Information  X 
Enter a valid email address

Aviva PLC (AV.)

  Print      Mail a friend       Annual reports

Thursday 06 August, 2020

Aviva PLC

Aviva plc HY20 results - 3 of 4

RNS Number : 2921V
Aviva PLC
06 August 2020
 

START PART 3 of 4

Page 41

 

IFRS financial statements

In this section

Page

Condensed consolidated financial statements

42

Condensed consolidated income statement

42

Condensed consolidated statement of comprehensive income

43

Condensed consolidated statement of changes in equity

44

Condensed consolidated statement of financial position

45

Condensed consolidated statement of cash flows

46

Notes to the condensed consolidated financial statements

47

B1  Basis of preparation

47

B2  Changes to comparative amounts

47

B3  Significant events since the previous reporting period

48

B4  Exchange rates

49

B5  Subsidiaries, joint ventures and associates

49

B6  Segmental information

50

B7  Tax

57

B8  Earnings per share

59

B9  Dividends and appropriations

60

B10  Contract liabilities and associated reinsurance

61

B11  Insurance liabilities

63

B12  Liability for investment contracts

65

B13  Reinsurance assets

66

B14  Effect of changes in assumptions and estimates during the period

67

B15  Unallocated divisible surplus

68

B16  Borrowings

68

B17  Pension obligations and other provisions

69

B18  Related party transactions

70

B19  Fair value

71

B20  Risk management

79

B21  Cash and cash equivalents

85

B22  Contingent liabilities and other risk factors

85

B23  Acquired value of in-force business and intangible assets

86

B24  Subsequent events

86

Directors' responsibility statement

87

Independent review report to Aviva plc

88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 42

 

Condensed consolidated income statement

For the six month period ended 30 June 2020

 

Note

6 months
2020
£m

6 months
2019
£m

Full year
2019
£m

Income

 

 

 

 

Gross written premiums

 

15,229

15,211

31,243

Premiums ceded to reinsurers

 

(2,005)

(1,442)

(3,563)

Premiums written net of reinsurance

 

13,224

13,769

27,680

Net change in provision for unearned premiums

 

(199)

(273)

(209)

Net earned premiums

 

13,025

13,496

27,471

Fee and commission income

 

1,074

1,011

2,141

Net investment (expense)/income

 

(3,639)

28,014

40,577

Share of profit after tax of joint ventures and associates

 

66

62

85

Loss on the disposal and remeasurement of subsidiaries, joint ventures and associates

B5(b)

(12)

(13)

(22)

 

 

10,514

42,570

70,252

Expenses

 

 

 

 

Claims and benefits paid, net of recoveries from reinsurers

 

(10,995)

(11,824)

(23,096)

Change in insurance liabilities, net of reinsurance

B10(b)

(3,520)

(5,448)

(5,702)

Change in investment contract provisions

 

6,945

(15,927)

(24,095)

Change in unallocated divisible surplus

B15

1,334

(2,838)

(3,985)

Fee and commission expense

 

(1,553)

(2,648)

(5,536)

Other expenses

 

(1,643)

(1,552)

(3,329)

Finance costs

 

(278)

(285)

(576)

 

 

(9,710)

(40,522)

(66,319)

Profit before tax

 

804

2,048

3,933

Tax attributable to policyholders' returns

B7(d)

272

(525)

(559)

Profit before tax attributable to shareholders' profits

 

1,076

1,523

3,374

Tax income/(expense)

B7(d)

70

(868)

(1,270)

Less: tax attributable to policyholders' returns

B7(d)

(272)

525

559

Tax attributable to shareholders' profits

B7(d)

(202)

(343)

(711)

Profit for the period

 

874

1,180

2,663

 

 

 

 

 

Attributable to:

 

 

 

 

Equity holders of Aviva plc

 

821

1,116

2,548

Non-controlling interests

 

53

64

115

Profit for the period

 

874

1,180

2,663

Earnings per share

B8

 

 

 

Basic (pence per share)

 

20.0

28.2

63.8

Diluted (pence per share)

 

19.7

27.9

63.1

 

 

 

Page 43

 

Condensed consolidated statement of comprehensive income

For the six month period ended 30 June 2020

 

Note

6 months
 2020
£m

6 months
2019
£m

Full year
 2019
£m

Profit for the period

 

874

1,180

2,663

 

 

 

 

 

Other comprehensive income:

 

 

 

 

Items that may be reclassified subsequently to income statement

 

 

 

 

Investments classified as available for sale

 

 

 

 

Fair value gains

 

3

48

39

Fair value gains transferred to profit on disposals

 

(1)

(3)

(19)

Share of other comprehensive income of joint ventures and associates

 

7

9

22

Foreign exchange rate movements

 

311

79

(219)

Aggregate tax effect - shareholder tax on items that may be reclassified subsequently to income statement

B7(b)

(13)

(18)

6

 

 

 

 

 

Items that will not be reclassified to income statement

 

 

 

 

Owner-occupied properties - fair value gains

 

-

1

3

Remeasurements of pension schemes

B17(b)

711

70

(867)

Aggregate tax effect - shareholder tax on items that will not be reclassified subsequently to income statement

B7(b)

(200)

(20)

103

Total other comprehensive income, net of tax

 

818

166

(932)

Total comprehensive income for the period

 

1,692

1,346

1,731

 

 

 

 

 

Attributable to:

 

 

 

 

Equity holders of Aviva plc

 

1,591

1,282

1,655

Non-controlling interests

 

101

64

76

 

 

1,692

1,346

1,731

 

 

 

 

Page 44

 

Condensed consolidated statement of changes in equity

For the six month period ended 30 June 2020

 

Note

6 months
2020
£m

6 months
2019
£m

Full year
2019
£m

Balance at 1 January as reported

 

18,685

18,455

18,455

Adjustment at 1 January 2019 for adoption of IFRS 161

 

-

(110)

(110)

Balance at 1 January restated1

 

18,685

18,345

18,345

Profit for the period

 

874

1,180

2,663

Other comprehensive income

 

818

166

(932)

Total comprehensive income for the period

 

1,692

1,346

1,731

Dividends and appropriations

B9

(36)

(828)

(1,244)

Non-controlling interests share of dividends declared in the period

 

(18)

(50)

(63)

Reclassification of DCI and tier 1 notes to financial liabilities2

 

(499)

-

(210)

Reserves credit for equity compensation plans

 

10

30

62

Shares issued under equity compensation plans

 

4

6

18

Treasury shares held by subsidiary companies

 

-

-

13

Forfeited dividend income

 

-

-

4

Changes in non-controlling interests in subsidiaries

 

(50)

(1)

(2)

Change in equity accounted option

 

-

-

22

Aggregate tax effect - shareholder tax

 

-

2

9

Balance at 30 June/31 December

 

19,788

18,850

18,685

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

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

 

 

 

Page 45

 

Condensed consolidated statement of financial position

As at 30 June 2020

 

Note

30 June
2020
£m

30 June
2019
£m

31 December 2019
£m

Assets

 

 

 

 

Goodwill

 

1,850

1,871

1,855

Acquired value of in-force business and intangible assets

B23

2,649

3,024

2,800

Interests in, and loans to, joint ventures

 

1,163

1,226

1,227

Interests in, and loans to, associates

 

336

311

304

Property and equipment

 

926

972

889

Investment property

 

11,306

11,471

11,203

Loans

 

40,109

39,452

38,579

Financial investments

 

353,583

343,858

343,418

Reinsurance assets

B13

13,307

12,414

12,356

Deferred tax assets

 

162

171

151

Current tax assets

 

181

81

132

Receivables

 

13,003

9,767

8,995

Deferred acquisition costs

 

3,291

3,215

3,156

Pension surpluses and other assets

 

3,467

3,522

2,799

Prepayments and accrued income

 

3,051

3,050

3,143

Cash and cash equivalents

 

19,125

15,296

19,524

Assets of operations classified as held for sale

B5(c)

9,330

8,524

9,512

Total assets

 

476,839

458,225

460,043

Equity

 

 

 

 

Capital

 

 

 

 

Ordinary share capital

 

982

979

980

Preference share capital

 

200

200

200

 

 

1,182

1,179

1,180

Capital reserves

 

 

 

 

Share premium

 

1,242

1,225

1,239

Capital redemption reserve

 

44

44

44

Merger reserve

 

8,974

8,974

8,974

 

 

10,260

10,243

10,257

Treasury shares

 

