Final Results - Part 4 of 4

RNS Number : 0469H

Aviva PLC

08 March 2018

Start part 4 of 4

Page 95

Capital & liquidity

In this section		Page
Capital and liquidity
C1	Analysis of return on equity	96
C2	Group capital structure - IFRS basis	97
C3	Equity sensitivity analysis - IFRS basis	98

Page 96

C1 - Analysis of return on equity

	Operating return¹
2017	Before tax £m	After tax £m	Weighted average shareholders' funds including non-controlling interests² £m	Return on equity² %
United Kingdom	2,201	1,782	12,828	13.9%
Canada	46	34	1,442	2.4%
Europe³	1,096	787	5,890	13.4%
Asia	227	212	1,638	12.9%
Fund management	164	127	495	25.7%
Corporate and Other Business⁴	(273)	(196)	5,669	n/a
Return on total capital employed	3,461	2,746	27,962	9.8%
Subordinated debt	(389)	(314)	(7,224)	4.3%
Senior debt	(4)	(3)	(1,398)	0.2%
Return on total equity	3,068	2,429	19,340	12.6%
Less: Non-controlling interests		(134)	(1,325)	10.1%
Direct capital instrument and tier 1 notes		(65)	(1,025)	6.3%
Preference capital		(17)	(200)	8.5%
Return on equity shareholders' funds		2,213	16,790	13.2%

1 The operating return is based upon Group operating profit. Refer to section 1.

2 Return on equity is based on an annualised operating return after tax attributable to ordinary shareholders expressed as a percentage of weighted average ordinary shareholders' equity.

3 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.

4 The 'Corporate' and 'Other Business' loss before tax of £273 million comprises corporate costs of £184 million, interest on internal lending arrangements of £7 million, other business operating loss (net of investment return) of £157 million, partly offset by finance income on the main UK pension scheme of £75 million.

	Operating return¹
2016	Before tax £m	After tax £m	Weighted average shareholders' funds including non-controlling interests² £m	Return on equity² %
United Kingdom	1,946	1,573	13,289	11.8%
Canada	269	197	1,256	15.7%
Europe³	1,044	743	5,520	13.5%
Asia	228	216	1,548	14.0%
Fund management	138	104	426	24.4%
Corporate and Other Business⁴	(227)	(219)	4,850	n/a
Return on total capital employed	3,398	2,614	26,889	9.7%
Subordinated debt	(387)	(309)	(6,907)	4.5%
Senior debt	(1)	(1)	(869)	0.1%
Return on total equity	3,010	2,304	19,113	12.1%
Less: Non-controlling interests		(147)	(1,279)	11.5%
Direct capital instrument and tier 1 notes		(68)	(1,123)	6.1%
Preference capital		(17)	(200)	8.5%
Return on equity shareholders' funds		2,072	16,511	12.5%

1 The operating return is based upon Group operating profit. Refer to section 1.

2 Return on equity is based on an annualised operating return after tax attributable to ordinary shareholders expressed as a percentage of weighted average ordinary shareholders' equity.

4 The 'Corporate' and 'Other Business' loss before tax of £227 million comprises corporate costs of £184 million, interest on internal lending arrangements of £23 million, other business operating loss (net of investment return) of £106 million, partly offset by finance income on the main UK pension scheme of £86 million.

Page 97

C2 - Group capital structure - IFRS basis

The table below shows how our capital is deployed by market and how that capital is funded.

	2017 Capital employed £m	2016 Capital employed £m
Life business
United Kingdom¹	11,517	11,670
France	2,704	2,756
Poland	352	296
Italy	954	947
Other Europe¹	422	759
Europe	4,432	4,758
Asia	1,558	1,643
	17,507	18,071
General insurance & health
United Kingdom general insurance^1,2	1,721	1,450
United Kingdom health	93	66
Canada	1,364	1,471
France	589	462
Italy	319	282
Other Europe¹	343	315
Europe	1,251	1,059
Asia	10	16
	4,439	4,062
Fund management	520	462
Corporate and Other Business^2,3	5,309	5,533
Total capital employed	27,775	28,128
Financed by
Equity shareholders' funds	16,969	16,803
Non-controlling interests	1,235	1,425
Direct capital instrument and tier 1 notes	731	1,123
Preference shares	200	200
Subordinated debt⁴	7,221	7,213
Senior debt	1,419	1,364
Total capital employed⁵	27,775	28,128

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 Other Europe. As a result, comparative balances have been restated. For the Life business, Other Europe also includes Spain and Turkey and for General insurance & health includes Poland.

2 Capital employed for United Kingdom General Insurance excludes c.£0.9 billion of goodwill which does not support the general insurance business for capital purposes and is included in 'Corporate and Other Business'.

3 'Corporate and Other Business' includes centrally held tangible net assets, the main UK staff pension scheme surplus and also reflects internal lending arrangements. These internal lending arrangements, which net out on consolidation, include the formal loan arrangement between Aviva Group Holdings Limited and Aviva Insurance Limited.

4 Subordinated debt excludes amounts held by Group companies of £9 million (2016: £9 million).

5 Goodwill, AVIF and other intangibles are maintained within the capital base. Goodwill includes goodwill in subsidiaries of £1,876 million (2016: £2,045 million), goodwill in joint ventures of £17 million (2016: £20 million) and goodwill in associates of £nil (2016: £47 million). AVIF and other intangibles comprise £3,456 million (2016: £5,468 million) of intangibles in subsidiaries, £40 million (2016: £72 million) of intangibles in joint ventures and £nil million (2016: £18 million) of intangibles in associates, net of deferred tax liabilities of £(721) million (2016: £(783) million) and the non-controlling interest share of intangibles of £(222) million (2016: £(226) million).

Total capital employed is financed by a combination of equity shareholders' funds, preference capital, subordinated debt and other borrowings. At the end of 2017 the Group had £27.8 billion (2016: £28.1 billion) of total capital employed in our trading operations measured on an IFRS basis. In 2017 the Group redeemed the $650 million fixed rate tier 1 notes in full at the first call date on 3 November and completed a share buy-back of ordinary shares for an aggregate purchase price of £300 million. The number of shares in issue has reduced by 57,724,500 in respect of shares acquired and cancelled under the buy-back programme.

At the end of 2017 the market value of our external debt (subordinated debt and senior debt), preference shares (including both Aviva plc preference shares of £200 million and General Accident plc preference shares, within non-controlling interests, of £250 million), and direct capital instrument and tier 1 notes was £11,311 million (2016: £11,006 million).

Page 98

C3 - Equity sensitivity analysis - IFRS basis

The sensitivity of the Group's total equity on an IFRS basis at 31 December 2017 to a 10% fall in global equity markets, a rise of 1% in global interest rates or a 0.5% increase in credit spreads is as follows:

31 December 2016 £bn	IFRS basis	31 December 2017 £bn	Equities down 10% £bn	Interest rates up 1% £bn	0.5% increased credit spread £bn
18.1	Long-term savings	17.5	-	(0.7)	(0.4)
10.1	General insurance and other	10.3	(0.1)	(0.5)	0.6
(8.6)	Borrowings	(8.6)	-	-	-
19.6	Total equity	19.2	(0.1)	(1.2)	0.2

These sensitivities assume a full tax charge/credit on market value assumptions. The interest rate sensitivity also assumes an equivalent movement in both inflation and discount rate (i.e. no change to real interest rates) and therefore incorporates the offsetting effects of these items on the pension scheme liabilities. A 1% increase in the real interest rate has the effect of reducing the pension scheme liability in the main UK pension scheme by £1.9 billion (before any associated tax impact).

The 0.5% increased credit spread sensitivity does not make an allowance for any adjustment to risk-free interest rates. The long-term business sensitivities provide for any impact of credit spread movements on liability valuations. The sensitivities also include the allocation of staff pension scheme sensitivities, which assume inflation rates and government bond yields remain constant. In practice, the sensitivity of the business to changes in credit spreads is subject to a number of complex interactions. The impact of the credit spread movements will be related to individual portfolio composition and may be driven by changes in credit or liquidity risk; hence, the actual impact may differ substantially from applying spread movements implied by various published credit spread indices to these sensitivities.

Page 99

Analysis of assets

In this section		Page
Analysis of assets
D1	Total assets	100
D2	Total assets - Valuation bases/fair value hierarchy	101
D3	Analysis of asset quality	103
D4	Pension fund assets	120
D5	Available funds	121
D6	Guarantees	121

Page 100

D1 - Total assets

As an insurance business, Aviva Group holds a variety of assets to match the characteristics and duration of its insurance liabilities. Appropriate and effective asset liability matching (on an economic basis) is the principal way in which Aviva manages its investments. In addition, to support this, Aviva also uses a variety of hedging and other risk management strategies to diversify away any residual mismatch risk that is outside of the Group's risk appetite.

2017	Policyholder assets £m	Participating fund assets £m	Shareholder assets £m	Total assets analysed £m	Less assets of operations classified as held for sale £m	Balance sheet total £m
Goodwill and acquired value of in-force business and intangible assets	-	-	6,798	6,798	(1,467)	5,331
Interests in joint ventures and associates	2	1,133	507	1,642	-	1,642
Property and equipment	-	175	339	514	(5)	509
Investment property	6,256	3,966	575	10,797	-	10,797
Loans	8	3,340	24,515	27,863	(6)	27,857
Financial investments
Debt securities	30,987	95,775	49,186	175,948	(1,140)	174,808
Equity securities	74,110	15,058	995	90,163	(195)	89,968
Other investments	42,368	7,023	3,886	53,277	(6,971)	46,306
Reinsurance assets	6,103	235	7,277	13,615	(123)	13,492
Deferred tax assets	-	-	146	146	(2)	144
Current tax assets	-	-	94	94	-	94
Receivables and other financial assets	488	1,484	6,351	8,323	(38)	8,285
Deferred acquisition costs and other assets	27	565	5,952	6,544	(170)	6,374
Prepayments and accrued income	286	1,230	1,359	2,875	(15)	2,860
Cash and cash equivalents	12,000	18,855	13,231	44,086	(739)	43,347
Assets of operations classified as held for sale	-	-	-	-	10,871	10,871
Total	172,635	148,839	121,211	442,685	-	442,685
Total %	39.0%	33.6%	27.4%	100.0%	-	100.0%
2016 Total	161,128	157,775	121,516	440,419	-	440,419
2016 Total %	36.6%	35.8%	27.6%	100.0%	-	100.0%

As at 31 December 2017, 27.4% of Aviva's total asset base was shareholder assets, 33.6% participating fund assets where Aviva shareholders have partial exposure, and 39.0% policyholder assets where Aviva shareholders have no exposure. Of the total assets (excluding held for sale), investment property, loans and financial investments comprise £349.7 billion, compared to £335.4 billion at 31 December 2016.

D2 - Total assets - Valuation bases/fair value hierarchy

Total assets - 2017	Fair value £m	Amortised cost £m	Equity accounted/ tax assets¹ £m	Total £m
Goodwill and acquired value of in-force business and intangible assets	-	6,798	-	6,798
Interests in joint ventures and associates	-	-	1,642	1,642
Property and equipment	389	125	-	514
Investment property	10,797	-	-	10,797
Loans	24,398	3,465	-	27,863
Financial Investments
Debt securities	175,948	-	-	175,948
Equity securities	90,163	-	-	90,163
Other investments	53,277	-	-	53,277
Reinsurance assets	6,094	7,521	-	13,615
Deferred tax assets	-	-	146	146
Current tax assets	-	-	94	94
Receivables and other financial assets	-	8,323	-	8,323
Deferred acquisition costs and other assets	-	6,544	-	6,544
Prepayments and accrued income	-	2,875	-	2,875
Cash and cash equivalents	44,086	-	-	44,086
Total	405,152	35,651	1,882	442,685
Total %	91.5%	8.1%	0.4%	100.0%
Assets of operations classified as held for sale	9,059	1,810	2	10,871
Total (excluding assets held for sale)	396,093	33,841	1,880	431,814
Total % (excluding assets held for sale)	91.8%	7.8%	0.4%	100.0%
2016 Total	400,358	37,674	2,387	440,419
2016 Total %	90.9%	8.6%	0.5%	100.0%

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

Page 101

D2 - Total assets - Valuation bases/fair value hierarchy continued

Total assets - Policyholder assets 2017	Fair value £m	Amortised cost £m	Equity accounted/ tax assets¹ £m	Total £m
Goodwill and acquired value of in-force business and intangible assets	-	-	-	-
Interests in joint ventures and associates	-	-	2	2
Property and equipment	-	-	-	-
Investment property	6,256	-	-	6,256
Loans	-	8	-	8
Financial Investments
Debt securities	30,987	-	-	30,987
Equity securities	74,110	-	-	74,110
Other investments	42,368	-	-	42,368
Reinsurance assets	6,091	12	-	6,103
Deferred tax assets	-	-	-	-
Current tax assets	-	-	-	-
Receivables and other financial assets	-	488	-	488
Deferred acquisition costs and other assets	-	27	-	27
Prepayments and accrued income	-	286	-	286
Cash and cash equivalents	12,000	-	-	12,000
Total	171,812	821	2	172,635
Total %	99.5%	0.5%	-	100.0%
Assets of operations classified as held for sale	8,007	6	-	8,013
Total (excluding assets held for sale)	163,805	815	2	164,622
Total % (excluding assets held for sale)	99.5%	0.5%	-	100.0%
2016 Total	159,107	1,932	89	161,128
2016 Total %	98.7%	1.2%	0.1%	100.0%

