets classified as non-participating investment contracts, where, for such contracts, deposit accounting is applied on the income statement.

3 The movement during 2016 relates to the recognition of a reinsurance asset following disposal of a closed book of offshore bonds business. The movement during 2017 primarily relates to Antarius in France.

The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets and mainly relates to business in the UK, with corresponding movements in gross insurance contract liabilities. For participating businesses, a movement in reinsurance assets is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit.

Page 73

B11 - Reinsurance assets continued

(ii) In respect of general insurance and health outstanding claims provisions and IBNR

	2017 £m	2016 £m
Carrying amount at 1 January	1,885	1,595
Impact of changes in assumptions	(15)	80
Reinsurers' share of claim losses and expenses
Incurred in current year	179	433
Incurred in prior years¹	15	109
Reinsurers' share of incurred claim losses and expenses	194	542
Less:
Reinsurance recoveries received on claims
Incurred in current year	(32)	(195)
Incurred in prior years	(293)	(214)
Reinsurance recoveries received in the year	(325)	(409)
Unwind of discounting	8	9
Change in reinsurance asset recognised as income (note B9(a)(ii))	(138)	222
Effect of portfolio transfers, acquisitions and disposals	-	(25)
Foreign exchange rate movements	(18)	97
Other movements	-	(4)
Carrying amount at 31 December	1,729	1,885

1 The change in reinsurance assets for 2016 includes the impact of the £78 million reinsurance asset relating to an outwards reinsurance contract completed by the UK General Insurance business.

(iii) Reinsurers' share of the provision for UPR

	2017 £m	2016 £m
Carrying amount at 1 January	250	289
Premiums ceded to reinsurers in the year¹	489	668
Less: Reinsurers' share of premiums earned during the year¹	(484)	(687)
Changes in reinsurance asset recognised as income	5	(19)
Reinsurers' share of portfolio transfers and acquisitions	-	(38)
Foreign exchange rate movements	2	18
Other movements	-	-
Carrying amount at 31 December	257	250

1 For 2016 includes £107 million of ceded premiums relating to an outwards reinsurance contract completed by the UK General Insurance business.

Page 74

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

Certain estimates and assumptions used in determining our liabilities for insurance and investment contract business were changed from 2016 to 2017, affecting the profit recognised for the year with an equivalent effect on liabilities. This note analyses the effect of the changes. This note only allows for the impact on liabilities and related assets, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing financial assets.

	Effect on profit 2017 £m	Effect on profit 2016 £m
Assumptions
Long-term insurance business
Interest rates	(1,720)	(4,490)
Expenses	(128)	48
Persistency rates	(79)	(80)
Mortality and morbidity for assurance contracts	113	(11)
Mortality for annuity contracts	779	294
Tax and other assumptions	2	97
Investment contracts
Expenses	-	-
General insurance and health business
Change in discount rate assumptions	(7)	(242)
Change in expense ratio and other assumptions	-	-
Total	(1,040)	(4,384)

The impact of interest rates on long-term business relates primarily to annuities in the UK (including any change in credit default and reinvestment risk provisions), where a decrease in the valuation interest rate, in response to narrowing of credit spreads is partially offset by increasing risk-free rates, has increased liabilities. Within the UK there were also two modelling changes which resulted in a reduction in reserves: an alignment of approach in calculating the valuation interest rate across the Life portfolios of £153 million and a refinement to the approach to calculating the valuation interest rate for certain deferred annuity business of £136 million. Outside of the UK, there was a one-off impact in France due to an increase in life annuity pension reserves, resulting from a reduction to the discount rate cap used in the calculation of these reserves of £138 million. The overall impact on profit also depends on movements in the value of assets backing the liabilities, which is not included in this disclosure.

The impact of expenses on long-term business has resulted in an increase in reserves, following a review of recent experience. In the UK this includes a strengthening of maintenance expense reserves from harmonising the UK expense basis following the Friends Life Part VII transfer in 2017 of £89 million (2016: £nil); recognition of future project expense reserves of £125 million (2016: £nil); partly offset by a release due to updating the charging structure in place with Aviva Investors following the Friends Life integration of £70million (2016: £42 million) (and other less significant adverse movements of £13 million in 2016). Across Europe and Asia, expense reserves have reduced by £16 million (2016: £19 million).

The impact of persistency rates on long-term business has resulted in an increase in reserves following a review of recent experience in the UK.

The impact of mortality and morbidity for assurance contracts on long-term business has resulted in a reduction in reserves following a review of recent experience, most notably for critical illness in the UK.

The impact of mortality for annuitant contracts on long-term business relates primarily to the UK. In 2017, this has resulted in a reduction in reserves due to recognition of benefits from changes in longevity assumptions including: the impact of completing our review of the allowance for anti-selection risk of £170 million, updates reflecting our recent experience of £200 million, updates to the rate of historic and future mortality improvements, including the adoption of CMI 2016, of £340 million, and other less significant movements of £31 million. In Ireland there was a reduction of £38 million following a review of recent experience.

In 2016 there was a release of annuitant reserves in the UK following a review of recent experience (including the exposure to anti-selection risk) of £130 million, the adoption of CMI 2015 mortality improvement assumptions of £153 million and other less significant movements of £11 million.

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

Page 75

B13 - Unallocated divisible surplus

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

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

	2017 £m	2016 £m
Carrying amount at 1 January	10,208	8,811
Change in participating fund assets	406	4,977
Change in participating fund liabilities	(710)	(4,596)
Other movements	10	-
Change in liability recognised as an expense	(294)	381
Effect of portfolio transfers, acquisition and disposals¹	(1,076)	-
Foreign exchange rate movements	263	1,016
Carrying amount at 31 December	9,101	10,208
Less: Amounts classified as held for sale	(19)	(859)
	9,082	9,349

1 The movement during 2017 relates to the disposal of Antarius (£832 million) and majority of Spanish business (£244 million).

The amount of UDS at 31 December 2017 has decreased to £9.1 billion (2016: £10.2 billion) including amounts classified as held for sale, and £9.1 billion (2016: £9.3 billion) excluding amounts classified as held for sale. The decrease is mainly due to the sale of both Antarius and the majority of Spanish business and a distribution of assets out of UK Life's UDS in anticipation of a special bonus to policyholders, partly offset by the weakening of sterling against the euro.

The participating assets and liabilities have offsetting impacts across the UK and Europe in 2017. In Europe they have increased mainly driven by an increase in new business and in the UK they have reduced, mainly driven by an increase in bond yields and the distribution of assets. In 2016, the impacts did not offset. The participating assets and liabilities increased across all the markets mainly driven by an increase in new business in Europe and a decrease in bond yields in the UK.

Where the aggregate amount of participating assets is less than the participating liabilities within a fund then the shortfall may be held as negative UDS, subject to recoverability testing as part of the liability adequacy requirements of IFRS 4. There are no material negative UDS balances at the participating fund-level within each life entity in the current and comparative periods, with the exception of one fund in UK Life in the comparative period (2016: a negative UDS of £16 million). This negative UDS balance was tested for recoverability and considered to be recoverable by comparing the excess of IFRS participating liabilities over the adjusted Solvency II best estimate liabilities for the relevant contracts. The Solvency II best estimate liabilities were adjusted where Solvency II does not represent a best estimate of shareholders' interests consistent with the impairment test for goodwill for long-term business and for AVIF on insurance contracts.

Page 76

B14 - 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 and contractual maturity amounts of each type, and explains their main features and movements during the year.

