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Page 38

IFRS financial statements

In this section	Page
Consolidated financial statements	39
Consolidated income statement	39
Consolidated statement of comprehensive income	40
Consolidated statement of changes in equity	41
Consolidated statement of financial position	42
Consolidated statement of cash flows	43

Notes to the consolidated financial statements	44
B1 Basis of preparation	44
B2 Changes to comparative amounts	45
B3 Significant events in the current reporting period	45
B4 Exchange rates	46
B5 Strategic transactions	46
B6 Segmental information	50
B7 Tax	54
B8 Earnings per share	56
B9 Dividends and appropriations	58
B10 Contract liabilities and associated reinsurance	58
B11 Insurance liabilities	60
B12 Insurance liabilities methodology and assumptions	64
B13 Liability for investment contracts	68
B14 Reinsurance assets	70
B15 Effect of changes in assumptions and estimates during the year	72
B16 Unallocated divisible surplus	73
B17 Borrowings	73
B18 Pension obligations	74
B19 Related party transactions	75
B20 Risk management	76
B21 Direct capital instrument and tier 1 notes	90
B22 Cash and cash equivalents	90
B23 Contingent liabilities and other risk factors	90
B24 Acquired value of in-force business and intangible assets	91
B25 Subsequent events	91

Page 39

Consolidated income statement

For the year ended 31 December 2020

	Note	2020 £m	2019¹ £m
Continuing operations
Income
Gross written premiums		29,015	29,711
Premiums ceded to reinsurers		(3,638)	(3,184)
Premiums written net of reinsurance		25,377	26,527
Net change in provision for unearned premiums		(123)	(193)
Net earned premiums		25,254	26,334
Fee and commission income		1,946	1,936
Net investment income		19,330	39,611
Share of profit after tax of joint ventures and associates		27	94
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates		12	6
		46,569	67,981
Expenses
Claims and benefits paid, net of recoveries from reinsurers		(21,045)	(22,092)
Change in insurance liabilities, net of reinsurance	B10(b)	(6,640)	(5,670)
Change in investment contract provisions		(6,413)	(23,878)
Change in unallocated divisible surplus		(1,528)	(3,616)
Fee and commission expense		(4,161)	(3,924)
Investment expense attributable to unitholders		(579)	(1,355)
Other expenses		(3,037)	(3,057)
Finance costs		(553)	(568)
		(43,956)	(64,160)
Profit before tax		2,613	3,821
Tax attributable to policyholders' returns	B7(d)	(43)	(501)
Profit before tax attributable to shareholders' profits		2,570	3,320
Tax expense	B7(a)	(571)	(1,201)
Less: tax attributable to policyholders' returns	B7(d)	43	501
Tax attributable to shareholders' profits		(528)	(700)
Profit from continuing operations		2,042	2,620
Profit from discontinued operations	B5(d)	868	43
Profit for the year		2,910	2,663

Attributable to:
Equity holders of Aviva plc		2,798	2,548
Non-controlling interests		112	115
Profit for the year		2,910	2,663
Earnings per share	B8
Basic (pence per share)		70.2	63.8
Diluted (pence per share)²		69.8	63.6

Continuing operations - basic (pence per share)		48.1	62.7
Continuing operations - diluted (pence per share)²		47.8	62.5

1 The 2019 comparative results have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note B2.

2 Following a revision to the methodology to calculate the dilutive effect of share awards, the 2019 comparative amounts have been amended from those previously reported. See note B8 for more information.

Page 40

Consolidated statement of comprehensive income

For the year ended 31 December 2020

	Note	2020 £m	2019¹ £m
Profit for the year from continuing operations		2,042	2,620

Other comprehensive income from continuing operations:
Items that may be reclassified subsequently to income statement
Investments classified as available for sale
Fair value gains		22	39
Fair value gains transferred to profit on disposals		(7)	(19)
Share of other comprehensive income of joint ventures and associates		17	22
Foreign exchange rate movements		131	(193)
Aggregate tax effect - shareholder tax on items that may be reclassified subsequently to income statement	B7(b)	(11)	6

Items that will not be reclassified to income statement
Owner-occupied properties - fair value gains		3	3
Remeasurements of pension schemes		(150)	(867)
Aggregate tax effect - shareholder tax on items that will not be reclassified subsequently to income statement	B7(b)	(22)	103
Total other comprehensive income, net of tax from continuing operations		(17)	(906)
Total comprehensive income for the year from continuing operations		2,025	1,714

Profit for the year from discontinued operations	B5(d)	868	43
Other comprehensive income, net of tax from discontinued operations	B5(d)	4	(26)
Total comprehensive income for the year from discontinued operations		872	17
Total comprehensive income for the year		2,897	1,731

Attributable to:
Equity holders of Aviva plc
From continuing operations		1,880	1,637
From discontinued operations		871	18
Non-controlling interests
From continuing operations		145	77
From discontinued operations		1	(1)
		2,897	1,731

1 The 2019 comparative results have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note B2.

Page 41

Consolidated statement of changes in equity

For the year ended 31 December 2020

	Ordinary share capital £m	Preference share capital £m	Capital reserves¹ £m	Treasury shares £m	Currency translation reserve £m	Other reserves £m	Retained earnings £m	DCI £m	Total equity excluding non-controlling interests £m	Non-controlling interests £m	Total equity £m
Balance at 1 January	980	200	10,257	(7)	814	(101)	5,065	500	17,708	977	18,685
Profit for the year	-	-	-	-	-	-	2,798	-	2,798	112	2,910
Other comprehensive income	-	-	-	-	221	(97)	(171)	-	(47)	34	(13)
Total comprehensive income for the year	-	-	-	-	221	(97)	2,627	-	2,751	146	2,897
Dividends and appropriations	-	-	-	-	-	-	(280)	-	(280)	-	(280)
Non-controlling interests share of dividends declared in the year	-	-	-	-	-	-	-	-	-	(30)	(30)
Reclassification of DCI to financial liabilities²	-	-	-	-	-	-	1	(500)	(499)	-	(499)
Reserves credit for equity compensation plans	-	-	-	-	-	37	-	-	37	-	37
Shares issued under equity compensation plans	2	-	3	1	-	(51)	46	-	1	-	1
Treasury shares held by subsidiary companies	-	-	-	-	-	-	-	-	-	-	-
Forfeited dividend income	-	-	-	-	-	-	2	-	2	-	2
Changes in non-controlling interests in subsidiaries	-	-	-	-	-	-	7	-	7	(61)	(54)
Change in equity accounted option	-	-	-	-	-	-	-	-	-	-	-
Transfer to profit on disposal of subsidiaries, joint ventures and associates	-	-	-	-	(173)	-	-	-	(173)	(26)	(199)
Aggregate tax effect - shareholder tax	-	-	-	-	-	-	-	-	-	-	-
Balance at 31 December	982	200	10,260	(6)	862	(212)	7,468	-	19,554	1,006	20,560

1 Capital reserves consist of share premium of £1,242 million, a capital redemption reserve of £44 million and a merger reserve of £8,974 million.

2 On 23 June 2020, notification was given that the Group would redeem the 5.9021% £500 million DCI. The instrument was reclassified as a financial liability of £499 million, representing its fair value, and the difference of £1 million charged to retained earnings. On 27 July 2020, the instrument was redeemed in full. See note B21 for further information.

For the year ended 31 December 2019

	Ordinary share capital £m	Preference share capital £m	Capital reserves¹ £m	Treasury shares £m	Currency translation reserve £m	Other reserves £m	Retained earnings £m	DCI & Tier 1 notes £m	Total equity excluding non-controlling interests £m	Non-controlling interests £m	Total equity £m
Balance at 1 January	975	200	10,232	(15)	1,122	(279)	4,523	731	17,489	966	18,455
Adjustment at 1 January 2019 for adoption of IFRS 16²	-	-	-	-	-	-	(110)	-	(110)	-	(110)
Balance at 1 January restated²	975	200	10,232	(15)	1,122	(279)	4,413	731	17,379	966	18,345
Profit for the year	-	-	-	-	-	-	2,548	-	2,548	115	2,663
Other comprehensive income	-	-	-	-	(308)	178	(763)	-	(893)	(39)	(932)
Total comprehensive income for the year	-	-	-	-	(308)	178	1,785	-	1,655	76	1,731
Dividends and appropriations	-	-	-	-	-	-	(1,244)	-	(1,244)	-	(1,244)
Non-controlling interests share of dividends declared in the year	-	-	-	-	-	-	-	-	-	(63)	(63)
Reclassification of tier 1 notes to financial liabilities³	-	-	-	-	-	-	21	(231)	(210)	-	(210)
Reserves credit for equity compensation plans	-	-	-	-	-	62	-	-	62	-	62
Shares issued under equity compensation plans	5	-	25	(5)	-	(62)	55	-	18	-	18
Treasury shares held by subsidiary companies	-	-	-	13	-	-	-	-	13	-	13
Forfeited dividend income	-	-	-	-	-	-	4	-	4	-	4
Changes in non-controlling interests in subsidiaries	-	-	-	-	-	-	-	-	-	(2)	(2)
Change in equity accounted option	-	-	-	-	-	-	22	-	22	-	22
Transfer to profit on disposal of subsidiaries, joint ventures and associates	-	-	-	-	-	-	-	-	-	-	-
Aggregate tax effect - shareholder tax	-	-	-	-	-	-	9	-	9	-	9
Balance at 31 December	980	200	10,257	(7)	814	(101)	5,065	500	17,708	977	18,685

1 Capital reserves consist of share premium of £1,239 million, a capital redemption reserve of £44 million and a merger reserve of £8,974 million.

2 The Group adopted IFRS 16 Leases from 1 January 2019. In line with the transition options available, prior period comparatives were not restated and the impact of the adoption was shown as an adjustment to opening retained earnings.

3 On 17 October 2019, notification was given that the Group would redeem the 6.875% £230 million tier 1 notes. The instrument was reclassified as a financial liability of £210 million, representing its fair value, and the difference of £21 million charged to retained earnings. On 21 November 2019, the instrument was redeemed in full.

Page 42

Consolidated statement of financial position

As at 31 December 2020

	Note	2020 £m	2019 £m
Assets
Goodwill		1,799	1,855
Acquired value of in-force business and intangible assets	B24	2,434	2,800
Interests in, and loans to, joint ventures		1,702	1,227
Interests in, and loans to, associates		263	304
Property and equipment		768	889
Investment property		11,369	11,203
Loans		43,679	38,579
Financial investments		351,378	343,418
Reinsurance assets	B14	13,338	12,356
Deferred tax assets		119	151
Current tax assets		183	132
Receivables		9,352	8,995
Deferred acquisition costs		3,264	3,156
Pension surpluses and other assets		2,834	2,799
Prepayments and accrued income		2,742	3,143
Cash and cash equivalents		16,900	19,524
Assets of operations classified as held for sale	B5(c)	17,733	9,512
Total assets		479,857	460,043
Equity
Capital
Ordinary share capital		982	980
Preference share capital		200	200
		1,182	1,180
Capital reserves
Share premium		1,242	1,239
Capital redemption reserve		44	44
Merger reserve		8,974	8,974
		10,260	10,257
Treasury shares		(6)	(7)
Currency translation reserve		862	814
Other reserves		(212)	(101)
Retained earnings		7,468	5,065
Equity attributable to shareholders of Aviva plc		19,554	17,208
Direct capital instrument and tier 1 notes	B21	-	500
Equity excluding non-controlling interests		19,554	17,708
Non-controlling interests		1,006	977
Total equity		20,560	18,685
Liabilities
Gross insurance liabilities	B11	152,482	149,338
Gross liabilities for investment contracts	B13	222,831	222,127
Unallocated divisible surplus	B16	9,736	9,597
Net asset value attributable to unitholders		20,301	16,610
Pension deficits and other provisions		1,435	1,565
Deferred tax liabilities		1,828	2,155
Current tax liabilities		114	569
Borrowings	B17	9,684	9,039
Payables and other financial liabilities		20,667	18,138
Other liabilities		3,043	3,094
Liabilities of operations classified as held for sale	B5(c)	17,176	9,126
Total liabilities		459,297	441,358
Total equity and liabilities		479,857	460,043

Page 43

Consolidated statement of cash flows

For the year ended 31 December 2020

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

	Note	2020 £m	2019¹ £m
Continuing operations
Cash flows from operating activities²
Cash (used in)/generated from operating activities		(1,644)	6,392
Tax paid		(1,040)	(543)
Total net cash (used in)/from operating activities		(2,684)	5,849
Cash flows from investing activities
Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired		(11)	(19)
Disposals of subsidiaries, joint ventures and associates, net of cash transferred		12	12
Purchases of property and equipment		(97)	(63)
Proceeds on sale of property and equipment		3	4
Purchases of intangible assets		(72)	(57)
Total net cash used in investing activities		(165)	(123)
Cash flows from financing activities
Proceeds from issue of ordinary shares		3	27
Treasury shares purchased for employee trusts		(2)	(9)
New borrowings drawn down, net of expenses		966	552
Repayment of borrowings³		(1,005)	(927)
Net repayment of borrowings		(39)	(375)
Interest paid on borrowings		(536)	(545)
Preference dividends paid	B9	(17)	(17)
Ordinary dividends paid	B9	(236)	(1,184)
Forfeited dividend income		2	4
Coupon payments on direct capital instrument and tier 1 notes	B9	(27)	(43)
Dividends paid to non-controlling interests of subsidiaries		(30)	(63)
Other		(2)	(5)
Total net cash used in financing activities		(884)	(2,210)
Total net (decrease)/increase in cash and cash equivalents from continuing operations		(3,733)	3,516
Net cash flows from discontinued operations	B5(d)	245	112
Cash and cash equivalents at 1 January		19,434	16,051
Effect of exchange rate changes on cash and cash equivalents		236	(245)
Cash and cash equivalents at 31 December	B22	16,182	19,434

1 The 2019 comparative results have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note B2.

2 Cash flows from operating activities include interest received of £5,705 million (2019: £5,693 million) and dividends received of £3,434 million (2019: £5,568 million).

3 2020 includes the redemption of 5.902% £500 million direct capital instrument and lease payments of £76 million. 2019 includes the redemption of 6.875% £210 million tier 1 notes.

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B1 - Basis of preparation

(a) The results in this preliminary announcement have been taken from the Group's 2020 Annual Report and Accounts which will be available on the Company's website on 9 March 2021. The consolidated financial statements have been prepared and approved by the directors in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 (IFRS) and the legal requirements of the Companies Act 2006. In addition to complying with international accounting standards in conformity with the requirements of the Companies Act 2006, the consolidated financial statements also comply with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (EU).

The basis of preparation and summary of accounting policies applicable to the Group's consolidated financial statements can be found in the Accounting policies section of the 2020 Annual Report and Accounts. The comparative figures have been restated for the adjustments detailed in note B2. The Group has adopted new amendments to published standards as described below.