(5)

(18)

(7)

Currency translation reserve

 

1,231

1,192

814

Other reserves

 

(286)

(251)

(101)

Retained earnings

 

6,394

4,795

5,065

Equity attributable to shareholders of Aviva plc

 

18,776

17,140

17,208

Direct capital instrument and tier 1 notes

 

-

731

500

Equity excluding non-controlling interests

 

18,776

17,871

17,708

Non-controlling interests

 

1,012

979

977

Total equity

 

19,788

18,850

18,685

Liabilities

 

 

 

 

Gross insurance liabilities

B11

157,598

150,413

149,338

Gross liabilities for investment contracts

B12

222,112

218,881

222,127

Unallocated divisible surplus

B15

8,748

8,841

9,597

Net asset value attributable to unitholders

 

18,669

16,764

16,610

Pension deficits and other provisions

 

1,405

1,338

1,565

Deferred tax liabilities

 

2,045

2,305

2,155

Current tax liabilities

 

163

526

569

Borrowings

B16

10,356

9,234

9,039

Payables and other financial liabilities

 

24,134

19,818

18,138

Other liabilities

 

2,888

3,065

3,094

Liabilities of operations classified as held for sale

B5(c)

8,933

8,190

9,126

Total liabilities

 

457,051

439,375

441,358

Total equity and liabilities

 

476,839

458,225

460,043

 

 

 

 

Page 46

 

Condensed consolidated statement of cash flows

For the six month period ended 30 June 2020

 

Note

6 months
2020
£m

6 months
2019
£m

Full year
2019
£m

Cash flows from operating activities1

 

 

 

 

Cash generated from operating activities

 

67

824

6,517

Tax paid

 

(734)

(173)

(549)

Total net cash (used in)/from operating activities

 

(667)

651

5,968

Cash flows from investing activities

 

 

 

 

Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired

 

(11)

(13)

(19)

Disposals of subsidiaries, joint ventures and associates, net of cash transferred

 

7

12

12

Repayment of loans to joint ventures and associates

 

-

5

-

Purchases of property and equipment

 

(71)

(52)

(84)

Proceeds on sale of property and equipment

 

2

3

4

Purchases of intangible assets

 

(35)

(32)

(63)

Total net cash used in investing activities

 

(108)

(77)

(150)

Cash flows from financing activities

 

 

 

 

Proceeds from issue of ordinary shares

 

4

12

27

Treasury shares purchased for employee trusts

 

-

(6)

(9)

New borrowings drawn down, net of expenses

 

617

187

580

Repayment of borrowings2

 

(35)

(358)

(927)

Net drawdown/(repayment) of borrowings

 

582

(171)

(347)

Interest paid on borrowings

 

(269)

(274)

(553)

Preference dividends paid

B9

(9)

(9)

(17)

Ordinary dividends paid

B9

-

(812)

(1,184)

Forfeited dividend income

 

-

-

4

Coupon payments on direct capital instrument and tier 1 notes

B9

-

(7)

(43)

Dividends paid to non-controlling interests of subsidiaries

 

(18)

(50)

(63)

Other3

 

-

-

(5)

Total net cash from/(used in) financing activities

 

290

(1,317)

(2,190)

Total net (decrease)/increase in cash and cash equivalents

 

(485)

(743)

3,628

Cash and cash equivalents at 1 January

 

19,434

16,051

16,051

Effect of exchange rate changes on cash and cash equivalents

 

326

11

(245)

Cash and cash equivalents at 30 June/31 December

B21

19,275

15,319

19,434

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

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

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

 

 

Page 47

 

B1 - Basis of preparation

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

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

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

Going concern

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

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

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

Accounting policies

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

IFRS 16 Leases

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

B2 - Changes to comparative amounts

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

 

 

 

Page 48

 

B3 - Significant events since the previous reporting period

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

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

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

Business and performance

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

Long-term business

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

General insurance and health

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

Fund management

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

Risk profile

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

Fair value measurement

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

Capital management

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

Other

(i)  Dividend

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

Subsequent to 30 June 2020, the directors declared a second interim dividend in respect of 2019 of 6.00 pence per ordinary share, amounting to £250 million recognising the strong capital and centre liquidity position, enhanced by receipt of proceeds from the sale of FPI.

Further details can be found in note B9.

 

 

 

Page 49

 

B4 - Exchange rates

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

 

6 months
2020

6 months
2019

Full year
2019

Eurozone

 

 

 

Average rate (€1 equals)

£0.88

£0.88

£0.88

Period end rate (€1 equals)

£0.91

£0.89

£0.85

Canada

 

 

 

Average rate ($CAD1 equals)

£0.58

£0.58

£0.59

Period end rate ($CAD1 equals)

£0.59

£0.60

£0.58

Poland

 

 

 

Average rate (PLN1 equals)

£0.20

£0.20

£0.20

Period end rate (PLN1 equals)

£0.20

£0.21

£0.20

B5 - Subsidiaries, joint ventures and associates

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

(a) Acquisitions

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

(b) Disposals and remeasurements

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

 

6 months
2020
£m

6 months
2019
£m

Full year
2019
£m

Disposals

7

6

6

Held for sale remeasurements

(19)

(19)

(28)

Total loss on disposal and remeasurements

(12)

(13)

(22)

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

(c) Assets and liabilities of operations classified as held for sale

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

 

30 June
2020
£m

30 June
2019
£m

31 December 2019
£m

Assets

 

 

 

Acquired value of in-force business and intangible assets

447

576

526

Interests in, and loans to, joint ventures and associates

56

-

8

Property and equipment

8

5

8

Loans

1

-

1

Financial investments

7,634

6,909

7,824

Reinsurance assets

44

53

75

Other assets

278

283

290

Cash and cash equivalents

862

698

780

Total assets

9,330

8,524

9,512

Liabilities

 

 

 

Gross insurance liabilities

668

118

687

Gross liabilities for investment contracts

8,123

8,022

8,324

External borrowings

26

-

28

Other liabilities

116

50

87

Total liabilities

8,933

8,190

9,126

Net assets

397

334

386

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

 

 

 

Page 50

 

B5 - Subsidiaries, joint ventures and associates continued

(c) Assets and liabilities of operations classified as held for sale continued

FPI

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

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

B6 - Segmental information

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

(a) Operating segments

United Kingdom

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

Canada

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

France

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

Poland

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

Italy, Ireland and Other

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

Asia

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

Aviva Investors

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

Other Group activities

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

 

 

 

Page 51

 

B6 - Segmental information continued

Measurement basis

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

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

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

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

 

United Kingdom

 

 

 

Europe

 

 

 

 

 

Life
£m

GI
£m

Canada
£m

France
£m

Poland
£m

Italy, Ireland and Other
£m

Asia
£m

Aviva Investors
£m

Other Group activities
£m

Total
£m

Gross written premiums

5,142

2,315

1,580

2,630

297

2,504

761

-

-

15,229

Premiums ceded to reinsurers

(1,519)

(175)

(78)

(39)

(7)

(67)

(120)

-

-

(2,005)

Internal reinsurance revenue

-

-

-

-

-

-

-

-

-

-

Premiums written net of reinsurance

3,623

2,140

1,502

2,591

290

2,437

641

-

-

13,224

Net change in provision for unearned premiums

(38)

(48)

6

(126)

2

9

(4)

-

-

(199)

Net earned premiums

3,585

2,092

1,508

2,465

292

2,446

637

-

-

13,025

Fee and commission income

493

49

13

156

46

62

100

154

1

1,074

 

4,078

2,141

1,521

2,621

338

2,508

737

154

1

14,099

Net investment (expense)/income

(725)

49

124

(1,731)

(62)

(600)

(244)

(15)

(435)

(3,639)

Inter-segment revenue

-

-

-

-

-

-

-

103

-

103

Share of (loss)/profit after tax of joint ventures and associates

(26)

-

-

10

-

6

19

-

57

66

Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates

-

-

7

-

-

-

(19)

-

-

(12)

Segmental income1

3,327

2,190

1,652

900

276

1,914

493

242

(377)

10,617

Claims and benefits paid, net of recoveries from reinsurers

(4,354)

(1,174)

(874)

(2,649)

(191)

(1,362)

(391)

-

-

(10,995)

Change in insurance liabilities, net of reinsurance

(2,634)

(339)

(70)

14

131

(349)

(271)

-

(2)

(3,520)