Total assets - Participating fund assets 2017	Fair value £m	Amortised cost £m	Equity accounted/ tax assets¹ £m	Total £m
Goodwill and acquired value of in-force business and intangible assets	-	-	-	-
Interests in joint ventures and associates	-	-	1,133	1,133
Property and equipment	168	7	-	175
Investment property	3,966	-	-	3,966
Loans	92	3,248	-	3,340
Financial Investments
Debt securities	95,775	-	-	95,775
Equity securities	15,058	-	-	15,058
Other investments	7,023	-	-	7,023
Reinsurance assets	-	235	-	235
Deferred tax assets	-	-	-	-
Current tax assets	-	-	-	-
Receivables and other financial assets	-	1,484	-	1,484
Deferred acquisition costs and other assets	-	565	-	565
Prepayments and accrued income	-	1,230	-	1,230
Cash and cash equivalents	18,855	-	-	18,855
Total	140,937	6,769	1,133	148,839
Total %	94.7%	4.5%	0.8%	100.0%
Assets of operations classified as held for sale	-	-	-	-
Total (excluding assets held for sale)	140,937	6,769	1,133	148,839
Total % (excluding assets held for sale)	94.7%	4.5%	0.8%	100.0%
2016 Total	149,146	7,273	1,356	157,775
2016 Total %	94.5%	4.6%	0.9%	100.0%

Page 102

D2 - Total assets - Valuation bases/fair value hierarchy continued

Total assets - Shareholder assets 2017	Fair value £m	Amortised cost £m	Equity accounted/ tax assets¹ £m	Total £m
Goodwill and acquired value of in-force business and intangible assets	-	6,798	-	6,798
Interests in joint ventures and associates	-	-	507	507
Property and equipment	221	118	-	339
Investment property	575	-	-	575
Loans	24,306	209	-	24,515
Financial Investments
Debt securities	49,186	-	-	49,186
Equity securities	995	-	-	995
Other investments	3,886	-	-	3,886
Reinsurance assets	3	7,274	-	7,277
Deferred tax assets	-	-	146	146
Current tax assets	-	-	94	94
Receivables and other financial assets	-	6,351	-	6,351
Deferred acquisition costs and other assets	-	5,952	-	5,952
Prepayments and accrued income	-	1,359	-	1,359
Cash and cash equivalents	13,231	-	-	13,231
Total	92,403	28,061	747	121,211
Total %	76.2%	23.2%	0.6%	100.0%
Assets of operations classified as held for sale	1,052	1,804	2	2,858
Total (excluding assets held for sale)	91,351	26,257	745	118,353
Total % (excluding assets held for sale)	77.2%	22.2%	0.6%	100.0%
2016 Total	92,105	28,469	942	121,516
2016 Total %	75.8%	23.4%	0.8%	100.0%

Fair value hierarchy

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

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

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

· Inputs to Level 3 fair values are unobservable inputs for the asset. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such unobservable inputs reflect the assumption the business unit considers that market participants would use in pricing the asset. Examples are investment property, certain private equity investment and private placements.

	Fair value hierarchy
Investment property and financial assets - Total 2017	Level 1 £m	Level 2 £m	Level 3 £m	Sub-total fair value £m	Amortised cost £m	Less: Assets of operations classified as held for sale £m	Balance sheet total £m
Investment property	-	-	10,797	10,797	-	-	10,797
Loans	-	449	23,949	24,398	3,465	(6)	27,857
Debt securities	108,535	51,921	15,492	175,948	-	(1,140)	174,808
Equity securities	89,313	-	850	90,163	-	(195)	89,968
Other investments (including derivatives)	43,556	5,194	4,527	53,277	-	(6,971)	46,306
Assets of operations classified as held for sale	-	-	-	-	-	8,312	8,312
Total	241,404	57,564	55,615	354,583	3,465	-	358,048
Total %	67.4%	16.1%	15.5%	99.0%	1.0%	-	100.0%
Assets of operations classified as held for sale	6,192	27	2,093	8,312	-	-	8,312
Total (excluding assets held for sale)	235,212	57,537	53,522	346,271	3,465	-	349,736
Total % (excluding assets held for sale)	67.3%	16.4%	15.3%	99.0%	1.0%	-	100.0%
2016 Total¹	215,221	73,387	54,032	342,640	3,576	-	346,216
2016 Total %	62.2%	21.2%	15.6%	99.0%	1.0%	-	100.0%

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 D3.3 for further details of this adjustment and the financial statement impact arising.

At 31 December 2017, the proportion of total financial assets classified as Level 1 in the fair value hierarchy increased to 67.4% (2016: 62.2%). The proportion of Level 2 loans and financial assets was 16.1% (2016: 21.2%) and investment properties, loans and financial assets classified as Level 3 was 15.5% (2016: 15.6%).

Page 103

D3 - Analysis of asset quality

The analysis of assets that follows provides a breakdown of information about the assets held by the Group.

D3.1 - Investment property

				2017				2016
	Fair value hierarchy				Fair value hierarchy
Investment property - Total	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Lease to third parties under operating leases	-	-	10,514	10,514	-	-	10,754	10,754
Vacant investment property/held for capital appreciation	-	-	283	283	-	-	62	62
Total	-	-	10,797	10,797	-	-	10,816	10,816
Total %	-	-	100.0%	100.0%	-	-	100.0%	100.0%
Assets of operations classified as held for sale	-	-	-	-	-	-	48	48
Total (excluding assets held for sale)	-	-	10,797	10,797	-	-	10,768	10,768
Total % (excluding assets held for sale)	-	-	100.0%	100.0%	-	-	100.0%	100.0%

				2017				2016
	Fair value hierarchy				Fair value hierarchy
Investment property - Policyholder assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Lease to third parties under operating leases	-	-	6,082	6,082	-	-	6,612	6,612
Vacant investment property/held for capital appreciation	-	-	174	174	-	-	13	13
Total	-	-	6,256	6,256	-	-	6,625	6,625
Total %	-	-	100.0%	100.0%	-	-	100.0%	100.0%
Assets of operations classified as held for sale	-	-	-	-	-	-	-	-
Total (excluding assets held for sale)	-	-	6,256	6,256	-	-	6,625	6,625
Total % (excluding assets held for sale)	-	-	100.0%	100.0%	-	-	100.0%	100.0%

				2017				2016
	Fair value hierarchy				Fair value hierarchy
Investment property - Participating fund assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Lease to third parties under operating leases	-	-	3,871	3,871	-	-	3,616	3,616
Vacant investment property/held for capital appreciation	-	-	95	95	-	-	48	48
Total	-	-	3,966	3,966	-	-	3,664	3,664
Total %	-	-	100.0%	100.0%	-	-	100.0%	100.0%
Assets of operations classified as held for sale	-	-	-	-	-	-	48	48
Total (excluding assets held for sale)	-	-	3,966	3,966	-	-	3,616	3,616
Total % (excluding assets held for sale)	-	-	100.0%	100.0%	-	-	100.0%	100.0%

				2017				2016
	Fair value hierarchy				Fair value hierarchy
Investment property - Shareholder assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Lease to third parties under operating leases	-	-	561	561	-	-	526	526
Vacant investment property/held for capital appreciation	-	-	14	14	-	-	1	1
Total	-	-	575	575	-	-	527	527
Total %	-	-	100.0%	100.0%	-	-	100.0%	100.0%
Assets of operations classified as held for sale	-	-	-	-	-	-	-	-
Total (excluding assets held for sale)	-	-	575	575	-	-	527	527
Total % (excluding assets held for sale)	-	-	100.0%	100.0%	-	-	100.0%	100.0%

Within total investment properties by value 94.7% (2016: 95.1%) are held in policyholder or participating fund assets. Shareholder exposure to investment properties is principally through investments in UK and French commercial property.

Investment properties are stated at their market values as assessed by qualified external independent valuers. The investment properties are valued on an income basis that is based on current rental income plus anticipated uplifts at the next rent review, lease expiry, or break option taking into consideration lease incentives and assuming no further growth in the estimated rental value of the property. This uplift and the discount rate are derived from rates implied by recent market transactions on similar property. These inputs are deemed unobservable.

Within total investment properties by value 97.4% (2016: 99.4%) are leased to third parties under operating leases, with the remainder either being vacant or held for capital appreciation.

Page 104

D3 - Analysis of asset quality continued

D3.2 - Loans

The Group loan portfolio is principally made up of:

· 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;

· Mortgage loans collateralised by property assets;

· Healthcare, Infrastructure & Private Finance Initiative ('PFI') other loans; and

· Other loans, which include loans to brokers and intermediaries.

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

For certain mortgage loans, the Group has taken advantage of the fair value option under IAS 39 to present the mortgages, associated borrowings, other liabilities and derivative financial instruments at fair value, since they are managed together on a fair value basis. The mortgage loans are not traded in active markets. These investments are classified as level 3 as the assumptions used to derive the credit risk, liquidity premium and property risk are not deemed to be market observable.

Loans - Total 2017	United Kingdom £m	Canada £m	Europe £m	Asia £m	Total £m
Policy loans	21	-	738	34	793
Loans and advances to banks	2,524	-	-	-	2,524
Healthcare, Infrastructure & PFI other loans	3,367	-	196	-	3,563
Mortgage loans	20,279	-	1	-	20,280
Other loans	509	180	14	-	703
Total	26,700	180	949	34	27,863
Total %	95.9%	0.6%	3.4%	0.1%	100.0%
Assets of operations classified as held for sale	-	-	6	-	6
Total (excluding assets held for sale)	26,700	180	943	34	27,857
Total % (excluding assets held for sale)	95.9%	0.6%	3.4%	0.1%	100.0%
2016 Total	23,699	170	953	37	24,859
2016 Total %	95.4%	0.7%	3.8%	0.1%	100.0%

Loans - Policyholders assets 2017	United Kingdom £m	Canada £m	Europe £m	Asia £m	Total £m
Policy loans	-	-	-	8	8
Loans and advances to banks	-	-	-	-	-
Healthcare, Infrastructure & PFI other loans	-	-	-	-	-
Mortgage loans	-	-	-	-	-
Other loans	-	-	-	-	-
Total	-	-	-	8	8
Total %	-	-	-	100.0%	100.0%
Assets of operations classified as held for sale	-	-	-	-	-
Total (excluding assets held for sale)	-	-	-	8	8
Total % (excluding assets held for sale)	-	-	-	100.0%	100.0%
2016 Total	1,019	-	-	8	1,027
2016 Total %	99.2%	-	-	0.8%	100.0%

Loans - Participating fund assets 2017	United Kingdom £m	Canada £m	Europe £m	Asia £m	Total £m
Policy loans	16	-	735	24	775
Loans and advances to banks	1,970	-	-	-	1,970
Healthcare, Infrastructure & PFI other loans	-	-	-	-	-
Mortgage loans	90	-	1	-	91
Other loans	504	-	-	-	504
Total	2,580	-	736	24	3,340
Total %	77.3%	-	22.0%	0.7%	100.0%
Assets of operations classified as held for sale	-	-	-	-	-
Total (excluding assets held for sale)	2,580	-	736	24	3,340
Total % (excluding assets held for sale)	77.3%	-	22.0%	0.7%	100.0%
2016 Total	1,613	-	830	27	2,470
2016 Total %	65.3%	-	33.6%	1.1%	100.0%

Page 105

D3 - Analysis of asset quality continued

D3.2 - Loans continued

Loans - Shareholder assets 2017	United Kingdom £m	Canada £m	Europe £m	Asia £m	Total £m
Policy loans	5	-	3	2	10
Loans and advances to banks	554	-	-	-	554
Healthcare, Infrastructure & PFI other loans	3,367	-	196	-	3,563
Mortgage loans	20,189	-	-	-	20,189
Other loans	5	180	14	-	199
Total	24,120	180	213	2	24,515
Total %	98.4%	0.7%	0.9%	-	100.0%
Assets of operations classified as held for sale	-	-	6	-	6
Total (excluding assets held for sale)	24,120	180	207	2	24,509
Total % (excluding assets held for sale)	98.5%	0.7%	0.8%	-	100.0%
2016 Total	21,067	170	123	2	21,362
2016 Total %	98.6%	0.8%	0.6%	-	100.0%

The value of the Group's loan portfolio (including Policyholder, Participating Fund and Shareholder assets) excluding assets held for sale at 31 December 2017 stood at £27.9 billion (2016: £24.8 billion), an increase of £3.1 billion.

The total shareholder exposure to loans was £24.5 billion (2016: £21.4 billion) and represented 87.8% of the total loan portfolio, with the remaining 12.2% mainly held in participating funds (£3.3 billion (2016: £2.4 billion)) with £8 million (2016: £1.0 billion) in policyholder assets.

Of the Group's total loan portfolio excluding assets held for sale (including Policyholder, Participating Fund and Shareholder assets), 73% (2016: 74%) is invested in mortgage loans.

Primary Healthcare, Infrastructure and PFI other loans included within shareholder assets are £3.6 billion (2016: £2.5 billion) and are secured against the income from healthcare and educational premises.

Mortgage loans - Shareholder assets

2017	Total £m
Non-securitised mortgage loans
- Residential (Equity release)	6,799
- Commercial	7,547
- Healthcare, Infrastructure & PFI mortgage loans	3,380
	17,726
Securitised mortgage loans	2,463
Total	20,189
Assets of operations classified as held for sale	-
Total (excluding assets held for sale)	20,189
2016 Total	18,133

The Group's mortgage loan portfolio is mainly focussed in the UK, across various sectors, including residential loans, commercial loans and government supported healthcare loans. Aviva's shareholder exposure to mortgage loans accounts for 82% of total shareholder asset loans. This section focuses on explaining the shareholder risk within these exposures.

United Kingdom

(Non-securitised mortgage loans)

Residential

The UK non-securitised residential mortgage portfolio has a total value at the end of 2017 of £6.8 billion (2016: £5.7 billion).

The movement in the year is due to £0.7 billion of net new loans and £0.1 billion of accrued interest (net of redemptions). Fair value movements were £0.3 billion.

These mortgages are all in the form of equity release, whereby homeowners mortgage their property to release cash equity. Due to the structure of equity release mortgages, whereby interest amounts due are not paid in cash but instead rolled into the amount outstanding, they predominantly have a current Loan to Value ('LTV') of below 70%. The average LTV across the portfolio is 24.6% (2016: 24.5%). The change from prior year reflects the change in portfolio mix following the transfer, as outlined above.