(a) Analysis of total borrowings

Total borrowings comprise:

	2017 £m	2016 £m
Core structural borrowings, at amortised cost	8,640	8,577
Operational borrowings, at amortised cost	466	608
Operational borrowings, at fair value	1,180	1,110
	1,646	1,718
	10,286	10,295

(b) Movements during the year

Movements in borrowings during the year were:

			2017			2016
	Core Structural £m	Operational £m	Total £m	Core Structural £m	Operational £m	Total £m
New borrowings drawn down, excluding commercial paper, net of expenses	-	55	55	1,372	148	1,520
Repayment of borrowings, excluding commercial paper¹	(488)	(151)	(639)	(320)	(56)	(376)
Movement in commercial paper²	-	-	-	42	-	42
Net cash inflow/(outflow)	(488)	(96)	(584)	1,094	92	1,186
Foreign exchange rate movements	104	(17)	87	574	33	607
Borrowings reclassified/(loans repaid) for non-cash consideration¹	484	(13)	471	-	-	-
Fair value movements	-	108	108	-	(220)	(220)
Amortisation of discounts and other non-cash items	(37)	(16)	(53)	(34)	(16)	(50)
Movements in debt held by Group companies³	-	(38)	(38)	31	(29)	2
Movements in the year	63	(72)	(9)	1,665	(140)	1,525
Balance at 1 January	8,577	1,718	10,295	6,912	1,858	8,770
Balance at 31 December	8,640	1,646	10,286	8,577	1,718	10,295

1 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 at that date. On 3 November 2017 the instrument was redeemed in full at a cost of £488 million. See note B18 for further details.

2 Gross issuances of commercial paper were £1,265 million in 2017 (2016: £2,006 million), offset by repayments of £1,265 million (2016: £1,964 million).

3 Certain subsidiary companies have purchased issued subordinated notes and securitised loan notes as part of their investment portfolios. In the consolidated statement of financial position, borrowings are shown net of these holdings but movements in such holdings over the year are reflected in the tables above.

All movements in fair value in 2016 and 2017 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions.

Page 77

B15 - Pension obligations

The Group operates a number of defined benefit and defined contribution pension schemes. The material defined benefit schemes are in the UK, Ireland and Canada with the main UK scheme being the largest. The assets and liabilities of these defined benefit schemes as at 31 December 2017 are shown below.

				2017				2016
	UK £m	Ireland £m	Canada £m	Total £m	UK £m	Ireland £m	Canada £m	Total £m
Total fair value of scheme assets	17,744	658	276	18,678	18,803	610	281	19,694
Present value of defined benefit obligation	(14,824)	(847)	(372)	(16,043)	(16,131)	(848)	(368)	(17,347)
Net IAS 19 surpluses/(deficits) in the schemes	2,920	(189)	(96)	2,635	2,672	(238)	(87)	2,347

Surpluses included in other assets	3,399	-	-	3,399	3,190	-	-	3,190
Deficits included in provisions	(479)	(189)	(96)	(764)	(518)	(238)	(87)	(843)
Net IAS 19 surpluses/(deficits) in the schemes	2,920	(189)	(96)	2,635	2,672	(238)	(87)	2,347

Page 78

B15 - Pension obligations continued

Movements in the scheme surpluses and deficits

Movements in the pension schemes' surpluses and deficits comprise:

2017	Fair Value of Scheme Assets £m	Present Value of defined benefit obligation £m	IAS 19 Pensions net surplus/ (deficits) £m
Net IAS 19 surplus in the schemes at 1 January	19,694	(17,347)	2,347
Past service costs - amendments	-	(1)	(1)
Administrative expenses¹	-	(18)	(18)
Total pension cost charged to net operating expenses	-	(19)	(19)
Net interest credited/(charged) to investment income /(finance costs)²	470	(407)	63
Total recognised in income	470	(426)	44

Remeasurements:
Actual return on these assets	740	-	740
Less: Interest income on scheme assets	(470)	-	(470)
Return on scheme assets excluding amounts in interest income	270	-	270
Losses from change in financial assumptions	-	(182)	(182)
Losses from change in demographic assumptions	-	(30)	(30)
Experience losses	-	(63)	(63)
Total recognised in other comprehensive income	270	(275)	(5)

Employer contributions	259	-	259
Plan participant contributions	9	(9)	-
Benefits paid	(2,021)	2,021	-
Administrative expenses paid from scheme assets¹	(21)	18	(3)
Foreign exchange rate movements	18	(25)	(7)
Net IAS 19 surplus in the schemes at 31 December	18,678	(16,043)	2,635

1 Administrative expenses are expensed as incurred.

2 Net interest income of £87 million has been credited to investment income and net interest expense of £24 million has been charged to finance costs.

The increase in the net surplus during the period is primarily due to employer contributions paid into the schemes.

2016	Fair Value of Scheme Assets £m	Present Value of defined benefit obligation £m	IAS 19 Pensions net surplus/ (deficits) £m
Net IAS 19 surplus in the schemes at 1 January	16,161	(14,324)	1,837
Past service costs - amendments	-	(1)	(1)
Administrative expenses¹	-	(13)	(13)
Total pension cost charged to net operating expenses	-	(14)	(14)
Net interest credited/(charged) to investment income /(finance costs)²	590	(517)	73
Total recognised in income	590	(531)	59

Remeasurements:
Actual return on these assets	4,044	-	4,044
Less: Interest income on scheme assets	(590)	-	(590)
Return on scheme assets excluding amounts in interest income	3,454	-	3,454
Losses from change in financial assumptions	-	(3,944)	(3,944)
Gains from change in demographic assumptions	-	363	363
Experience gains	-	438	438
Total recognised in other comprehensive income	3,454	(3,143)	311

Employer contributions	190	-	190
Plan participant contributions	6	(6)	-
Benefits paid	(825)	825	-
Administrative expenses paid from scheme assets¹	(15)	13	(2)
Foreign exchange rate movements	133	(181)	(48)
Net IAS 19 surplus in the schemes at 31 December	19,694	(17,347)	2,347

1 Administrative expenses are expensed as incurred.

2 Net interest income of £102 million has been credited to investment income and net interest expense of £29 million has been charged to finance costs.

Page 79

B16 - Related party transactions

This note gives details of the transactions between Group companies and related parties which comprise our joint ventures, associates and staff pension schemes.

The Group undertakes transactions with related parties in the normal course of business. Loans to related parties are made on normal arm's-length commercial terms.

Services provided to, and by related parties

				2017 £m				2016 £m
	Income earned in the year £m	Expenses incurred in the year £m	Payable at year end £m	Receivable at year end £m	Income earned in the year £m	Expenses incurred in the year £m	Payable at year end £m	Receivable at year end £m
Associates	4	(4)	-	-	4	(3)	-	-
Joint ventures	49	-	-	2	46	-	-	2
Employee pension schemes	12	-	-	14	16	-	-	5
	65	(4)	-	16	66	(3)	-	7

Transactions with joint ventures in the UK relate to the property management undertakings. The Group has equity interests in these joint ventures, together with the provision of administration services and financial management to many of them. Our fund management companies also charge fees to these joint ventures for administration services and for arranging external finance.

Key management personnel of the Company may from time to time purchase insurance, savings, asset management or annuity products marketed by group companies on equivalent terms to those available to all employees of the Group. In 2017, other transactions with key management personnel were not deemed to be significant either by size or in the context of their individual financial positions.

Our UK fund management companies manage most of the assets held by the Group's main UK staff pension scheme, for which they charge fees based on the level of funds under management. The main UK scheme holds investments in Group-managed funds and insurance policies with other group companies. As at 31 December 2017, the Friends Provident Pension Scheme ('FPPS'), acquired in 2015 as part of the acquisition of the Friends Life business, held an insurance policy of £630 million (2016: £633 million) issued by a group company, which eliminates on consolidation.