Change in investment contract provisions

5,348

-

-

1,576

-

(314)

321

14

-

6,945

Change in unallocated divisible surplus

310

-

-

463

3

538

20

-

-

1,334

Fee and commission expense

(315)

(618)

(449)

(250)

(77)

(191)

(137)

(14)

498

(1,553)

Other expenses

(489)

(228)

(95)

(133)

(41)

(98)

(125)

(208)

(226)

(1,643)

Inter-segment expenses

(91)

(3)

(3)

-

(1)

(5)

-

-

-

(103)

Finance costs

(78)

(2)

(3)

(1)

-

(2)

-

-

(192)

(278)

Segmental expenses

(2,303)

(2,364)

(1,494)

(980)

(176)

(1,783)

(583)

(208)

78

(9,813)

Profit/(loss) before tax

1,024

(174)

158

(80)

100

131

(90)

34

(299)

804

Tax attributable to policyholders' returns

267

-

-

-

-

4

1

-

-

272

Profit/(loss) before tax attributable to shareholders' profits

1,291

(174)

158

(80)

100

135

(89)

34

(299)

1,076

Adjusting items:

 

 

 

 

 

 

 

 

 

 

Reclassification of unallocated interest

32

(7)

16

26

-

-

-

1

(68)

-

Life business: Investment variances and economic assumption changes

(634)

-

-

193

2

(13)

147

-

-

(305)

Non-life business: Short-term fluctuation in return on investments

-

84

(72)

72

(3)

24

-

-

66

171

General insurance and health business: Economic assumption changes

-

31

7

7

-

-

-

-

-

45

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

-

-

16

-

-

-

1

-

-

17

Amortisation and impairment of intangibles acquired in business combinations

25

-

11

1

2

1

4

-

-

44

Amortisation and impairment of acquired value of in-force business

103

-

-

1

-

3

58

-

-

165

(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates

-

-

(7)

-

-

-

19

-

-

12

Other

-

-

-

-

-

-

-

-

-

-

Group adjusted operating profit/(loss) before tax attributable to shareholders' profits

817

(66)

129

220

101

150

140

35

(301)

1,225

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

 

 

 

Page 52

 

B6 - Segmental information continued

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

 

United Kingdom

 

 

 

Europe

 

 

 

 

 

Life
£m

GI
£m

Canada
£m

France
 m

Poland
 m

Italy, Ireland and Other
£m

Asia
£m

Aviva Investors £m

Other Group activities £m

Total
£m

Gross written premiums

3,509

2,338

1,525

3,407

311

3,377

744

-

-

15,211

Premiums ceded to reinsurers

(814)

(180)

(67)

(40)

(5)

(70)

(266)

-

-

(1,442)

Internal reinsurance revenue

-

-

-

-

-

-

(4)

-

4

-

Premiums written net of reinsurance

2,695

2,158

1,458

3,367

306

3,307

474

-

4

13,769

Net change in provision for unearned premiums

(37)

(74)

(9)

(121)

-

(12)

(20)

-

-

(273)

Net earned premiums

2,658

2,084

1,449

3,246

306

3,295

454

-

4

13,496

Fee and commission income

450

60

10

142

50

30

109

159

1

1,011

 

3,108

2,144

1,459

3,388

356

3,325

563

159

5

14,507

Net investment income

19,469

181

128

4,582

67

2,561

353

35

638

28,014

Inter-segment revenue

-

-

-

-

-

-

-

118

-

118

Share of profit/(loss) after tax of joint ventures and associates

33

-

-

4

-

6

32

-

(13)

62

Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates

-

-

6

-

-

-

(19)

-

-

(13)

Segmental income2

22,610

2,325

1,593

7,974

423

5,892

929

312

630

42,688

Claims and benefits paid, net of recoveries from reinsurers

(4,844)

(1,329)

(928)

(2,434)

(200)

(1,588)

(480)

-

(21)

(11,824)

Change in insurance liabilities, net of reinsurance

(3,696)

(59)

(36)

(792)

2

(814)

(60)

-

7

(5,448)

Change in investment contract provisions

(11,948)

-

-

(2,018)

1

(2,043)

116

(35)

-

(15,927)

Change in unallocated divisible surplus

311

-

-

(1,994)

(1)

(970)

(184)

-

-

(2,838)

Fee and commission expense

(255)

(624)

(401)

(418)

(77)

(164)

(114)

(15)

(580)

(2,648)

Other expenses3

(514)

(187)

(79)

(122)

(51)

(90)

(134)

(204)

(171)

(1,552)

Inter-segment expenses

(104)

(3)

(3)

(2)

(2)

(4)

-

-

-

(118)

Finance costs

(69)

(2)

(4)

(1)

-

(3)

(2)

-

(204)

(285)

Segmental expenses

(21,119)

(2,204)

(1,451)

(7,781)

(328)

(5,676)

(858)

(254)

(969)

(40,640)

Profit/(loss) before tax

1,491

121

142

193

95

216

71

58

(339)

2,048

Tax attributable to policyholders' returns

(519)

-

-

-

-

(6)

-

-

-

(525)

Profit/(loss) before tax attributable to shareholders' profits

972

121

142

193

95

210

71

58

(339)

1,523

Adjusting items:

 

 

 

 

 

 

 

 

 

 

Reclassification of unallocated interest4

32

(9)

17

24

-

-

-

2

(66)

-

Life business: Investment variances and economic assumption changes

(400)

-

-

86

(2)

(39)

(17)

-

-

(372)

Non-life business: Short-term fluctuation in return on investments

-

(70)

(77)

(71)

(1)

(28)

-

-

102

(145)

General insurance and health business: Economic assumption changes

-

54

3

16

-

-

-

-

-

73

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

-

-

2

-

-

-

9

-

-

11

Amortisation and impairment of intangibles acquired in business combinations

27

-

8

1

2

1

6

-

-

45

Amortisation and impairment of acquired value of in-force business

121

-

-

1

-

5

63

-

1

191

(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates

-

-

(6)

-

-

-

19

-

-

13

Other5

-

45

-

-

-

2

-

-

-

47

Group adjusted operating profit/(loss) before tax attributable to shareholders' profits4

752

141

89

250

94

151

151

60

(302)

1,386

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

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

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

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

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

 

 

 

Page 53

 

B6 - Segmental information continued

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

 

United Kingdom

 

 

 

Europe

 

 

 

 

 

Life
£m

GI
£m

Canada
£m

France
£m

Poland
£m

Italy, Ireland and Other
£m

Asia
£m

Aviva Investors £m

Other Group activities £m

Total
£m

Gross written premiums

8,596

4,624

3,204

6,883

643

5,761

1,532

-

-

31,243

Premiums ceded to reinsurers

(2,271)

(406)

(143)

(86)

(12)

(264)

(381)

-

-

(3,563)

Internal reinsurance revenue

-

-

-

-

-

-

1

-

(1)

-

Premiums written net of reinsurance

6,325

4,218

3,061

6,797

631

5,497

1,152

-

(1)

27,680

Net change in provision for unearned premiums

(2)

(57)

(99)

(28)

2

(9)

(16)

-

-

(209)

Net earned premiums

6,323

4,161

2,962

6,769

633

5,488

1,136

-

(1)

27,471

Fee and commission income

951

113

24

305

99

123

205

320

1

2,141

 

7,274

4,274

2,986

7,074

732

5,611

1,341

320

-

29,612

Net investment income

27,070

254

171

6,267

155

4,352

967

61

1,280

40,577

Inter-segment revenue

-

-

-

-

-

-

-

247

-

247

Share of profit/(loss) after tax of joint ventures and associates

20

-

-

48

-

12

33

-

(28)

85

Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates

-

-

6

-

-

-

(28)

-

-

(22)

Segmental income1

34,364

4,528

3,163

13,389

887

9,975

2,313

628

1,252

70,499

Claims and benefits paid, net of recoveries from reinsurers

(9,569)

(2,614)

(1,938)

(4,751)

(380)

(2,820)

(1,003)

-

(21)

(23,096)

Change in insurance liabilities, net of reinsurance

(3,428)

(53)

(16)

(1,112)

(49)

(1,062)

(32)

-

50

(5,702)

Change in investment contract provisions

(16,411)

-

-

(4,041)

1

(3,365)

(216)

(63)

-

(24,095)

Change in unallocated divisible surplus

162

-

-

(2,010)

(4)

(1,764)

(369)

-

-

(3,985)