Page 106

D3 - Analysis of asset quality continued

D3.2 - Loans continued

Commercial

Gross exposure by loan to value and arrears is shown in the table below.

Shareholder assets

2017	>120% £m	115-120% £m	110-115% £m	105-110% £m	100-105% £m	95-100% £m	90-95% £m	80-90% £m	70-80% £m	<70% £m	Total £m
Not in arrears	-	-	-	-	-	-	333	50	684	6,480	7,547
0 - 3 months	-	-	-	-	-	-	-	-	-	-	-
3 - 6 months	-	-	-	-	-	-	-	-	-	-	-
6 - 12 months	-	-	-	-	-	-	-	-	-	-	-
> 12 months	-	-	-	-	-	-	-	-	-	-	-
Total	-	-	-	-	-	-	333	50	684	6,480	7,547

Of the £7.5 billion (2016: £6.7 billion) of UK non-securitised commercial mortgage loans in the shareholder fund held by UK Life, £7.1 billion are used to back annuity liabilities and are stated on a fair value basis. The loan exposures for UK Life are calculated on a discounted cash flow basis, and include a risk adjustment through the use of Credit Risk Adjusted Value ('CRAV') methods.

For commercial mortgages loan service collection ratios, a key indicator of mortgage portfolio performance, improved to 2.23x (2016: 1.89x). Loan Interest Cover (LIC), which is defined as the annual net rental income (including rental deposits and less ground rent) divided by the annual loan interest service, also improved to 2.51x (2016: 2.18x). Average mortgage LTV decreased by 2pp compared to 2016 from 58% to 56% (CRAV). There are no loans in arrears included within our shareholder assets (2016: £0.1 million).

Commercial mortgages and Healthcare, Infrastructure & PFI loans are held at fair value on the asset side of the statement of financial position. Insurance liabilities are valued using a discount rate derived from gross yield on assets, with adjustments to allow for risk. £13.9 billion of shareholder loan assets are backing annuity liabilities and comprise of commercial mortgage loans (£7.1 billion), Healthcare, Infrastructure and PFI mortgage loans (£3.4 billion) and Primary Healthcare, Infrastructure and PFI other loans (£3.4 billion). The Group carries a valuation allowance within the liabilities against the risk of default of commercial mortgages, including Healthcare and PFI mortgages, of £0.4 billion which equates to 40 bps at 31 December 2017 (2016: 50 bps). The total valuation allowance held by Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including Healthcare and PFI mortgages are £1.3 billion (2016: £1.3 billion) over the remaining term of the UK Life corporate bond and mortgage portfolio.

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

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

Healthcare

Primary Healthcare, Infrastructure and PFI mortgage loans included within shareholder assets of £3.4 billion (2016: £3.3 billion) are secured against primary health care premises (including General Practitioner surgeries), education, social housing and emergency services related premises. For all such loans, Government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not Government guaranteed, the nature of these businesses and premises provides considerable comfort of an ongoing business model and low risk of default.

On a market value basis, we estimate the average LTV of these mortgages to be 76% (2016: 74%), although as explained above, we do not consider this to be a key risk indicator. Income support from the Government bodies and the social need for these premises provide sustained income stability. Aviva therefore considers these loans to be lower risk relative to other mortgage loans.

Securitised mortgage loans

Securitised residential mortgages held are predominantly issued through vehicles in the UK.

As at 31 December 2017, the Group has £2.5 billion (2016: £2.4 billion) securitised mortgage loans. Funding for the securitised residential mortgage assets was obtained by issuing loan note securities. Of these loan notes approximately £231 million (2016: £217 million) are held by Group companies. The remainder is held by third parties external to Aviva. As any cash shortfall arising once all mortgages have redeemed is borne by the loan note holders, the majority of the credit risk of these mortgages is borne by third parties.

Page 107

D3 - Analysis of asset quality continued

D3.3 - Financial investments

				2017				2016
Financial Investments - Total	Cost/ amortised cost £m	Unrealised gains £m	Impairment and unrealised losses £m	Fair value £m	Cost/ amortised cost £m	Unrealised gains £m	Impairment and unrealised losses £m	Fair value £m
Debt securities	162,092	20,244	(6,388)	175,948	172,007	16,014	(1,313)	186,708
Equity securities	75,060	16,819	(1,716)	90,163	60,194	14,152	(1,640)	72,706
Other investments	37,570	15,930	(223)	53,277	42,341	8,491	295	51,127
Total	274,722	52,993	(8,327)	319,388	274,542	38,657	(2,658)	310,541
Assets of operations classified as held for sale	7,075	1,245	(14)	8,306	9,872	865	(31)	10,706
Total (excluding assets held for sale)	267,647	51,748	(8,313)	311,082	264,670	37,792	(2,627)	299,835

Aviva holds large quantities of debt securities in the form of high quality bonds, primarily to match our liability to make guaranteed payments to policyholders. Some credit risk is taken, partly to increase returns to policyholders and partly to optimise the risk/return profile for shareholders. The risks are consistent with the products we offer and the related investment mandates, and are in line with our risk appetite.

The Group also holds equities, the majority of which are held in participating funds and policyholder funds, where they form an integral part of the investment expectations of policyholders and follow well-defined investment mandates. Some equities are also held in shareholder funds. The vast majority of equity investments are valued at quoted market prices and therefore classified as Level 1. Refer to D3.3.2 for further analysis of equities.

Other investments include investments such as unit trusts, derivative financial instruments and deposits with credit institutions. For further analysis, see D3.3.3.

Following a review of the Group's investment classifications, comparative amounts have been amended from those previously reported, reflecting the fact that equity and debt securities held indirectly through majority owned investment funds in the UK managed by third parties, which in 2016 were presented as unit trusts and other investment vehicles within other investments, are now presented as debt and equity securities. The effect of this change is to increase equity and debt securities by £3,434 million and £3,694 million respectively and decrease unit trusts and other investment vehicles within other investments by £7,128 million.

In addition, assets classified as held for sale of £10,706 million have been revised from available for sale to other than trading.

Page 108

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.1 - Debt securities

	Fair value hierarchy
Debt securities - 2017	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
UK Government	27,743	2,276	242	30,261
Non-UK government	37,948	11,283	3,510	52,741
Europe	30,991	6,368	2,966	40,325
North America	1,900	2,882	441	5,223
Asia Pacific & Other	5,057	2,033	103	7,193
Corporate bonds - Public utilities	4,383	6,206	540	11,129
Corporate convertible bonds	9	-	-	9
Other Corporate bonds	34,349	26,626	9,006	69,981
Other	4,103	5,530	2,194	11,827
Total	108,535	51,921	15,492	175,948
Total %	61.7%	29.5%	8.8%	100.0%
Assets of operations classified as held for sale	764	21	355	1,140
Total (excluding assets held for sale)	107,771	51,900	15,137	174,808
Total % (excluding assets held for sale)	61.6%	29.7%	8.7%	100.0%
2016 Total¹	102,724	66,668	17,316	186,708
2016 Total %	55.0%	35.7%	9.3%	100.0%

	Fair value hierarchy
Debt securities - Policyholders assets 2017	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
UK Government	9,172	2	(1)	9,173
Non-UK government	4,983	726	6	5,715
Europe	1,453	385	1	1,839
North America	1,168	294	4	1,466
Asia Pacific & Other	2,362	47	1	2,410
Corporate bonds - Public utilities	810	393	5	1,208
Corporate convertible bonds	-	-	-	-
Other Corporate bonds	10,123	1,863	556	12,542
Other	1,289	1,060	-	2,349
Total	26,377	4,044	566	30,987
Total %	85.1%	13.1%	1.8%	100.0%
Assets of operations classified as held for sale	-	11	355	366
Total (excluding assets held for sale)	26,377	4,033	211	30,621
Total % (excluding assets held for sale)	86.1%	13.2%	0.7%	100.0%
2016 Total¹	17,521	11,193	803	29,517
2016 Total %	59.4%	37.9%	2.7%	100.0%

1 Following a review of the Group's investment classification, 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 D3.3 for further details of this adjustment and the financial statement impact arising.

Page 109

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.1 - Debt securities continued

	Fair value hierarchy
Debt securities - Participating fund assets 2017	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
UK Government	9,269	975	77	10,321
Non-UK government	29,380	4,103	1,892	35,375
Europe	26,085	2,651	1,847	30,583
North America	691	22	1	714
Asia Pacific & Other	2,604	1,430	44	4,078
Corporate bonds - Public utilities	3,419	1,128	17	4,564
Corporate convertible bonds	9	-	-	9
Other Corporate bonds	23,027	9,544	5,792	38,363
Other	2,609	2,689	1,845	7,143
Total	67,713	18,439	9,623	95,775
Total %	70.7%	19.3%	10.0%	100.0%
Assets of operations classified as held for sale	-	-	-	-
Total (excluding assets held for sale)	67,713	18,439	9,623	95,775
Total % (excluding assets held for sale)	70.7%	19.3%	10.0%	100.0%
2016 Total¹	70,161	23,256	10,280	103,697
2016 Total %	67.7%	22.4%	9.9%	100.0%

	Fair value hierarchy
Debt securities - Shareholder assets 2017	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
UK Government	9,302	1,299	166	10,767
Non-UK government	3,585	6,454	1,612	11,651
Europe	3,453	3,332	1,118	7,903
North America	41	2,566	436	3,043
Asia Pacific & Other	91	556	58	705
Corporate bonds - Public utilities	154	4,685	518	5,357
Corporate convertible bonds	-	-	-	-
Other Corporate bonds	1,199	15,219	2,658	19,076
Other	205	1,781	349	2,335
Total	14,445	29,438	5,303	49,186
Total %	29.3%	59.9%	10.8%	100.0%
Assets of operations classified as held for sale	764	10	-	774
Total (excluding assets held for sale)	13,681	29,428	5,303	48,412
Total % (excluding assets held for sale)	28.2%	60.8%	11.0%	100.0%
2016 Total¹	15,042	32,219	6,233	53,494
2016 Total %	28.1%	60.2%	11.7%	100.0%

Within the shareholder assets 29.3% (2016: 28.1%) of exposure to debt securities is based on quoted prices in an active market and are therefore classified as fair value level 1.

Within the shareholder assets 59.9% (2016: 60.2%) of exposure to debt securities is based on inputs other than quoted prices and are observable for the asset or liability, either directly or indirectly and are therefore classified as fair value level 2.

Within the shareholder assets 10.8% (2016: 11.7%) of exposure to debt securities is fair valued using models with significant unobservable market parameters (classified as fair value level 3). Where estimates are used, these are based on a combination of independent third party evidence and internally developed models, calibrated to market observable data where possible.

Page 110

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.1 - Debt securities continued

	External ratings
Debt securities - Total 2017	AAA £m	AA £m	A £m	BBB £m	Less than BBB £m	Non-rated £m	Total £m
Government
UK Government	164	29,756	75	-	138	109	30,242
UK local authorities	-	1	-	-	1	17	19
Non-UK Government	10,757	20,602	6,157	12,443	1,689	1,093	52,741
	10,921	50,359	6,232	12,443	1,828	1,219	83,002
Corporate
Public utilities	2	175	4,165	5,517	670	600	11,129
Convertibles and bonds with warrants	-	-	-	9	-	-	9
Other corporate bonds	6,944	5,640	22,455	20,372	7,688	6,882	69,981
	6,946	5,815	26,620	25,898	8,358	7,482	81,119
Certificates of deposits	-	377	557	-	-	92	1,026
Structured
RMBS² non-agency ALT A	-	-	-	-	-	-	-
RMBS² non-agency prime	12	27	93	1	59	-	192
RMBS² agency	53	-	-	-	-	-	53
	65	27	93	1	59	-	245
CMBS³	317	35	289	-	1	1	643
ABS⁴	38	465	469	101	81	-	1,154
CDO (including CLO)⁵	377	-	-	-	-	-	377
ABCP⁶	-	-	-	-	-	-	-
	732	500	758	101	82	1	2,174
Wrapped credit	-	18	485	81	43	12	639
Other	54	144	447	2,423	3,370	1,305	7,743
Total	18,718	57,240	35,192	40,947	13,740	10,111	175,948
Total %	10.6%	32.5%	20.0%	23.3%	7.8%	5.8%	100.0%
Assets of operations classified as held for sale	68	25	8	1,017	11	11	1,140
Total (excluding assets held for sale)	18,650	57,215	35,184	39,930	13,729	10,100	174,808
Total % (excluding assets held for sale)	10.7%	32.7%	20.1%	22.8%	7.9%	5.8%	100.0%
2016 Total¹	22,030	62,495	35,403	44,660	11,163	10,957	186,708
2016 Total %	11.7%	33.5%	19.0%	23.9%	6.0%	5.9%	100.0%

2 RMBS - Residential Mortgage Backed Security

3 CMBS - Commercial Mortgage Backed Security

4 ABS - Asset Backed Security

5 CDO - Collateralised Debt Obligation, CLO - Collateralised Loan Obligation

6 ABCP - Asset Backed Commercial Paper

Page 111

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.1 - Debt securities continued