The related parties' receivables are not secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit terms.

B17 - Risk management

This note sets out the major risks our businesses and our shareholders face and describes the Group's approach to managing these. It also gives sensitivity analyses around the major economic and non-economic assumptions that can cause volatility in the Group's earnings and capital position.

(a) Risk management framework

The risk management framework in Aviva forms an integral part of the management and Board processes and decision-making framework across the Group. The key elements of our risk management framework comprise 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.

For the purposes of risk identification and measurement, and aligned to Aviva's risk policies, risks are usually grouped by risk type: credit, market, liquidity, life insurance (including long-term health), general insurance (including short-term health), asset management and operational risk. Risks falling within these types may affect a number of metrics including those relating to balance sheet strength, liquidity and profit. They may also affect the performance of the products we deliver to our customers and the service to our customers and distributors, which can be categorised as risks to our brand and reputation or as conduct risk.

To promote a consistent and rigorous approach to risk management across all businesses we have a set of risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group's worldwide operations. The business chief executive officers make an annual declaration supported by an opinion from the business chief risk officers that the system of governance and internal controls was effective and fit for purpose for their business throughout the year.

A regular top-down key risk identification and assessment process is carried out by the risk function. This includes the consideration of emerging risks and is supported by deeper thematic reviews. This process is replicated at the business unit level. The risk assessment processes are used to generate risk reports which are shared with the relevant risk committees.

Risk models are an important tool in our measurement of risks and are used to support the monitoring and reporting of the risk profile and in the consideration of the risk management actions available. We carry out a range of stress (where one risk factor, such as equity returns, is assumed to vary) and scenario (where combinations of risk factors are assumed to vary) tests to evaluate their impact on the business and the management actions available to respond to the conditions envisaged. For those risk types managed through the holding of capital, being our principal risk types except for liquidity risk, we measure and monitor our risk profile on the basis of the Solvency II solvency capital requirement.

Roles and responsibilities for risk management in Aviva are based around the 'three lines of defence model' where ownership for risk is taken at all levels in the Group. Line management in the business is accountable for risk management, including the implementation of the risk management framework and embedding of the risk culture. The risk function is accountable for quantitative and qualitative oversight and challenge of the risk identification, measurement, monitoring, management and reporting processes and for developing the risk management framework. Internal Audit provides an independent assessment of the risk framework and internal control processes.

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Board oversight of risk and risk management across the Group is maintained on a regular basis through its Risk Committee and Governance Committee. The Board has overall responsibility for determining risk appetite, which is an expression of the risk the business is willing to take. Risk appetites are set relative to capital and liquidity at Group and in the business units.

Risk appetites, requiring management action if breached, are also set for interest rate and foreign exchange risk (calculated on the basis of the Solvency II solvency capital requirement), and liquidity risk (based on stressing forecast central liquid assets and cash inflows and outflows over a specified time horizon). For other risk types the Group sets Solvency II capital tolerances. The Group's position against risk appetite and capital tolerances is monitored and reported to the Board on a regular basis. Long-term sustainability depends upon the protection of franchise value and good customer relationships. As such, Aviva has a risk preference that we will not accept risks that materially impair the reputation of the Group and requires that customers are always treated with integrity. The oversight of risk and risk management at the Group level is supported by the Asset Liability Committee, which focuses on business and financial risks, and the Operational Risk Committee which focuses on operational and reputational risks. Similar committee structures with equivalent terms of reference exist in the business units.

The risk management framework of a small number of our joint ventures and strategic equity holdings differs from the Aviva framework outlined in this note. We work with these entities to understand how their risks are managed and to align them, where possible, with Aviva's framework.

Further information on the types and management of specific risk types is given in sections (b) to (j) below.

(b) Credit risk

Credit risk is the risk of financial loss as a result of the default or failure of third parties to meet their payment obligations to Aviva, or variations in market values as a result of changes in expectations related to these risks. Credit risk is taken so that we can provide the returns required to satisfy policyholder liabilities and to generate returns for our shareholders. In general we prefer to take credit risk over equity and property risks, due to the better expected risk adjusted return, our credit risk analysis capability and the structural investment advantages conferred to insurers with long-dated, relatively illiquid liabilities.

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

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

A detailed breakdown of the Group's current credit exposure by credit quality is shown below.

(i) Financial exposures by credit ratings

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

As at 31 December 2017	AAA	AA	A	BBB	Below BBB	Not rated	Carrying value including held for sale £m	Less: Amounts classified as held for sale £m	Carrying value £m
Debt securities	10.6%	32.5%	20.0%	23.3%	7.8%	5.8%	175,948	(1,140)	174,808
Reinsurance assets	-	87.3%	8.2%	1.9%	-	2.6%	13,615	(123)	13,492
Other investments	-	0.2%	0.3%	0.1%	-	99.4%	53,277	(6,971)	46,306
Loans	-	7.1%	-	-	-	92.9%	27,863	(6)	27,857
Total							270,703	(8,240)	262,463

As at 31 December 2016¹	AAA	AA	A	BBB	Below BBB	Not rated	Carrying value including held for sale £m	Less: Amounts classified as held for sale £m	Carrying value £m
Debt securities	11.8%	33.4%	19.0%	23.9%	6.0%	5.9%	186,708	(7,738)	178,970
Reinsurance assets	-	92.0%	6.3%	0.1%	-	1.6%	26,754	(411)	26,343
Other investments	-	0.2%	0.6%	-	-	99.2%	51,127	(2,304)	48,823
Loans	-	8.0%	-	0.1%	-	91.9%	24,859	(75)	24,784
Total							289,448	(10,528)	278,920

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 note 26 for further details of this adjustment and the financial statement impact arising.

The majority of non-rated debt securities within shareholder assets are held by our businesses in the UK. Of these securities most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £2.0 billion (2016: £2.3 billion) of debt securities held in our UK Life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade.

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The Group continues to hold a series of macro credit hedges to reduce the overall credit risk exposure. The Group's maximum exposure to credit risk of financial assets, without taking collateral or these hedges into account, is represented by the carrying value of the financial instruments in the statement of financial position. These comprise debt securities, reinsurance assets, derivative assets, loans and receivables.

To the extent that collateral held is greater than the amount receivable that it is securing, the table above shows only an amount equal to the latter. In the event of default, any over-collateralised security would be returned to the relevant counterparty.

(ii) Financial exposures to peripheral European countries and worldwide banks

Included in our debt securities and other financial assets are exposures to peripheral European countries and worldwide banks. We continued in 2017 to limit our direct shareholder and participating assets exposure to the governments (including local authorities and agencies) and banks of Greece, Portugal, Italy and Spain. We continue to review whether the restrictions on investment in place since late 2009 can be relaxed, given the improved economic situation in these economies.

(iii) Other investments

Other investments (including assets of operations classified as held for sale) include unit trusts and other investment vehicles; derivative financial instruments, representing positions to mitigate the impact of adverse market movements; and other assets includes deposits with credit institutions and minority holdings in property management undertakings.

The credit quality of the underlying debt securities within investment vehicles is managed by the safeguards built into the investment mandates for these funds which determine the funds' risk profiles. At the Group level, we also monitor the asset quality of unit trusts and other investment vehicles against Group set limits.

A proportion of the assets underlying these investments are represented by equities and so credit ratings are not generally applicable. Equity exposures are managed against agreed benchmarks that are set with reference to overall appetite for market risk.

(iv) Loans

The Group loan portfolio principally comprises:

· Policy loans which are generally collateralised by a lien or charge over the underlying policy;

· Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions. These loans are fully collateralised by other securities;

· Healthcare, infrastructure and PFI loans secured against healthcare, education, social housing and emergency services related premises; and

· Mortgage loans collateralised by property assets.