Fee and commission expense

(669)

(1,265)

(823)

(816)

(156)

(352)

(257)

(27)

(1,171)

(5,536)

Other expenses

(1,332)

(298)

(162)

(246)

(95)

(230)

(283)

(447)

(236)

(3,329)

Inter-segment expenses

(218)

(6)

(6)

(2)

(5)

(10)

-

-

-

(247)

Finance costs

(159)

(4)

(7)

(1)

(1)

(6)

(8)

-

(390)

(576)

Segmental expenses

(31,624)

(4,240)

(2,952)

(12,979)

(689)

(9,609)

(2,168)

(537)

(1,768)

(66,566)

Profit/(loss) before tax

2,740

288

211

410

198

366

145

91

(516)

3,933

Tax attributable to policyholders' returns

(487)

-

-

-

-

(14)

(58)

-

-

(559)

Profit/(loss) before tax attributable to shareholders' profits

2,253

288

211

410

198

352

87

91

(516)

3,374

Adjusting items:

 

 

 

 

 

 

 

 

 

 

Reclassification of unallocated interest2

65

(8)

33

46

-

-

-

5

(141)

-

Life business: Investment variances and economic assumption changes

(695)

-

-

84

(4)

(42)

10

-

(7)

(654)

Non-life business: Short-term fluctuation in return on investments

-

(102)

(64)

(95)

(5)

(33)

-

-

132

(167)

General insurance and health business: Economic assumption changes

-

27

2

24

-

-

-

-

1

54

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

-

-

2

-

-

-

13

-

-

15

Amortisation and impairment of intangibles acquired in business combinations

54

-

13

2

5

2

11

-

-

87

Amortisation and impairment of acquired value of in-force business

243

-

-

2

-

33

126

-

2

406

(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates

-

-

(6)

-

-

-

28

-

-

22

Other3

-

45

-

-

-

2

-

-

-

47

Group adjusted operating profit/(loss) before tax attributable to shareholders' profits2

1,920

250

191

473

194

314

275

96

(529)

3,184

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

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

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

(b) Further analysis by products and services

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

Long-term business

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

General insurance and health

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

 

 

 

Page 54

 

B6 - Segmental information continued

Fund management

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

Other

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

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

 

Long-term business
£m

General insurance and

health1 

£m

Fund management £m

Other
£m

Total
£m

Gross written premiums2

9,681

5,548

-

-

15,229

Premiums ceded to reinsurers

(1,673)

(332)

-

-

(2,005)

Premiums written net of reinsurance

8,008

5,216

-

-

13,224

Net change in provision for unearned premiums

-

(199)

-

-

(199)

Net earned premiums

8,008

5,017

-

-

13,025

Fee and commission income

817

59

154

44

1,074

 

8,825

5,076

154

44

14,099

Net investment (expense)/income

(3,294)

113

-

(458)

(3,639)

Inter-segment revenue

-

-

105

-

105

Share of profit after tax of joint ventures and associates

8

1

-

57

66

(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates

(19)

7

-

-

(12)

Segmental income

5,520

5,197

259

(357)

10,619

Claims and benefits paid, net of recoveries from reinsurers

(8,073)

(2,922)

-

-

(10,995)

Change in insurance liabilities, net of reinsurance

(3,065)

(455)

-

-

(3,520)

Change in investment contract provisions

6,945

-

-

-

6,945

Change in unallocated divisible surplus

1,334

-

-

-

1,334

Fee and commission expense

(663)

(1,352)

(14)

476

(1,553)

Other expenses

(721)

(416)

(210)

(296)

(1,643)

Inter-segment expenses

(99)

(6)

-

-

(105)

Finance costs

(80)

(5)

-

(193)

(278)

Segmental expenses

(4,422)

(5,156)

(224)

(13)

(9,815)

Profit/(loss) before tax

1,098

41

35

(370)

804

Tax attributable to policyholders' returns

272

-

-

-

272

Profit/(loss) before tax attributable to shareholders' profits

1,370

41

35

(370)

1,076

Adjusting items

(51)

170

1

29

149

Group adjusted operating profit/(loss) before tax attributable to shareholders' profits

1,319

211

36

(341)

1,225

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

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

 

 

 

 

Page 55

 

B6 - Segmental information continued

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

 

Long-term business
£m

General insurance and

health2  

£m

Fund management £m

Other
£m

Total
£m

Gross written premiums3

9,649

5,562

-

-

15,211

Premiums ceded to reinsurers

(1,126)

(316)

-

-

(1,442)

Premiums written net of reinsurance

8,523

5,246

-

-

13,769

Net change in provision for unearned premiums

-

(273)

-

-

(273)

Net earned premiums

8,523

4,973

-

-

13,496

Fee and commission income

687

65

158

101

1,011

 

9,210

5,038

158

101

14,507

Net investment income

26,973

427

-

614

28,014

Inter-segment revenue

-

-

120

-

120

Share of profit/(loss) after tax of joint ventures and associates

75

-

-

(13)

62

(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates

(19)

6

-

-

(13)

Segmental income

36,239

5,471

278

702

42,690

Claims and benefits paid, net of recoveries from reinsurers

(8,613)

(3,211)

-

-

(11,824)

Change in insurance liabilities, net of reinsurance

(5,325)

(123)

-

-

(5,448)

Change in investment contract provisions

(15,927)

-

-

-

(15,927)

Change in unallocated divisible surplus

(2,838)

-

-

-

(2,838)

Fee and commission expense

(691)

(1,304)

(14)

(639)

(2,648)

Other expenses

(748)

(349)

(207)

(248)

(1,552)

Inter-segment expenses

(112)

(7)

-

(1)

(120)

Finance costs

(72)

(6)

-

(207)

(285)

Segmental expenses

(34,326)

(5,000)

(221)

(1,095)

(40,642)

Profit/(loss) before tax

1,913

471

57

(393)

2,048

Tax attributable to policyholders' returns

(525)

-

-

-

(525)

Profit/(loss) before tax attributable to shareholders' profits

1,388

471

57

(393)

1,523

Adjusting items4

(91)

(120)

2

72

(137)

Group adjusted operating profit/(loss) before tax attributable to shareholders' profits4

1,297

351

59

(321)

1,386

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

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

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

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

 

 

 

 

Page 56

 

B6 - Segmental information continued

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

 

Long-term business
£m

General insurance and

health1  

£m

Fund management £m

Other
£m

Total
£m

Gross written premiums2

20,335

10,908

-

-

31,243

Premiums ceded to reinsurers

(2,879)

(684)

-

-

(3,563)

Premiums written net of reinsurance

17,456

10,224

-

-

27,680

Net change in provision for unearned premiums

-

(209)

-

-

(209)

Net earned premiums

17,456

10,015

-

-

27,471

Fee and commission income

1,490

126

319

206

2,141

 

18,946

10,141

319

206

29,612

Net investment income/(expense)

38,722

622

(1)

1,234

40,577

Inter-segment revenue

-

-

250

-

250

Share of profit/(loss) after tax of joint ventures and associates

113

-

-

(28)

85

(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates

(28)

6

-

-

(22)

Segmental income

57,753

10,769

568

1,412

70,502

Claims and benefits paid, net of recoveries from reinsurers

(16,612)

(6,484)

-

-

(23,096)

Change in insurance liabilities, net of reinsurance

(5,566)

(136)

-

-

(5,702)

Change in investment contract provisions

(24,095)

-

-

-

(24,095)

Change in unallocated divisible surplus

(3,985)

-

-

-

(3,985)

Fee and commission expense

(1,546)

(2,672)

(27)

(1,291)

(5,536)

Other expenses

(1,850)

(649)

(453)

(377)

(3,329)

Inter-segment expenses

(237)

(13)

-

-

(250)

Finance costs

(170)

(10)

-

(396)

(576)

Segmental expenses

(54,061)

(9,964)

(480)

(2,064)

(66,569)

Profit/(loss) before tax

3,692

805

88

(652)

3,933

Tax attributable to policyholders' returns

(559)

-

-

-

(559)

Profit/(loss) before tax attributable to shareholders' profits

3,133

805

88

(652)

3,374

Adjusting items3

(68)

(161)

4

35

(190)

Group adjusted operating profit/(loss) before tax attributable to shareholders' profits3

3,065

644

92

(617)

3,184

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

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

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

 

 

Page 57

 

B7 - Tax

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

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

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

 