	External ratings
Debt securities - Policyholders assets 2017	AAA £m	AA £m	A £m	BBB £m	Less than BBB £m	Non-rated £m	Total £m
Government
UK Government	164	8,871	-	-	138	-	9,173
UK local authorities	-	-	-	-	-	-	-
Non-UK Government	1,724	166	1,557	1,431	603	234	5,715
	1,888	9,037	1,557	1,431	741	234	14,888
Corporate
Public utilities	-	17	431	392	363	5	1,208
Convertibles and bonds with warrants	-	-	-	-	-	-	-
Other corporate bonds	436	433	3,867	2,462	3,325	2,019	12,542
	436	450	4,298	2,854	3,688	2,024	13,750
Certificates of deposits	-	377	557	-	-	13	947
Structured
RMBS² non-agency ALT A	-	-	-	-	-	-	-
RMBS² non-agency prime	-	2	12	-	-	-	14
RMBS² agency	-	-	-	-	-	-	-
	-	2	12	-	-	-	14
CMBS³	4	10	23	-	-	-	37
ABS⁴	-	-	35	2	22	-	59
CDO (including CLO)⁵	-	-	-	-	-	-	-
ABCP⁶	-	-	-	-	-	-	-
	4	10	58	2	22	-	96
Wrapped credit	-	-	-	4	-	-	4
Other	9	24	75	401	561	218	1,288
Total	2,337	9,900	6,557	4,692	5,012	2,489	30,987
Total %	7.6%	31.9%	21.2%	15.1%	16.2%	8.0%	100.0%
Assets of operations classified as held for sale	1	-	2	346	6	11	366
Total (excluding assets held for sale)	2,336	9,900	6,555	4,346	5,006	2,478	30,621
Total % (excluding assets held for sale)	7.7%	32.3%	21.4%	14.2%	16.3%	8.1%	100.0%
2016 Total¹	1,661	8,946	5,011	6,028	4,002	3,869	29,517
2016 Total %	5.6%	30.3%	17.0%	20.4%	13.6%	13.1%	100.0%

2 RMBS - Residential Mortgage Backed Security

3 CMBS - Commercial Mortgage Backed Security

4 ABS - Asset Backed Security

5 CDO - Collateralised Debt Obligation, CLO - Collateralised Loan Obligation

6 ABCP - Asset Backed Commercial Paper

Page 112

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.1 - Debt securities continued

	External ratings
Debt securities - Participating fund assets 2017	AAA £m	AA £m	A £m	BBB £m	Less than BBB £m	Non-rated £m	Total £m
Government
UK Government	-	10,285	1	-	-	33	10,319
UK local authorities	-	1	-	-	1	-	2
Non-UK Government	4,350	16,511	3,205	9,915	1,077	317	35,375
	4,350	26,797	3,206	9,915	1,078	350	45,696
Corporate
Public utilities	2	61	1,241	2,799	277	184	4,564
Convertibles and bonds with warrants	-	-	-	9	-	-	9
Other corporate bonds	4,480	2,854	10,531	12,928	4,167	3,403	38,363
	4,482	2,915	11,772	15,736	4,444	3,587	42,936
Certificates of deposits	-	-	-	-	-	-	-
Structured
RMBS² non-agency ALT A	-	-	-	-	-	-	-
RMBS² non-agency prime	11	15	16	-	10	-	52
RMBS² agency	-	-	-	-	-	-	-
	11	15	16	-	10	-	52
CMBS³	80	9	117	-	1	-	207
ABS⁴	-	91	160	59	16	-	326
CDO (including CLO)⁵	377	-	-	-	-	-	377
ABCP⁶	-	-	-	-	-	-	-
	457	100	277	59	17	-	910
Wrapped credit	-	5	81	10	-	-	96
Other	42	114	351	1,898	2,653	1,027	6,085
Total	9,342	29,946	15,703	27,618	8,202	4,964	95,775
Total %	9.7%	31.3%	16.4%	28.8%	8.6%	5.2%	100.0%
Assets of operations classified as held for sale	-	-	-	-	-	-	-
Total (excluding assets held for sale)	9,342	29,946	15,703	27,618	8,202	4,964	95,775
Total % (excluding assets held for sale)	9.7%	31.3%	16.4%	28.8%	8.6%	5.2%	100.0%
2016 Total¹	13,070	33,782	16,508	29,533	6,586	4,218	103,697
2016 Total %	12.5%	32.6%	15.9%	28.5%	6.4%	4.1%	100.0%

2 RMBS - Residential Mortgage Backed Security

3 CMBS - Commercial Mortgage Backed Security

4 ABS - Asset Backed Security

5 CDO - Collateralised Debt Obligation, CLO - Collateralised Loan Obligation

6 ABCP - Asset Backed Commercial Paper

Page 113

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.1 - Debt securities continued

	External ratings
Debt securities - Shareholder assets 2017	AAA £m	AA £m	A £m	BBB £m	Less than BBB £m	Non-rated £m	Total £m
Government
UK Government	-	10,600	74	-	-	76	10,750
UK local authorities	-	-	-	-	-	17	17
Non-UK Government	4,683	3,925	1,395	1,097	9	542	11,651
	4,683	14,525	1,469	1,097	9	635	22,418
Corporate
Public utilities	-	97	2,493	2,326	30	411	5,357
Convertibles and bonds with warrants	-	-	-	-	-	-	-
Other corporate bonds	2,028	2,353	8,057	4,982	196	1,460	19,076
	2,028	2,450	10,550	7,308	226	1,871	24,433
Certificates of deposits	-	-	-	-	-	79	79
Structured
RMBS² non-agency ALT A	-	-	-	-	-	-	-
RMBS² non-agency prime	1	10	65	1	49	-	126
RMBS² agency	53	-	-	-	-	-	53
	54	10	65	1	49	-	179
CMBS³	233	16	149	-	-	1	399
ABS⁴	38	374	274	40	43	-	769
CDO (including CLO)⁵	-	-	-	-	-	-	-
ABCP⁶	-	-	-	-	-	-	-
	271	390	423	40	43	1	1,168
Wrapped credit	-	13	404	67	43	12	539
Other	3	6	21	124	156	60	370
Total	7,039	17,394	12,932	8,637	526	2,658	49,186
Total %	14.2%	35.4%	26.3%	17.6%	1.1%	5.4%	100.0%
Assets of operations classified as held for sale	67	25	6	671	5	-	774
Total (excluding assets held for sale)	6,972	17,369	12,926	7,966	521	2,658	48,412
Total % (excluding assets held for sale)	14.3%	35.9%	26.7%	16.5%	1.1%	5.5%	100.0%
2016 Total¹	7,299	19,767	13,884	9,099	575	2,870	53,494
2016 Total %	13.7%	36.8%	26.0%	17.0%	1.1%	5.4%	100.0%

2 RMBS - Residential Mortgage Backed Security

3 CMBS - Commercial Mortgage Backed Security

4 ABS - Asset Backed Security

5 CDO - Collateralised Debt Obligation, CLO - Collateralised Loan Obligation

6 ABCP - Asset Backed Commercial Paper

Within shareholder assets debt securities, 46% of exposure is in government holdings (2016: 43%). Our corporate debt securities portfolio represents 50% of total shareholder debt securities (2016: 52%). At 31 December 2017, the proportion of our shareholder debt securities that are investment grade is 93.5% (2016: 93.5%). The remaining 6.5% of shareholder debt securities that do not have an external rating of BBB or higher can be split as follows:

· 1.1% are debt securities that are rated as below investment grade;

· 5.4% are not rated by the major rating agencies.

The majority of non-rated corporate bonds are held by our businesses in the UK. Of the securities not rated by an external agency most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £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.

The Group has limited shareholder exposure to CDOs, CLOs and 'Sub-prime' debt securities.

Out of the total asset backed securities (ABS), £713 million (2016: £948 million) are held by the UK Life business. The Group's shareholder holdings in ABS are investment grade of 94.1% (2016: 95.7%). ABS that either have a rating below BBB or are not rated, represent approximately 0.1% of shareholder exposure to debt securities (2016: 0.1%).

Page 114

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.2 - Equity securities

				2017				2016¹
	Fair value hierarchy				Fair value hierarchy
Equity securities - Total assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Public utilities	2,402	-	-	2,402	2,188	-	-	2,188
Banks, trusts and insurance companies	24,088	-	208	24,296	16,162	-	190	16,352
Industrial miscellaneous and all other	62,579	-	642	63,221	53,138	-	723	53,861
Non-redeemable preferred shares	244	-	-	244	305	-	-	305
Total	89,313	-	850	90,163	71,793	-	913	72,706
Total %	99.1%	-	0.9%	100.0%	98.7%	-	1.3%	100.0%
Assets of operations classified as held for sale	121	-	74	195	664	-	-	664
Total (excluding assets held for sale)	89,192	-	776	89,968	71,129	-	913	72,042
Total % (excluding assets held for sale)	99.1%	-	0.9%	100.0%	98.7%	-	1.3%	100.0%

				2017				2016¹
	Fair value hierarchy				Fair value hierarchy
Equity securities - Policyholder assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Public utilities	2,042	-	-	2,042	1,767	-	-	1,767
Banks, trusts and insurance companies	19,784	-	13	19,797	12,322	-	5	12,327
Industrial miscellaneous and all other	52,179	-	64	52,243	41,447	-	19	41,466
Non-redeemable preferred shares	28	-	-	28	91	-	-	91
Total	74,033	-	77	74,110	55,627	-	24	55,651
Total %	99.9%	-	0.1%	100.0%	100.0%	-	-	100.0%
Assets of operations classified as held for sale	115	-	74	189	8	-	-	8
Total (excluding assets held for sale)	73,918	-	3	73,921	55,619	-	24	55,643
Total % (excluding assets held for sale)	100.0%	-	-	100.0%	100.0%	-	-	100.0%

				2017				2016¹
	Fair value hierarchy				Fair value hierarchy
Equity securities - Participating fund assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Public utilities	356	-	-	356	415	-	-	415
Banks, trusts and insurance companies	4,270	-	89	4,359	3,715	-	104	3,819
Industrial miscellaneous and all other	9,776	-	563	10,339	11,585	-	689	12,274
Non-redeemable preferred shares	4	-	-	4	8	-	-	8
Total	14,406	-	652	15,058	15,723	-	793	16,516
Total %	95.7%	-	4.3%	100.0%	95.2%	-	4.8%	100.0%
Assets of operations classified as held for sale	-	-	-	-	656	-	-	656
Total (excluding assets held for sale)	14,406	-	652	15,058	15,067	-	793	15,860
Total % (excluding assets held for sale)	95.7%	-	4.3%	100.0%	95.0%	-	5.0%	100.0%

				2017				2016¹
	Fair value hierarchy				Fair value hierarchy
Equity securities - Shareholder assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Public utilities	4	-	-	4	6	-	-	6
Banks, trusts and insurance companies	34	-	106	140	125	-	81	206
Industrial miscellaneous and all other	624	-	15	639	106	-	15	121
Non-redeemable preferred shares	212	-	-	212	206	-	-	206
Total	874	-	121	995	443	-	96	539
Total %	87.8%	-	12.2%	100.0%	82.2%	-	17.8%	100.0%
Assets of operations classified as held for sale	6	-	-	6	-	-	-	-
Total (excluding assets held for sale)	868	-	121	989	443	-	96	539
Total % (excluding assets held for sale)	87.8%	-	12.2%	100.0%	82.2%	-	17.8%	100.0%

Within our total shareholder exposure to equity securities 87.8% is based on quoted prices in an active market and as such is classified as level 1 (2016: 82.2%).

Page 115

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.3 - Other investments

				2017				2016¹
	Fair value hierarchy				Fair value hierarchy
Other investments - Total	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Unit trusts and other investment vehicles	42,518	437	2,711	45,666	39,348	956	2,758	43,062
Derivative financial instruments	370	4,730	407	5,507	596	5,376	147	6,119
Deposits with credit institutions	161	-	-	161	325	-	-	325
Minority holdings in property management undertakings	-	27	1,408	1,435	-	27	1,159	1,186
Other	507	-	1	508	435	-	-	435
Total	43,556	5,194	4,527	53,277	40,704	6,359	4,064	51,127
Total %	81.8%	9.7%	8.5%	100.0%	79.6%	12.4%	8.0%	100.0%
Assets of operations classified as held for sale	5,307	-	1,664	6,971	2,122	119	63	2,304
Total (excluding assets held for sale)	38,249	5,194	2,863	46,306	38,582	6,240	4,001	48,823
Total % (excluding assets held for sale)	82.6%	11.2%	6.2%	100.0%	79.0%	12.8%	8.2%	100.0%

				2017				2016¹
	Fair value hierarchy				Fair value hierarchy
Other investments - Policyholder assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Unit trusts and other investment vehicles	39,550	260	1,670	41,480	36,548	853	1,692	39,093
Derivative financial instruments	108	13	-	121	63	32	-	95
Deposits with credit institutions	147	-	-	147	294	-	-	294
Minority holdings in property management undertakings	-	-	183	183	-	-	172	172
Other	437	-	-	437	427	-	-	427
Total	40,242	273	1,853	42,368	37,332	885	1,864	40,081
Total %	95.0%	0.6%	4.4%	100.0%	93.1%	2.2%	4.7%	100.0%
Assets of operations classified as held for sale	5,231	-	1,660	6,891	1,876	85	39	2,000
Total (excluding assets held for sale)	35,011	273	193	35,477	35,456	800	1,825	38,081
Total % (excluding assets held for sale)	98.7%	0.8%	0.5%	100.0%	93.1%	2.1%	4.8%	100.0%

				2017				2016¹
	Fair value hierarchy				Fair value hierarchy
Other investments - Participating fund assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Unit trusts and other investment vehicles	1,697	177	996	2,870	1,107	94	1,032	2,233
Derivative financial instruments	216	2,873	34	3,123	492	3,508	102	4,102
Deposits with credit institutions	10	-	-	10	28	-	-	28
Minority holdings in property management undertakings	-	-	1,020	1,020	-	-	825	825
Other	-	-	-	-	-	-	-	-
Total	1,923	3,050	2,050	7,023	1,627	3,602	1,959	7,188
Total %	27.4%	43.4%	29.2%	100.0%	22.6%	50.1%	27.3%	100.0%
Assets of operations classified as held for sale	-	-	-	-	246	34	24	304
Total (excluding assets held for sale)	1,923	3,050	2,050	7,023	1,381	3,568	1,935	6,884
Total % (excluding assets held for sale)	27.4%	43.4%	29.2%	100.0%	20.1%	51.8%	28.1%	100.0%

				2017				2016¹
	Fair value hierarchy				Fair value hierarchy
Other investments - Shareholders assets	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Unit trusts and other investment vehicles	1,271	-	45	1,316	1,693	9	34	1,736
Derivative financial instruments	46	1,844	373	2,263	41	1,836	45	1,922
Deposits with credit institutions	4	-	-	4	3	-	-	3
Minority holdings in property management undertakings	-	27	205	232	-	27	162	189
Other	70	-	1	71	8	-	-	8
Total	1,391	1,871	624	3,886	1,745	1,872	241	3,858
Total %	35.8%	48.1%	16.1%	100.0%	45.2%	48.5%	6.3%	100.0%
Assets of operations classified as held for sale	76	-	4	80	-	-	-	-
Total (excluding assets held for sale)	1,315	1,871	620	3,806	1,745	1,872	241	3,858
Total % (excluding assets held for sale)	34.5%	49.2%	16.3%	100.0%	45.2%	48.5%	6.3%	100.0%

Page 116

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.3 - Other investments continued

The unit trusts and other investment vehicles invest in a variety of assets, which can include cash equivalents, debt, equity and property securities. Total shareholder other investments classified as level 2 decreased during 2017 to 48.1% (2016: 48.5%), primarily due a decrease in Unit trusts and other investment vehicles. Total shareholder other investments classified as level 3 have increased during 2017 to 16.1% (2016: 6.3%), primarily due to disposals in minority holdings in property management undertakings.