We use loan to value; interest and debt service cover; and diversity and quality of the tenant base metrics to internally monitor our exposures to mortgage loans. We use credit quality, based on dynamic market measures, and collateralisation rules to manage our stock lending activities. Policy loans are loans and advances made to policyholders, and are collateralised by the underlying policies.

(v) Credit concentration risk

The long-term and general insurance businesses are generally not individually exposed to significant concentrations of credit risk due to the regulations applicable in most markets and the Group credit policy and limits framework, which limit investments in individual assets and asset classes. Credit concentrations are monitored as part of the regular credit monitoring process and are reported to Group ALCO. With the exception of government bonds the largest aggregated counterparty exposure within shareholder assets (i.e. excluding potential exposures arising from reinsurance of unit-linked funds) is to the Swiss Reinsurance Company Limited (including subsidiaries), representing approximately 2.3% of the total shareholder assets.

(vi) Reinsurance credit exposures

The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall risk is within appetite. The Group Capital and Group Risk teams have an active monitoring role with escalation to the Chief Financial Officer (CFO), Chief Risk Officer (CRO), Group ALCO and the Board Risk Committee as appropriate.

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. At 31 December 2017, the reinsurance asset recoverable, including debtor balances, from BlackRock Life Ltd was £5,307 million (2016: £17,087 million), a significant reduction in exposure as a result of action taken to restructure the agreements with BlackRock Life Ltd, and will be further significantly reduced during 2018.

(vii) Securities finance

The Group has significant securities financing operations within the UK and smaller operations in some other businesses. The risks within this activity are mitigated by collateralisation and minimum counterparty credit quality requirements.

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(viii) Derivative credit exposures

The Group is exposed to counterparty credit risk through derivative trades. This risk is generally mitigated through holding collateral for most trades. Residual exposures are captured within the Group's credit management framework.

(ix) Unit-linked business

In unit-linked business the policyholder bears the direct market risk and credit risk on investment assets in the unit funds and the shareholders' exposure to credit risk is limited to the extent of the income arising from asset management charges based on the value of assets in the fund.

(x) Impairment of financial assets

The following table provides information regarding the carrying value of financial assets subject to impairment testing that have been impaired and the ageing of those assets that are past due but not impaired. The table excludes assets carried at fair value through profit or loss and held for sale.

		Financial assets that are past due but not impaired
At 31 December 2017	Neither past due nor impaired £m	0-3 months £m	3-6 months £m	6 months-1 year £m	Greater than 1 year £m	Financial assets that have been impaired £m	Carrying value £m
Debt securities	1,726	-	-	-	-	-	1,726
Reinsurance assets	7,521	-	-	-	-	-	7,521
Other investments	1	-	-	-	-	-	1
Loans	3,465	-	-	-	-	-	3,465
Receivables and other financial assets	8,185	78	12	5	5	-	8,285

		Financial assets that are past due but not impaired
At 31 December 2016	Neither past due nor impaired £m	0-3 months £m	3-6 months £m	6 months-1 year £m	Greater than 1 year £m	Financial assets that have been impaired £m	Carrying value £m
Debt securities	1,092	-	-	-	-	-	1,092
Reinsurance assets	8,388	-	-	-	-	-	8,388
Other investments	1	-	-	-	-	-	1
Loans	3,501	-	-	-	-	-	3,501
Receivables and other financial assets	7,717	61	7	8	1	-	7,794

Excluded from the tables above are financial and reinsurance assets carried at fair value through profit or loss that are not subject to impairment testing, as follows: £174.2 billion of debt securities (2016: £185.6 billion), £53.3 billion of other investments (2016: £51.1 billion), £24.4 billion of loans (2016: £21.3 billion) and £6.1 billion of reinsurance assets (2016: £18.4 billion).

Where assets have been classed as 'past due and impaired', an analysis is made of the risk of default and a decision is made whether to seek to mitigate the risk. There were no material financial assets that would have been past due or impaired had the terms not been renegotiated.

Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations in interest rates, inflation, foreign currency exchange rates, equity and property prices. Market risk arises in business units due to fluctuations in both the value of liabilities and the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses and in the value of investment assets owned directly by the shareholders. We actively seek some market risks as part of our investment and product strategy. However, we have limited appetite for interest rate risk as we do not believe it is adequately rewarded.

The management of market risk is undertaken at business unit and at Group level. Businesses manage market risks locally using the Group market risk framework and within local regulatory constraints. Group Capital is responsible for monitoring and managing market risk at Group level and has established criteria for matching assets and liabilities to limit the impact of mismatches due to market movements.

In addition, where the Group's long-term savings businesses have written insurance and investment products where the majority of investment risks are borne by its policyholders, these risks are managed in line with local regulations and marketing literature, in order to satisfy the policyholders' risk and reward objectives. The Group writes unit-linked business in a number of its operations. The shareholders' exposure to market risk on this business is limited to the extent that income arising from asset management charges is based on the value of assets in the fund.

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The most material types of market risk that the Group is exposed to are described below.

(i) Equity price risk

The Group is subject to direct equity price risk arising from changes in the market values of its equity securities portfolio. Our most material indirect equity price risk exposures are to policyholder unit-linked funds, which are exposed to a fall in the value of the fund thereby reducing the fees we earn on those funds, and participating contracts, which are exposed to a fall in the value of the funds thereby increasing our costs for policyholder guarantees. We also have some equity exposure in shareholder funds through equities held to match inflation-linked liabilities.

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

Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of risk models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. An equity hedging strategy remains in place to help control the Group's overall direct and indirect exposure to equities. At 31 December 2017 the Group continues to hold a series of macro equity hedges to reduce the overall shareholder equity risk exposure.

Sensitivity to changes in equity prices is given in section '(j) risk and capital management' below.

(ii) Property price risk

The Group is subject to property price risk directly due to holdings of investment properties in a variety of locations worldwide and indirectly through investments in mortgages and mortgage backed securities. Investment in property is managed at business unit level, and is subject to local regulations on investments, liquidity requirements and the expectations of policyholders.

As at 31 December 2017, no material derivative contracts had been entered into to mitigate the effects of changes in property prices.

Sensitivity to changes in property prices is given in section '(j) risk and capital management' below.

(iii) Interest rate risk

Interest rate risk arises primarily from the Group's investments in long-term debt and fixed income securities and their movement relative to the value placed on the insurance liabilities. A number of policyholder product features have an influence on the Group's interest rate risk. The major features include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values.

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

The Group typically manages interest rate risk by investing in fixed interest securities which closely match the interest rate sensitivity of the liabilities where such investments are available. In particular, a key objective is to at least match the duration of our annuity liabilities with assets of the same duration, and in some cases where appropriate cash flow matching has been used. 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 risk is also managed in some business units using a variety of derivative instruments, including futures, options, swaps, caps and floors.

Some of the Group's products, principally participating contracts, expose us to the risk that changes in interest rates will impact on profits through a change in the interest spread (the difference between the amounts that we are required to pay under the contracts and the investment income we are able to earn on the investments supporting our obligations under those contracts). The primary markets where Aviva is exposed to this risk are the UK, France and Italy.

Despite a pick up in market interest rates from the historical lows experienced in 2016, the continued low interest rate environment in a number of markets around the world has resulted in our current reinvestment yields being lower than the overall current portfolio yield, primarily for our investments in fixed income securities and commercial mortgage loans. As long as market yields remain below the current portfolio level, the portfolio yield, and as a result net investment income, will continue to decline. While we anticipate interest rates may remain below historical averages before the 2008 financial crisis for some time to come, it is also possible that further future increases in interest rates or market anticipation of such increases, if larger and more rapid than expected, could adversely impact market values of our portfolio of fixed income securities and increase the risk of credit defaults and downgrades.