6 months
2020
£m

6 months
2019
£m

Full year
 2019
£m

Current tax

 

 

 

For the period

308

532

1,062

Prior period adjustments

(23)

(54)

(179)

Total current tax

285

478

883

Deferred tax

 

 

 

Origination and reversal of temporary differences

(353)

393

402

Changes in tax rates or tax laws

(11)

(6)

(6)

Write down/(back) of deferred tax assets

9

3

(9)

Total deferred tax

(355)

390

387

Total tax (credited)/charged to income statement

(70)

868

1,270

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

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

 

6 months
2020
£m

6 months
 2019
£m

Full year
2019
£m

UK tax

(143)

699

851

Overseas tax

73

169

419

 

(70)

868

1,270

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

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

 

6 months
2020
£m

6 months
2019
£m

Full year
2019
£m

Current tax

 

 

 

In respect of pensions and other post-retirement obligations

(19)

(29)

(49)

In respect of foreign exchange movements

15

4

(10)

 

(4)

(25)

(59)

Deferred tax

 

 

 

In respect of pensions and other post-retirement obligations

219

49

(56)

In respect of fair value gains on owner-occupied properties

-

-

1

In respect of unrealised (losses)/gains on investments

(2)

14

5

 

217

63

(50)

Total tax charged/(credited) to other comprehensive income

213

38

(109)

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

 

 

Page 58

 

B7 - Tax continued

(c) Tax credited to equity

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

(d) Tax reconciliation

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

 

Shareholder £m

Policyholder £m

6 months 2020
£m

Shareholder £m

Policyholder £m

6 months 2019
£m

Shareholder £m

Policyholder £m

Full year
2019
£m

Total profit before tax

1,076

(272)

804

1,523

525

2,048

3,374

559

3,933

 

 

 

 

 

 

 

 

 

 

Tax calculated at standard UK corporation tax rate of 19.00% (2019: 19.00%)

205

(52)

153

289

100

389

641

106

747

Reconciling items

 

 

 

 

 

 

 

 

 

Different basis of tax - policyholders

-

(221)

(221)

-

426

426

-

454

454

Adjustment to tax charge in respect of prior periods

(19)

-

(19)

(3)

-

(3)

5

-

5

Non-assessable income and items not taxed at the full statutory rate

(80)

-

(80)

6

-

6

(51)

-

(51)

Non-taxable profit on sale of subsidiaries and associates

-

-

-

-

-

-

(1)

-

(1)

Disallowable expenses

17

-

17

17

-

17

41

-

41

Different local basis of tax on overseas profits

22

1

23

42

(1)

41

98

(1)

97

Change in future local statutory tax rates

49

-

49

-

-

-

(6)

-

(6)

Movement in deferred tax not recognised

14

-

14

(3)

-

(3)

(4)

-

(4)

Tax effect of profit from joint ventures and associates

(5)

-

(5)

(6)

-

(6)

(8)

-

(8)

Other

(1)

-

(1)

1

-

1

(4)

-

(4)

Total tax charged/(credited) to income statement

202

(272)

(70)

343

525

868

711

559

1,270

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

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

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

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

 

 

Page 59

 

B8 - Earnings per share

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

(a) Basic earnings per share

(i)  The profit attributable to ordinary shareholders is:

 

 

 

6 months 2020

 

 

Restated1

6 months 2019

 

 

Full year 2019

 

Group adjusted operating profit
£m

Adjusting items
£m

Total
 m

Group adjusted operating profit
£m

Adjusting items
£m

Total
£m

Group adjusted operating profit
£m

Adjusting items
£m

Total
£m

Profit before tax attributable to shareholders' profits

1,225

(149)

1,076

1,386

137

1,523

3,184

190

3,374

Tax attributable to shareholders' profit

(224)

22

(202)

(306)

(37)

(343)

(668)

(43)

(711)

Profit for the period

1,001

(127)

874

1,080

100

1,180

2,516

147

2,663

Amount attributable to non-controlling interests

(48)

(5)

(53)

(47)

(17)

(64)

(98)

(17)

(115)

Cumulative preference dividends for the year

(9)

-

(9)

(9)

-

(9)

(17)

-

(17)

Coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax)2

(27)

-

(27)

(6)

-

(6)

(34)

-

(34)

Profit attributable to ordinary shareholders

917

(132)

785

1,018

83

1,101

2,367

130

2,497

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

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

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

 

 

 

6 months 2020

 

 

Restated2

6 months 2019

 

 

Full year 2019

 

Before tax £m

Net of tax, NCI, preference dividends

and DCI1 

£m

Per share
p

Before tax £m

Net of tax, NCI, preference dividends

and DCI1  

£m

Per share
p

Before tax £m

Net of tax, NCI, preference dividends

and DCI1  

£m

Per share
p

Group adjusted operating profit attributable to ordinary shareholders

1,225

917

23.4

1,386

1,018

26.1

3,184

2,367

60.5

Adjusting items:

 

 

 

 

 

 

 

 

 

Life business: Investment variances and economic assumption changes

305

290

7.4

372

292

7.5

654

535

13.7

Non-life business: Short-term fluctuation in return on investments

(171)

(179)

(4.6)

145

121

3.1

167

129

3.3

General insurance and health business: Economic assumption changes

(45)

(36)

(0.9)

(73)

(58)

(1.4)

(54)

(33)

(0.8)

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

(17)

(15)

(0.4)

(11)

(11)

(0.3)

(15)

(15)

(0.4)

Amortisation and impairment of intangibles acquired in business combinations2

(44)

(34)

(0.9)

(45)

(42)

(1.1)

(87)

(61)

(1.6)

Amortisation and impairment of acquired value of in-force business

(165)

(145)

(3.7)

(191)

(167)

(4.3)

(406)

(356)

(9.1)

Loss on disposal and remeasurement of subsidiaries, joint ventures and associates

(12)

(13)

(0.3)

(13)

(14)

(0.4)

(22)

(23)

(0.6)

Other3

-

-

-

(47)

(38)

(1.0)

(47)

(46)

(1.2)

Profit attributable to ordinary shareholders

1,076

785

20.0

1,523

1,101

28.2

3,374

2,497

63.8

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

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

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

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

 

 

Page 60

 

B8 - Earnings per share continued

(b) Diluted earnings per share

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

 

 

 

6 months 2020

 

 

6 months 2019

 

 

Full year 2019

 

Total
£m

Weighted average number of shares million

Per share
p

Total
£m

Weighted average number of shares million

Per share
p

Total
£m

Weighted average number of shares million

Per share
p

Profit attributable to ordinary shareholders

785

3,923

20.0

1,101

3,907

28.2

2,497

3,911

63.8

Dilutive effect of share awards and options

-

58

(0.3)

-

43

(0.3)

-

45

(0.7)

Diluted earnings per share

785

3,981

19.7

1,101

3,950

27.9

2,497

3,956

63.1

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

 

 

 

6 months 2020

 

 

Restated1

6 months 2019

 

 

Full year 2019

 

Total
£m

Weighted average number of shares million

Per share
p

Total
 m

Weighted average number of shares million

Per share
p

Total
£m

Weighted average number of shares million

Per share
p

Group adjusted operating profit attributable to ordinary shareholders

917

3,923

23.4

1,018

3,907

26.1

2,367

3,911

60.5

Dilutive effect of share awards and options

-

58

(0.4)

-

43

(0.3)

-

45

(0.7)

Diluted group adjusted operating profit per share

917

3,981

23.0

1,018

3,950

25.8

2,367

3,956

59.8

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

B9 - Dividends and appropriations

 

6 months
2020
£m

6 months
2019
£m

Full year
2019
£m

Ordinary dividends declared and charged to equity in the period

 

 

 

Final 2019 - 21.40 pence per share, withdrawn on 8 April 2020

-

-

-

Final 2018 - 20.75 pence per share, paid on 30 May 2019

-

812

812

Interim 2019 - 9.50 pence per share, paid on 26 September 2019

-

-

372

 

-

812

1,184

Preference dividends declared and charged to equity in the period

9

9

17

Coupon payments on DCI and tier 1 notes

27

7

43

 

36

828

1,244

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

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

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

 

 

Page 61

 

B10 - Contract liabilities and associated reinsurance

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

· Note B11 covers insurance liabilities

· Note B12 covers liabilities for investment contracts

· Note B13 details the associated reinsurance assets on these liabilities

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

(a) Carrying amount

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

 