In total 83.9% (2016: 93.7%) of total shareholder other investments are classified as level 1 or 2 in the fair value hierarchy.

D3.3.4 - Available for sale investments - Impairments and duration and amount of unrealised losses

The impairment expense during 2017 relating to AFS debt securities and other investments was £nil (2016: £nil) and £nil (2016: £nil) respectively.

Total unrealised losses on AFS debt securities, equity securities and other investments at 31 December 2017 was £1 million (2016: £2 million), £nil (2016: £nil) and £nil (2016: £nil) respectively.

	0 - 6 months		7 - 12 months		more than 12 months		Total
2017	Fair value¹ £m	Gross unrealised £m	Fair value¹ £m	Gross unrealised £m	Fair value¹ £m	Gross unrealised £m	Fair value¹ £m	Gross unrealised £m
Less than 20% loss position:
Debt securities	-	-	3	-	47	(1)	50	(1)
Equity securities	-	-	-	-	-	-	-	-
Other investments	-	-	-	-	-	-	-	-
	-	-	3	-	47	(1)	50	(1)
20%-50% loss position:
Debt securities	-	-	-	-	-	-	-	-
Equity securities	-	-	-	-	-	-	-	-
Other investments	-	-	-	-	-	-	-	-
	-	-	-	-	-	-	-	-
Greater than 50% loss position:
Debt securities	-	-	-	-	-	-	-	-
Equity securities	-	-	-	-	-	-	-	-
Other investments	-	-	-	-	-	-	-	-
	-	-	-	-	-	-	-	-
Total
Debt securities	-	-	3	-	47	(1)	50	(1)
Equity securities	-	-	-	-	-	-	-	-
Other investments	-	-	-	-	-	-	-	-
	-	-	3	-	47	(1)	50	(1)
Assets of operations classified as held for sale	-	-	-	-	-	-	-	-
Total (excluding assets held for sale)	-	-	3	-	47	(1)	50	(1)

1 Only includes AFS securities that are in unrealised loss positions.

	0 - 6 months		7 - 12 months		more than 12 months		Total
2016	Gross unrealised £m	Fair value¹ £m	Gross unrealised £m	Fair value¹ £m	Gross unrealised £m	Fair value¹ £m	Gross unrealised £m	Fair value¹ £m
Less than 20% loss position:
Debt securities	-	-	6	-	73	(2)	79	(2)
Equity securities	-	-	-	-	-	-	-	-
Other investments	-	-	-	-	-	-	-	-
	-	-	6	-	73	(2)	79	(2)
20%-50% loss position:
Debt securities	-	-	-	-	-	-	-	-
Equity securities	-	-	-	-	-	-	-	-
Other investments	-	-	-	-	-	-	-	-
	-	-	-	-	-	-	-	-
Greater than 50% loss position:
Debt securities	-	-	-	-	-	-	-	-
Equity securities	-	-	-	-	-	-	-	-
Other investments	-	-	-	-	-	-	-	-
	-	-	-	-	-	-	-	-
Total
Debt securities	-	-	6	-	73	(2)	79	(2)
Equity securities	-	-	-	-	-	-	-	-
Other investments	-	-	-	-	-	-	-	-
	-	-	6	-	73	(2)	79	(2)
Assets of operations classified as held for sale	-	-	-	-	-	-	-	-
Total (excluding assets held for sale)	-	-	6	-	73	(2)	79	(2)

1 Only includes AFS securities that are in unrealised loss positions.

Page 117

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.5 - Exposures to peripheral European countries

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

Net of non-controlling interests, our direct shareholder and participating fund asset exposure to the government (and local authorities and agencies) of Italy is £6.6 billion (2016: £5.8 billion).

Direct sovereign exposures to Greece, Ireland, Portugal, Italy and Spain (net of non-controlling interests, excluding policyholder assets)

		Participating		Shareholder		Total
	2017 £bn	2016 £bn	2017 £bn	2016 £bn	2017 £bn	2016 £bn
Greece	-	-	-	-	-	-
Ireland	0.7	0.7	0.1	0.1	0.8	0.8
Portugal	0.1	0.1	-	-	0.1	0.1
Italy	6.0	5.4	0.6	0.4	6.6	5.8
Spain	0.3	1.0	-	0.4	0.3	1.4
Total Greece, Ireland, Portugal, Italy and Spain	7.1	7.2	0.7	0.9	7.8	8.1

Direct sovereign exposures to Greece, Ireland, Portugal, Italy and Spain (gross of non-controlling interests, excluding policyholder assets)

		Participating		Shareholder		Total
	2017 £bn	2016 £bn	2017 £bn	2016 £bn	2017 £bn	2016 £bn
Greece	-	-	-	-	-	-
Ireland	0.7	0.7	0.1	0.1	0.8	0.8
Portugal	0.1	0.1	-	-	0.1	0.1
Italy	8.2	7.5	0.8	0.5	9.0	8.0
Spain	0.3	1.4	0.2	0.7	0.5	2.1
Total Greece, Ireland, Portugal, Italy and Spain	9.3	9.7	1.1	1.3	10.4	11.0

D3.3.6 - Non-UK Government debt securities (gross of non-controlling interests)

		Policyholder		Participating		Shareholder		Total
Non-UK Government Debt Securities	2017 £m	2016¹ £m	2017 £m	2016¹ £m	2017 £m	2016¹ £m	2017 £m	2016¹ £m
Austria	5	11	550	715	127	138	682	864
Belgium	22	21	967	1,273	314	357	1,303	1,651
France	133	115	13,454	13,285	2,093	1,859	15,680	15,259
Germany	127	142	1,437	1,629	615	606	2,179	2,377
Greece	-	-	-	-	-	-	-	-
Ireland	3	3	679	662	84	130	766	795
Italy	183	223	8,223	7,500	823	556	9,229	8,279
Netherlands	43	47	88	976	322	329	453	1,352
Poland	845	807	790	769	598	384	2,233	1,960
Portugal	2	2	136	118	-	-	138	120
Spain	87	88	314	1,386	233	659	634	2,133
European Supranational debt	213	174	1,841	2,404	1,777	1,821	3,831	4,399
Other European countries	176	272	2,104	1,029	917	642	3,197	1,943
Europe	1,839	1,905	30,583	31,746	7,903	7,481	40,325	41,132
Canada	23	16	53	174	2,512	2,397	2,588	2,587
United States	1,443	1,424	661	871	531	1,022	2,635	3,317
North America	1,466	1,440	714	1,045	3,043	3,419	5,223	5,904
Singapore	14	2	558	904	297	330	869	1,236
Other	2,396	2,634	3,520	2,819	408	143	6,324	5,596
Asia Pacific and other	2,410	2,636	4,078	3,723	705	473	7,193	6,832
Total	5,715	5,981	35,375	36,514	11,651	11,373	52,741	53,868
Assets of operations classified as held for sale	1	-	-	2,325	531	-	532	2,325
Total (excluding assets held for sale)	5,714	5,981	35,375	34,189	11,120	11,373	52,209	51,543

At 31 December 2017, the Group's total government (non-UK) debt securities stood at £52.7 billion (2016: £53.9 billion). The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds.

Our direct shareholder asset exposure to government (non-UK) debt securities amounts to £11.7 billion (2016: £11.4 billion). The primary exposures, relative to total shareholder (non-UK) government debt exposure, are to Canadian (22%), French (18%), Italian (7%), German (5%), Polish (5%), and US (5%) government debt securities.

Page 118

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.6 - Non-UK Government debt securities (gross of non-controlling interests) continued

The participating funds exposure to (non-UK) government debt amounts to £35.4 billion (2016: £36.5 billion). The primary exposures, relative to total (non-UK) government debt exposures included within our participating funds, are to the (non-UK) government debt securities of France (38%), Italy (23%), Germany (4%), Belgium (3%), Poland (2%), and Ireland (2%).

D3.3.7 - Exposure to worldwide bank debt securities

Direct shareholder and participating fund assets exposures to worldwide bank debt securities (net of non-controlling interests, excluding policyholder assets)

	Shareholder assets			Participating fund assets
2017	Total senior debt £bn	Total subordinated debt £bn	Total debt £bn	Total senior debt £bn	Total subordinated debt £bn	Total debt £bn
Australia	0.2	-	0.2	0.6	0.2	0.8
Denmark	-	-	-	0.6	-	0.6
France	0.5	0.1	0.6	2.6	0.6	3.2
Germany	-	-	-	0.5	0.3	0.8
Ireland	-	-	-	-	-	-
Italy	-	-	-	0.1	-	0.1
Netherlands	0.4	0.2	0.6	1.4	0.2	1.6
Spain	0.4	-	0.4	0.3	0.1	0.4
Sweden	0.2	-	0.2	0.4	0.1	0.5
Switzerland	-	-	-	1.3	-	1.3
United Kingdom	1.3	0.4	1.7	1.4	0.8	2.2
United States	1.0	0.2	1.2	1.7	0.1	1.8
Other	0.4	0.1	0.5	1.2	0.1	1.3
Total	4.4	1.0	5.4	12.1	2.5	14.6
Assets of operations classified as held for sale	-	-	-	-	-	-
Total (excluding assets held for sale)	4.4	1.0	5.4	12.1	2.5	14.6
2016 Total	5.4	1.2	6.6	14.8	3.1	17.9

Net of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £5.4 billion (2016: £6.6 billion). The majority of our holding (81%) is in senior debt. The primary exposures are to UK (31%), US (22%), Dutch (11%), and French (11%) banks.

Net of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £14.6 billion (2016: £17.9 billion). The majority of the exposure (83%) is in senior debt. Participating funds are most exposed to French (22%), UK (15%) and US (12%) banks.

Direct shareholder and participating fund assets exposures to worldwide bank debt securities (gross of non-controlling interests, excluding policyholder assets)

	Shareholder assets			Participating fund assets
2017	Total senior debt £bn	Total subordinated debt £bn	Total debt £bn	Total senior debt £bn	Total subordinated debt £bn	Total debt £bn
Australia	0.2	-	0.2	0.6	0.2	0.8
Denmark	-	-	-	0.6	-	0.6
France	0.5	0.1	0.6	2.7	0.6	3.3
Germany	-	-	-	0.6	0.3	0.9
Ireland	-	-	-	-	-	-
Italy	-	-	-	0.2	-	0.2
Netherlands	0.4	0.2	0.6	1.4	0.2	1.6
Spain	0.4	-	0.4	0.3	0.1	0.4
Sweden	0.2	-	0.2	0.4	0.1	0.5
Switzerland	-	-	-	1.3	-	1.3
United Kingdom	1.3	0.4	1.7	1.5	0.8	2.3
United States	1.0	0.2	1.2	1.7	0.1	1.8
Other	0.4	0.1	0.5	1.2	0.1	1.3
Total	4.4	1.0	5.4	12.5	2.5	15.0
Assets of operations classified as held for sale	-	-	-	-	-	-
Total (excluding assets held for sale)	4.4	1.0	5.4	12.5	2.5	15.0
2016 Total	5.5	1.2	6.7	16.2	3.3	19.5

Gross of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £5.4 billion (2016: £6.7 billion). The majority of our holding (81%) is in senior debt. The primary exposures are to UK (31%), US (22%), Dutch (11%), and French (11%) banks.

Gross of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £15.0 billion (2016: £19.5 billion). The majority of the exposure (83%) is in senior debt. Participating funds are most exposed to French (22%), UK (15%) and US (12%) banks.

Page 119

D3 - Analysis of asset quality continued

D3.4 - Reinsurance assets

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

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

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

					Ratings
Ratings 2017	AAA £m	AA £m	A £m	BBB £m	Less than BBB £m	Not rated £m	Total £m
Policyholders assets	-	5,335	511	-	-	257	6,103
Participating fund assets	-	218	14	3	-	-	235
Shareholder assets	-	6,327	588	261	3	98	7,277
Total	-	11,880	1,113	264	3	355	13,615
Total %	-	87.3%	8.2%	1.9%	-	2.6%	100.0%
Assets of operations classified as held for sale	-	51	70	-	-	2	123
Total (excluding assets held for sale)	-	11,829	1,043	264	3	353	13,492
Total % (excluding assets held for sale)	-	87.7%	7.7%	2.0%	-	2.6%	100.0%
2016 Total	-	24,608	1,689	14	-	443	26,754
2016 Total %	-	92.0%	6.3%	-	-	1.7%	100.0%

D3.5 - Receivables and other financial assets

The credit quality of receivables and other financial assets is managed at the local business unit level. Where assets classed as 'past due and impaired' exceed local credit limits, and are also deemed at sufficiently high risk of default, an analysis of the asset is performed and a decision is made whether to seek sufficient collateral from the counterparty or to write down the value of the asset as impaired. At 2017, 99% (2016: 99%) of the receivables and other financial assets were neither past due nor impaired.