Other product lines of the Group, such as protection, are not significantly sensitive to interest rate or market movements. For unit-linked business, the shareholder margins emerging are typically a mixture of annual management fees and risk/expense charges. Risk and expense margins will be largely unaffected by low interest rates. Annual management fees may increase in the short term as the move towards low interest rates increases the value of unit funds. However, in the medium term, unit funds will grow at a lower rate which will reduce fund charges. For the UK annuities business interest rate exposure is mitigated by closely matching the duration of liabilities with assets of the same duration.

The UK participating business includes contracts with features such as guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. These liabilities are managed through duration matching of assets and liabilities and the use of derivatives, including swaptions. As a result, the Group's exposure to sustained low interest rates on this portfolio is not material. The Group's key exposure to low interest rates arises through its other participating contracts, principally in Italy and France. Some of these contracts also include features such as guaranteed minimum bonuses, guaranteed investment returns and guaranteed surrender values. In a low interest rate environment there is a risk that the yield on assets might not be sufficient to cover these obligations. For certain of its participating contracts the Group is able to amend guaranteed crediting rates. Our ability to lower crediting rates may be limited by competition, bonus mechanisms and contractual arrangements.

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The following table summarises the weighted average minimum guaranteed crediting rates and weighted average book value yields on assets as at 31 December 2017 for our Italian and French participating contracts, where the Group's key exposure to sustained low interest rates arises.

	Weighted average minimum guaranteed crediting rate	Weighted average book value yield on assets	Participating contract liabilities £m
France	0.64%	3.02%	67,689
Italy	0.69%	3.56%	15,237
Other¹	N/A	N/A	54,656
Total	N/A	N/A	137,582

1 'Other' includes UK participating business

Profit before tax on General Insurance and Health Insurance business is generally a mixture of insurance, expense and investment returns. The asset portfolio is invested primarily in fixed income securities and the reduction in interest rates in recent years has reduced the investment component of profit. The portfolio investment yield and average total invested assets in our general insurance and health business are set out in the table below.

	Portfolio investment yield¹	Average assets £m
2015	2.58%	15,268
2016	2.47%	14,369
2017	2.07%	14,770

1 Before realised and unrealised gains and losses and investment expenses

The nature of the business means that prices in certain circumstances can be increased to maintain overall profitability. This is subject to the competitive environment in each market. To the extent that there are further falls in interest rates the investment yield would be expected to decrease further in future periods.

Sensitivity to changes in interest rates is given in section '(j) risk and capital management' below.

(iv) Inflation risk

Inflation risk arises primarily from the Group's exposure to general insurance claims inflation, to inflation linked benefits within the defined benefit staff pension schemes and within the UK annuity portfolio and to expense inflation. Increases in long-term inflation expectations are closely linked to long-term interest rates and so are frequently considered with interest rate risk. Exposure to inflation risk is monitored through capital modelling, sensitivity testing and stress and scenario testing. The Group typically manages inflation risk through its investment strategy and, in particular, by investing in inflation linked securities and through a variety of derivative instruments, including inflation linked swaps.

(v) Currency risk

The Group has minimal exposure to currency risk from financial instruments held by business units in currencies other than their functional currencies, as nearly all such holdings are backing either unit-linked or with-profits contract liabilities or hedging. As a result the foreign exchange and losses on investments are largely offset by changes in unit-linked and with-profits liabilities and fair value changes in derivatives attributable to changes in foreign exchange rates recognised in the income statement.

The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately 59% of the Group's premium income arises in currencies other than sterling and the Group's net assets are denominated in a variety of currencies, of which the largest are sterling, euro and Canadian dollars. The Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group's business and meet local regulatory and market requirements. However, the Group does use foreign currency forward contracts to hedge planned dividends from its subsidiaries.

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Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities, however movements may impact the value of the Group's consolidated shareholders' equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the Group's regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set. Except where the Group has applied net investment hedge accounting, foreign exchange gains and losses on foreign currency borrowings (see note 6) are recognised in the income statement, whereas foreign exchange gains and losses arising on consolidation from the translation of assets and liabilities of foreign subsidiaries are recognised in other comprehensive income. At 31 December 2017 and 2016, the Group's total equity deployment by currency including assets 'held for sale' was:

	Sterling £m	Euro £m	CAD$ £m	Other £m	Total £m
Capital 31 December 2017	16,776	444	309	1,606	19,135
Capital 31 December 2016	15,813	923	627	2,188	19,551

A 10% change in sterling to euro/Canada$ (CAD$) period-end foreign exchange rates would have had the following impact on total equity.

	10% increase in sterling / euro rate £m	10% decrease in sterling / euro rate £m	10% increase in sterling / CAD$ rate £m	10% decrease in sterling / CAD$ rate £m
Net assets at 31 December 2017	(44)	44	(31)	31
Net assets at 31 December 2016	(92)	92	(63)	20

A 10% change in sterling to euro/Canada$ (CAD$) average foreign exchange rates applied to translate foreign currency profits would have had the following impact on profit before tax, including resulting gains and losses on foreign exchange hedges.

	10% increase in sterling/ euro rate £m	10% decrease in sterling/ euro rate £m	10% increase in sterling/ CAD$ rate £m	10% decrease in sterling/ CAD$ rate £m
Impact on profit before tax 31 December 2017	(78)	95	6	(7)
Impact on profit before tax 31 December 2016	(55)	67	(15)	(9)

The balance sheet changes arise from retranslation of business unit statements of financial position from their functional currencies into sterling, with above movements being taken through the currency translation reserve. These balance sheet movements in exchange rates therefore have no impact on profit. Net asset and profit before tax figures are stated after taking account of the effect of currency hedging activities.

(vi) Derivatives risk

Derivatives are used by a number of the businesses. Derivatives are primarily used for efficient investment management, risk hedging purposes, or to structure specific retail savings products. Activity is overseen by the Group Capital and Group Risk teams, which monitor exposure levels and approve large or complex transactions.

The Group applies strict requirements to the administration and valuation processes it uses, and has a control framework that is consistent with market and industry practice for the activity that is undertaken.

(vii) Correlation risk

The Group recognises that lapse behaviour and potential increases in consumer expectations are sensitive to and interdependent with market movements and interest rates. These interdependencies are taken into consideration in the internal capital model and in scenario analysis.

(d) Liquidity risk

Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. 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 financial resources to meet its obligations as they fall due through the application of a Group liquidity risk policy and business standard and through the development of its liquidity risk management plan. At Group and business unit level, there is a liquidity risk appetite which requires that sufficient liquid resources be maintained to cover net outflows in a stress scenario. In addition to the existing liquid resources and expected inflows, the Group maintains significant undrawn committed borrowing facilities (£1,650 million) from a range of leading international banks to further mitigate this risk.

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Maturity analyses

The following tables show the maturities of our insurance and investment contract liabilities, and of the financial and reinsurance assets held to meet them.

(i) Analysis of maturity of insurance and investment contract liabilities

For non-linked insurance business, the following table shows the gross liability at 31 December 2017 and 2016 analysed by remaining duration. The total liability is split by remaining duration in proportion to the cash-flows expected to arise during that period, as permitted under IFRS 4, Insurance Contracts.

Almost all linked business and non-linked investment contracts may be surrendered or transferred on demand. For such contracts, the earliest contractual maturity date is therefore the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial position liability. However, we expect surrenders, transfers and maturities to occur over many years, and therefore the tables below reflect the expected cash flows for these contracts, rather than their contractual maturity date. This table includes assets held for sale.