30 June 2020

30 June 2019

31 December 2019

 

Gross provisions £m

Reinsurance assets
£m

Net
£m

Gross provisions
£m

Reinsurance assets
£m

Net
£m

Gross provisions
£m

Reinsurance assets
£m

Net
£m

Long-term business

 

 

 

 

 

 

 

 

 

Insurance liabilities

(137,662)

7,930

(129,732)

(131,347)

6,202

(125,145)

(131,182)

6,369

(124,813)

Liabilities for participating investment contracts

(95,486)

-

(95,486)

(94,575)

1

(94,574)

(92,762)

1

(92,761)

Liabilities for non-participating investment contracts

(134,749)

3,021

(131,728)

(132,328)

4,285

(128,043)

(137,689)

4,006

(133,683)

 

(367,897)

10,951

(356,946)

(358,250)

10,488

(347,762)

(361,633)

10,376

(351,257)

Outstanding claims provisions

(2,586)

111

(2,475)

(2,160)

81

(2,079)

(2,187)

93

(2,094)

 

(370,483)

11,062

(359,421)

(360,410)

10,569

(349,841)

(363,820)

10,469

(353,351)

General insurance and health

 

 

 

 

 

 

 

 

 

Outstanding claims provisions

(8,893)

690

(8,203)

(9,130)

724

(8,406)

(8,831)

683

(8,148)

Provisions for claims incurred but not reported

(3,653)

1,306

(2,347)

(2,554)

891

(1,663)

(2,672)

1,004

(1,668)

 

(12,546)

1,996

(10,550)

(11,684)

1,615

(10,069)

(11,503)

1,687

(9,816)

Provision for unearned premiums

(5,464)

293

(5,171)

(5,324)

283

(5,041)

(5,138)

275

(4,863)

Provision arising from liability adequacy tests1

(8)

-

(8)

(16)

-

(16)

(15)

-

(15)

 

(18,018)

2,289

(15,729)

(17,024)

1,898

(15,126)

(16,656)

1,962

(14,694)

Total

(388,501)

13,351

(375,150)

(377,434)

12,467

(364,967)

(380,476)

12,431

(368,045)

Less: Liabilities classified as held for sale

8,791

(44)

8,747

8,140

(53)

8,087

9,011

(75)

8,936

 

(379,710)

13,307

(366,403)

(369,294)

12,414

(356,880)

(371,465)

12,356

(359,109)

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

 

 

Page 62

 

B10 - Contract liabilities and associated reinsurance continued

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

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

6 months 2020

Gross
£m

Reinsurance £m

Net
£m

Long-term business

 

 

 

Change in insurance liabilities (note B11(b))

4,178

(1,447)

2,731

Change in provision for outstanding claims

342

(8)

334

 

4,520

(1,455)

3,065

General insurance and health

 

 

 

Change in insurance liabilities (note B11(c) and B13(c))

743

(280)

463

Change in provision arising from liability adequacy tests

(7)

-

(7)

Less: Unwind of discount

(5)

4

(1)

 

731

(276)

455

Total change in insurance liabilities

5,251

(1,731)

3,520

 

6 months 2019

Gross
£m

Reinsurance £m

Net
£m

Long-term business

 

 

 

Change in insurance liabilities (note B11(b))

5,517

(362)

5,155

Change in provision for outstanding claims

162

8

170

 

5,679

(354)

5,325

General insurance and health

 

 

 

Change in insurance liabilities (note B11(c) and B13(c))1

123

2

125

Change in provision arising from liability adequacy tests

-

-

-

Less: Unwind of discount

(7)

5

(2)

 

116

7

123

Total change in insurance liabilities

5,795

(347)

5,448

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

Full year 2019

Gross
£m

Reinsurance £m

Net
£m

Long-term business

 

 

 

Change in insurance liabilities (note B11(b))

6,600

(1,030)

5,570

Change in provision for outstanding claims

4

(8)

(4)

 

6,604

(1,038)

5,566

General insurance and health

 

 

 

Change in insurance liabilities (note B11(c) and B13(c))1

234

(94)

140

Change in provision arising from liability adequacy tests

-

-

-

Less: Unwind of discount

(14)

10

(4)

 

220

(84)

136

Total change in insurance liabilities

6,824

(1,122)

5,702

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

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

 

 

Page 63

 

B11 - Insurance liabilities

(a) Carrying amount

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

 

30 June
 2020
£m

30 June
2019
 m

31 December 2019
 m

Long-term business

 

 

 

Participating insurance liabilities

49,687

48,204

47,344

Unit-linked non-participating insurance liabilities

14,505

15,147

14,707

Other non-participating insurance liabilities1

73,470

67,996

69,131

 

137,662

131,347

131,182

Outstanding claims provisions

2,586

2,160

2,187

 

140,248

133,507

133,369

General insurance and health

 

 

 

Outstanding claims provisions

8,893

9,130

8,831

Provision for claims incurred but not reported

3,653

2,554

2,672

 

12,546

11,684

11,503

Provision for unearned premiums

5,464

5,324

5,138

Provision arising from liability adequacy tests1

8

16

15

 

18,018

17,024

16,656

Total

158,266

150,531

150,025

Less: Liabilities classified as held for sale

(668)

(118)

(687)

 

157,598

150,413

149,338

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

(b) Movement in long-term business liabilities

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

 

6 months
2020
£m

6 months
2019
£m

Full year
 2019
£m

Carrying amount at 1 January

131,182

125,829

125,829

Liabilities in respect of new business

4,288

2,816

6,988

Expected change in existing business

(3,729)

(3,628)

(6,452)

Variance between actual and expected experience

(717)

2,945

3,212

Impact of operating assumption changes

165

-

(961)

Impact of economic assumption changes

4,084

3,009

3,766

Other movements recognised as an expense1

87

375

47

Change in liability recognised as an expense (note B10(b))

4,178

5,517

6,600

Foreign exchange rate movements

2,192

2

(1,775)

Other movements2

110

(1)

528

Carrying amount at 30 June/31 December

137,662

131,347

131,182

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

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

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

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

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

 

 

Page 64

 

B11 - Insurance liabilities continued

(c) Movements in general insurance and health liabilities

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

 

6 months
2020
£m

6 months
2019
£m

Full year
2019

 m

Carrying amount at 1 January

11,503

11,406

11,406

Impact of changes in assumptions

135

115

126

Claim losses and expenses incurred in the current year

3,779

3,408

7,045

Decrease in estimated claim losses and expenses incurred in prior periods

(56)

(58)

(186)

Incurred claims losses and expenses

3,858

3,465

6,985

Less:

 

 

 

Payments made on claims incurred in the current year

(1,245)

(1,440)

(3,834)

Payments made on claims incurred in prior periods

(2,049)

(2,097)

(3,327)

Recoveries on claim payments

174

188

396

Claims payments made in the period, net of recoveries

(3,120)

(3,349)

(6,765)

Unwind of discounting

5

7

14

Changes in claims reserve recognised as an expense (note B10(b))

743

123

234

Foreign exchange rate movements

300

153

(138)

Other movements

-

2

1

Carrying amount at 30 June/31 December

12,546

11,684

11,503

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

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

 

 

 

Page 65

 

B12 - Liability for investment contracts

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

(a) Carrying amount

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

 

30 June
2020
£m

30 June
 2019
£m

31 December 2019
£m

Long-term business

 

 

 

Liabilities for participating investment contracts

95,486

94,575

92,762

Liabilities for non-participating investment contracts

134,749

132,328

137,689

Total

230,235

226,903

230,451

Less: Liabilities classified as held for sale

(8,123)

(8,022)

(8,324)

 

222,112

218,881

222,127

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

(b) Movements in participating investment contracts

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

 

6 months
2020
£m

6 months
 2019
£m

Full year
 2019
£m

Carrying amount at 1 January

92,762

90,455

90,455

Liabilities in respect of new business

2,404

3,795

6,991

Expected change in existing business

(2,867)

(2,660)

(4,857)

Variance between actual and expected experience

(2,282)

2,833

4,751

Impact of operating assumption changes

-

-

173

Impact of economic assumption changes

447

139

204

Other movements recognised as an expense1

(4)

161

103

Change in liability recognised as an expense2

(2,302)

4,268

7,365

Foreign exchange rate movements

5,124

(148)

(4,054)

Other movements3

(98)

-

(1,004)