The preliminary announcement for the year ended 31 December 2020 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The results on an IFRS basis for full year 2020 and 2019 have been audited by PricewaterhouseCoopers LLP (PwC). PwC have reported on the 2020 and 2019 consolidated financial statements. Both reports were unqualified and neither contained a statement under section 498 (2) or (3) of the Companies Act 2006. The Group's 2019 Annual Report and Accounts have been filed with the Registrar of Companies.

Going concern

A detailed going concern review has been undertaken as part of the 2020 reporting process. This review includes consideration of the Group's current and forecast solvency and liquidity positions over a three-year period through management's 2021-2023 business plan and evaluates the results of stress and scenario testing. The Group's stress and scenario testing considers the Group's capacity to respond to a series of relevant financial, insurance or operational shocks should future circumstances or events differ from the current assumptions in the business plan, focusing on the impacts on Group solvency, cash remittances and liquidity. The range of scenarios allow for the potential impacts of COVID-19 both directly on the claims and operations of the Group and also on the wider macroeconomic environment, and considers the potential risks associated with the UK's negotiations with the European Union on their future relationship.

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).

In response to the COVID-19 pandemic, the Group has reduced exposure to equity and interest rate risk, credit spread and counterparty default risk across all our major markets and actions are being taken to further reduce the sensitivity to economic shocks. In the event of major new risks emerging, the Group has a number of actions available to ensure that solvency and liquidity are maintained in line with the Group's risk-appetite levels.

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

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

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

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

Group adjusted operating profit excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of intangible assets acquired in business combinations; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates. These items principally relate to merger, acquisition and disposal activity which we view as strategic in nature, hence they are excluded from the Group adjusted operating profit APM as this is principally used to manage the performance of our operating segments when reporting to the Group's chief decision maker.

Group adjusted operating profit also excludes Other items, which are those items that, in the directors' view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. Details of these items, including an explanation of the rationale for their exclusion, are provided in the relevant notes.

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

Page 45

B1 - Basis of preparation continued

New standards, interpretations and amendments to published standards that have been adopted by the Group

The following amendments to existing standards and IFRIC interpretations have been issued and endorsed by the EU, are effective from 1 January 2020 or earlier, and do not have a significant impact on the Group's consolidated financial statements.

(i) Amendments to References to the Conceptual Framework in IFRS Standards (published by the IASB in March 2018)

(ii) Amendment to IFRS 3 Business Combinations (published by the IASB in October 2018)

(iii) Amendment to IAS 1 and IAS 8: Definition of material (published by the IASB in October 2018)

(iv) Interest Rate Benchmark Reform: Amendments to IFRS 9, IAS 39 and IFRS 7 (published by the IASB in October 2019)

B2 - Changes to comparative amounts

(a) Discontinued operations

In the second half of 2020, Aviva has announced the completion of the disposal of its controlling interest in Friends Provident International Limited (FPI), its entire shareholdings in the Hong Kong and Indonesia joint ventures and its majority shareholding in Aviva Singapore. The sale of its entire shareholding in Aviva Vietnam Life Insurance Limited has been agreed and is subject to regulatory approval, expected in 2021.

In accordance with IFRS 5 'Non-current assets held for sale and discontinued operations', the results of these operations have been reclassified as discontinued operations in these consolidated financial statements, as they represent an exit from a single geographical area of business. Profit from discontinued operations for the year ended 31 December 2020 has been shown as a single line in the consolidated income statement and net cash flows from discontinued operations have been shown as a single line in the consolidated statement of cash flows, with 2019 comparatives re-presented accordingly. Further analysis of the results from discontinued operations is provided in note B5(d).

(b) Amendment to segmental analysis

At our interim results announcement on 6 August 2020, we announced our strategic priorities to focus on building and extending leadership in the UK, Ireland and Canada (Core markets), and managing our other international businesses for long-term shareholder value (Manage‑ for‑value markets). As a result, the financial performance of our 'Core markets' are presented as UK & Ireland Life, General Insurance (which brings together our UK & Ireland General Insurance businesses and Canada) and Aviva Investors. Our 'Manage-for-value markets' consist of our other international businesses: France, Italy, Poland and Other. The 2019 comparative results have been restated from those previously published to reclassify operations on this basis. See note B6 for further information.

B3 - Significant events in the current 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. 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 had a significant impact on the global economy, causing volatile equity markets and falls in interest rates.

In our interim results announcement on 6 August 2020, we assessed the emerging situation and provided details of the significant impacts of COVID-19 on the Group's results for the first half of 2020. The Group has been impacted by the COVID-19 pandemic through its operations, insurance products and assets holdings as well as ongoing difficult conditions in the global financial markets and the wider macroeconomic environment. The effects of COVID-19 continue to present unprecedented uncertainty 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 key considerations in relation to the impact of COVID-19 on the Group's results.

Business and performance

(i) 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 £16 million increase in long-term insurance contract liabilities as a result of the changes in non-economic assumptions for 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 B15.

(ii) General insurance

The estimated impact of COVID-19 on the general insurance results in the period is £(17) million, principally reflecting business interruption claims net of reinsurance, which were partly offset by favourable impacts of reduced economic activity in other product lines tempered by higher profit-contingent commission payments to distributors. Further information on the impact of COVID-19 on general insurance liabilities can be found within note B11(c) and note B20(f).

(iii) Fund management

The widespread economic disruption caused by COVID-19 has led to significant volatility in financial markets and elevated levels of investor activity throughout 2020. Information on the revenue earned by the Group's fund management segment can be found within note B6(b).

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B3 - Significant events in the current reporting period continued

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 during 2020.

Fair value measurement

In addition to the increased volatility in financial markets, the economic disruption caused by COVID-19 has led to declines in the level of trading in some asset classes giving rise to additional valuation uncertainty. In particular, certain assets relying on comparable market transactions for valuation, such as investment properties within the leisure and hospitality sectors, have been more difficult to value due to a reduction in the level of available market evidence. A number of property valuers have included 'material uncertainty declarations' in their valuation reports on these assets to reflect this. There is also increased uncertainty in relation to long term economic assumptions such as residential and commercial property growth rate assumptions which are inputs to the valuation models for equity release mortgage loans and commercial mortgage loans held by our UK Life business.

Capital management

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 £29.3 billion at 31 December 2020 (2019: £28.3 billion) and the estimated Solvency II shareholder own funds is £25.8 billion (2019: £24.5 billion).

Other

(i) Dividend

On 26 November 2020, the Group announced a new dividend policy and capital framework. Information on dividends paid during the year and the proposed final dividend for 2020 can be found within note B9.

B4 - Exchange rates

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

	2020	2019
Eurozone
Average rate (€1 equals)	£0.88	£0.88
Year end rate (€1 equals)	£0.90	£0.85
Canada
Average rate ($CAD1 equals)	£0.58	£0.59
Year end rate ($CAD1 equals)	£0.57	£0.58
Poland
Average rate (PLN1 equals)	£0.20	£0.20
Year end rate (PLN1 equals)	£0.20	£0.20

B5 - Strategic transactions

This note provides details of the acquisitions and disposals of subsidiaries, joint ventures and associates that the Group has made during the year, together with the details of business held for sale at 31 December 2020 and discontinued operations.

(a) Acquisitions

On 5 June 2020, 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 profit on the disposal and remeasurement of subsidiaries, joint ventures and associates comprises:

	2020 £m	2019 £m
Disposals	744	6
Held for sale remeasurements	(19)	(28)
Total gain/(loss) on disposals and remeasurements	725	(22)

The net gain on the disposal and remeasurement of subsidiaries, joint ventures and associates during the year of £725 million predominantly relates to the disposals of Friends Provident International Limited (FPI), Singapore, Indonesia and Hong Kong. In 2019, the loss on disposal of £22 million comprised of £6 million of gains relating to small disposals and a £28 million remeasurement loss relating to FPI.

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(b) Disposals and remeasurements continued

Disposals of subsidiaries, joint ventures and associates

The following businesses were disposed of in 2020:

	FPI⁽ⁱ⁾ £m	Singapore⁽ⁱⁱ⁾ £m	Total £m
Assets
Goodwill, acquired value of in-force business and intangible assets	442	44	486
Interests in, and loans to, associates and joint ventures	-	38	38
Property and equipment	5	4	9
Financial investments	6,981	5,573	12,554
Reinsurance assets	15	734	749
Receivables and other financial assets	36	87	123
Deferred acquisition costs	205	10	215
Prepayments and accrued income	6	40	46
Cash and cash equivalents	851	186	1,037
Total assets	8,541	6,716	15,257
Liabilities
Gross insurance liabilities	103	4,276	4,379
Gross liabilities for investment contracts	8,033	-	8,033
Unallocated divisible surplus	-	693	693
Tax liabilities	-	388	388
Other liabilities	104	367	471
Total liabilities	8,240	5,724	13,964
Net assets	301	992	1,293
Total consideration	309	1,540	1,849
Less: transaction costs	(11)	(34)	(45)
Net consideration	298	1,506	1,804
Reserves recycled to the income statement	-	160	160
(Loss)/profit on disposal	(3)	674	671
Other small disposals (iii)			73
Total profit on disposal			744

(i) FPI

On 19 July 2017, Aviva announced the sale of FPI to RL360 Holding Company Limited, a subsidiary of International Financial Group Limited 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% shareholding in FPI for a consideration of £259 million, including £50 million of deferred consideration.

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 transaction completed on 16 July 2020.

On 11 December 2020, an option was exercised by RL360 requiring Aviva to recapture a book of business from FPI, subject to regulatory approval, resulting in Aviva forgoing both the deferred consideration and its remaining shareholding in FPI. The estimated value of the book of business matches the total value of the deferred consideration and the shareholding, therefore there is no impact on the value of consideration received.

(ii) Singapore

On 11 September 2020, Aviva announced the sale of a majority shareholding in Aviva Singapore to a consortium led by Singapore Life Ltd (Singlife) for a consideration of SGD 2.7 billion (approximately £1.5 billion), which is comprised of SGD 2.0 billion in cash and marketable securities, SGD 250 million in vendor finance notes and a 26% equity shareholding in the new group (Aviva Singlife Holdings Pte. Ltd). The transaction completed on 30 November 2020.

(iii) Other

On 6 March 2020, Aviva announced the sale of its entire shareholding in its joint venture in Indonesia, PT Astra Aviva Life, to the joint venture partner, PT Astra International Tbk. The consideration received was INR 1,389 billion (approximately £72 million). The transaction completed on 16 November 2020.

On 20 November 2019, Aviva announced the sale of its entire 40% shareholding in its Hong Kong joint venture (Blue) to Hillhouse AV Holdings Limited for HKD 450 million (approximately £44 million). The transaction completed on 10 December 2020.

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The assets and liabilities of operations classified as held for sale as at 31 December 2020 are as follows:

	2020 £m	2019 £m
Assets
Acquired value of in-force business and intangible assets	18	526
Interests in, and loans to, joint ventures and associates	-	8
Property and equipment	69	8
Loans	-	1
Financial investments	16,907	7,824
Reinsurance assets	18	75
Other assets	531	290
Cash and cash equivalents	190	780
Total assets	17,733	9,512
Liabilities
Gross insurance liabilities	3,166	687
Gross liabilities for investment contracts	12,425	8,324
Unallocated divisible surplus	1,234	-
Borrowings	43	28
Other liabilities	308	87
Total liabilities	17,176	9,126
Net assets	557	386

Assets and liabilities of operations classified as held for sale as at 31 December 2020 relate to the expected disposal of the Group's operations in Vietnam and of Aviva Vita S.p.A. (Aviva Vita). See below for further details. Assets and liabilities classified as held for sale at 31 December 2019 related primarily to FPI and Hong Kong.

(i) Vietnam

On 14 December 2020, Aviva announced the sale of its entire shareholding in Aviva Vietnam Life Insurance Limited to Manulife Financial Asia Limited. The transaction is expected to complete in the second half of 2021, subject to regulatory approvals.

(ii) Aviva Vita (Italy)

On 23 November 2020, Aviva announced the sale of its entire 80% shareholding in the Italian life insurance joint venture, Aviva Vita to its partner UBI Banca. The transaction is subject to customary closing conditions, including regulatory approval, and is expected to complete in the first half of 2021.

(d) Discontinued operations

In the second half of 2020, Aviva has announced the completion of the disposal of its controlling interest in FPI, its entire shareholdings in the Hong Kong and Indonesia joint ventures and its majority shareholding in Aviva Singapore. The sale of its entire shareholding in Aviva Vietnam Life Insurance Limited has been agreed and is subject to regulatory approval, expected in 2021.

In accordance with IFRS 5 Non-current assets held for sale and discontinued operations, the results of these operations have been reclassified as discontinued operations in these consolidated financial statements. Profit from discontinued operations for the year ended 31 December 2020 has been shown as a single line in the consolidated income statement and net cash flows from discontinued operations have been shown as a single line in the consolidated statement of cash flows, with 2019 comparatives being re-presented accordingly. Notes to the consolidated statement of financial position are presented on a total group basis and, as a result, income statement and cash flow movements included within these notes may not reconcile to those presented in the consolidated income statement and the consolidated statement of cash flows.

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(d) Discontinued operations continued

Further analysis of the results and cash flows for the discontinued operations presented in the consolidated financial statements are analysed below.

Income Statement

Discontinued operations	2020 £m	2019 £m
Net written premiums	1,284	1,153
Net change in provision for unearned premiums	3	(16)
Net earned premiums	1,287	1,137
Net investment income	119	966
Other income	119	205
Share of loss after tax of joint ventures and associates	(12)	(9)
Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates	713	(28)
Total income	2,226	2,271
Claims and benefits paid, net of recoveries from reinsurers	(749)	(1,004)
Change in insurance liabilities, net of reinsurance	(265)	(32)
Change in investment contract provisions	342	(217)
Change in unallocated divisible surplus	(161)	(369)
Other expenses	(445)	(537)
Total expenses	(1,278)	(2,159)
Profit before tax from discontinued operations	948	112
Tax attributable to policyholders' returns	(44)	(58)
Profit before tax attributable to shareholders' profits from discontinued operations	904	54
Tax expense	(36)	(11)
Profit for the year from discontinued operations	868	43

Other Comprehensive Income

Discontinued operations	2020 £m	2019 £m
Other comprehensive income from discontinued operations:
Items that may be reclassified subsequently to income statement
Foreign exchange rate movements	4	(26)
Total other comprehensive income for the year from discontinued operations	4	(26)

Cash flows

Discontinued operations	2020 £m	2019 £m
Total net cash from operating activities	102	119
Cash proceeds from disposal of subsidiaries, joint ventures and associates	1,208	-
Less: Net cash and cash equivalents divested with subsidiaries	(1,065)	-
Other investing activities	4	(27)
Total net cash from investing activities	147	(27)
Total net cash (used in)/from financing activities	(4)	20
Net cash flows from discontinued operations	245	112

(e) Significant restrictions

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

(f) Subsequent events

For the following subsequent events, management undertook an assessment of the facts and circumstances at 31 December 2020 and concluded that for each of the transactions, the IFRS 5 criteria for reclassification as held for sale were not met at that date.