At 31 December 2017	Total £m	On demand or within 1 year £m	1-5 years £m	5-15 years £m	Over 15 years £m
Long-term business
Insurance contracts - non-linked	109,900	10,105	27,278	41,720	30,797
Investment contracts - non-linked	71,948	5,370	17,088	26,300	23,190
Linked business	163,571	17,609	27,632	55,519	62,811
General insurance and health	16,794	6,877	6,838	2,462	617
Total contract liabilities	362,213	39,961	78,836	126,001	117,415

At 31 December 2016	Total £m	On demand or within 1 year £m	1-5 years £m	5-15 years £m	Over 15 years £m
Long-term business
Insurance contracts - non-linked	116,400	9,757	31,423	44,791	30,429
Investment contracts - non-linked	73,112	5,358	17,050	27,568	23,136
Linked business	153,901	17,374	27,234	51,454	57,839
General insurance and health	16,488	6,761	6,594	2,448	685
Total contract liabilities	359,901	39,250	82,301	126,261	112,089

(ii) Analysis of maturity of financial assets

The following table provides an analysis, by maturity date of the principal, of the carrying value of financial assets which are available to fund the repayment of liabilities as they crystallise. This table excludes assets held for sale.

At 31 December 2017	Total £m	On demand or within 1 year £m	1-5 years £m	Over 5 years £m	No fixed term (perpetual) £m
Debt securities	174,808	28,037	47,289	99,078	404
Equity securities	89,968	-	-	-	89,968
Other investments	46,306	40,500	364	4,680	762
Loans	27,857	1,651	5,053	21,149	4
Cash and cash equivalents	43,347	43,347	-	-	-
	382,286	113,535	52,706	124,907	91,138

At 31 December 2016¹	Total £m	On demand or within 1 year £m	1-5 years £m	Over 5 years £m	No fixed term (perpetual) £m
Debt securities	178,970	24,293	49,061	105,448	168
Equity securities	72,042	-	-	-	72,042
Other investments	48,823	45,889	1,112	275	1,547
Loans	24,784	1,352	5,609	17,819	4
Cash and cash equivalents	38,708	38,708	-	-	-
	363,327	110,242	55,782	123,542	73,761

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B17 - Risk management continued

The assets above are analysed in accordance with the earliest possible redemption date of the instrument at the initiation of the Group. Where an instrument is transferable back to the issuer on demand, such as most unit trusts or similar types of investment vehicle, it is included in the 'On demand or within 1 year' column. Debt securities with no fixed contractual maturity date are generally callable at the option of the issuer at the date the coupon rate is reset under the contractual terms of the instrument. The terms for resetting the coupon are such that we expect the securities to be redeemed at this date, as it would be uneconomic for the issuer not to do so, and for liquidity management purposes we manage these securities on this basis. The first repricing and call date is normally ten years or more after the date of issuance. Most of the Group's investments in equity securities and fixed maturity securities are market traded and therefore, if required, can be liquidated for cash at short notice.

(e) Life and health insurance risk

Life insurance risk in the Group arises through its exposure to mortality risk and exposure to worse than anticipated operating experience on factors such as persistency levels, exercising of policy holder options and management and administration expenses. 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. The Group chooses to take measured amounts of life and health insurance risk provided that the relevant business has the appropriate core skills to assess and price the risk and adequate returns are available. The Group's underwriting strategy and appetite is communicated via specific policy statements, related business standards and guidelines. Life insurance risk is managed primarily at business unit level with oversight at the Group level.

The underlying risk profile of our life and health insurance risks, primarily persistency, longevity, mortality and expense risk, has remained stable during 2017, although the current continued relatively low levels of interest rates have increased our sensitivity to longevity shocks compared to historical norms. 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. Longevity risk remains the Group's most significant life insurance risk, while persistency risk remains significant and continues to have a volatile outlook with underlying performance linked to some degree to economic conditions. However, businesses across the Group have continued to make progress with a range of customer retention activities. The Group has continued to write considerable volumes of life protection business, and to utilise reinsurance to reduce exposure to potential losses. More generally, life insurance risks are believed to provide a significant diversification against other risks in the portfolio. Life insurance risks are modelled within the internal capital model and subject to sensitivity and stress and scenario testing. The assumption and management of life and health insurance risks is governed by the Group-wide business standards covering underwriting, pricing, product design and management, in-force management, claims handling, and reinsurance. The individual life and health insurance risks are managed as follows:

· Mortality and morbidity risks are mitigated by use of reinsurance. The Group allows businesses to select reinsurers, from those approved by the Group, based on local factors, but retains oversight of the overall exposures and monitors that the aggregation of risk ceded is within credit risk appetite.

· Longevity risk and internal experience analysis are monitored against the latest external industry data and emerging trends. Whilst individual businesses are responsible for reserving and pricing for annuity business, the Group monitors the exposure to this risk and any associated capital implications. The Group has used reinsurance solutions to reduce the risks from longevity and continually monitors and evaluates emerging market solutions to mitigate this risk further.

· Persistency risk is managed at a business unit level through frequent monitoring of company experience, and benchmarked against local market information. Generally, persistency risk arises from customers lapsing their policies earlier than has been assumed. Where possible the financial impact of lapses is reduced through appropriate product design. Businesses also implement specific initiatives to improve the retention of policies which may otherwise lapse. The Group has developed guidelines on persistency management.

· Expense risk is primarily managed by the business units through the assessment of business unit profitability and frequent monitoring of expense levels.

Embedded derivatives

The Group is exposed to the risk of changes in policyholder behaviour due to the exercise of options, guarantees and other product features embedded in its long-term savings products. These product features offer policyholders varying degrees of guaranteed benefits at maturity or on early surrender, along with options to convert their benefits into different products on pre-agreed terms. The extent of the impact of these embedded derivatives differs considerably between business units and exposes Aviva to changes in policyholder behaviour in the exercise of options as well as market risk.

Examples of each type of embedded derivative affecting the Group are:

· Options: call, put, surrender and maturity options, guaranteed annuity options, options to cease premium payment, options for withdrawals free of market value adjustment, annuity options, and guaranteed insurability options.

· Guarantees: embedded floor (guaranteed return), maturity guarantee, guaranteed death benefit, and guaranteed minimum rate of annuity payment.

· Other: indexed interest or principal payments, maturity value, loyalty bonus.

The impact of these is reflected in the capital model and managed as part of the asset liability framework.

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B17 - Risk management continued

(f) General insurance risk

Types of risk

General insurance risk in the Group arises from:

· Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations;

· Unexpected claims arising from a single source or cause;

· Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten; and

· Inadequate reinsurance protection or other risk transfer techniques.

Aviva has a preference for general insurance risk in measured amounts for explicit reward, in line with our core skills in underwriting and pricing. The majority of the general insurance business underwritten by the Group continues to be short tail in nature such as motor, household and commercial property insurances. The Group's underwriting strategy and appetite is communicated via specific policy statements, related business standards and guidelines. General insurance risk is managed primarily at business unit level with oversight at the Group level. Claims reserving is undertaken by local actuaries in the various general insurance businesses and is also subject to periodic external reviews.

The vast majority of the Group's general insurance business is managed and priced in the same country as the domicile of the customer.

Management of general insurance risks

Significant insurance risks will be reported under the risk management framework. Additionally, the capital model is used to assess the risks that each general insurance business unit, and the Group as a whole, is exposed to, quantifying their impact and calculating appropriate capital requirements.

Business units have developed mechanisms that identify, quantify and manage accumulated exposures to contain them within the limits of the appetite of the Group. The business units are assisted by the General Insurance Council which provides technical input for major decisions which fall outside individual delegated limits or escalations outside group risk preferences, group risk accumulation, concentration and profitability limits.