Credit terms vary from subsidiary to subsidiary, and from country to country, and are set locally within overall credit limits prescribed by the Group credit limit framework, and in line with the Group Credit Policy. The carrying value of receivables is reviewed at each reporting period. If the carrying value of a receivable or other financial asset is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment.

D3.6 - Cash and cash equivalents

Cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three months maturity from the date of acquisition, and include certificates of deposit with maturities of less than three months at the date of issue.

Page 120

D4 - Pension fund assets

In addition to the assets recognised directly on the Group's statement of financial position outlined in the disclosures above, the Group is also exposed to the 'Scheme assets' that are shown net of the present value of scheme liabilities within the IAS 19 net pension surplus. Pension surpluses are included within other assets and pension deficits are recognised within provisions in the Group's consolidated statement of financial position. Refer to note B15 for details on the movements in the main schemes' surpluses and deficits.

Scheme assets are stated at their fair values. Total scheme assets are comprised in the UK, Ireland and Canada as follows:

				2017				2016
	UK £m	Ireland £m	Canada £m	Total £m	UK £m	Ireland £m	Canada £m	Total £m
Bonds
Fixed interest	6,925	408	163	7,496	7,085	249	151	7,485
Index-linked	11,744	292	-	12,036	11,469	157	-	11,626
Equities	129	-	-	129	71	-	-	71
Property	365	-	-	365	338	-	-	338
Pooled investment vehicles	4,955	238	107	5,300	3,433	200	96	3,729
Derivatives	(34)	4	-	(30)	86	1	-	87
Cash and other¹	(5,710)	(284)	6	(5,988)	(3,046)	3	34	(3,009)
Total fair value of scheme assets	18,374	658	276	19,308	19,436	610	281	20,327
Less: consolidation elimination for non-transferable Group insurance policy²	(630)	-	-	(630)	(633)	-	-	(633)
Total IAS 19 fair value of scheme assets	17,744	658	276	18,678	18,803	610	281	19,694

1 Cash and other assets comprise cash at bank, insurance policies, receivables, payables and repos. At 31 December 2017, cash and other assets primarily consist of repos of £5,386 million (2016: £4,666 million).

2 The Friends Provident Pension Scheme (FPPS) assets are included in the UK balances. As at 31 December 2017, the FPPS's cash and other balances includes an insurance policy of £630 million (2016: £633 million) issued by a Group company that is not transferable under IAS 19 and is consequently eliminated from the Group's IAS 19 scheme assets.

Total scheme assets are analysed by those that have a quoted price in an active market and those that do not as follows:

			2017			2016
	Total Quoted £m	Total Unquoted £m	Total £m	Total Quoted £m	Total Unquoted £m	Total £m
Bonds
Fixed interest	4,334	3,162	7,496	3,697	3,788	7,485
Index-linked	11,627	409	12,036	11,141	485	11,626
Equities	35	94	129	71	-	71
Property	-	365	365	-	338	338
Pooled investment vehicles	167	5,133	5,300	189	3,540	3,729
Derivatives	4	(34)	(30)	70	17	87
Cash and other¹	(1,801)	(4,187)	(5,988)	714	(3,723)	(3,009)
Total fair value of scheme assets	14,366	4,942	19,308	15,882	4,445	20,327
Less: consolidation elimination for non-transferable Group insurance policy²	-	(630)	(630)	-	(633)	(633)
Total IAS 19 fair value of scheme assets	14,366	4,312	18,678	15,882	3,812	19,694

Risk management and asset allocation strategy

The long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long-term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes. To meet these objectives, the schemes' assets are invested in a portfolio consisting primarily of debt securities. The investment strategy will continue to evolve over time and is expected to match the liability profile increasingly closely with swap overlays to improve interest rate and inflation matching. The schemes are generally matched to interest rate risk relative to the funding basis.

Main UK Scheme

The Company works closely with the trustee, who is required to consult it on the investment strategy.

Interest rate and inflation risk are managed using a combination of liability-matching assets and swaps. Exposure to equity risk has been reducing over time and credit risk is managed within appetite. Currency risk is relatively small and is largely hedged. The other principal risk is longevity risk. This risk has reduced due to the Aviva Staff Pension Scheme entering into a longevity swap in 2014 covering approximately £5 billion of pensioner in payment scheme liabilities.

Other schemes

The other schemes are considerably less material but their risks are managed in a similar way to those in the main UK scheme. During 2015, the RAC pension scheme entered into a longevity swap covering approximately £600 million of pensioner in payment scheme liabilities.

Page 121

D5 - Available funds

To ensure access to liquidity as and when needed, the Group maintains £1.7 billion of undrawn committed central borrowing facilities with a range of leading international banks, all of which have investment grade credit ratings. These facilities are used to support the Group's commercial paper programme. The expiry profile of the undrawn committed central borrowing facilities is as follows:

	2017 £m	2016 £m
Expiring within one year	-	-
Expiring beyond one year	1,650	1,650
Total	1,650	1,650

D6 - Guarantees

As a normal part of their operating activities, various Group companies have given guarantees and options, including investment return guarantees, in respect of certain long-term insurance and fund management products.

For the UK Life with-profits business, provisions in respect of these guarantees and options are calculated on a market consistent basis, in which stochastic models are used to evaluate the level of risk (and additional cost) under a number of economic scenarios, which allow for the impact of volatility in both interest rates and equity prices. For UK Life non-profit business, provisions do not materially differ from those determined on a market consistent basis.

In all other businesses, provisions for guarantees and options are calculated on a local basis with sensitivity analysis undertaken where appropriate to assess the impact on provisioning levels of a movement in interest rates and equity levels (typically a 1% decrease in interest rates and 10% decline in equity markets).

Page 122

VNB & Sales analysis

In this section		Page
E1	Sales, VNB and new business margin analysis	123
	by market (adjusted Solvency II basis)
E2	Trend analysis of adjusted Solvency II VNB - cumulative	123
E3	Trend analysis of adjusted Solvency II VNB - discrete	124
E4	Trend analysis of PVNBP - cumulative	124
E5	Trend analysis of PVNBP - discrete	124
E6	Trend analysis of PVNBP by product -	125
	cumulative
E7	Trend analysis of PVNBP by product - discrete	125
E8	Geographical analysis of regular and single	126
	premiums
E9	Trend analysis of Investment sales -	126
	cumulative
E10	Trend analysis of Investment sales - discrete	126
E11	Trend analysis of general insurance and health net written premiums - cumulative	127
	net written premiums - cumulative
E12	Trend analysis of general insurance and health net written premiums - discrete	127
	net written premiums - discrete
E13	Reconciliation of sales to net written	128
	premiums in IFRS
E14	Principal Assumptions underlying the
	calculation of VNB (on an adjusted SII basis)	129

Page 123

E1 - Sales, VNB and new business margin analysis by market (adjusted Solvency II basis)

The table below sets out the present value of new business premiums (PVNBP) written by the life and related businesses, value generated by new business written during the period (VNB) and the resulting margin, gross of tax and non-controlling interests, on an adjusted Solvency II basis. Following the introduction of the Solvency II regime on 1 January 2016, MCEV (which was calculated on the expired Solvency I basis) is no longer used as an indicator of the drivers of financial performance of the Group's in-force Life and related businesses. The MCEV VNB and MCEV PVNBP were disclosed for the last time at 31 December 2016.

The VNB shown below is the present value of the projected stream of pre-tax distributable profit generated by the new business written during the period, including expected profit between point of sale and the valuation date on an adjusted Solvency II basis. It reflects the additional value to shareholders created through the activity of writing new business including the impacts of interactions between in-force and new business. The VNB and PVNBP for 2016 include £(12) million and £257 million respectively relating to the internal transfer of annuities from a with-profits fund to a non-profit fund during the second half of 2016 in the UK. The methodology underlying the calculation of adjusted Solvency II VNB remains unchanged from the prior year as set out in note 4. The demographic assumptions used are derived from an analysis of recent operating experience to give a best estimate of future experience. The demographic assumptions have been updated to reflect the position as at 31 December 2017 and produce an adjusted Solvency II VNB which is materially the same as using the assumptions used at 31 December 2016 as set out in D.2.2 of the Aviva 2016 Solvency and Financial Condition Report (SFCR). The economic assumptions have been updated to be those relevant at the point of sale which has been implemented with the assumptions being taken as those appropriate to the start of each quarter. For contracts that are re-priced more frequently, weekly or monthly economic assumptions have been used. The principal economic assumptions are set out in note E14. Adjusted Solvency II PVNBP is calculated using assumptions consistent with those used to determine the adjusted Solvency II VNB.

		Present value of new business premiums¹		Value of new business²		New business margin²
Gross of tax and non-controlling interests	2017 £m	2016 £m	2017 £m	2016 £m	2017 £m	2016 £m
United Kingdom	23,764	18,142	527	429	2.2%	2.4%
France	4,453	5,523	228	225	5.1%	4.1%
Poland	468	421	57	54	12.2%	12.8%
Italy	4,617	3,634	179	83	3.9%	2.3%
Ireland³	1,050	710	11	12	1.0%	1.7%
Spain	1,004	935	38	34	3.8%	3.6%
Turkey	473	455	20	21	4.2%	4.6%
Europe	12,065	11,678	533	429	4.4%	3.7%
Asia	2,719	2,372	162	106	6.0%	4.5%
Aviva Investors	2,247	2,845	21	28	0.9%	1.0%
Total	40,795	35,037	1,243	992	3.0%	2.8%

1 A reconciliation to IFRS net written premiums can be found in note E13.

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

E2 - Trend analysis of adjusted Solvency II VNB - cumulative

					Growth on 2H16
Gross of tax and non-controlling interests	1H16 YTD £m	2H16 YTD £m	1H17 YTD £m	2H17 YTD £m	Sterling %	Constant currency %
United Kingdom¹	200	429	267	527	23%	23%
France²	101	225	120	228	1%	(5)%
Poland³	22	54	28	57	5%	(4)%
Italy	42	83	60	179	116%	102%
Ireland⁴	5	12	3	11	(3)%	(9)%
Spain	12	34	25	38	10%	3%
Turkey	11	21	10	20	(7)%	7%
Europe	193	429	246	533	24%	17%
Asia	43	106	71	162	52%	47%
Aviva Investors	12	28	12	21	(23)%	(23)%
Total	448	992	596	1,243	25%	21%

1 Includes £(12) million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund in 2H16.

2 France includes Antarius up until 2H16.

3 Poland includes Lithuania.

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

Page 124

E3 - Trend analysis of adjusted Solvency II VNB - discrete

					Growth on 2H16
Gross of tax and non-controlling interests	1H16 Discrete £m	2H16 Discrete £m	1H17 Discrete £m	2H17 Discrete £m	Sterling %	Constant currency %
United Kingdom¹	200	229	267	260	13%	13%
France²	101	124	120	108	(13)%	(19)%
Poland³	22	32	28	29	(8)%	(16)%
Italy	42	41	60	119	192%	173%
Ireland⁴	5	7	3	8	22%	14%
Spain	12	22	25	13	(43)%	(47)%
Turkey	11	10	10	10	(13)%	-
Europe	193	236	246	287	21%	14%
Asia	43	63	71	91	45%	40%
Aviva Investors	12	16	12	9	(40)%	(40)%
Total	448	544	596	647	19%	15%

1 Includes £(12) million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund in 2H16.

2 France includes Antarius up until 2H16.

3 Poland includes Lithuania.

E4 - Trend analysis of PVNBP - cumulative

					Growth on 2H16
Present value of new business premiums¹	1H16 YTD £m	2H16 YTD £m	1H17 YTD £m	2H17 YTD £m	Sterling %	Constant currency %
United Kingdom²	8,232	18,142	11,191	23,764	31%	31%
France³	2,898	5,523	2,405	4,453	(19)%	(25)%
Poland⁴	190	421	202	468	11%	1%
Italy	2,024	3,634	2,191	4,617	27%	19%
Ireland⁵	339	710	495	1,050	48%	38%
Spain	299	935	677	1,004	7%	-
Turkey	216	455	274	473	4%	20%
Europe	5,966	11,678	6,244	12,065	3%	(3)%
Asia	982	2,372	1,328	2,719	15%	11%
Aviva Investors	1,388	2,845	1,262	2,247	(21)%	(21)%
Total	16,568	35,037	20,025	40,795	16%	14%

1 Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business.