(i) Aviva France

On 23 February 2021, Aviva announced it had approved the sale of its entire shareholding in Aviva France to Aéma Groupe for cash consideration of €3.2 billion (approximately £2.9 billion), including €1.1 billion (approximately £1.0 billion) in respect of Aviva France's intra‑group debt. The transaction will significantly strengthen the Group's capital and liquidity on completion, and covers the French life, general insurance, and asset management businesses and the 75% shareholding in L'Union Financière de France, a wealth manager listed on the Paris Bourse. The transaction is subject to consultation and customary closing conditions, including regulatory approval, and is expected to complete in the second half of 2021. The transaction would have decreased the Group's IFRS net asset value by approximately £0.5 billion, increased Solvency II surplus on a shareholder basis by approximately £0.8 billion and strengthened the Solvency II cover ratio on a shareholder basis by approximately 22 percentage points as at 31 December 2020.

(ii) AvivaSA (Turkey)

On 24 February 2021, Aviva announced the sale of its entire 40% shareholding in its joint venture in Turkey, AvivaSA Emeklilik ve Hayat AS (AvivaSA), to Ageas Insurance International N.V. for cash consideration of £122 million. The transaction is subject to customary closing conditions, including regulatory approval, and is expected to complete in 2021.

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(d) Strategic transactions continued

(iii) Aviva Italy

On 3 March 2021, the Group entered into agreements to sell its remaining Italian Life and General Insurance businesses (Aviva Italy). The sale of the remaining Life business primarily comprises the entire 100% shareholding in Aviva Life S.p.A. and the 51% shareholding in Aviva S.p.A. to CNP Assurances for cash consideration of €543 million (approximately £486 million). The sale of the General Insurance business comprises the entire 100% shareholding in Aviva Italia S.p.A. to Allianz for cash consideration of €330 million (approximately £295 million). The transactions are subject to customary closing conditions, including regulatory and anti-trust approvals, and are expected to complete in the second half of 2021. The transactions would have increased the Group's IFRS net asset value by approximately £0.2 billion, increased Solvency II surplus on a shareholder basis by approximately £0.2 billion and strengthened the Solvency II cover ratio on a shareholder basis by approximately 7 percentage points as at 31 December 2020. Following completion of these transactions, Aviva will retain Aviva Italia Holdings S.p.A, which will have no underlying operating insurance entities.

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 being given by business activity. This note provides segmental information on the consolidated income statement. At our 2020 interim results announcement on 6 August 2020, we announced our strategic priorities to focus on building and extending our leadership in the UK, Ireland and Canada (Core markets), and managing International businesses for long-term shareholder value (Manage-for-value markets). As a result, the financial performance of our 'Core markets' is presented as UK & Ireland Life, General Insurance (which brings together our UK & Ireland businesses and Canada) and Aviva Investors. Our 'Manage-for-value markets' consists of our other international businesses: France, Italy, Poland and Other. The 2019 comparative results have been restated (see note B2) from those previously published to reclassify operations to reflect these changes. Segmental information is presented for continuing operations only, an analysis of results from discontinued operations is presented in note B5(d).

(a) Operating segments

UK & Ireland Life

The principal activities of our UK & Ireland Life operations are life insurance, long-term health and accident insurance, savings, pensions and annuity business.

General Insurance

UK & Ireland

The principal activities of our UK & Ireland General Insurance operations are the provision of 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 Canada General Insurance operation is the provision of personal and commercial lines insurance products principally distributed through insurance brokers.

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.

Manage-for-value

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.

Italy

The principal activities of our operations in Italy are in the life and non-domestic insurance markets. We offer savings, investments, pension and protection products with distribution through a major bancassurance partnership with Unione di Banche Italiane S.p.A. and also through independent financial advisor networks.

Poland

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

Other

Our other continuing activities principally comprise our long-term business operations in China, India and Singapore and our life operations in Turkey. These have been aggregated into a single reporting segment in line with IFRS 8 'Operating Segments'.

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 are also included in this segment, as are the elimination entries for certain inter-segment transactions and group consolidation adjustments.

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Measurement basis

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

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

(ii) profit or loss from operations before tax attributable to shareholders, adjusted for non-operating items, including investment market performance.

(a) (i) Segmental income statement for the year ended 31 December 2020

		General Insurance			Manage-for-value
Continuing operations	UK & Ireland Life £m	UK & Ireland GI £m	Canada £m	Aviva Investors £m	France £m	Italy £m	Poland £m	Other £m	Other Group activities £m	Total continuing operations £m
Gross written premiums	10,268	5,051	3,271	-	5,326	4,473	626	-	-	29,015
Premiums ceded to reinsurers	(2,904)	(421)	(175)	-	(78)	(44)	(16)	-	-	(3,638)
Internal reinsurance revenue	-	-	-	-	-	-	-	-	-	-
Premiums written net of reinsurance	7,364	4,630	3,096	-	5,248	4,429	610	-	-	25,377
Net change in provision for unearned premiums	(1)	(38)	(56)	-	(28)	(1)	1	-	-	(123)
Net earned premiums	7,363	4,592	3,040	-	5,220	4,428	611	-	-	25,254
Fee and commission income	989	101	25	325	327	80	95	-	4	1,946
	8,352	4,693	3,065	325	5,547	4,508	706	-	4	27,200
Net investment income	13,842	123	227	31	1,881	2,318	157	-	751	19,330
Inter-segment revenue	-	-	-	217	-	-	-	-	-	217
Share of profit/(loss) after tax of joint ventures and associates	(58)	-	-	-	15	-	-	54	16	27
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	12	-	-	-	-	-	-	12
Segmental income¹	22,136	4,816	3,304	573	7,443	6,826	863	54	771	46,786
Claims and benefits paid, net of recoveries from reinsurers	(8,748)	(2,559)	(1,712)	-	(5,418)	(2,260)	(339)	-	(9)	(21,045)
Change in insurance liabilities, net of reinsurance	(4,505)	(345)	(148)	-	(670)	(925)	(54)	-	7	(6,640)
Change in investment contract provisions	(5,221)	-	-	(30)	631	(1,793)	-	-	-	(6,413)
Change in unallocated divisible surplus	505	-	-	-	(844)	(1,179)	(10)	-	-	(1,528)
Fee and commission expense	(730)	(1,372)	(914)	(27)	(698)	(257)	(159)	-	(4)	(4,161)
Investment expense attributable to unitholders	-	-	-	-	9	-	-	-	(588)	(579)
Other expenses	(1,112)	(474)	(168)	(432)	(245)	(90)	(103)	(3)	(410)	(3,037)
Inter-segment expenses	(201)	(5)	(7)	-	(1)	-	(3)	-	-	(217)
Finance costs	(166)	(4)	(6)	-	(1)	(2)	(1)	-	(373)	(553)
Segmental expenses	(20,178)	(4,759)	(2,955)	(489)	(7,237)	(6,506)	(669)	(3)	(1,377)	(44,173)
Profit/(loss) before tax	1,958	57	349	84	206	320	194	51	(606)	2,613
Tax attributable to policyholders' returns	(43)	-	-	-	-	-	-	-	-	(43)
Profit/(loss) before tax attributable to shareholders' profits	1,915	57	349	84	206	320	194	51	(606)	2,570
Adjusting items:
Reclassification of unallocated interest	48	(13)	29	1	53	-	-	-	(118)	-
Life business: Investment variances and economic assumption changes	(314)	-	-	-	145	(31)	2	(26)	-	(224)
Non-life business: Short-term fluctuation in return on investments	-	92	(118)	-	40	8	(5)	-	47	64
General insurance and health business: Economic assumption changes	-	77	7	-	19	-	-	-	1	104
Impairment of goodwill, joint ventures, associates and other amounts expensed	-	-	16	-	-	-	-	13	-	29
Amortisation and impairment of intangibles acquired in business combinations	46	-	16	-	2	1	5	-	-	70
Amortisation and impairment of acquired value of in-force business	212	-	-	-	2	-	-	-	-	214
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	(12)	-	-	-	-	-	-	(12)
Other²	-	-	-	-	-	-	-	-	34	34
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits	1,907	213	287	85	467	298	196	38	(642)	2,849

1 Total reported income, excluding inter-segment revenue, includes £26,051 million from the United Kingdom (Aviva plc's country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts were written.

2 Other includes a charge of £16 million relating to costs on contracts that have become onerous following the disposals of FPI, Singapore, Indonesia and Hong Kong and a charge of £18 million relating to the estimated additional liability arising in the UK defined benefit pension schemes as a result of the requirement to equalise members' benefits for the effects of Guaranteed Minimum Pension (GMP).

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(a) (ii) Segmental income statement for the year ended 31 December 2019 - restated¹

		General Insurance			Manage-for-value
Continuing operations	UK & Ireland Life £m	UK & Ireland GI £m	Canada £m	Aviva Investors £m	France £m	Italy £m	Poland £m	Other £m	Other Group activities £m	Total continuing operations £m
Gross written premiums	8,921	5,066	3,204	-	6,883	4,994	643	-	-	29,711
Premiums ceded to reinsurers	(2,477)	(428)	(143)	-	(86)	(36)	(12)	(2)	-	(3,184)
Internal reinsurance revenue	-	-	-	-	-	-	-	1	(1)	-
Premiums written net of reinsurance	6,444	4,638	3,061	-	6,797	4,958	631	(1)	(1)	26,527
Net change in provision for unearned premiums	(2)	(55)	(99)	-	(28)	(11)	2	-	-	(193)
Net earned premiums	6,442	4,583	2,962	-	6,769	4,947	633	(1)	(1)	26,334
Fee and commission income	984	114	24	320	305	89	99	-	1	1,936
	7,426	4,697	2,986	320	7,074	5,036	732	(1)	-	28,270
Net investment income	28,247	252	171	61	6,267	3,218	155	1	1,239	39,611
Inter-segment revenue	-	-	-	247	-	-	-	-	-	247
Share of profit/(loss) after tax of joint ventures and associates	20	-	-	-	48	-	-	55	(29)	94
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	6	-	-	-	-	-	-	6
Segmental income²	35,693	4,949	3,163	628	13,389	8,254	887	55	1,210	68,228
Claims and benefits paid, net of recoveries from reinsurers	(9,878)	(2,844)	(1,938)	-	(4,751)	(2,280)	(380)	-	(21)	(22,092)
Change in insurance liabilities, net of reinsurance	(3,431)	(80)	(16)	-	(1,112)	(1,032)	(49)	-	50	(5,670)
Change in investment contract provisions	(17,186)	-	-	(63)	(4,041)	(2,589)	1	-	-	(23,878)
Change in unallocated divisible surplus	174	-	-	-	(2,010)	(1,776)	(4)	-	-	(3,616)
Fee and commission expense	(711)	(1,337)	(823)	(27)	(659)	(238)	(156)	-	27	(3,924)
Investment expense attributable to unitholders	-	-	-	-	(157)	-	-	-	(1,198)	(1,355)
Other expenses	(1,416)	(340)	(162)	(447)	(246)	(109)	(95)	(11)	(231)	(3,057)
Inter-segment expenses	(228)	(6)	(6)	-	(2)	-	(5)	-	-	(247)
Finance costs	(192)	(4)	(7)	-	(1)	(3)	(1)	-	(360)	(568)
Segmental expenses	(32,868)	(4,611)	(2,952)	(537)	(12,979)	(8,027)	(689)	(11)	(1,733)	(64,407)
Profit/(loss) before tax	2,825	338	211	91	410	227	198	44	(523)	3,821
Tax attributable to policyholders' returns	(501)	-	-	-	-	-	-	-	-	(501)
Profit/(loss) before tax attributable to shareholders' profits	2,324	338	211	91	410	227	198	44	(523)	3,320
Adjusting items:
Reclassification of unallocated interest	54	(8)	33	5	46	-	-	-	(130)	-
Life business: Investment variances and economic assumption changes	(735)	-	-	-	84	(3)	(4)	(17)	(8)	(683)
Non-life business: Short-term fluctuation in return on investments	-	(105)	(64)	-	(95)	(30)	(5)	-	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	-	-	-	-	9	-	11
Amortisation and impairment of intangibles acquired in business combinations	54	-	13	-	2	1	5	1	1	77
Amortisation and impairment of acquired value of in-force business	275	-	-	-	2	-	-	-	3	280
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	-	(6)	-	-	-	-	-	-	(6)
Other³	2	45	-	-	-	-	-	-	-	47
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits²	1,974	297	191	96	473	195	194	37	(524)	2,933

1 The 2019 comparative results have been restated from those previously published due to the change in presentation of segmental information. See note B2.

2 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 were written.

3 Other relates to 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.

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B6 - Segmental information continued

(b) Further analysis by products and services

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

Long-term business

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

General insurance and health

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

Fund management

Our fund management business invests policyholders' and shareholders' funds and provides investment management services for institutional pension fund mandates. It manages a range of retail investment products, including investment funds, unit trusts, 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 elimination entries for certain inter-segment transactions and group consolidation adjustments.

(b) (i) Segmental income statement - products and services for the year ended 31 December 2020

Continuing operations	Long-term business £m	General insurance and health¹ £m	Fund management £m	Other £m	Total continuing operation £m
Gross written premiums²	18,288	10,727	-	-	29,015
Premiums ceded to reinsurers	(2,948)	(690)	-	-	(3,638)
Premiums written net of reinsurance	15,340	10,037	-	-	25,377
Net change in provision for unearned premiums	-	(123)	-	-	(123)
Net earned premiums	15,340	9,914	-	-	25,254
Fee and commission income	1,423	126	321	76	1,946
	16,763	10,040	321	76	27,200
Net investment income	18,213	365	1	751	19,330
Inter-segment revenue	-	-	219	-	219
Share of profit/(loss) after tax of joint ventures and associates	16	(4)	-	15	27
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	12	-	-	12
Segmental income	34,992	10,413	541	842	46,788
Claims and benefits paid, net of recoveries from reinsurers	(15,345)	(5,700)	-	-	(21,045)
Change in insurance liabilities, net of reinsurance	(6,073)	(567)	-	-	(6,640)
Change in investment contract provisions	(6,413)	-	-	-	(6,413)
Change in unallocated divisible surplus	(1,528)	-	-	-	(1,528)
Fee and commission expense	(1,290)	(2,794)	(27)	(50)	(4,161)
Investment expense attributable to unitholders	9	-	-	(588)	(579)
Other expenses	(1,347)	(751)	(430)	(509)	(3,037)
Inter-segment expenses	(206)	(13)	-	-	(219)
Finance costs	(139)	(10)	-	(404)	(553)
Segmental expenses	(32,332)	(9,835)	(457)	(1,551)	(44,175)
Profit/(loss) before tax	2,660	578	84	(709)	2,613
Tax attributable to policyholders' returns	(43)	-	-	-	(43)
Profit/(loss) before tax attributable to shareholders' profits	2,617	578	84	(709)	2,570
Adjusting items	126	144	1	8	279
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits	2,743	722	85	(701)	2,849

1 General insurance and health business segment includes gross written premiums of £100 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 £637 million, which all relates to property and liability insurance.