Reinsurance strategy

Significant reinsurance purchases are reviewed annually at both business unit and Group level to verify that the levels of protection being bought reflect any developments in exposure and the risk appetite of the Group. The basis of these purchases is underpinned by analysis of capital, earnings and capital volatility, cash flow and liquidity and the Group's franchise value.

Detailed actuarial analysis is used to calculate the Group's extreme risk profile and then design cost and capital efficient reinsurance programmes to mitigate these risks to within agreed appetites. For businesses writing general insurance we analyse the natural catastrophe exposure using our own internal probabilistic catastrophe model which is benchmarked against external catastrophe models widely used by the rest of the (re)insurance industry.

The Group cedes much of its worldwide catastrophe risk to third-party reinsurers through excess of loss and aggregate excess of loss structures. The Group purchases a group-wide catastrophe reinsurance programme to protect against catastrophe losses exceeding a 1 in 200 year return period. The total Group potential retained loss from its most concentrated catastrophe exposure peril (Northern Europe Windstorm) is approximately £150 million on a per occurrence basis and £175 million on an annual aggregate basis. Any losses above these levels are covered by the group-wide catastrophe reinsurance programme to a level in excess of a 1 in 200 year return period. In addition the Group purchases a number of GI business line specific reinsurance programmes with various retention levels to protect both capital and earnings, and has reinsured 100% of its latent exposures to its historic UK employers' liability and public liability business written prior to 31 December 2000.

(g) Asset management risk

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 derived from investment performance, specialist investment professionals and leadership, product development capabilities, fund liquidity, margin, client retention, regulatory developments, fiduciary and contractual responsibilities. Funds invested in illiquid assets such as commercial property are particularly exposed to liquidity risk. The risk profile is regularly monitored.

A client relationship team is in place to manage client retention risk, while all new asset management products undergo a review and approval process at each stage of the product development process, including approvals from legal, compliance and risk functions. Investment performance against client objectives relative to agreed benchmarks is monitored as part of our investment performance and risk management process, and subject to further independent oversight and challenge by a specialist risk team, reporting directly to the Aviva Investors' Chief Risk Officer.

(h) Operational risk

Operational risk is the risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment. We have limited appetite for operational risk and aim to reduce these risks as far as is commercially sensible.

Our business units are primarily responsible for identifying and managing operational risks within their businesses, within the group-wide operational risk framework including the risk and control self-assessment process. Businesses must be satisfied that all material risks falling outside our risk tolerances are being mitigated, monitored and reported to an appropriate level. Any risks with a high potential impact are monitored centrally on a regular basis. Businesses use key indicator data to help monitor the status of the risk and control environment. They also identify and capture loss events, taking appropriate action to address actual control breakdowns and promote internal learning.

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B17 - Risk management continued

(i) Brand and reputation risk

We are exposed to the risk that litigation, employee misconduct, operational failures, the outcome of regulatory investigations, media speculation and negative publicity, disclosure of confidential client information, inadequate services, whether or not founded, could impact our brands or reputation. Any of our brands or our reputation could also be affected if products or services recommended by us (or any of our intermediaries) do not perform as expected (whether or not the expectations are founded) or customers' expectations for the product change. We seek to reduce this risk to as low a level as commercially sensible.

The FCA regularly considers whether we are meeting the requirement to treat our customers fairly and we make use of various metrics to assess our own performance, including customer advocacy, retention and complaints. Failure to meet these requirements could also impact our brands or reputation.

If we do not manage the perception of our brands and reputation successfully, it could cause existing customers or agents to withdraw from our business and potential customers or agents to choose not to do business with us.

(j) Risk and capital management

(i) Sensitivity test analysis

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

(ii) Life insurance and investment contracts

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

(iii) General insurance and health business

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

(iv) Sensitivity test results

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

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

Long-term business sensitivities as at 31 December 2017

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)

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B17 - Risk management continued

Sensitivities as at 31 December 2016

31 December 2016 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance Participating	(50)	30	(10)	(130)	65	(30)	(5)	(15)
Insurance non-participating	(190)	20	(775)	(35)	10	(190)	(90)	(920)
Investment participating	(10)	5	(5)	-	-	(5)	-	-
Investment non-participating	10	(15)	-	50	(70)	(65)	-	-
Assets backing life shareholders' funds	(115)	190	10	(85)	85	-	-	-
Total	(355)	230	(780)	(200)	90	(290)	(95)	(935)

31 December 2016 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expensed +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance Participating	(50)	30	(10)	(130)	65	(30)	(5)	(15)
Insurance non-participating	(190)	20	(775)	(35)	10	(190)	(90)	(920)
Investment participating	(10)	5	(5)	-	-	(5)	-	-
Investment non-participating	10	(15)	-	50	(70)	(65)	-	-
Assets backing life shareholders' funds	(155)	230	5	(85)	85	-	-	-
Total	(395)	270	(785)	(200)	90	(290)	(95)	(935)

Changes in sensitivities between 2017 and 2016 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 as at 31 December 2017

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)

Sensitivities as at 31 December 2016

31 December 2016 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(315)	320	(145)	85	(85)	(115)	(340)
Net of reinsurance	(385)	375	(145)	85	(85)	(115)	(320)

31 December 2016 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(315)	320	(145)	85	(85)	(25)	(340)
Net of reinsurance	(385)	375	(145)	85	(85)	(25)	(320)

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

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B17 - Risk management continued

Fund management and non-insurance business sensitivities as at 31 December 2017

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%
Total	(30)	30	80	(10)	20

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%
Total	(25)	25	80	(10)	15

Sensitivities as at 31 December 2016

31 December 2016 Impact on profit before tax
£m

Interest rates
+1%

Interest rates
-1%

Credit spreads

+0.5%¹

Equity/ property
+10%

Equity/ property
-10%

Total

(10)

1 Revised from £10 million to £30 million to include Aviva International Insurance.

31 December 2016 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

(10)

1 Revised from £10 million to £30 million to include Aviva International Insurance.

Limitations of sensitivity analysis

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

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

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

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

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

Page 92

B18 - Direct capital instrument and tier 1 notes

Notional amount	2017 £m	2016 £m
5.9021% £500 million direct capital instrument - Issued November 2004	500	500
8.25% $650 million fixed rate tier 1 notes - Issued May 2012	-	392
6.875% £210 million STICS - Issued November 2003	231	231
Total	731	1,123

The direct capital instrument (the DCI) was issued on 25 November 2004. The DCI has no fixed redemption date but the Company may, at its sole option, redeem all (but not part) of the principal amount on 27 July 2020, at which date the interest rate changes to a variable rate, or on any respective coupon payment date thereafter. The variable rate will be the six month sterling deposit rate plus margin.

The $650 million fixed rate tier 1 notes (the FxdRNs) were issued on 3 May 2012. On 28 September 2017 notification was given that the Group would redeem the FxdRNs at first call date on 3 November 2017. At the notification date the instrument was reclassified as a financial liability of £484 million, representing its fair value on translation into sterling at that date. The resulting foreign exchange loss of £92 million has been charged to retained earnings. The FxdRNs were redeemed in full on 3 November 2017 at a cost of £488 million, including an additional £4 million of exchange losses subsequent to the reclassification which are included within other expenses within the income statement.