2 Includes £257 million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund in 2H16.

3 France includes Antarius up until 2H16.

4 Poland includes Lithuania.

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

E5 - Trend analysis of PVNBP - discrete

					Growth on 2H16
Present value of new business premiums¹	1H16 Discrete £m	2H16 Discrete £m	1H17 Discrete £m	2H17 Discrete £m	Sterling %	Constant currency %
United Kingdom²	8,232	9,910	11,191	12,573	27%	27%
France³	2,898	2,625	2,405	2,048	(22)%	(27)%
Poland⁴	190	231	202	266	15%	5%
Italy	2,024	1,610	2,191	2,426	51%	41%
Ireland⁵	339	371	495	555	49%	40%
Spain	299	636	677	327	(48)%	(52)%
Turkey	216	239	274	199	(16)%	(3)%
Europe	5,966	5,712	6,244	5,821	2%	(4)%
Asia	982	1,390	1,328	1,391	-	(3)%
Aviva Investors	1,388	1,457	1,262	985	(32)%	(32)%
Total	16,568	18,469	20,025	20,770	12%	10%

2 Includes £257 million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund in 2H16.

3 France includes Antarius up until 2H16.

4 Poland includes Lithuania.

Page 125

E6 - Trend analysis of PVNBP by product - cumulative

					Growth on 2H16
Present value of new business premiums¹	1H16 YTD £m	2H16 YTD £m	1H17 YTD £m	2H17 YTD £m	Sterling %	Constant currency %
Pensions	5,578	11,615	7,169	14,430	24%	24%
Annuities²	571	2,074	1,075	3,510	69%	69%
Bonds	62	141	70	284	101%	101%
Protection	887	1,770	1,006	1,964	11%	11%
Equity release	247	637	360	777	22%	22%
Other	887	1,905	1,511	2,799	47%	47%
United Kingdom	8,232	18,142	11,191	23,764	31%	31%
Savings	2,704	5,114	2,151	4,043	(21)%	(26)%
Protection	194	409	254	410	-	(6)%
France³	2,898	5,523	2,405	4,453	(19)%	(25)%
Pensions	515	1,195	721	1,372	15%	14%
Savings	2,188	4,177	2,604	5,229	25%	18%
Annuities	63	109	119	233	115%	101%
Protection	302	674	395	778	15%	9%
Poland⁴, Italy, Ireland⁵, Spain and Turkey	3,068	6,155	3,839	7,612	24%	17%
Europe	5,966	11,678	6,244	12,065	3%	(3)%
Asia	982	2,372	1,328	2,719	15%	11%
Aviva Investors	1,388	2,845	1,262	2,247	(21)%	(21)%
Total	16,568	35,037	20,025	40,795	16%	14%

2 Includes £257 million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund in 2H16.

3 France includes Antarius up until 2H16.

4 Poland includes Lithuania.

E7 - Trend analysis of PVNBP by product - discrete

					Growth on 2H16
Present value of new business premiums¹	1H16 Discrete £m	2H16 Discrete £m	1H17 Discrete £m	2H17 Discrete £m	Sterling %	Constant currency %
Pensions	5,578	6,037	7,169	7,261	20%	20%
Annuities²	571	1,503	1,075	2,435	62%	62%
Bonds	62	79	70	214	171%	171%
Protection	887	883	1,006	958	8%	8%
Equity release	247	390	360	417	7%	7%
Other	887	1,018	1,511	1,288	27%	27%
United Kingdom	8,232	9,910	11,191	12,573	27%	27%
Savings	2,704	2,410	2,151	1,892	(22)%	(27)%
Protection	194	215	254	156	(27)%	(32)%
France³	2,898	2,625	2,405	2,048	(22)%	(27)%
Pensions	515	680	721	651	(4)%	(5)%
Savings	2,188	1,989	2,604	2,625	32%	23%
Annuities	63	46	119	114	151%	134%
Protection	302	372	395	383	3%	(3)%
Poland⁴, Italy, Ireland⁵, Spain and Turkey	3,068	3,087	3,839	3,773	22%	16%
Europe	5,966	5,712	6,244	5,821	2%	(4)%
Asia	982	1,390	1,328	1,391	-	(3)%
Aviva Investors	1,388	1,457	1,262	985	(32)%	(32)%
Total	16,568	18,469	20,025	20,770	12%	10%

2 Includes £257 million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund in 2H16.

3 France includes Antarius up until 2H16.

4 Poland includes Lithuania.

Page 126

E8 - Geographical analysis of regular and single premiums

	Regular premiums							Single premiums
	2017 £m	Constant currency growth	WACF	Present value £m	2016 £m	WACF	Present value £m	2017 £m	2016 £m	Constant currency growth
United Kingdom	1,807	8%	5.3	9,605	1,679	5.3	8,881	14,159	9,261	53%
France	94	(14)%	9.0	842	103	8.7	899	3,611	4,624	(27)%
Poland¹	51	10%	7.3	371	42	7.7	324	97	97	(8)%
Italy	50	(28)%	7.5	375	65	3.0	194	4,242	3,440	15%
Ireland²	40	15%	7.0	281	32	6.3	203	769	507	42%
Spain	32	(15)%	6.3	202	34	6.9	236	802	699	7%
Turkey	97	14%	3.7	358	98	3.8	373	115	82	62%
Europe	364	(5)%	6.7	2,429	374	5.9	2,229	9,636	9,449	(5)%
Asia	301	28%	7.0	2,092	227	7.6	1,733	627	639	(3)%
Aviva Investors	-	-	-	-	-	-	-	2,247	2,845	(21)%
Total	2,472	8%	5.7	14,126	2,280	5.6	12,843	26,669	22,194	17%

1 Poland includes Lithuania.

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

E9 - Trend analysis of investment sales - cumulative

					Growth on 2H16
Investment sales¹	1H16 YTD £m	2H16 YTD £m	1H17 YTD £m	2H17 YTD £m	Sterling %	Constant currency %
United Kingdom²	575	1,390	1,143	2,137	54%	54%
Aviva Investors³	3,587	5,765	2,949	5,510	(4)%	(8)%
Asia⁴	58	137	116	241	76%	67%
Total investment sales⁵	4,220	7,292	4,208	7,888	8%	5%

1 Investment sales are calculated as new single premiums plus the annualised value of new regular premiums.

2 UK investment sales are also reported in UK Life PVNBP, YTD investment sales of £575 million for 1H16, £1,390 million for 2H16, £1,143 million for 1H17 and £2,137 million for 2H17 are equivalent to £636 million, £1,484 million, £1,202 million and £2,258 million respectively on a PVNBP basis.

3 YTD investment sales of £1,381 million for 1H16, £2,834 million for 2H16, £1,259 million for 1H17 and £2,243 million 2H17 are also included in Aviva Investors' PVNBP.

4 Asia investment sales are also reported in Asia PVNBP.

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

E10 - Trend analysis of investment sales - discrete

					Growth on 2H16
Investment sales¹	1H16 Discrete £m	2H16 Discrete £m	1H17 Discrete £m	2H17 Discrete £m	Sterling %	Constant currency %
United Kingdom²	575	815	1,143	994	22%	22%
Aviva Investors³	3,587	2,178	2,949	2,561	18%	21%
Asia⁴	58	79	116	125	60%	58%
Total investment sales	4,220	3,072	4,208	3,680	20%	22%

1 Investment sales are calculated as new single premiums plus the annualised value of new regular premiums.

2 UK investment sales are also reported in UK Life PVNBP, YTD investment sales of £575 million for 1H16, £815 million for 2H16, £1,143 million for 1H17 and £994 million for 2H17 are equivalent to £636 million, £847 million, £1,202 million and £1,056 million respectively on a PVNBP basis.

3 Discrete investment sales of £1,381 million for 1H16, £1,453 million for 2H16, £1,259 million for 1H17 and £984 million for 2H17 are also included in Aviva Investors' PVNBP.

4 Asia investment sales are also reported in Asia PVNBP.

Page 127

E11 - Trend analysis of general insurance and health net written premiums - cumulative

					Growth on 2H16
	1H16 YTD £m	2H16 YTD £m	1H17 YTD £m	2H17 YTD £m	Sterling %	Constant currency %
General insurance
United Kingdom⁴	2,001	3,930	2,105	4,078	4%	4%
Canada	1,049	2,453	1,477	3,028	23%	15%
Europe⁴	936	1,816	1,100	2,018	11%	4%
Asia and Other	5	12	6	17	47%	40%
	3,991	8,211	4,688	9,141	11%	7%
Health insurance
United Kingdom¹	292	514	293	509	(1)%	(1)%
Europe²	198	284	165	240	(15)%	(22)%
Asia³	64	125	78	145	16%	10%
	554	923	536	894	(3)%	(6)%
Total	4,545	9,134	5,224	10,035	10%	6%

1 These premiums are also reported in UK Life PVNBP, 1H16 YTD NWP of £292 million, 2H16 YTD NWP of £514 million, 1H17 YTD NWP of £293 million, 2H17 YTD NWP of £509 million are equivalent to £255 million, £424 million, £308 million and £540 million on a PVNBP basis respectively.

2 The sale of Ireland Health business was completed in 2016. Ireland Health businesses have been aligned to the new management structure and reported within Europe.

3 Singapore long-term health business is also reported in Asia PVNBP. For Singapore long-term health business, 1H16 YTD NWP of £30 million, 2H16 YTD NWP of £67 million, 1H17 YTD NWP of £38 million and 2H17 YTD NWP £82 million are equivalent to £97 million, £209 million, £69 million and £147million on a PVNBP basis respectively.

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

E12 - Trend analysis of general insurance and health net written premiums - discrete

					Growth on 2H16
	1H16 Discrete £m	2H16 Discrete £m	1H17 Discrete £m	2H17 Discrete £m	Sterling %	Constant currency %
General insurance
United Kingdom⁴	2,001	1,929	2,105	1,973	2%	2%
Canada	1,049	1,404	1,477	1,551	10%	8%
Europe⁴	936	880	1,100	918	4%	3%
Asia and Other	5	7	6	11	82%	82%
	3,991	4,220	4,688	4,453	6%	4%
Health insurance
United Kingdom¹	292	222	293	216	(2)%	(2)%
Europe²	198	86	165	75	(13)%	(10)%
Asia³	64	61	78	67	9%	10%
	554	369	536	358	(3)%	(2)%
Total	4,545	4,589	5,224	4,811	5%	4%

1 These premiums are also reported in UK Life PVNBP. 1H16 NWP of £292 million, 2H16 NWP of £222 million, 1H17 NWP of £293 million and 2H17 NWP of £216 million , are equivalent to £255 million, £255 million, £308 million and £232 million on a PVNBP basis respectively.

2 The sale of the Ireland Health business was completed in 2016. Ireland Health businesses have been aligned to the new management structure and reported within Europe.

3 Singapore long-term health business is also reported in Asia PVNBP. For Singapore long-term health business, 1H16 NWP of £30 million, 2H16 NWP of £37 million, 1H17 NWP of £38 million and 2H17 NWP of £44 million are equivalent to £97 million, £112 million, £69 million and £78 million on a PVNBP basis respectively.

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

Page 128

E13 - Reconciliation of sales to net written premiums in IFRS

The table below presents our consolidated sales for the year ended 31 December 2017 and the year ended 31 December 2016 as well as the reconciliation of sales to net written premiums in IFRS.

	2017 £m	2016 £m
Present value of new business premiums	40,795	35,037
Investment sales	7,888	7,292
General insurance and health net written premiums	10,035	9,134
Less: long-term health and collectives business¹	(5,213)	(4,944)
Total sales	53,505	46,519
Less: Effect of capitalisation factor on regular premium long-term business	(11,412)	(10,563)
Share of long-term new business sales from JVs and associates	(618)	(552)
Annualisation impact of regular premium long-term business	(281)	(264)
Deposits taken on non-participating investment contracts and equity release contracts	(10,953)	(7,834)
Retail sales of mutual fund type products (investment sales)	(7,888)	(7,292)
Add: IFRS gross written premiums from existing long-term business	4,765	4,867
Less: long-term insurance and savings business premiums ceded to reinsurers	(1,741)	(1,696)
Less: Outward reinsurance premium relating to general insurance business	-	(107)
Total IFRS net written premiums	25,377	23,078
Analysed as:
Long-term insurance and savings net written premiums	15,342	14,051
General insurance and health net written premiums	10,035	9,027
	25,377	23,078

1 Long-term health and collectives business are included as part of PVNBP.

Effect of capitalisation factor on regular premium long-term business

PVNBP is derived from the single and regular premiums of the products sold during the financial period and is expressed at the point of sale. The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts. The discounted value of regular premiums is calculated using the same methodology as for VNB (on an adjusted Solvency II basis).

The discounted value reflects the expected income streams over the life of the contract, adjusted for expected levels of persistency, discounted back to present value. The discounted value can also be expressed as annualised regular premiums multiplied by a weighted average capitalisation factor (WACF). The WACF varies over time depending on the mix of new products sold, the average outstanding term of the new contracts and the projection assumptions.

Share of long-term new business sales from joint ventures and associates

Total long-term new business sales include our share of sales from joint ventures and associates. Under IFRS reporting, premiums from these sales are excluded from our consolidated accounts, with only our share of profits or losses from such businesses being brought into the income statement separately.

Annualisation impact of regular premium long-term business

As noted above, the calculation of PVNBP includes annualised regular premiums. The impact of this annualisation is removed in order to reconcile the non-GAAP new business sales to IFRS premiums and will vary depending on the volume of regular premium sales during the year.

Deposits taken on non-participating investment contracts and equity release contracts

Under IFRS, non-participating investment contracts are recognised in the Statement of Financial Position by recording the cash received as a deposit and an associated liability and are not recorded as premiums received in the IFRS income statement. Only the margin earned is recognised in the IFRS income statement.

Retail sales of mutual fund type products (investment sales)

Investment sales included in the total sales number represent the cash inflows received from customers to invest in mutual fund type products such as unit trusts and OEICs. We earn fees on the investment and management of these funds which are recorded separately in the IFRS income statement as 'fees and commissions received' and are not included in statutory premiums.

IFRS gross written premiums from existing long-term business

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

Page 129

E14 - Principal assumptions underlying the calculation of VNB (on an adjusted SII basis)

Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting period.

The risk-free interest rate curves used to calculate VNB reflect the basic risk-free interest rate curves (including the credit risk adjustment), volatility adjustment and fundamental spread for the matching adjustment published by EIOPA on their website. The details on methodology are unchanged from those set out in D.2.2.3 of the Aviva 2016 Solvency and Financial Condition Report (SFCR).

(a) Basic risk-free interest rates

The basic risk-free rate curves are stated in the table below, including a credit risk adjustment.