Page 54

B6 - Segmental information continued

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

Continuing operations	Long-term business £m	General insurance and health² £m	Fund management £m	Other £m	Total continuing operations¹ £m
Gross written premiums³	19,058	10,653	-	-	29,711
Premiums ceded to reinsurers	(2,529)	(655)	-	-	(3,184)
Premiums written net of reinsurance	16,529	9,998	-	-	26,527
Net change in provision for unearned premiums	-	(193)	-	-	(193)
Net earned premiums	16,529	9,805	-	-	26,334
Fee and commission income	1,301	126	315	194	1,936
	17,830	9,931	315	194	28,270
Net investment income/(expense)	37,756	622	(1)	1,234	39,611
Inter-segment revenue	-	-	250	-	250
Share of profit/(loss) after tax of joint ventures and associates	122	-	-	(28)	94
Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates	-	6	-	-	6
Segmental income	55,708	10,559	564	1,400	68,231
Claims and benefits paid, net of recoveries from reinsurers	(15,774)	(6,318)	-	-	(22,092)
Change in insurance liabilities, net of reinsurance	(5,540)	(130)	-	-	(5,670)
Change in investment contract provisions	(23,878)	-	-	-	(23,878)
Change in unallocated divisible surplus	(3,616)	-	-	-	(3,616)
Fee and commission expense	(1,151)	(2,653)	(27)	(93)	(3,924)
Investment expense attributable to unitholders	(157)	-	-	(1,198)	(1,355)
Other expenses	(1,628)	(622)	(445)	(362)	(3,057)
Inter-segment expenses	(237)	(13)	-	-	(250)
Finance costs	(162)	(10)	-	(396)	(568)
Segmental expenses	(52,143)	(9,746)	(472)	(2,049)	(64,410)
Profit/(loss) before tax	3,565	813	92	(649)	3,821
Tax attributable to policyholders' returns	(501)	-	-	-	(501)
Profit/(loss) before tax attributable to shareholders' profits	3,064	813	92	(649)	3,320
Adjusting items	(265)	(161)	4	35	(387)
Group adjusted operating profit/(loss) before tax attributable to shareholders' profits	2,799	652	96	(614)	2,933

1 The 2019 comparative results have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note B2.

2 General insurance and health business segment includes gross written premiums of £704 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 £62 million, which all relates to property and liability insurance.

B7 - Tax

This note analyses the tax charge for the year and explains the factors that affect it. The comparative amounts in (a), (b) and (d) have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note B2.

(a) Tax charged to the income statement

(i) The total tax charge comprises:

	2020 £m	2019 £m
Continuing operations
Current tax
For the period	648	1,041
Prior period adjustments	(64)	(178)
Total current tax from continuing operations	584	863
Deferred tax
Origination and reversal of temporary differences	12	344
Changes in tax rates or tax laws	(14)	(6)
Write (back) of deferred tax assets	(11)	-
Total deferred tax from continuing operations	(13)	338
Total tax charged to income statement from continuing operations	571	1,201
Total tax charged to income statement from discontinued operations	80	69
Total tax charged to income statement	651	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 life insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholder returns included in the charge above is £87 million (2019: £559 million) of which £43 million (2019: £501 million) relates to continuing operations and £44 million (2019: £58 million) relates to discontinued operations.

Page 55

B7 - Tax continued

(a) Tax charged to the income statement continued

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

Continuing operations	2020 £m	2019 £m
UK tax	259	851
Overseas tax	312	350
	571	1,201

(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax charge by £6 million and £11 million (2019: £nil and £11 million), respectively.

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

	2020 £m	2019 £m
Continuing operations
Long-term business technical provisions and other insurance items	(339)	(1,241)
Deferred acquisition costs	16	4
Unrealised gains on investments	343	1,554
Pensions and other post-retirement obligations	(2)	21
Unused losses and tax credits	(32)	13
Subsidiaries, associates and joint ventures	6	4
Intangibles and additional value of in-force long-term business	(23)	(63)
Provisions and other temporary differences	18	46
Total deferred tax (credited)/charged to income statement from continuing operations	(13)	338
Total deferred tax charged to income statement from discontinued operations	70	49
Total deferred tax charged to income statement	57	387

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

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

	2020 £m	2019 £m
Current tax from continuing operations
In respect of pensions and other post-retirement obligations	(34)	(49)
In respect of foreign exchange movements	9	(10)
	(25)	(59)
Deferred tax from continuing operations
In respect of pensions and other post-retirement obligations	55	(56)
In respect of fair value gains on owner-occupied properties	1	1
In respect of unrealised gains on investments	2	5
	58	(50)
Total tax charged/(credited) to other comprehensive income arising from continuing operations	33	(109)
Total tax charged/(credited) to other comprehensive income arising from discontinued operations	-	-
Total tax charged/(credited) to other comprehensive income	33	(109)

(ii) There is no tax charge/(credit) attributable to policyholders' return included above in either 2020 or 2019.

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

Page 56

B7 - Tax continued

(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	2020 £m	Shareholder £m	Policyholder £m	2019 £m
Profit before tax from continuing operations	2,570	43	2,613	3,320	501	3,821
Profit before tax from discontinued operations	904	44	948	54	58	112
Total profit before tax	3,474	87	3,561	3,374	559	3,933

Tax calculated at standard UK corporation tax rate of 19.00% (2019: 19.00%)	660	17	677	641	106	747
Reconciling items
Different basis of tax - policyholders	-	73	73	-	454	454
Adjustment to tax charge in respect of prior periods	(30)	-	(30)	5	-	5
Non-assessable income and items not taxed at the full statutory rate	(72)	-	(72)	(51)	-	(51)
Non-taxable profit on sale of subsidiaries and associates	(138)	-	(138)	(1)	-	(1)
Disallowable expenses	33	-	33	41	-	41
Different local basis of tax on overseas profits	100	(3)	97	98	(1)	97
Change in future local statutory tax rates	30	-	30	(6)	-	(6)
Movement in deferred tax not recognised	(3)	-	(3)	(4)	-	(4)
Tax effect of profit from joint ventures and associates	(10)	-	(10)	(8)	-	(8)
Other	(6)	-	(6)	(4)	-	(4)
Total tax charged to income statement	564	87	651	711	559	1,270

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

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 31 December 2019.

During 2020, the reduction in the UK corporation tax rate that was due to take effect from 1 April 2020 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 31 December 2020 and increased the Group's deferred tax liabilities by £81 million.

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. The comparative amounts in (a) and (b) have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note B2.

(a) Basic earnings per share

(i) The profit attributable to ordinary shareholders is:

			2020			2019
	Group adjusted operating profit £m	Adjusting items £m	Total £m	Group adjusted operating profit £m	Adjusting items £m	Total £m
Continuing operations
Profit before tax attributable to shareholders' profits	2,849	(279)	2,570	2,933	387	3,320
Tax attributable to shareholders' profits	(596)	68	(528)	(640)	(60)	(700)
Profit from continuing operations	2,253	(211)	2,042	2,293	327	2,620
Amount attributable to non-controlling interests	(98)	(14)	(112)	(98)	(17)	(115)
Cumulative preference dividends for the year	(17)	-	(17)	(17)	-	(17)
Coupon payments in respect of DCI and tier 1 notes (net of tax)	(27)	-	(27)	(34)	-	(34)
Profit attributable to ordinary shareholders from continuing operations	2,111	(225)	1,886	2,144	310	2,454
Profit/(loss) attributable to ordinary shareholders from discontinued operations	274	594	868	223	(180)	43
Profit attributable to ordinary shareholders	2,385	369	2,754	2,367	130	2,497

Page 57

B8 - Earnings per share continued

(a) Basic earnings per share continued

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

			2020			2019
	Before tax £m	Net of tax, NCI, preference dividends and DCI £m	Per share p	Before tax £m	Net of tax, NCI, preference dividends and DCI¹ £m	Per share p
Continuing operations
Group adjusted operating profit attributable to ordinary shareholders²	2,849	2,111	53.8	2,933	2,144	54.8
Adjusting items:
Life business: Investment variances and economic assumption changes	224	143	3.6	683	558	14.3
Non-life business: Short-term fluctuation in return on investments	(64)	(11)	(0.3)	167	118	3.0
General insurance and health business: Economic assumption changes	(104)	(83)	(2.1)	(54)	(33)	(0.8)
Impairment of goodwill, joint ventures, associates and other amounts expensed	(29)	(27)	(0.7)	(11)	(11)	(0.3)
Amortisation and impairment of intangibles acquired in business combinations	(70)	(55)	(1.4)	(77)	(51)	(1.3)
Amortisation and impairment of acquired value of in-force business	(214)	(174)	(4.4)	(280)	(230)	(5.9)
Loss on disposal and remeasurement of subsidiaries, joint ventures and associates	12	12	0.3	6	5	0.1
Other	(34)	(30)	(0.7)	(47)	(46)	(1.2)
Profit attributable to ordinary shareholders from continuing operations	2,570	1,886	48.1	3,320	2,454	62.7
Discontinued operations
Group adjusted operating profit attributable to ordinary shareholders²	312	274	7.0	251	223	5.7
Adjusting items	592	594	15.1	(197)	(180)	(4.6)
Profit attributable to ordinary shareholders from discontinued operations	904	868	22.1	54	43	1.1
Profit attributable to ordinary shareholders	3,474	2,754	70.2	3,374	2,497	63.8

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

2 Group adjusted operating earnings per share from continuing operations and discontinued operations is 60.8p (2019: 60.5p).

(iii) The calculation of basic earnings per share uses a weighted average of 3,925 million (2019: 3,911 million) ordinary shares in issue, after deducting treasury shares. The actual number of shares in issue at 31 December 2020 was 3,928 million (2019: 3,921 million) or 3,926 million (2019: 3,919 million) excluding treasury shares.

(b) Diluted earnings per share

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

			2020			2019¹
	Total £m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share p
Continuing operations
Profit attributable to ordinary shareholders	1,886	3,925	48.1	2,454	3,911	62.7
Dilutive effect of share awards and options	-	19	(0.3)	-	14	(0.2)
Diluted earnings per share from continuing operations	1,886	3,944	47.8	2,454	3,925	62.5
Discontinued operations
Profit attributable to ordinary shareholders	868	3,925	22.1	43	3,911	1.1
Dilutive effect of share awards and options	-	19	(0.1)	-	14	-
Diluted earnings per share from discontinued operations	868	3,944	22.0	43	3,925	1.1
Diluted earnings per share	2,754	3,944	69.8	2,497	3,925	63.6

1 Following a revision to the methodology to correctly allow for unvested share options in the calculation of the dilutive effect of share awards, the 2019 comparative amounts have been amended from those previously reported.

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

			2020			2019¹
	Total £m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share p
Continuing operations
Group adjusted operating profit attributable to ordinary shareholders	2,111	3,925	53.8	2,144	3,911	54.8
Dilutive effect of share awards and options	-	19	(0.3)	-	14	(0.2)
Diluted group adjusted operating profit per share from continuing operations	2,111	3,944	53.5	2,144	3,925	54.6
Discontinued operations
Group adjusted operating profit attributable to ordinary shareholders	274	3,925	7.0	223	3,911	5.7
Dilutive effect of share awards and options	-	19	-	-	14	-
Diluted group adjusted operating profit per share from discontinued operations	274	3,944	7.0	223	3,925	5.7
Diluted group adjusted operating profit per share	2,385	3,944	60.5	2,367	3,925	60.3

Page 58

B9 - Dividends and appropriations

This note analyses the total dividends and other appropriations paid during the year, as set out in the table below. Details are also provided of the 2020 interim dividend, paid in January 2021, and the proposed final dividend for 2020, which are not accrued in these financial statements and are therefore excluded from the table.

	2020 £m	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
Second interim 2019 - 6.00 pence per share, paid on 24 September 2020	236	-
Interim 2019 - 9.50 pence per share, paid on 26 September 2019	-	372
	236	1,184
Preference dividends declared and charged to equity in the period	17	17
Coupon payments on DCI and tier 1 notes	27	43
	280	1,244

On 21 January 2021, an interim dividend of 7.00 pence per ordinary share was paid in respect of the 2020 financial year, amounting to £275 million, and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2021. In respect of the 2019 financial year, two interim dividends were paid: 9.50 pence per ordinary share, amounting to £372 million, on 26 September 2019, accounted for as an appropriation of retained earnings in the year ended 31 December 2019, and a second payment of 6.00 pence per ordinary share, amounting to £236 million, on 24 September 2020, accounted for as an appropriation of retained earnings in the year ended 31 December 2020.

Subsequent to 31 December 2020, the directors proposed a final dividend for 2020 of 14 pence per ordinary share, amounting to £550 million in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 14 May 2021 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2021. 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.

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, the date on which the DCI was redeemed. 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 until the redemption date 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.

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 the methodology and assumptions used in calculating the insurance liabilities;

· Note B13 covers liabilities for investment contracts;

· Note B14 details the associated reinsurance assets on these liabilities; and

· Note B15 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 31 December.

			2020 £m			2019 £m
	Gross provisions £m	Reinsurance assets £m	Net £m	Gross provisions £m	Reinsurance assets £m	Net £m
Long-term business
Insurance liabilities	(135,409)	7,176	(128,233)	(131,182)	6,369	(124,813)
Liabilities for participating investment contracts	(97,073)	1	(97,072)	(92,762)	1	(92,761)
Liabilities for non-participating investment contracts	(138,183)	3,860	(134,323)	(137,689)	4,006	(133,683)
	(370,665)	11,037	(359,628)	(361,633)	10,376	(351,257)
Outstanding claims provisions	(2,643)	87	(2,556)	(2,187)	93	(2,094)
	(373,308)	11,124	(362,184)	(363,820)	10,469	(353,351)
General insurance and health
Outstanding claims provisions	(9,017)	794	(8,223)	(8,831)	683	(8,148)
Provisions for claims incurred but not reported	(3,367)	1,139	(2,228)	(2,672)	1,004	(1,668)
	(12,384)	1,933	(10,451)	(11,503)	1,687	(9,816)
Provision for unearned premiums	(5,210)	299	(4,911)	(5,138)	275	(4,863)
Provision arising from liability adequacy tests¹	(2)	-	(2)	(15)	-	(15)
	(17,596)	2,232	(15,364)	(16,656)	1,962	(14,694)
Total	(390,904)	13,356	(377,548)	(380,476)	12,431	(368,045)
Less: Liabilities classified as held for sale	15,591	(18)	15,573	9,011	(75)	8,936
	(375,313)	13,338	(361,975)	(371,465)	12,356	(359,109)

1 Provision arising from liability adequacy tests relates to general insurance business only. Additional liabilities arising from liability adequacy test for life operations, where applicable, are included in unallocated divisible surplus. At 31 December 2020 this liability is £8 million (2019: £nil) for life operations.