Carrying amount at 30 June/31 December

95,486

94,575

92,762

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

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

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

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

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

(c) Movements in non-participating investment contracts

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

 

6 months
2020
£m

6 months
 2019
£m

Full year
2019
£m

Carrying amount at 1 January

137,689

120,354

120,354

Liabilities in respect of new business

1,760

2,552

5,520

Expected change in existing business

(3,223)

(2,110)

(3,742)

Variance between actual and expected experience

(2,294)

11,545

16,345

Impact of operating assumption changes

-

-

(22)

Impact of economic assumption changes

-

-

(1)

Other movements recognised as an expense1

63

2

2

Change in liability

(3,694)

11,989

18,102

Foreign exchange rate movements

734

(15)

(575)

Other movements2

20

-

(192)

Carrying amount at 30 June/ 31 December

134,749

132,328

137,689

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

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

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

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

 

 

Page 66

 

B13 - Reinsurance assets

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

(a) Carrying amount

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

 

30 June
2020
£m

30 June
2019
£m

31 December
2019
 m

Long-term business

 

 

 

Insurance contracts

7,930

6,202

6,369

Participating investment contracts

-

1

1

Non-participating investment contracts1

3,021

4,285

4,006

 

10,951

10,488

10,376

Outstanding claims provisions

111

81

93

 

11,062

10,569

10,469

General insurance and health

 

 

 

Outstanding claims provisions

690

724

683

Provisions for claims incurred but not reported

1,306

891

1,004

 

1,996

1,615

1,687

Provisions for unearned premiums

293

283

275

 

2,289

1,898

1,962

 

13,351

12,467

12,431

Less: Assets classified as held for sale

(44)

(53)

(75)

Total

13,307

12,414

12,356

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

(b) Movements in long-term business liabilities

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

 

6 months
2020
£m

6 months
2019
£m

Full year
2019
£m

Carrying amount at 1 January

10,376

9,846

9,846

Assets in respect of new business

865

555

954

Expected change in existing business assets

(155)

22

(185)

Variance between actual and expected experience

(192)

(32)

274

Impact of non-economic assumption changes

140

-

(175)

Impact of economic assumption changes

535

131

193

Other movements recognised as an expense1

(733)

(38)

(37)

Change in assets2

460

638

1,024

Foreign exchange rate movements

103

4

(73)

Other movements3

12

-

(421)

Carrying amount at 30 June/31 December

10,951

10,488

10,376

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

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

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

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

 

 

Page 67

 

B13 - Reinsurance assets continued

(c) Movements in general insurance and health claims liabilities

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

 

6 months
2020
£m

6 months
2019
£m

Full year
 2019
£m

Carrying amount at 1 January

1,687

1,611

1,611

Impact of changes in assumptions

90

41

73

Reinsurers' share of claim losses and expenses

 

 

 

Incurred in current year

406

89

195

Incurred in prior years

(22)

(2)

96

Reinsurers' share of incurred claim losses and expenses

384

87

291

Less:

 

 

 

Reinsurance recoveries received on claims

 

 

 

Incurred in current year

(91)

(6)

(53)

Incurred in prior years

(107)

(129)

(227)

Reinsurance recoveries received in the year

(198)

(135)

(280)

Unwind of discounting

4

5

10

Change in reinsurance asset recognised as income (note B10(b))

280

(2)

94

Foreign exchange rate movements

29

6

(15)

Other movements

-

-

(3)

Carrying amount at 30 June/31 December

1,996

1,615

1,687

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

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

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

 

Effect on profit 6 months
2020
 m

Effect on profit 6 months
2019
 m

Effect on profit Full year
2019
£m

Assumptions

 

 

 

Long-term insurance business

 

 

 

Interest rates

(2,184)

(2,504)

(2,978)

Expenses

-

-

(47)

Persistency rates

-

-

(124)

Mortality and morbidity for assurance contracts

-

-

(38)

Mortality for annuity contracts

-

-

830

Tax and other assumptions

(25)

-

9

General insurance and health business

 

 

 

Change in discount rate assumptions

(45)

(73)

(54)

Total

(2,254)

(2,577)

(2,402)

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

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

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

 

 

Page 68

 

B15 - Unallocated divisible surplus

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

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

 

6 months
2020
£m

6 months
2019
£m

Full year
2019
£m

Carrying amount at 1 January

9,597

5,949

5,949

Change in participating fund assets

47

8,954

9,411

Change in participating fund liabilities

(1,605)

(6,195)

(5,426)

Other movements1

224

79

-

Change in liability recognised as an expense

(1,334)

2,838

3,985

Foreign exchange rate movements

485

54

(337)

Carrying amount at 30 June/ 31 December

8,748

8,841

9,597

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

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

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

B16 - Borrowings

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

(a) Analysis of total borrowings

Total borrowings comprise:

 

30 June
2020
£m

30 June
2019
£m

31 December
2019
£m

Core structural borrowings, at amortised cost

8,822

7,694

7,496

Operational borrowings, at amortised cost

371

313

338

Operational borrowings, at fair value

1,189

1,227

1,233

 

1,560

1,540

1,571

 

10,382

9,234

9,067

Less: Liabilities classified as held for sale

(26)

-

(28)

 

10,356

9,234

9,039

(b) Core structural borrowings

The carrying amounts of these borrowings are:

 

30 June
2020
£m

30 June
2019
£m

31 December 2019
£m

Subordinated debt

 

 

 

6.125% £700 million subordinated notes 2036

695

694

695

6.125% £800 million undated subordinated notes

798

797

797

6.875% £600 million subordinated notes 2058

595

594

594

12.000% £162 million subordinated notes 2021

173

185

179

8.250% £500 million subordinated notes 2022

536

555

545

6.625% £450 million subordinated notes 2041

449

449

449

6.125% €650 million subordinated notes 2043

589

580

549

3.875% €700 million subordinated notes 2044

634

623

591

5.125% £400 million subordinated notes 2050

395

395

395

3.375% €900 million subordinated notes 2045

811

797

756

4.500% C$450 million subordinated notes 2021

267

270

261

4.375% £400 million subordinated notes 2049

395

394

395

4.000% £500 million subordinated notes 2055

492

-

-

5.9021% £500 million direct capital instrument1

499

-

-

 

7,328

6,333

6,206

Senior notes

 

 

 

0.625% €500 million senior notes 2023

453

445

422

1.875% €750 million senior notes 2027

676

665

630

 

1,129

1,110

1,052

Commercial paper

365

251

238

Total

8,822

7,694

7,496

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

 

 

Page 69

 

B16 - Borrowings continued

(c) Operational borrowings

The carrying amounts of these borrowings are:

 

30 June
2020
£m

30 June
2019
£m

31 December 2019
 m

Amounts owed to financial institutions

 

 

 

Loans

371

313

338

Securitised mortgage loan notes

 

 

 

UK lifetime mortgage business1

1,189

1,227

1,233

Total

1,560

1,540

1,571

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

B17 - Pension obligations and other provisions

(a)  Carrying amounts  

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

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

 

30 June
2020
£m

30 June
 2019
£m

31 December 2019
£m

Total IAS 19 obligations to main staff pension schemes

605

692

770

Deficits in other staff pension schemes

72

66

66

Total IAS 19 obligations to staff pension schemes

677

758

836

Restructuring provisions

33

60

29

Other provisions

696

520

700

Total Provisions

1,406

1,338

1,565

Less: Liabilities classified as held for sale

(1)

-

-

Total

1,405

1,338

1,565

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

(ii) Pension obligations

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

 

30 June
2020
£m

30 June
2019
 m

31 December 2019
 m

Total fair value of scheme assets

20,383

19,472

18,768

Present value of defined benefit obligation

(17,581)

(16,696)

(16,792)

Net IAS 19 surplus in the schemes

2,802

2,776

1,976

 

 

 

 

Surpluses included in other assets1

3,407

3,468

2,746

Deficits included in provisions

(605)

(692)

(770)

Net IAS 19 surplus in the schemes

2,802

2,776

1,976

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

 

 

 

Page 70

 

B17 - Pension obligations and other provisions continued

(b)  Movements in the schemes' surpluses and deficits

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

 

6 months
2020
£m

6 months
2019
£m

Full year
2019
£m

Net IAS 19 surplus in the schemes at 1 January

1,976

2,563

2,563

 

 

 

 

Administrative expenses

(8)

(9)

(19)

Total pension cost charged to net operating expenses

(8)

(9)

(19)

Net interest credited to investment income/(finance costs)1

20

34

73

Total recognised in income statement

12

25

54

 

 

 

 

Remeasurements:

 

 

 

Actual return on these assets

1,758

1,575

1,141

Less: Interest income on scheme assets

(176)

(240)

(479)

Return on scheme assets excluding amounts in interest income

1,582

1,335

662

Losses from change in financial assumptions

(850)

(1,277)

(1,824)

(Losses)/gains from change in demographic assumptions

(21)

(10)

165

Experience gains

2

22

130

Total remeasurements recognised in other comprehensive income2

713

70

(867)

 

 

 

 

Employer contributions

116

119

215

Foreign exchange rate movements

(15)

(1)

11

Net IAS 19 surplus in the schemes at 30 June/31 December

2,802

2,776

1,976

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

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

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

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

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

B18 - Related party transactions

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

 

 

Page 71

 

B19 - Fair value

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

(a) Basis for determining fair value hierarchy

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

Level 1

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

Level 2

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

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

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

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

· Market-corroborated inputs.