United Kingdom	4Q 2017	3Q 2017	2Q 2017	1Q 2017	4Q 2016	3Q 2017	2Q 2016	1Q 2016
Reference rate
1 year	0.6%	0.5%	0.4%	0.4%	0.4%	0.3%	0.4%	0.6%
5 years	0.9%	1.0%	0.8%	0.7%	0.7%	0.4%	0.5%	0.9%
10 years	1.2%	1.3%	1.2%	1.0%	1.1%	0.6%	0.9%	1.3%
15 years	1.3%	1.5%	1.4%	1.2%	1.3%	0.8%	1.1%	1.5%
20 years	1.4%	1.6%	1.5%	1.3%	1.3%	0.9%	1.1%	1.6%

Eurozone	4Q 2017	3Q 2017	2Q 2017	1Q 2017	4Q 2016	3Q 2017	2Q 2016	1Q 2016
Reference rate
1 year	(0.4)%	(0.4)%	(0.3)%	(0.3)%	(0.3)%	(0.3)%	(0.3)%	(0.2)%
5 years	0.2%	0.2%	0.2%	0.1%	-	(0.2)%	(0.2)%	(0.1)%
10 years	0.8%	0.8%	0.8%	0.7%	0.6%	0.2%	0.3%	0.5%
15 years	1.2%	1.3%	1.2%	1.1%	1.0%	0.5%	0.7%	0.8%
20 years	1.4%	1.5%	1.4%	1.3%	1.1%	0.7%	0.8%	0.9%

(b) Matching adjustment

The matching adjustment (MA) is an increase applied to the risk-free rate used to value insurance liabilities where the cash flows are relatively fixed (e.g. no future premiums or surrender risk) and are well matched by assets that are intended to be held to maturity and have cash flows that are also relatively fixed. The intention is that, if held to maturity, the business can earn the additional yield on these assets that relate to illiquidity risk.

Aviva applies a matching adjustment to certain obligations in UK Life and Spain Life, using methodology which is set out in the SFCR Report. The matching adjustments used to value new business will reflect the characteristics of the assets allocated to back the new business. The allocation of assets to new business anticipates the expected assets chosen to back new business at the end of year closing balance sheet. These may be different to the matching adjustments applied at the portfolio level.

The matching adjustments used for new business are shown in the table below:

Matching adjustment portfolio	2H 2017	1H 2017	2H 2016	1H 2016
UK Life	116	123	171	152
Spain Life	-	19	24	30

A combined MA of 116 bps and 123 bps was calculated for new business at FY17 and HY17 respectively within the Friends Life UK and the Aviva UK annuity portfolios. Prior to HY17 separate MAs were calculated for these portfolios and the assumptions shown in the table above for the comparative periods relate to the Aviva UK annuity portfolio. For Friends Life UK, the MAs were 106 bps and 123 bps at 2H2016 and 1H2016 respectively. In the comparative periods, the higher MA for Aviva UK new business partly reflects the allocation to Aviva UK of a higher proportion of illiquid assets. Following the sale of the majority of the Spanish business in the second half of 2017, none of the retained entities apply a MA.

The volatility adjustment (VA) is intended to reflect temporary distortions in spreads caused by illiquidity in the market or extreme widening of credit spreads, in particular in relation to government bonds. VAs are prescribed by EIOPA and published along with the basic risk-free interest rate curves on their website. Where applicable the VA is applied to all those liabilities where a MA is not applied, with the exception of unit-linked business in UK Life where, in line with the approved applications, no allowance for the VA is made.

The volatility adjustments used are shown in the table below:

Volatility Adjustment (bps)	2H 2017	1H 2017	2H 2016	1H 2016
United Kingdom	18	21	30	38
Eurozone	4	9	13	16

Page 130

Glossary

This glossary to the Analyst Pack contains the definitions of non-GAAP financial Alternative Performance Measures (APMs) which are not bound by the requirements of IFRS.

Annual Premium Equivalent (APE)

Annual Premium Equivalent is a measure of sales in our life insurance businesses. APE is calculated as the sum of new regular premiums plus 10% of new single premiums written in the period. Whilst not a key performance metric of the Group, the APE measure provides useful information on sales and new business when considered alongside other measures such as the present value of new business premiums (PVNBP) or Solvency II value of new business (VNB).

Assets under management (AUM)

Assets under management represent all assets managed or administered by or on behalf of the Group, including those assets managed by third parties. AUM include managed assets that are included within the Group's statement of financial position and those assets belonging to external clients outside the Aviva Group which are therefore not included in the Group's statement of financial position. AUM is monitored as this reflects the potential earnings arising from investment interest and commission and measures the size and scale of the AUM business.

Cash remittances

Cash remittances represent amounts paid by our operating businesses to the Group, comprise dividends and interest on internal loans. Dividend payments by operating businesses may be subject to insurance regulations that restrict the amount that can be paid. The business monitors total cash remittances at a group level and in each of its markets.

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

Claims ratio

A financial measure of the performance of our general insurance business which is derived from incurred claims as a percentage of net earned premiums.

Combined Operating Ratio (COR)

A financial measure of the Group's general insurance underwriting profitability which is derived from total underwriting costs - comprising of incurred claims, written commissions and expenses - expressed as a percentage of net earned premiums. A combined operating ratio below 100% indicates profitable underwriting.

Commission and expense ratio

A financial measure of the performance of our general insurance business which is derived from the sum of written commissions and expenses expressed as a percentage of net earned premiums.

Estimated Solvency II cover ratio

The Solvency II cover ratio is an indicator of the Group's balance sheet strength which is derived from 'Own funds' divided by the Solvency Capital Requirement (SCR), as calculated on a shareholder view. The shareholder view excludes the contribution to Group SCR and Group 'Own funds' of fully ring fenced with-profits funds and staff pension schemes in surplus. These exclusions have no impact on Solvency II surplus.

The most material fully ring fenced with-profits funds and staff pension schemes are self-supporting on a Solvency II capital basis with any surplus capital above SCR not recognised in the Group position. The shareholder view is therefore considered by management to be more representative of the shareholders' risk-exposure and the Group's ability to cover the SCR with eligible own funds.

The Solvency II cover ratio is shown inclusive of pro forma adjustments to align it with the capital information presented to management internally. Pro forma adjustments are made when, in the opinion of the Directors, the cover ratio does not fully reflect the effect of transactions or capital actions that are known as at each reporting date. Such adjustments may be required in respect of planned acquisitions and disposals, group reorganisations and adjustments to the Solvency II valuation basis arising from changes to the underlying Regulations or updated interpretations provided by EIOPA.

Estimated Solvency II own funds

Available capital resources determined under Solvency II are referred to as 'Own Funds'. This includes the excess of assets over liabilities in the Solvency II balance sheet (calculated on best estimate, market consistent assumptions and net of transitional measures on technical provisions), subordinated liabilities that qualify as capital under Solvency II, and off-balance sheet Own Funds.

Estimated Solvency II Surplus

The surplus represents 'Own funds' less the SCR. Holding capital in excess of the SCR demonstrates an insurer has adequate financial resources in place to meet all its liabilities as and when they fall due and that there is sufficient capital to absorb significant losses.

Excess centre cash flow

This represents the cash remitted by business units to the Group centre less central operating expenses and debt financing costs. Excess centre cash flow is a measure of the cash available to pay dividends, reduce debt or invest back into our business.

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

Group adjusted operating profit (operating profit)

Operating profit is a non-GAAP APM which is reported to the Group chief operating decision maker for the purpose of decision making and internal performance management of the Group's operating segments that incorporates an expected return on investments supporting the life and non-life insurance businesses. Throughout the Preliminary Announcement, Group adjusted operating profit is referred to as operating profit.

The various items taken out of operating profit are:

Investment variances and economic assumptions changes

Operating profit for the life insurance business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities.

· The expected rate of return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification.

Page 131

· For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risks. Where such securities are classified as available for sale the expected return comprises interest or dividend payments and amortisation of the premium or discount at purchase.

· The expected return on equities and properties is calculated by reference to the opening 10-year swap rate in the relevant currency plus an appropriate risk margin.

Operating profit includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. This would include movements in liabilities due to changes in discount rate arising from management decisions that impact on product profitability over the lifetime of products. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.

Operating profit for the non-life insurance business is based on expected investment returns on financial investments backing shareholder funds over the period.

· Expected investment returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of return. This rate of return is the same as that applied for the long-term business expected returns.

· The longer-term return for other investments is the actual income receivable for the period.

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

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

Impairment, amortisation and profit/loss on disposal

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 re-measurement of subsidiaries, joint ventures and associates. These items principally relate to merger 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 chief operating decision maker.

Other items

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

Operating profit is presented before and after integration and restructuring costs.

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.

Investment sales

This measure comprises of retail sales of mutual fund-type products such as unit trusts, individual savings accounts (ISAs) and open ended investment companies (OEICs).

Net Asset Value (NAV) per share

NAV per share is calculated as the equity attributable to shareholders of Aviva plc, less preference share capital (both within the consolidated statement of financial position), divided by the actual number of shares in issue as at the balance sheet date.

Net fund flows

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

New business income

New business income represents the impact on group adjusted operating profit of new business written in the period. New business income comprises income arising from premiums written during the period less initial reserves, expenses and commission. Expense and commission are shown net of deferred acquisition costs. Whilst not a key performance metric of the Group, new business income provides useful information on sales and new business when considered alongside other measures such as the present value of new business premiums (PVNBP) or Solvency II value of new business (VNB).

New business margin

New business margins are calculated as the adjusted Solvency II value of new business divided by the adjusted Solvency II present value of new business premiums (PVNBP), and expressed as a percentage.

Normalised accident year claims ratio

The normalised accident year claims ratio is derived from the claims ratio (as defined above) with adjustments made to exclude the impact of exceptional and non-recurring items; prior year claims development and weather variations versus expectations. These adjustments are made so that the underlying performance of the Group can be assessed excluding factors that might distort the trend in the claims ratio on a year-on-year basis. The ratio is shown gross of the impact of profit sharing arrangements.

Normalised accident year Combined Operating Ratio

The normalised accident year combined operating ratio is derived from the COR (as defined above) with adjustments made to exclude the impact of exceptional and non-recurring items; prior year claims development and weather variations versus expectations, gross of the impact of profit sharing arrangements. These adjustments are made so that the underlying performance of the Group can be assessed excluding factors that might distort the trend in the claims ratio on a year-on-year basis.

Page 132

Operating Capital Generation (OCG)

Operating Capital Generation represents the movement in the Solvency II surplus in the period due to the impact of new business, expected returns on existing business, operating variances, non-economic assumption changes and non-recurring capital actions.

OCG excludes economic variances, economic assumption changes and integration and restructuring costs. The exclusion of these items from OCG reflects the long-term nature of much of the Group's business and excludes the impact of economic factors which are typically outside the control of management.

'Underlying' OCG is the component of the OCG which excludes the effect of non-recurring capital actions and non-economic assumption changes and is therefore considered to be more representative of the long-term trend.

Operating Earnings per Share (EPS)

Operating EPS is calculated based on the adjusted operating profit attributable to ordinary shareholders net of tax, deducting non-controlling interests, preference dividends, the direct capital instrument (DCI) and tier one note coupons divided by the weighted average number of ordinary shares in issue, after deducting treasury shares.

Operating expense ratio

The operating expense ratio expresses operating expenses as a percentage of operating income.

Operating income is calculated as Group adjusted operating profit before Group debt costs and operating expenses.

Operating expenses

The day-to-day expenses involved in running the business are classified as operating expenses. These expenses include other acquisition costs and claims handling costs as these are considered to be controllable by the Group's operating segments and directly impact their performance.

Operating expenses exclude 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 re-measurement of subsidiaries, joint ventures and associates. These items principally relate to merger and acquisition activity which we view as strategic in nature, hence they are excluded as this measure is principally used to manage segment performance. Operating expenses also exclude integration & restructuring costs and other similar expenses incurred which are considered to be non-recurring and strategic in nature.

Present value of new business premiums

The present value of new business premiums (PVNBP) is a financial measure which is used as a measure of sales in the Group's life insurance businesses. PVNBP is derived from the present value of new regular premiums plus 100% of single premiums from new business written at the point of sale. PVNBP also includes any changes to existing contracts which were not anticipated at the outset of the contract that generates additional shareholder risk and associated premium income of the nature of a new policy. An example of a change to existing contracts that is considered to generate additional PVNBP is an internal transfer of annuities from a with-profits fund to a non-profit fund.

Return on equity

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

Return on capital employed (ROCE)

ROCE indicates the efficiency with which a company uses its assets to generate profits. Usually calculated as pre-tax profit divided by capital employed (total assets minus current liabilities) and expressed as a percentage.

Solvency Capital Requirement (SCR)

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

Spread margin

The spread margin represents the return made on the Group's annuity and other non-linked business, based on the expected investment return, less amounts credited to policyholders. Whilst not a key performance metric of the Group, the spread margin is a useful indicator of the expected investment return arising on this business.

Underwriting margin

The underwriting margin represents the release of reserves held to cover claims, surrenders and administrative expenses less the cost of actual claims and surrenders in the period. Whilst not a key performance metric of the Group; the underwriting margin is a useful measure of the financial performance of our Life insurance business when considered alongside other financial metrics.

Unit linked margin

The unit linked margin represents the annual management charges on unit-linked business based on expected investment return. Whilst not a key performance metric of the Group, the unit linked margin is a useful indicator of the expected investment return arising on this business.

Value of New Business (VNB)

The Solvency II value of new business (VNB) represents the increase in own funds arising from business written in the period, with adjustments made to i) include VNB not included in Solvency II (e.g. UK and Asia Healthcare business, retail fund management business and UK Equity Release business) ii) remove the impact of contract boundaries and iii) include a 'look through' to the value of profits arising in service companies (which would otherwise be excluded from Solvency II). These adjustments are considered to reflect a more realistic basis than the prudential Solvency II rules. The VNB is derived from the present value of projected pre-tax distributable profits generated by new business plus a risk margin. Adjusted Solvency II VNB can be reconciled to the Solvency II Own Funds impact of new business; however there is no equivalent IFRS metric.

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR BCGDXBXGBGIR

Companies

Aviva (AV.)

Full Archive

UK 100

Latest directors dealings

All directors dealings today