Page 59

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. The components of the reconciliation are the change in provision for outstanding claims on long-term business (which is not included in a separate movement table), and the unwind of discounting on general insurance reserves (which is included within finance costs in the income statement). For general insurance and health, the change in the provision for unearned premiums is not included in the reconciliation as, within the income statement, this is included within earned premiums.

2020	Gross £m	Reinsurance £m	Net £m
Long-term business
Change in insurance liabilities (note B11(b)(iii))	7,336	(1,458)	5,878
Change in provision for outstanding claims	471	(22)	449
	7,807	(1,480)	6,327
General insurance and health
Change in insurance liabilities (note B11(c)(iv) and B14(c)(ii))	852	(259)	593
Change in provision arising from liability adequacy tests	(12)	-	(12)
Less: Unwind of discount	(11)	8	(3)
	829	(251)	578
Total change in insurance liabilities	8,636	(1,731)	6,905
Less: Change in insurance liabilities from discontinued operations	(515)	250	(265)
Total change in insurance liabilities from continued operations	8,121	(1,481)	6,640

2019	Gross £m	Reinsurance £m	Net £m
Long-term business
Change in insurance liabilities (note B11(b)(iii))	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)(iv) and B14(c)(ii))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
Less: Change in insurance liabilities from discontinued operations	(390)	358	(32)
Total change in insurance liabilities from continued operations	6,434	(764)	5,670

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 investment contract provisions shown on the income statement consists of the attributed investment return. For participating investment contracts, the change in 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 60

B11 - Insurance liabilities

This note analyses the Group's gross insurance contract liabilities for the long-term and general insurance and health business, describes how the Group calculates these liabilities and presents the movement in these liabilities during the year.

(a) Carrying amount

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

	2020 £m	2019 £m
Long-term business
Participating insurance liabilities	44,725	47,344
Unit-linked non-participating insurance liabilities	14,061	14,707
Other non-participating insurance liabilities	76,623	69,131
	135,409	131,182
Outstanding claims provisions	2,643	2,187
	138,052	133,369
General insurance and health
Outstanding claims provisions	9,017	8,831
Provision for claims incurred but not reported	3,367	2,672
	12,384	11,503
Provision for unearned premiums	5,210	5,138
Provision arising from liability adequacy tests¹	2	15
	17,596	16,656
Total	155,648	150,025
Less: Liabilities classified as held for sale	(3,166)	(687)
	152,482	149,338

(b) Long-term business liabilities

(i) Business description

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

· In the UK and Ireland, long-term business is mainly written in the 'Non-Profit' funds and in a number of 'With-Profits' sub-funds. In the 'Non‑Profit' funds shareholders are entitled to 100% of the distributed profits. In the 'With-Profits' sub-funds the with-profits policyholders are entitled to between 40% and 100% of distributed profits, depending on the fund rules. There is also the Reattributed Inherited Estate External Support Account (RIEESA) in the UK, which does not itself underwrite any business, but provides capital support to one of the with-profits sub-funds and receives any surplus or deficit emerging from it. In the RIEESA, shareholders are entitled to 100% of the distributed profits, but these cannot be distributed until the 'lock-in' criteria set by the Reattribution Scheme have been met;

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

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

(ii) Group practice

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

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

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

A description of the main methodology and most material valuation assumptions has been provided (see note B12).

Page 61

B11 - Insurance liabilities continued

(b) Long-term business liabilities continued

(iii) Movements in long-term business liabilities

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

	2020 £m	2019 £m
Carrying amount at 1 January	131,182	125,829
Liabilities in respect of new business	8,982	6,988
Expected change in existing business	(6,293)	(6,452)
Variance between actual and expected experience	(378)	3,212
Impact of operating assumption changes	(783)	(961)
Impact of economic assumption changes	5,531	3,766
Other movements recognised as an expense¹	277	47
Change in liability recognised as an expense (note B10(b))	7,336	6,600
Effect of portfolio transfers, acquisitions and disposals²	(4,707)	-
Foreign exchange rate movements	1,510	(1,775)
Other movements³	88	528
Carrying amount at 31 December	135,409	131,182

1 Other movements recognised as an expense during 2020 relate primarily to recognition of additional reserves related to with-profits legacy guarantees. Additional contributions from a special bonus distribution to with-profits policyholders and provisions for legacy unclaimed assets broadly offset by model changes in UK Life, Ireland and Singapore. 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 The movement during 2020 includes the disposal of FPI, Hong Kong and Singapore businesses.

3 Other movements include the reclassification in the UK from participating investment contracts to insurance contracts of £97 million during 2020 (2019: £972 million). Other movements in 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 insurance liabilities, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The gross long-term business liabilities increased by £4.2 billion during 2020 (2019: £5.4 billion increase) mainly driven by:

· New business net of the expected change on existing business of £2.7 billion, primarily due to growing bulk purchase annuities sales in the UK;

· Variance between actual and expected experience of £(0.4) billion, which was mainly due to lower than expected equity returns in the UK, France and Italy;

· Impact of operating assumption changes of £(0.8) billion mainly due to updates to longevity assumptions (with the impact on profit partially offset by a corresponding reduction in reinsurance assets) in the UK; and

· Economic assumption changes of £5.5 billion, which reflects a reduction in valuation interest rates in response to decreasing interest rates and narrowing of credit spreads, primarily in respect of annuity 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 profit. Where assumption changes impact profit, these are included in the effect of changes in assumptions and estimates during the year (see note B15), together with the impact of movements in related non-financial assets.

(i) Business description

The Group underwrites general insurance and health business in a number of countries as follows:

· In the UK and Ireland, providing individual and corporate customers with a wide range of insurance products;

· In Canada, providing a range of personal and commercial lines products; and

· In other Manage-for-Value operations in Europe, providing a range of general insurance and health products.

(ii) Group practice

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

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

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

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(iii) Provisions for outstanding claims

The table below shows the total general insurance and health liabilities split by outstanding claim provisions and provision for claims incurred but not reported (IBNR provisions), gross of reinsurance, by major line of business.

	As at 31 December 2020			As at 31 December 2019
	Outstanding claim provisions £m	IBNR provisions £m	Total claim provisions £m	Outstanding claim provisions £m	IBNR provisions £m	Total claim provisions £m
Motor	4,678	1,298	5,976	4,836	1,115	5,951
Property	2,117	430	2,547	1,823	155	1,978
Liability	1,940	1,440	3,380	1,864	1,277	3,141
Creditor	2	1	3	5	6	11
Other	280	198	478	303	119	422
	9,017	3,367	12,384	8,831	2,672	11,503

The gross outstanding claims provision before discounting was £12,546 million (2019: £11,801 million). Details of the range of discount rates used along with other material assumptions are available (see note B12(b)).

(iv) Movements in general insurance and health claims liabilities

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

	2020 £m	2019 £m
Carrying amount at 1 January	11,503	11,406
Impact of changes in assumptions	184	126
Claim losses and expenses incurred in the current year	6,909	7,045
Decrease in estimated claim losses and expenses incurred in prior periods	(122)	(186)
Incurred claims losses and expenses	6,971	6,985
Less:
Payments made on claims incurred in the current year	(3,315)	(3,834)
Payments made on claims incurred in prior periods	(3,137)	(3,327)
Recoveries on claim payments	322	396
Claims payments made in the period, net of recoveries	(6,130)	(6,765)
Unwind of discounting	11	14
Changes in claims reserve recognised as an expense (note B10(b))	852	234
Effect of portfolio transfers, acquisitions and disposals¹	(72)	-
Foreign exchange rate movements	101	(138)
Other movements	-	1
Carrying amount at 31 December	12,384	11,503

1 The movement during 2020 relates to the disposal of the Singapore business.

The impact of COVID-19 on general insurance incurred claims losses is estimated as £150 million after allowing for an estimated £500 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 insured by the Group; partially offset by a reduction in claims frequency on other product lines. 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. Allowances for uncertainties in the reserving process are discussed in note B12.

(v) Movements in general insurance and health unearned premiums

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

	2020 £m	2019 £m
Carrying amount at 1 January	5,138	4,946
Premiums written during the year	10,956	10,908
Less: Premiums earned during the year	(10,807)	(10,677)
Changes in UPR recognised as an expense/(income)	149	231
Gross portfolio transfers and acquisitions¹	(104)	-
Foreign exchange rate movements	27	(39)
Carrying amount at 31 December	5,210	5,138

1 The movement during 2020 relates to the disposal of the Singapore business.

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(vi) Analysis of general insurance and health claims development

The tables that follow present the development of claims payments and the estimated ultimate cost of claims for the accident years 2011 to 2020. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year, while the lower section of the tables shows the original estimated ultimate cost of claims and how these original estimates have increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity.

Key elements of the development of prior accident year general insurance and health net provisions during 2020 were:

· £47 million release from the UK and Ireland primarily due to favourable experience in personal property and personal motor lines, partially offset by strengthening across commercial lines due to adverse large claims experience;

· £13 million release from Canada primarily due to favourable injury experience in personal motor, offset by strengthening and large loss development in latent claims;

· £20 million release from Manage-for-value markets mainly due to favourable claims development in France.

Key elements of the development of prior accident year general insurance and health net provisions during 2019 were:

· £134 million release from the UK due to favourable claims experience in personal and commercial motor partly offset by a strengthening in commercial property and a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (for further details see note B12);

· £58 million release from Canada primarily due to favourable claims experience on personal and commercial motor and large reinsurance recoverable on two catastrophe events from August 2018 in personal and commercial property lines; and

· £83 million release from other markets mainly due to favourable claims development in France.

Gross of reinsurance

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

Accident year	All prior years £m	2011 £m	2012 £m	2013 £m	2014 £m	2015 £m	2016 £m	2017 £m	2018 £m	2019 £m	2020 £m	Total £m
Gross cumulative claim payments
At end of accident year		(3,420)	(3,055)	(3,068)	(3,102)	(2,991)	(3,534)	(3,517)	(3,769)	(3,617)	(3,240)
One year later		(4,765)	(4,373)	(4,476)	(4,295)	(4,285)	(4,972)	(4,952)	(5,239)	(4,986)
Two years later		(5,150)	(4,812)	(4,916)	(4,681)	(4,710)	(5,435)	(5,388)	(5,681)
Three years later		(5,457)	(5,118)	(5,221)	(4,974)	(4,997)	(5,781)	(5,699)
Four years later		(5,712)	(5,376)	(5,467)	(5,244)	(5,198)	(6,020)
Five years later		(5,864)	(5,556)	(5,645)	(5,406)	(5,364)
Six years later		(5,978)	(5,635)	(5,739)	(5,507)
Seven years later		(6,032)	(5,718)	(5,785)
Eight years later		(6,078)	(5,756)
Nine years later		(6,101)
Estimate of gross ultimate claims
At end of accident year		6,428	6,201	6,122	5,896	5,851	6,947	6,894	7,185	6,979	6,896
One year later		6,330	6,028	6,039	5,833	5,930	6,931	6,796	7,175	6,935
Two years later		6,315	6,002	6,029	5,865	5,912	6,864	6,756	7,220
Three years later		6,292	5,952	6,067	5,842	5,814	6,817	6,751
Four years later		6,262	6,002	6,034	5,772	5,785	6,836
Five years later		6,265	5,979	5,996	5,756	5,760
Six years later		6,265	5,910	5,956	5,735
Seven years later		6,223	5,902	5,950
Eight years later		6,205	5,895
Nine years later		6,213
Estimate of gross ultimate claims		6,213	5,895	5,950	5,735	5,760	6,836	6,751	7,220	6,935	6,896
Cumulative payments		(6,101)	(5,756)	(5,785)	(5,507)	(5,364)	(6,020)	(5,699)	(5,681)	(4,986)	(3,240)
	2,305	112	139	165	228	396	816	1,052	1,539	1,949	3,656	12,357
Effect of discounting	(160)	(1)	(1)	-	-	-	-	-	-	-	-	(162)
Present value	2,145	111	138	165	228	396	816	1,052	1,539	1,949	3,656	12,195
Cumulative effect of foreign exchange movements	-	1	5	7	18	60	(4)	(9)	(2)	17	-	93
Effect of acquisitions	-	5	7	7	15	31	31	-	-	-	-	96
Present value recognised in the statement of financial position	2,145	117	150	179	261	487	843	1,043	1,537	1,966	3,656	12,384

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B11 - Insurance liabilities continued

Net of reinsurance

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

Accident year	All prior years £m	2011 £m	2012 £m	2013 £m	2014 £m	2015 £m	2016 £m	2017 £m	2018 £m	2019 £m	2020 £m	Total £m
Net cumulative claim payments
At end of accident year		(3,300)	(2,925)	(2,905)	(2,972)	(2,867)	(3,309)	(3,483)	(3,718)	(3,565)	(3,090)
One year later		(4,578)	(4,166)	(4,240)	(4,079)	(4,061)	(4,591)	(4,843)	(5,117)	(4,873)
Two years later		(4,963)	(4,575)	(4,649)	(4,432)	(4,452)	(5,012)	(5,255)	(5,514)
Three years later		(5,263)	(4,870)	(4,918)	(4,720)	(4,725)	(5,329)	(5,560)
Four years later		(5,485)	(5,110)	(5,159)	(4,973)	(4,919)	(5,564)
Five years later		(5,626)	(5,289)	(5,324)	(5,132)	(5,085)
Six years later		(5,740)	(5,371)	(5,417)	(5,222)
Seven years later		(5,798)	(5,439)	(5,459)
Eight years later		(5,842)	(5,488)
Nine years later		(5,868)
Estimate of net ultimate claims
At end of accident year		6,202	5,941	5,838	5,613	5,548	6,489	6,714	6,997	6,774	6,378
One year later		6,103	5,765	5,745	5,575	5,635	6,458	6,591	6,944	6,729
Two years later		6,095	5,728	5,752	5,591	5,608	6,377	6,569	6,983
Three years later		6,077	5,683	5,733	5,559	5,517	6,334	6,560
Four years later		6,034	5,717	5,689	5,490	5,495	6,335
Five years later		6,005	5,680	5,653	5,472	5,469
Six years later		6,003	5,631	5,612	5,449
Seven years later		5,967	5,600	5,612
Eight years later		5,952	5,607
Nine years later		5,961
Estimate of net ultimate claims		5,961	5,607	5,612	5,449	5,469	6,335	6,560	6,983	6,729	6,378
Cumulative payments		(5,868)	(5,488)	(5,459)	(5,222)	(5,085)	(5,564)	(5,560)	(5,514)	(4,873)	(3,090)
	990	93	119	153	227	384	771	1,000	1,469	1,856	3,288	10,350
Effect of discounting	(89)	1	(1)	2	-	-	-	-	-	-	-	(87)
Present value	901	94	118	155	227	384	771	1,000	1,469	1,856	3,288	10,263
Cumulative effect of foreign exchange movements	-	1	5	7	17	59	(4)	(9)	(2)	16	-	90
Effect of acquisitions	3	5	7	7	15	30	31	-	-	-	-	98
Present value recognised in the statement of financial position	904	100	130	169	259	473	798	991	1,467	1,872	3,288	10,451

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

The loss development tables above include information on asbestos and environmental pollution claims provisions from business written more than 10 years ago. The undiscounted claim provisions, net of reinsurance, in respect of this business at 31 December 2020 were £87 million (2019: £88 million). The movement in asbestos and environmental pollution liabilities in the year reflects a reduction of £11 million due to favourable claims development, claim payments net of reinsurance recoveries and foreign exchange movements.