The Step-up Tier one Insurance Capital Securities ('STICS') were issued on 21 November 2003 by Friends Life Holdings plc, substituted as issuer by Aviva plc on 1 October 2015. The STICS are irrevocably guaranteed on a subordinated basis by Aviva Life & Pensions Limited. Prior to the Part VII transfer of the Friends Life business into UK Life on 1 October 2017 the guarantor for the STICS was Friends Life Limited. The STICS have no fixed redemption date but the Company may, at its sole option, redeem the instrument (in whole or in part) on 21 November 2019, or on the coupon payment date falling on successive fifth anniversaries from this date. For each coupon period beginning 21 November 2019, the STICS will bear interest reset every five years at the rate per annum which is the aggregate of 2.97% and the Gross Redemption Yield of the Benchmark Gilt.

The Company has the option to defer coupon payments on the DCI and the STICS on any relevant payment date.

In relation to the DCI, deferred coupons shall only be satisfied should the Company exercise its sole option to redeem the instruments.

In relation to the STICS, deferred coupons may be satisfied at any time, at the sole option of the Company. The Company is required to satisfy deferred coupons upon the earliest of the following:

· Resumption of payment of coupons on the STICS; or

· Redemption; or

· The commencement of winding up of the issuer.

No interest will accrue on any deferred coupon on the DCI. Interest will accrue on deferred coupons on the STICS at the then current rate of interest on the STICS.

Deferred coupons on the DCI and the STICS will be satisfied by the issue and sale of ordinary shares in the Company at their prevailing market value, to a sum as near as practicable to (and at least equal to) the relevant deferred coupons. In the event of any coupon deferral, the Company will not declare or pay any dividend on its ordinary or preference share capital. These instruments have been treated as equity. Please refer to accounting policy AE.

At the end of 2017 the fair value of the DCI and the STICS was £778 million (2016: £736 million).

Page 93

B19 - Cash and cash equivalents

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

	2017 £m	2016 £m
Cash and cash equivalents	43,347	38,708
Cash and cash equivalents of operations classified as held for sale	739	255
Bank overdrafts	(499)	(558)
Net cash and cash equivalents at 31 December	43,587	38,405

B20 - Contingent liabilities and other risk factors

This note sets out the main areas of uncertainty over the calculation of our liabilities.

(a) Uncertainty over claims provisions

Estimation techniques are used by the Group to determine the general insurance business outstanding claims provisions and of the methodology and assumptions used in determining the long-term business provisions. These approaches are designed to allow for the appropriate cost of policy-related liabilities, with a degree of prudence, to give a result within the normal range of outcomes. However, the actual cost of settling these liabilities may differ, for example because experience may be worse than that assumed, or future general insurance business claims inflation may differ from that expected, and hence there is uncertainty in respect of these liabilities.

(b) Asbestos, pollution and social environmental hazards

In the course of conducting insurance business, various companies within the Group receive general insurance liability claims, and become involved in actual or threatened related litigation arising therefrom, including claims in respect of pollution and other environmental hazards. Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including Europe, Canada and Australia. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents they cover and the uncertainties associated with establishing liability, the ultimate cost cannot be determined with certainty. However, on the basis of current information having regard to the level of provisions made for general insurance claims and substantial reinsurance cover now in place, the directors consider that any additional costs arising are not likely to have a material impact on the financial position of the Group.

As a normal part of their operating activities, various Group companies have given guarantees and options, including interest rate guarantees, in respect of certain long-term insurance and investment products. In providing these guarantees and options, the Group's capital position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, property values and equity prices. Interest rate guaranteed returns, such as those available on guaranteed annuity options, are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made. The directors continue to believe that the existing provisions for such guarantees and options are sufficient.

(d) Regulatory compliance

The Group's insurance and investment business is subject to local regulation in each of the countries in which it operates. A number of the Group's UK subsidiaries are dual regulated (directly authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation) while others are solo regulated (regulated solely by the FCA for both prudential and conduct regulation). Between them, the PRA and FCA have broad powers including the authority to grant, vary the terms of, or cancel a regulated firm's authorisation; to investigate marketing and sales practices; and to require the maintenance of adequate financial resources. The Group's regulators outside the UK typically have similar powers, but in some cases they also operate a system of 'prior product approval'.

The Group's regulated businesses have compliance resources to respond to regulatory enquiries in a constructive way, and take corrective action when warranted. However, all regulated financial services companies face the risk that their regulator could find that they have failed to comply with applicable regulations or have not undertaken corrective action as required.

The impact of any such finding (whether in the UK or overseas) could have a negative impact on the Group's reported results or on its relations with current and potential customers. Regulatory action against a member of the Group could result in adverse publicity for, or negative perceptions regarding, the Group, or could have a material adverse effect on the business of the Group, its results, operations and/or financial condition and divert management's attention from the day-to-day management of the business.

(e) Structured settlements

The Company has purchased annuities from licensed Canadian life insurers to provide for fixed and recurring payments to claimants. As a result of these arrangements, the Company is exposed to credit risk to the extent that any of the life insurers fail to fulfill their obligations. The Company's maximum exposure to credit risk for these types of arrangements is approximately CAD$1,213 million as at 31 December 2017 (2016: CAD$1,181 million). Credit risk is managed by acquiring annuities from a diverse portfolio of life insurers with proven financial stability. This risk is reduced to the extent of coverage provided by Assuris, the Canadian life insurance industry compensation plan. As at 31 December 2017, no information has come to the Company's attention that would suggest any weakness or failure in life insurers from which it has purchased annuities and consequently no provision for credit risk is required.

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B20 - Contingent liabilities and other risk factors continued

(f) Other

In the course of conducting insurance and investment business, various Group companies receive liability claims, and become involved in actual or threatened related litigation. In the opinion of the directors, adequate provisions have been established for such claims and no material loss will arise in this respect.

In addition, in line with standard business practice, various Group companies have given guarantees, indemnities and warranties in connection with disposals in recent years of subsidiaries and associates to parties outside the Aviva Group. In the opinion of the directors, no material unprovisioned loss will arise in respect of these guarantees, indemnities and warranties.

There are a number of charges registered over the assets of Group companies in favour of other Group companies or third parties. In addition, certain of the Company's assets are charged in favour of certain of its subsidiaries as security for intra-Group loans.

The Group's insurance subsidiaries pay contributions to levy schemes in several countries in which we operate. Given the economic environment, there is a heightened risk that the levy contributions will need to be increased to protect policyholders if an insurance company falls into financial difficulties. The directors continue to monitor the situation but are not aware of any need to increase provisions at the statement of financial position date.

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

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

	2017 £m	2016 £m
Acquired value of in-force business on insurance contracts¹	1,533	1,750
Acquired value of in-force business on investment contracts²	1,725	2,097
Intangible assets	1,628	1,633
	4,886	5,480
Less: amounts classified as held for sale	(1,431)	(12)
Total	3,455	5,468

1 On insurance and participating investment contracts.

2 On non-participating investment contracts.

The acquired value of in-force business on insurance and investment contract has reduced primarily due to an amortisation charge of £468 million (2016: £539 million charge) and a write-down of AVIF in relation to FPI's reinsured book of insurance contracts (£8 million) and FPI's investment contracts (£110 million). The latter was recorded as a remeasurement loss following FPI's classification as held for sale (see note B4).

The slight decrease in the intangible assets is primarily due to the amortisation charge for the year of £186 million (2016: £155 million) offset by additions in the year of £184 million. Additions are largely in respect of capitalised software in relation to the Group's digital initiatives and intangibles from our previously equity accounted joint ventures in Poland that are now fully consolidated (see note B4).

B22 - Subsequent events

For details of subsequent events relating to:

· subsidiaries - refer note B4a (iii)

· joint ventures - refer note B4c (iii)

· joint ventures - refer note B4c (iv)

· joint ventures - refer note B4d

This information is provided by RNS

The company news service from the London Stock Exchange

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