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

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

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

Level 3

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

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

(b)  Changes to valuation technique

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

 

 

 

Page 72

 

B19 - Fair value continued

(c) Comparison of the carrying amount and fair values of financial instruments

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

 

30 June 2020

30 June 2019

31 December 2019

 

Fair value
£m

Carrying amount
£m

Fair value
£m

Carrying amount
£m

Fair value
£m

Carrying amount
£m

Financial assets

 

 

 

 

 

 

Loans1

40,090

40,109

39,417

39,452

38,559

38,579

Financial investments

353,583

353,583

343,858

343,858

343,418

343,418

Fixed maturity securities2

211,264

211,264

201,566

201,566

198,832

198,832

Equity securities

91,308

91,308

94,743

94,743

99,570

99,570

Other investments (including derivatives)2

51,011

51,011

47,549

47,549

45,016

45,016

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

Non-participating investment contracts

126,626

126,626

124,306

124,306

129,365

129,365

Net asset value attributable to unitholders

18,669

18,669

16,764

16,764

16,610

16,610

Borrowings1

11,366

10,356

10,213

9,234

10,268

9,039

Derivative liabilities

9,563

9,563

7,041

7,041

6,517

6,517

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

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

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

· Receivables

· Cash and cash equivalents

· Loans at amortised cost

· Payables and other financial liabilities

(d) Fair value hierarchy analysis

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

 

Fair value hierarchy

 

 

 

At 30 June 2020

Level 1
£m

Level 2
£m

Level 3
 m

Sub-total
Fair value
£m

Amortised
cost
£m

Total carrying value
£m

Recurring fair value measurements

 

 

 

 

 

 

Investment property

-

-

11,306

11,306

-

11,306

Loans

-

-

29,330

29,330

10,779

40,109

Financial investments measured at fair value

 

 

 

 

 

 

Fixed maturity securities

58,068

132,987

20,209

211,264

-

211,264

Equity securities

90,572

-

736

91,308

-

91,308

Other investments (including derivatives)

35,164

9,487

6,360

51,011

-

51,011

Financial assets classified as held for sale

5,567

199

1,868

7,634

1

7,635

Total

189,371

142,673

69,809

401,853

10,780

412,633

Financial liabilities measured at fair value

 

 

 

 

 

 

Non-participating investment contracts1

126,586

40

-

126,626

-

126,626

Net asset value attributable to unit holders

18,546

-

123

18,669

-

18,669

Borrowings

-

-

1,189

1,189

9,167

10,356

Derivative liabilities

422

8,369

772

9,563

-

9,563

Financial liabilities classified as held for sale

5,174

21

2,928

8,123

26

8,149

Total

150,728

8,430

5,012

164,170

9,193

173,363

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

 

Fair value hierarchy

At 30 June 2020

Level 1
£m

Level 2
£m

Level 3
£m

Total
fair value
£m

Non-recurring fair value measurement

 

 

 

 

Properties occupied by group companies

-

-

349

349

Total

-

-

349

349

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

 

 

 

Page 73

 

B19 - Fair value continued

(d) Fair value hierarchy analysis continued

 

Fair value hierarchy

 

 

 

At 30 June 2019

Level 1
£m

Level 2
 m

Level 3
£m

Sub-total
Fair value
£m

Amortised
cost
£m

Total carrying value
 m

Recurring fair value measurements

 

 

 

 

 

 

Investment property

-

-

11,471

11,471

-

11,471

Loans

-

-

27,279

27,279

12,173

39,452

Financial investments measured at fair value

 

 

 

 

 

 

Fixed maturity securities1,2

58,063

125,495

18,008

201,566

-

201,566

Equity securities

94,267

-

476

94,743

-

94,743

Other investments (including derivatives)2

35,936

6,130

5,483

47,549

-

47,549

Financial assets classified as held for sale

5,075

20

1,814

6,909

-

6,909

Total

193,341

131,645

64,531

389,517

12,173

401,690

Financial liabilities measured at fair value

 

 

 

 

 

 

Non-participating investment contracts3

124,260

46

-

124,306

-

124,306

Net asset value attributable to unit holders

16,742

-

22

16,764

-

16,764

Borrowings

-

-

1,227

1,227

8,007

9,234

Derivative liabilities

304

6,054

683

7,041

-

7,041

Financial liabilities classified as held for sale

5,075

20

2,927

8,022

-

8,022

Total

146,381

6,120

4,859

157,360

8,007

165,367

Following a review of the fair value hierarchy for fixed maturity securities, a new framework has been implemented to improve consistency across the Group. Comparative amounts have been amended from those previously reported and the effect of this change is to move £14,442 million of fixed maturity securities from fair value hierarchy Level 1 to Level 2 and £2,267 million from Level 2 to Level 1.

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

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

 

Fair value hierarchy

At 30 June 2019

Level 1
 m

Level 2
£m

Level 3
£m

Total
 fair value
£m

Non-recurring fair value measurement

 

 

 

 

Properties occupied by group companies

-

-

362

362

Total

-

-

362

362

 

 

Fair value hierarchy

 

 

 

At 31 December 2019

Level 1
£m

Level 2
£m

Level 3
£m

Sub-total
Fair value
£m

Amortised cost £m

Total carrying value
£m

Recurring fair value measurements

 

 

 

 

 

 

Investment property

-

-

11,203

11,203

-

11,203

Loans

-

-

28,319

28,319

10,260

38,579

Financial investments measured at fair value

 

 

 

 

 

 

Fixed maturity securities1

56,124

125,113

17,595

198,832

-

198,832

Equity securities

98,850

-

720

99,570

-

99,570

Other investments (including derivatives)

32,465

6,878

5,673

45,016

-

45,016

Financial assets classified as held for sale

5,788

50

1,986

7,824

1

7,825

Total

193,227

132,041

65,496

390,764

10,261

401,025

Financial liabilities measured at fair value

 

 

 

 

 

 

Non-participating investment contracts2

129,323

42

-

129,365

-

129,365

Net asset value attributable to unit holders

16,498

-

112

16,610

-

16,610

Borrowings

-

-

1,233

1,233

7,806

9,039

Derivative liabilities

418

5,444

655

6,517

-

6,517

Financial liabilities classified as held for sale

5,259

20

3,045

8,324

28

8,352

Total

151,498

5,506

5,045

162,049

7,834

169,883

1  Following a review of the fair value hierarchy for fixed maturity securities, a new framework has been implemented to improve consistency across the Group. Comparative amounts have been amended from those previously reported and the effect of this change is to move £14,681 million of fixed maturity securities from fair value hierarchy Level 1 to Level 2 and £3,167 million from Level 2 to Level 1.

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

 

Fair value hierarchy

At 31 December 2019

Level 1
£m

Level 2
£m

Level 3
£m

Total
fair value
 m

Non-recurring fair value measurement

 

 

 

 

Properties occupied by group companies

-

-

320

320

Total

-

-

320

320

 

 

 

Page 74

 

B19 - Fair value continued

(e) Transfers between Levels of the fair value hierarchy

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

Transfers between Level 1 and Level 2

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

Transfers to/from Level 3

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

(f) Further information on Level 3 assets and liabilities

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

Assets

Liabilities

At 30 June 2020

Investment Property
£m

Loans
£m

Fixed maturity securities
£m

Equity securities
£m

Other investments (including derivatives)
 m

Financial assets classified as held for sale
£m

Non participating investment contracts
£m