B12 - Insurance liabilities methodology and assumptions

(a) Long-term business

The main method used for the actuarial valuation of long-term insurance liabilities is the gross premium method which involves the discounting of projected future cash flows. The cash flows are calculated using the contractual premiums payable together with explicit assumptions for investment returns, discount rates, inflation, mortality, morbidity, persistency and future expenses. These assumptions can vary by contract type and reflect current and expected future experience with an allowance for prudence.

The methodology and assumptions described below relate to the UK and France insurance businesses only.

(i) UK

Non-profit business

The valuation of non‑profit business is based on grandfathered regulatory requirements under IFRS 4 prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. Conventional non‑profit contracts, including those written in the with-profits funds, are valued using the gross premium method. For non‑profit business in the ex. Friends Life with‑profits funds, the liabilities are measured on a realistic basis with implicit recognition of the present value of future profits.

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

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(a) Long-term business continued

Discount rates

Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long‑term interest rates as measured by gilt yields. An explicit allowance for risk is included by making a deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. For equity release assets, the risk allowances are consistent with those used in the fair value asset methodology. A further margin for risk is then deducted for all asset classes.

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

Valuation discount rates (Gross of investment expenses)	2020	2019
Assurances
Life conventional non-profit	0.5%	0.5% to 2.1%
Pensions conventional non-profit	0.5%	0.6% to 1.6%
Annuities
Conventional immediate and deferred annuities	0.5% to 1.5%	0.9% to 2.3%
Non-unit reserves on unit-linked business
Life	0.4%	0.9%
Pensions	0.5%	1.1%
Income Protection
Active lives	0.5%	0.6% to 2.1%
Claims in payment (level and index linked)	0.5%	1.1%

The valuation discount rates are after a reduction for risk, but before allowance for investment expenses. For annuity business, the allowance for risk comprises long‑term assumptions on a prudent basis for defaults or, in the case of equity release assets, expected losses arising from the No‑Negative‑Equity Guarantee. These allowances vary by asset category and for some asset classes by rating.

The risk allowances made for corporate bonds (including overseas government bonds and structured finance assets), mortgages (including healthcare mortgages, commercial mortgages and infrastructure assets), and equity release equated to 46 bps, 35 bps, and 118 bps respectively at 31 December 2020 (2019: 45 bps - 47 bps, 31 bps - 35 bps, and 124 bps respectively).

The total valuation allowance in respect of corporate bonds was £1.4 billion (2019: £1.3 billion) over the remaining term of the portfolio at 31 December 2020. The total valuation allowance in respect of mortgages (including healthcare mortgages but excluding equity release) was £0.6 billion at 31 December 2020 (2019: £0.5 billion). The total valuation allowance in respect of equity release mortgages was £1.7 billion at 31 December 2020 (2019: £1.5 billion). Total liabilities for the annuity business were £62.9 billion at 31 December 2020 (2019: £57.6 billion).

Expenses

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

Mortality

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

Mortality tables used	2020	2019
Assurances
Non-profit	AM00/AF00 or TM08/TF08 adjusted for smoker status and age/sex specific factors	AM00/AF00 or TM08/TF08 adjusted for smoker status and age/sex specific factors

Pure endowments and deferred annuities before vesting	AM00/AF00 adjusted	AM00/AF00 adjusted
Annuities in payment
Pensions business and general annuity business	PMA08 HAMWP /PFA08 HAMWP adjusted plus allowance for future mortality improvement	PMA08 HAMWP /PFA08 HAMWP adjusted plus allowance for future mortality improvement
Bulk purchase annuities	CV3	CV3

For the largest portfolio of pensions annuity business, the underlying mortality assumptions for males are 105.2% of PMA08 HAMWP adjusted (2019: 105.4% of PMA08 HAMWP adjusted) with base year 2008; for females the underlying mortality assumptions are 102.7% of PFA08 HAMWP adjusted (2019: 99.5% of PFA08 HAMWP adjusted) with base year 2008.

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B12 - Insurance liabilities methodology and assumptions continued

(a) Long-term business continued

Mortality continued

Improvements are based on 'CMI_2019 (S=7.25) Advanced with adjustments' (2019: 'CMI_2018 (S=7.25) Advanced with adjustments') with a long-term improvement rate of 1.5% (2019: 1.75%) for males and 1.5% (2019: 1.5%) for females, both with an additional improvement for prudence of 0.5% (2019: 0.5%) to all future annual improvement adjustments. The CMI_2019 tables have been adjusted by adding 0.25% (2019: 0.25%) and 0.35% (2019: 0.35%) to the initial rate of mortality improvements for males and females respectively (to allow for greater mortality improvements in the annuitant population relative to the general population on which CMI_2019 is based), and uses the advanced parameters to taper the long-term improvement rates to zero between ages 90 and 115 (the 'core' parameters taper the long-term improvement rates to zero between ages 85 and 110). The tapering approach is unchanged from that used at 2019. In addition, on a significant proportion of individual annuity business, year-specific adjustments are made to allow for potential selection effects due to the development of the enhanced annuity market and covering possible selection effects from pension freedom reforms.

With-profits business

The Group's UK with‑profits funds are evaluated by reference to FRS 27, which was grandfathered under IFRS 4, prior to the adoption of Solvency II. This uses an approach of calculating the realistic liabilities for the contracts. The realistic liabilities include the with‑profits benefit reserve (WPBR), and an additional provision for the expected cost of any guarantees and options in excess of the WPBR.

The WPBR for an individual contract is generally calculated on a retrospective basis and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract.

Provisions for guarantees and options within realistic liabilities are measured using market‑consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising from uncertainty surrounding future economic conditions. Non‑market‑related assumptions (for example, persistency, mortality and expenses) are assessed on a best estimate basis with reference to Company and wider industry experience, adjusted to take into account future trends.

The with‑profits business is valued by adjusting Solvency II Best Estimate Liabilities and results in a valuation in accordance with FRS 27.

Future investment return

A risk-free rate equal to the spot yield on UK swaps is used for the valuation of with-profits business. The rates vary according to the outstanding term of the policy, with a typical rate as at 31 December 2020 of 0.40% (2019: 1.02%) for a policy with ten years outstanding.

Volatility of investment return

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

Volatility	2020	2019
Equity returns	19.0%	16.2%
Property returns	15.4%	15.8%

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

Future regular bonuses

Annual bonus assumptions for 2021 have been set consistently with the year-end 2020 declaration. Future annual bonus rates reflect the principles and practices of each fund. In particular, the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent with past practice.

Mortality

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

Mortality table used	2020	2019
Assurances, pure endowments and deferred annuities before vesting	Nil or Axx00 adjusted	Nil or Axx00 adjusted

Pensions business after vesting and pensions annuities in payment	PMA08 HAMWP/PFA08 HAMWP adjusted plus allowance for future mortality improvement	PMA08 HAMWP/PFA08 HAMWP adjusted plus allowance for future mortality improvement

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

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(a) Long-term business continued

Expenses

Maintenance fee assumptions for with-profits business are generally expressed as a fixed per policy charge in line with a memorandum of understanding between the with-profits funds and the non-profit fund within the company. The memorandum of understanding specifies the charges for a five-year period ending in 2023 and specifies a level of charge inflation during that period of CPI+2% or CPI+3% depending on the product type. After the end of the period covered by the memorandum of understanding we assume that the charges will remain unchanged, and a level of charge inflation of RPI+1% for all products will apply. Any difference of expenses charged by Aviva Life Services UK Limited (UKLS) to Aviva Life & Pensions UK Limited (AVLAP) over the charges specified by the memorandum of understanding accrues to the non-profit fund.

Guarantees and options

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

(ii) France

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

	Valuation discount rates		Mortality tables used
	2020	2019	2020 and 2019
			TD73-77, TD88-90,
			TH00-02, TF00-02, H_AVDBS, F_AVDBS,
Life assurances	0% to 4.5%	0% to 4.5%	H_SSDBS, F_SSDBS
Annuities	0% to 1.5%	0% to 1.5%	TGF05/TGH05

(b) General insurance and health

Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are set by skilled claims technicians and established case setting procedures. Claims above certain limits are referred to senior claims handlers for estimate authorisation.

No adjustments are made to the claims technicians' case estimates included in booked claim provisions, except for rare occasions when the estimated ultimate cost of individual large or unusual claims may be adjusted, subject to internal reserve committee approval, to allow for uncertainty regarding, for example, the outcome of a court case. The ultimate cost of outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where this is considered appropriate.

The assumptions used in most non-life actuarial projection techniques, including future rates of claims inflation or loss ratio assumptions, are implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in the future in order to arrive at a point estimate for the ultimate cost of claims that represents the likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved. The range of possible outcomes does not, however, result in the quantification of a reserve range.

The following explicit assumptions are made which could materially impact the level of booked net reserves:

Discounting

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

		Discount rate		Mean term of liabilities
Class	2020	2019	2020	2019
Reinsured London Market business	0.0% to 1.5%	0.8% to 2.2%	9 years	9 years
Latent claims	0.0% to 1.2%	0.8% to 2.2%	9 to 11 years	10 to 12 years
Structured settlements	-0.4% to 2.3%	-0.2% to 2.7%	11 to 35 years	11 to 35 years

The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.

The discount rate that has been applied to latent claims reserves, structured settlements and reinsured London Market business is based on the swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between 9 and 11 years depending on the geographical region.

At 31 December 2020, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £130 million (2019: £120 million), excluding the offsetting effect on asset values as assets are not hypothecated across classes of business.

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B12 - Insurance liabilities methodology and assumptions continued

(b) General insurance and health continued

UK mesothelioma claims

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

Allowance for risk and uncertainty

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

Lump sum payments in settlement of bodily injury claims that are decided by the UK courts are calculated in accordance with the Ogden Tables and discount rate. The Ogden discount rate is set by the Lord Chancellor and is applied when calculating the present value of future care costs and loss of earnings for claims settlement purposes. The balance sheet reserves in the UK have been calculated using the current Ogden discount rate of -0.25%, as this is the enacted legislative rate that was announced by the Lord Chancellor in August 2019. The Ogden discount rate is expected to be reviewed by the Lord Chancellor by summer 2024

B13 - 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 liabilities for investment contracts (gross of reinsurance) at 31 December 2020 comprised:

	2020 £m	2019 £m
Long-term business
Liabilities for participating investment contracts	97,073	92,762
Liabilities for non-participating investment contracts	138,183	137,689
Total	235,256	230,451
Less: Liabilities classified as held for sale	(12,425)	(8,324)
	222,831	222,127

(b) Group practice

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

Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according to the methodology for long-term business liabilities (see note B12). They are not measured at fair value as there is currently no agreed definition of fair valuation for discretionary participation features under IFRS. In the absence of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB deferred consideration of participating contracts to the IFRS 17 insurance standard, which is expected to apply to annual reporting periods beginning on or after 1 January 2023.

For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus, except for the with-profits sub-fund supported by the RIEESA.

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

Of the non-participating investment contracts measured at fair value, £138,044 million at 31 December 2020 (2019: £137,040 million) are unit‑linked in structure and the fair value liability is equal to the current unit fund value, including any unfunded units, plus if required, additional non-unit reserves based on a discounted cash flow analysis. These contracts are generally classified as Level 1 in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied by the number of units in issue, and any non-unit reserve is insignificant.

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

For non-participating investment contracts acquired in a business combination, an acquired value of in-force business asset is recognised in respect of the fair value of the investment management services component of the contracts, which is amortised on a systematic basis over the useful lifetime of the related contracts. The amount of the acquired value of in-force business asset is shown in note B24, which relates primarily to the acquisition of Friends Life in 2015 and Friends First in 2018.

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B13 - Liabilities for investment contracts continued

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

(i) Participating investment contracts

	2020 £m	2019 £m
Carrying amount at 1 January	92,762	90,455
Liabilities in respect of new business	4,691	6,991
Expected change in existing business	(5,127)	(4,857)
Variance between actual and expected experience	343	4,751
Impact of operating assumption changes	92	173
Impact of economic assumption changes	330	204
Other movements recognised as an expense¹	76	103
Change in liability recognised as an expense²	405	7,365
Foreign exchange rate movements	4,003	(4,054)
Other movements³	(97)	(1,004)
Carrying amount at 31 December	97,073	92,762

1 Other movements recognised as an expense during 2020 relate to a special bonus distribution to with-profits policyholders in UK Life. In 2019 this related to a special bonus distribution 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 £1,311 million (2019: £5,269 million).

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

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

The variance between actual and expected experience in 2020 of £0.3 billion is primarily due to higher bond and gilt values as a result of lower interest rates and increases in US and Japanese equity markets; partially offset by decreases in UK and European equity performance.

The impact of assumption changes in the analysis shows the resulting movement in the carrying value of participating investment contract liabilities. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes do impact profit, these are included in the effect of changes in assumptions and estimates during the year shown in note B15, together with the impact of movements in related non-financial assets.

(ii) Non-participating investment contracts

	2020 £m	2019 £m
Carrying amount at 1 January	137,689	120,354
Liabilities in respect of new business	4,187	5,520
Expected change in existing business	(3,231)	(3,742)
Variance between actual and expected experience	6,970	16,345
Impact of operating assumption changes	19	(22)
Impact of economic assumption changes	6	(1)
Other movements recognised as an expense	-	2
Change in liability	7,951	18,102
Effect of portfolio transfers, acquisitions and disposals¹	(8,038)	-
Foreign exchange rate movements	583	(575)
Other movements²	(2)	(192)
Carrying amount at 31 December	138,183	137,689

1 The movement during 2020 relates to the disposal of FPI.

2 Other movements during 2019 relate to a reclassification from non-participating investment 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 in 2020 of £7.0 billion is due to higher bond and gilt values as a result of lower interest rates and increases in US and Japanese equity markets; partially offset by decreases in UK and European equity performance. In addition more UK pension policies have remained in force due to increased pensions freedoms.

The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of non-participating investment contract liabilities. The impacts of assumption changes on profit are included in the effect of changes in assumptions and estimates during the year shown in note B15, which combines participating and non-participating investment contracts together with the impact of movements in related non-financial assets.

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B14 Reinsurance assets

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

(a) Carrying amount

The reinsurance assets at 31 December comprised:

	2020 £m	2019 £m
Long-term business
Insurance contracts	7,176	6,369
Participating investment contracts	1	1
Non-participating investment contracts¹	3,860	4,006
	11,037	10,376
Outstanding claims provisions	87	93
	11,124	10,469
General insurance and health
Outstanding claims provisions	794	683
Provisions for claims incurred but not reported	1,139	1,004
	1,933	1,687
Provisions for unearned premiums	299	275
	2,232	1,962
	13,356	12,431
Less: Assets classified as held for sale	(18)	(75)
Total	13,338	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.

Of the above total, £12,048 million (2019: £10,943 million) is expected to be recovered more than one year after this statement of financial position.

(b) Assumptions

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

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

(i) Long-term business liabilities

	2020 £m	2019 £m
Carrying amount at 1 January	10,376	9,846
Assets in respect of new business	1,539	954
Expected change in existing business assets	(335)	(185)
Variance between actual and expected experience	763	274
Impact of non-economic assumption changes	(150)	(175)
Impact of economic assumption changes	503	193
Other movements recognised as an expense¹	(998)	(37)
Change in assets²	1,322	1,024
Effect of portfolio transfers, acquisitions and disposals³	(731)	-
Foreign exchange rate movements	63	(73)
Other movements⁴	7	(421)
Carrying amount at 31 December	11,037	10,376

1 Other movements recognised as an expense during 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 Movements in 2020 relate to the disposals of the FPI, Hong Kong and Singapore businesses.

4 Other movements in 2019 included £(427) million of negative reinsurance assets in the UK which were reclassified form 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 year (see note B15), together with the impact of movements in related liabilities and other non-financial assets.

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B14 - Reinsurance assets continued

(ii) General insurance and health claims liabilities

	2020 £m	2019 £m
Carrying amount at 1 January	1,687	1,611
Impact of changes in assumptions	81	73
Reinsurers' share of claim losses and expenses
Incurred in current year	521	195
Incurred in prior years	(43)	96
Reinsurers' share of incurred claim losses and expenses	478	291
Less:
Reinsurance recoveries received on claims
Incurred in current year	(145)	(53)
Incurred in prior years	(163)	(227)
Reinsurance recoveries received in the year	(308)	(280)
Unwind of discounting	8	10
Change in reinsurance asset recognised as income (note B10(b))	259	94
Effect of portfolio transfers, acquisitions and disposals¹	(9)	-
Foreign exchange rate movements	(4)	(15)
Other movements	-	(3)
Carrying amount at 31 December	1,933	1,687

1 The movement during 2020 relates to the disposal of the Singapore business.

The impact of COVID-19 on reinsurers' share of incurred claim losses is estimated as £255 million. Further information on the impact of COVID‑19 on general insurance and health liabilities and associated reinsurance can be found within note B20.

(iii) General insurance and health unearned premiums

	2020 £m	2019 £m
Carrying amount at 1 January	275	254
Premiums ceded to reinsurers in the year	725	683
Less: Reinsurers' share of premiums earned during the year	(696)	(661)
Changes in reinsurance asset recognised as income	29	22
Reinsurers' share of portfolio transfers and acquisitions¹	(4)	-
Foreign exchange rate movements	-	(1)
Carrying amount at 31 December	300	275

1 The movement during 2020 relates to the disposal of the Singapore business.

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B15 - Effect of changes in assumptions and estimates during the year

This note analyses the impact of changes in estimates and assumptions from 2019 to 2020, 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 2020 £m	Effect on profit 2019 £m
Assumptions
Long-term insurance business
Interest rates	(3,831)	(2,978)
Expenses	111	(47)
Persistency rates	(31)	(124)
Mortality and morbidity for assurance contracts	81	(38)
Mortality for annuity contracts	384	830
Tax and other assumptions	14	9
Long-term investment business
Expenses	3	-
General insurance and health business
Change in discount rate assumptions	(104)	(54)
Total	(3,373)	(2,402)

The impact of change in interest rates on long-term business relates primarily to annuities in the UK (including any change in credit default and reinvestment risk provisions), where a reduction in the discount rate, in response to decreasing interest rates and narrowing credit spreads, has increased liabilities.

The impact of expense assumption changes on long-term business relates to the UK and Ireland, where reserves have decreased by £111 million following a review of recent experience including the expense allocations.

The impact of persistency assumption changes on long-term business relates to the UK where reserves have increased by £31 million following a review of recent experience on protection business.

The impact of change in mortality and morbidity assumptions for assurance contracts relates primarily to Singapore where prior to disposal there was a reduction in reserves of £86 million following a review of recent experience. In addition, there has been a £40 million strengthening of reserves in the UK as a result of COVID-19 partially offset by a £32 million reduction in reserves following a review of recent experience (not related to COVID-19).

The impact of mortality assumption changes for annuitant contracts on long-term business relates primarily to a reduction in reserves of £390 million in the UK. This is due to changes in assumptions on both individual and bulk purchase annuities arising from:

· Updates to base mortality to reflect recent experience of £224 million;

· Updates to the rate of mortality improvements, including moving to CMI 2019 and changing the long-term rate of future mortality improvements for males of £210 million;

· Changes to assumptions for anti-selection on individual annuities of £(68) million;

· Net impacts arising from COVID-19 of £24 million.

In 2019 the impact of mortality for annuitant contracts on long-term business related primarily to a reduction in reserves of £799 million in the UK comprising:

· Updates to base mortality to reflect recent experience for individual annuities of £81 million;

· Updates to the rate of mortality improvements for individual annuities, including CMI 2018 and a change in smoothing parameter, of £410 million;

· Refinements to modelling of bulk purchase annuities together with a change to base mortality, improvements and a change in smoothing parameter, of £231 million;

· Refinements to modelling of enhanced annuities of £58 million; and

· Other less significant movements of £19 million.

In the general insurance and health business, a negative impact of £(104) million (2019: £(54) million negative) 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.

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B16 - 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 year.

	2020 £m	2019 £m
Carrying amount at 1 January	9,597	5,949
Change in participating fund assets	2,925	9,411
Change in participating fund liabilities	(1,244)	(5,426)
Other movements¹	8	-
Change in liability recognised as an expense	1,689	3,985
Effect of portfolio transfers, acquisition and disposals²	(730)	-
Foreign exchange rate movements	414	(337)
	10,970	9,597
Less: Classified as held for sale	(1,234)	-
Carrying amount at 31 December	9,736	9,597

1 Other movements relates to additional liabilities arising from the liability adequacy test for France of £8 million (2019: £nil).

2 The movement during 2020 relates to disposal of the Singapore business.

The amount of UDS at 31 December 2020 has increased to £9.7 billion (2019: £9.6 billion). The movement in UDS is mainly due to market movements in Europe as a result of decreasing interest rates and narrowing credit spreads; partially offset by a decrease in the UK due to an increase in liabilities for special bonus distributions, the disposal of the Singapore business and business now held for sale in Italy.

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 (2019: no material negative UDS).

B17 - Borrowings

Our borrowings are classified as either core structural borrowings, which are included within the Group's capital employed, or operational borrowings drawn by operating subsidiaries. This note shows the carrying values and contractual maturity amounts of each type and explains their main features and movements during the year.

(a) Analysis of total borrowings

Total borrowings comprise:

	2020 £m	2019 £m
Core structural borrowings, at amortised cost	8,253	7,496
Operational borrowings, at amortised cost	308	338
Operational borrowings, at fair value	1,166	1,233
	1,474	1,571
	9,727	9,067
Less: Liabilities classified as held for sale	(43)	(28)
	9,684	9,039

(b) Movements in the year

Movements in borrowings during the year were:

			2020			2019
	Core Structural £m	Operational £m	Total £m	Core Structural £m	Operational £m	Total £m
New borrowings drawn down, excluding commercial paper, net of expenses	754	(2)	752	-	75	75
Repayment of borrowings, excluding commercial paper¹	(499)	(69)	(568)	(210)	(231)	(441)
Movement in commercial paper²	(150)	-	(150)	19	-	19
Net cash outflow	105	(71)	34	(191)	(156)	(347)
Foreign exchange rate movements	177	36	213	(204)	(28)	(232)
Borrowings reclassified/(loans repaid) for non-cash consideration¹	499	(26)	473	210	(4)	206
Fair value movements	-	(11)	(11)	-	38	38
Amortisation of discounts and other non-cash items	(24)	-	(24)	(23)	-	(23)
Movements in debt held by Group companies³	-	(25)	(25)	5	-	5
Movements in the year	757	(97)	660	(203)	(150)	(353)
Balance at 1 January	7,496	1,571	9,067	7,699	1,721	9,420
Balance at 31 December	8,253	1,474	9,727	7,496	1,571	9,067

1 On 23 June 2020, notification was given that the Group would redeem 5.9021% £500 million direct capital instrument. At that date, the instruments were reclassified as a financial liability of £499 million, representing the fair value at that date. On 27 July 2020 the instruments were redeemed in full at a cost of £500 million. The difference of £1 million between the carrying amount of £500 million and fair value of £499 million was charged to retained earnings. On 17 October 2019, notification was given that the Group would redeem the 6.875% £210 million tier 1 notes. At that date, the instruments were reclassified as a financial liability of £210 million, representing the fair value at that date. On 21 November 2019 the instruments were redeemed in full at a cost of £210 million. The difference of £21 million between the carrying amount of £231 million and fair value of £210 million was charged to retained earnings.

2 Gross issuances of commercial paper were £214 million in 2020 (2019: £505 million), offset by repayments of £364 million (2019: £486 million).

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

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B17 - Borrowings continued

All movements in fair value in 2019 and 2020 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions.

On 3 March 2021 the Group approved the launch of £800 million of tender offers for certain series of its euro and sterling denominated notes to expedite the delivery of the Group's debt reduction targets.

B18 - 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 defined benefit schemes as at 31 December 2020 are shown below.

				2020				2019
	UK £m	Ireland £m	Canada £m	Total £m	UK £m	Ireland £m	Canada £m	Total £m
Total fair value of scheme assets	18,915	941	269	20,125	17,671	833	264	18,768
Present value of defined benefit obligation	(16,623)	(1,123)	(345)	(18,091)	(15,416)	(1,035)	(341)	(16,792)
Net IAS 19 surpluses/(deficits) in the schemes	2,292	(182)	(76)	2,034	2,255	(202)	(77)	1,976

Surpluses included in other assets	2,780	-	-	2,780	2,746	-	-	2,746
Deficits included in provisions	(488)	(182)	(76)	(746)	(491)	(202)	(77)	(770)
Net IAS 19 surpluses/(deficits) in the schemes	2,292	(182)	(76)	2,034	2,255	(202)	(77)	1,976

Movements in the scheme surpluses and deficits

Movements in the pension schemes' surpluses and deficits comprise:

2020	Fair Value of Scheme Assets £m	Present Value of defined benefit obligation £m	IAS 19 Pensions net surplus/ (deficits) £m
Net IAS 19 surplus in the schemes at 1 January	18,768	(16,792)	1,976
Past service costs - amendments¹	-	(18)	(18)
Administrative expenses²	-	(17)	(17)
Total pension cost charged to net operating expenses	-	(35)	(35)
Net interest credited/(charged) to investment income /(finance costs)³	350	(309)	41
Total recognised in income	350	(344)	6

Remeasurements:
Actual return on these assets	1,746	-	1,746
Less: Interest income on scheme assets	(350)	-	(350)
Return on scheme assets excluding amounts in interest income	1,396	-	1,396
Losses from change in financial assumptions	-	(1,769)	(1,769)
Gains from change in demographic assumptions	-	43	43
Experience gains	-	182	182
Total recognised in other comprehensive income	1,396	(1,544)	(148)

Employer contributions	211	-	211
Plan participant contributions	2	(2)	-
Benefits paid	(631)	631	-
Administrative expenses paid from scheme assets²	(17)	17	-
Foreign exchange rate movements	46	(57)	(11)
Net IAS 19 surplus in the schemes at 31 December	20,125	(18,091)	2,034

1 Past service costs include a charge of £18 million relating to the estimated liability arising in the UK defined benefit pension schemes as a result of the requirement to equalise the cash equivalent transfer values paid to former scheme members for the effects of Guaranteed Minimum Pension (GMP). This additional liability has arisen following the High Court judgement in November 2020 in the case involving Lloyds Banking Group.

2 Administrative expenses are expensed as incurred.

3 Net interest income of £58 million has been credited to investment income and net interest expense of £17 million has been charged to finance costs.

During the period the Aviva Staff Pension Scheme (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 has been recognised as a 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.

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B18 - Pension obligations continued

The remeasurements recognised are also a result of falling interest rates over the period; as well as an update to the corporate bond portfolio used to derive the discount rate, which reduces the liabilities under IAS 19. The impact of the change in corporate bond portfolio used to derive the discount rate is recognised as a gain from change in financial assumptions within other comprehensive income.

2019	Fair Value of Scheme Assets £m	Present Value of defined benefit obligation £m	IAS 19 Pensions net surplus/ (deficits) £m
Net IAS 19 surplus in the schemes at 1 January	18,083	(15,520)	2,563
Administrative expenses¹	-	(19)	(19)
Total pension cost charged to net operating expenses	-	(19)	(19)
Net interest credited/(charged) to investment income /(finance costs)²	479	(406)	73
Total recognised in income	479	(425)	54

Remeasurements:
Actual return on these assets	1,141	-	1,141
Less: Interest income on scheme assets	(479)	-	(479)
Return on scheme assets excluding amounts in interest income	662	-	662
Losses from change in financial assumptions	-	(1,824)	(1,824)
Gains from change in financial assumptions	-	165	165
Experience gains	-	130	130
Total recognised in other comprehensive income	662	(1,529)	(867)

Employer contributions	215	-	215
Plan participant contributions	4	(4)	-
Benefits paid	(612)	612	-
Administrative expenses paid from scheme assets¹	(19)	19	-
Foreign exchange rate movements	(44)	55	11
Net IAS 19 surplus in the schemes at 31 December	18,768	(16,792)	1,976

1 Administrative expenses are expensed as incurred.

2 Net interest income of £96 million has been credited to investment income and net interest expense of £23 million has been charged to finance costs.

B19 - Related party transactions

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

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

Services provided to, and by related parties

				2020				2019
	Income earned in the year £m	Expenses incurred in the year £m	Payable at year end £m	Receivable at year end £m	Income earned in the year £m	Expenses incurred in the year £m	Payable at year end £m	Receivable at year end £m
Associates	12	(1)	-	6	1	-	-	4
Joint ventures	27	-	-	1	54	-	-	4
Employee pension schemes	11	-	-	6	9	-	-	6
	50	(1)	-	13	64	-	-	14

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

Key management personnel of the Company may from time to time purchase insurance, savings, asset management or annuity products marketed by group companies on equivalent terms to those available to all employees of the Group. In 2020, other transactions with key management personnel were not deemed to be significant either by size or in the context of their individual financial positions.

Our UK fund management companies manage most of the assets held by the Group's main UK staff pension scheme, for which they charge fees based on the level of funds under management. The main UK scheme holds investments in Group-managed funds and insurance policies with other group companies. As at 31 December 2020, the Friends Provident Pension Scheme ('FPPS'), acquired in 2015 as part of the acquisition of the Friends Life business, held an insurance policy of £667 million (2019: £646 million) issued by a Group company, which eliminates on consolidation.

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

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B19 - Related party transactions continued

During the prior period, the ASPS completed a bulk annuity buy-in transaction with Aviva Life & Pensions UK Limited (AVLAP), a Group company. At inception, the buy-in insured approximately 4,300 deferred and 1,500 current pensioner liabilities. A premium of £1,665 million was paid by the scheme to AVLAP, with AVLAP recognising gross insurance liabilities of £1,334 million. The difference between the premium and the gross liabilities implied a profit of £331 million, which did not include costs incurred by the Group associated with the transaction, and was driven primarily by differences between the measurement bases used to calculate the premium and the accounting value of the associated gross liabilities. The ASPS recognised a plan asset of £1,126 million, with the difference between the plan asset recognised and the premium paid being recognised as an actuarial loss through Other Comprehensive Income.

During the current period, the ASPS completed a further bulk annuity buy-in transaction with AVLAP. A premium of £873 million was paid by the scheme to AVLAP, with AVLAP recognising gross liabilities of £737 million. The difference between the premium and the gross liabilities implies a profit of £136 million, which does not include costs incurred by the Group associated with the transaction, and is driven primarily by differences between the measurement bases used to calculate the premium and the accounting value of the associated gross liabilities. The ASPS recognised a plan asset of £579 million, with the difference between the plan asset recognised and the premium paid being recognised as an actuarial loss through Other Comprehensive Income. As at 31 December 2020, AVLAP recognised technical provisions of £2,147 million (2019: £1,243 million) in relation to buy-in transactions with the ASPS which have been included within the Group's gross insurance liabilities, and the ASPS held a transferable plan asset of £1,858 million (2019: £1,144 million) which does not eliminate on consolidation.

B20 - Risk management

Risk management is key to Aviva's success. We accept the risks inherent to our core business lines of life, health and general insurance and asset management. We diversify these risks through our scale, geographic spread, the variety of the products and services we offer and the channels through which we sell them. We receive premiums which we invest to maximise risk-adjusted returns, so that we can fulfil our promises to customers while providing a return to our shareholders. In doing so we have a preference for retaining those risks we believe we are capable of managing to generate a return.

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

The key elements of our risk management framework comprise our risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and responsibilities; and the processes we use to identify, measure, manage, monitor and report risks, including the use of our risk models and stress and scenario testing.

The Group's overarching risk management and internal control system is actively responding to the challenges of the COVID-19 outbreak and remains intact. We are focused on ensuring that the control environment remains robust in the current operating environment.

Risk environment

During the year, the Group has been impacted by the COVID-19 pandemic through its operations, insurance products and asset holdings as well as ongoing difficult conditions in the global financial markets and the economy generally. General insurance products are impacted as a result of disruption to business and travel insured by the Group; life protection products as a result of increased mortality; savings and asset management revenues which are sensitive to asset values; and income protection, critical illness and health insurance products as a result of increased morbidity, offset by a potential reduction in annuity payments.

We have seen COVID-19 have a significant impact on the global economy and markets. Key impacts have been observed from volatile equity markets and falls in interest rates. We have taken a number of actions to reduce our exposure to equity and interest rate risk across all our markets. We have also taken a number of actions to reduce our exposure to credit spread and counterparty default risk across our major markets. The Group's balance sheet exposure has been reviewed and actions are being taken to further reduce the sensitivity to economic shocks.

The Group continues to maintain strong solvency and liquidity positions through a range of scenarios and stress testing. These scenarios allow for the potential impacts of COVID-19 both directly on operations of the Group and also the wider macroeconomic environment. Key financial actions taken in response to the crisis include significant de-risking to reduce sensitivity to equity and corporate credit spreads. We have been closely engaging with regulators in both Europe and globally on their response to COVID-19. The FCA Business Interruption test case judgement was broadly in line with expectations and reserves are not expected to materially change.

Risks associated with business conduct and financial crime heightened in the year with COVID-19 becoming a pretext for phishing activity, leading to pension and investment fraud. An increase in switching, churning and exaggerated or fraudulent GI claims is expected, particularly if the economic impact is prolonged. Our controls have been effectively monitoring this situation.

In the current climate, areas of increased conduct risk have been identified across the Group in relation to the financial vulnerability of our customers, product suitability and fair value. In response, our businesses have taken action to support the needs of different customer groups and we continue to work with local regulators. Steps have been taken to support our customers and their local communities, whether that be through extension of covers, additional support to customers and charitable donations.

The UK-EU Future Relationship Agreement came into effect on 1 January 2021, ending the Brexit transition period, for which the Group was fully prepared. It provides scope for managed policy divergence or maintaining alignment, if the UK chooses. The agreement will have evolving consequences in 2021 and beyond on future financial services and data regulation, UK-EU data transfers, EU market access and the UK economy which will require careful monitoring.

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B20 - Risk management continued

Risk environment continued

Aviva remains committed to supporting a low carbon economy that will improve the resilience of our economy, society and the financial system in line with the 2015 Paris Agreement target on climate change. We are acting now to mitigate and manage the impact of climate change on our business. We calculate a Climate VaR against IPCC scenarios to assess the climate-related risks and opportunities under different emission projections and associated temperature pathways. A range of different financial indicators are used to assess the impact on our investments and insurance liabilities.

The Group is in the process of implementing the new international accounting standards for insurance contracts, IFRS 17 Insurance Contracts. The impact of the adoption of IFRS 17 significantly impacts the measurement and presentation of the contracts in scope of the standard. It is now expected that the standard will apply to annual reporting periods beginning on or after 1 January 2023.

(a) Risk management framework

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

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

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

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

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

Board oversight of risk and risk management across the Group is maintained on a regular basis through its Risk Committee and Customer, Conduct and Reputation Committee. To further align with our strategic priority to transform customer experiences, the Customer, Conduct and Reputation Committee was designated as a sub-committee of the Risk Committee. The Board has overall responsibility for determining risk appetite, which is an expression of the risk the business is willing to take. Risk appetites are set relative to capital and liquidity at Group and in the business units.

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

The types of risks to which the Group is exposed have not changed significantly during the year and remain credit, market, liquidity, life and health insurance, general insurance, asset management and operational risks. These risks are described below.

(b) Credit risk

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

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

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

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B20 - Risk management continued

(b) Credit risk continued

As a result of the financial market impact of COVID-19 we have taken a number of actions to reduce our exposure to credit spread and counterparty default risk across our major markets. Actions include purchasing tactical derivative hedges, asset disposals and reallocation and reducing new business sales in certain markets and products. We continue to monitor credit quality in our Commercial Mortgage and Equity Release Mortgage portfolios, specific de-risking actions include phased sales and credit hedging.

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

(i) Financial exposures by credit ratings

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

As at 31 December 2020	AAA	AA	A	BBB	Below BBB	Not rated	Carrying value including held for sale £m	Less: Assets classified as held for sale £m	Carrying value £m
Fixed maturity securities	9.7%	34.0%	21.4%	23.2%	7.3%	4.4%	216,154	(13,317)	202,837
Reinsurance assets	-	77.4%	21.0%	-	-	1.6%	13,356	(18)	13,338
Other investments	-	0.1%	0.3%	-	-	99.6%	51,627	(3,490)	48,137
Loans	9.0%	10.2%	7.9%	0.4%	-	72.5%	43,679	-	43,679
Total							324,816	(16,825)	307,991

As at 31 December 2019	AAA	AA	A	BBB	Below BBB	Not rated	Carrying value including held for sale £m	Less: Assets classified as held for sale £m	Carrying value £m
Fixed maturity securities	10.7%	34.1%	19.7%	23.0%	8.0%	4.5%	199,481	(649)	198,832
Reinsurance assets	3.3%	75.8%	9.2%	7.8%	-	3.9%	12,431	(75)	12,356
Other investments	0.2%	-	0.3%	0.1%	-	99.4%	51,935	(6,919)	45,016
Loans	18.3%	3.8%	0.1%	-	-	77.8%	38,580	(1)	38,579
Total							302,427	(7,644)	294,783

At 31 December 2020, a significant portion of assets remain investment grade in line with 2019. We have remained focused on high quality assets.

The majority of non-rated debt securities within shareholder assets are held by our businesses in the UK. Of these securities most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £4,580 million (2019: £4,095 million) of debt securities held in our UK Life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade.

The following table provides information on the Group's exposure by credit ratings to financial assets that meet the definition of 'solely payment of principal and interest' (SPPI).

As at 31 December 2020	AAA	AA	A	BBB	Below BBB	Not rated
Loans	3,920	4,468	3,453	-	-	153
Receivables	-	497	539	459	2	4,555
Accrued income & interest	-	-	-	-	-	283
Other financial assets	-	-	-	-	-	12
Total	3,920	4,965	3,992	459	2	5,003

As at 31 December 2019	AAA	AA	A	BBB	Below BBB	Not rated
Loans	7,065	1,443	-	-	-	1,071
Receivables	-	144	338	259	4	5,044
Accrued income & interest	-	-	-	-	-	265
Other financial assets	-	-	5	-	-	-
Total	7,065	1,587	343	259	4	6,380

At the period end, the Group held cash and cash equivalents of £12,576 million (2019: £15,344 million) that met the SPPI criteria, of which all (2019: £15,322 million) is placed with financial institutions with issuer ratings within the range of AAA to BBB. Further information on the extent to which unrated receivables, including those that meet the SPPI criteria, are past due may be found in section (ix) of this note.

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

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B20 - Risk management continued

(b) Credit risk continued

(ii) Other investments

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

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

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

(iii) Loans

The Group loan portfolio principally comprises:

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

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

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

· Mortgage loans collateralised by property assets.

We use loan to value, interest and debt service cover, and diversity and quality of the tenant base metrics to internally monitor our exposures to mortgage loans. We use credit quality, based on dynamic market measures, and collateralisation rules to manage our stock lending activities.

(iv) Credit concentration risk

The long-term and general insurance businesses are generally not individually exposed to significant concentrations of credit risk due to the regulations applicable in most markets and the Group's credit policy and limits framework, which limit investments in individual assets and asset classes. Credit concentrations are monitored as part of the regular credit monitoring process and are reported to the Group Asset Liability Committee (ALCO). With the exception of government bonds, the largest aggregated counterparty exposure within shareholder assets is to the Swiss Reinsurance Company Ltd (including subsidiaries), representing approximately 2.1% of the total shareholder assets.

(v) Reinsurance credit exposures

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

The Group's largest reinsurance counterparty is Swiss Reinsurance Company Ltd (including subsidiaries). At 31 December 2020, the reinsurance asset recoverable, including debtor balances, from Swiss Reinsurance Company Ltd was £2,399 million (2019: £3,097 million).

(vi) Securities finance

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

(vii) Derivative credit exposures

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

(viii) Unit-linked business

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

(ix) Impairment of financial assets

In assessing whether financial assets carried at amortised cost or classified as available for sale are impaired, due consideration is given to the factors outlined in accounting policies (T) and (V). The following table provides information regarding the carrying value of financial assets subject to impairment testing that have been impaired and the ageing of those assets that are past due but not impaired. The table excludes assets carried at fair value through profit or loss and held for sale.

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(b) Credit risk continued

(ix) Impairment of financial assets continued

		Financial assets that are past due but not impaired
As at 31 December 2020	Neither past due nor impaired £m	0-3 months £m	3-6 months £m	6 months- 1 year £m	Greater than 1 year £m	Financial assets that have been impaired £m	Carrying value £m
Fixed maturity securities	1,573	-	-	6	-	-	1,579
Reinsurance assets	9,478	-	-	-	-	-	9,478
Other investments	1	-	-	-	-	-	1
Loans	13,840	-	-	-	-	-	13,840
Receivables and other financial assets	9,326	18	-	8	-	-	9,352

		Financial assets that are past due but not impaired
As at 31 December 2019	Neither past due nor impaired £m	0-3 months £m	3-6 months £m	6 months- 1 year £m	Greater than 1 year £m	Financial assets that have been impaired £m	Carrying value £m
Fixed maturity securities	1,455	-	-	6	-	-	1,461
Reinsurance assets	8,361	-	-	-	-	-	8,361
Other investments	2	-	-	-	-	-	2
Loans	10,260	-	-	-	-	-	10,260
Receivables and other financial assets	8,911	51	14	10	9	-	8,995

Excluded from the tables above are financial and reinsurance assets carried at fair value through profit or loss that are not subject to impairment testing, as follows: £214,575 million of debt securities (2019: £198,020 million), £42,320 million of other investments (2019 £44,836 million), £29,839 million of loans (2019: £28,319 million) and £3,860 million of reinsurance assets (2019: £4,006 million).

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

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

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

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

As a result of the significant financial market impact of COVID-19, particularly to equity markets and interest rates, we have taken a number of actions to reduce our exposure to equity and interest rate risk across all our markets. Actions include purchasing tactical derivative hedges, asset disposals and reallocations and reducing new business sales in certain markets and products. We are also exposed to the potential impact of increased defaults and downgrades on our commercial mortgage loans although we maintain conservative loan-to-value across this portfolio. Our capital position includes an allowance for the expected potential impacts from downgrades and defaults.

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

(i) Equity price risk

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

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

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(i) Equity price risk continued

Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of risk models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. An equity hedging strategy remains in place to help control the Group's overall direct and indirect exposure to equities. At 31 December 2020 the Group continues to hold a series of macro equity hedges to reduce the overall shareholder equity risk exposure.

Sensitivity to changes in equity prices is given in section (i) Risk and capital management, below.

(ii) Property price risk

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

As at 31 December 2020, no material derivative contracts had been entered into to mitigate the effects of changes in property prices. Exposure to property risk on equity release mortgages from sustained underperformance in the UK House Price Index (HPI) is mitigated by capping loan to value on origination at low levels and regularly monitoring the performance of the mortgage portfolio.

Sensitivity to changes in property prices is given in section (i) Risk and capital management, below.

(iii) Interest rate risk

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

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

The Group typically manages interest rate risk by investing in fixed interest securities which closely match the interest rate sensitivity of the liabilities where such investments are available. In particular, a key objective is to at least match the duration of our annuity liabilities with assets of the same duration, and in some cases where appropriate cash flow matching has been used. These assets include corporate bonds, residential mortgages and commercial mortgages. Should they default before maturity, it is assumed that the Group can reinvest in assets of a similar risk and return profile, which is subject to market conditions. Interest rate risk is also managed in some business units using a variety of derivative instruments, including futures, options, swaps, caps and floors.

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

The low interest rate environment in a number of markets around the world has resulted in our current investment yields being lower than the overall current portfolio yield, primarily in our investments in fixed income securities. We anticipate that interest rates may remain below historical averages for an extended period of time and that financial markets may continue to have periods of high volatility. Investing activity will continue to decrease the portfolio yield as long as market yields remain below the current portfolio level. We expect the decline in portfolio yield will result in lower net investment income in future periods.

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

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

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(iii) Interest rate risk continued

In addition, the following table summarises the weighted average minimum guaranteed crediting rates and weighted average book value yields on assets as at 31 December 2020 for our Italian and French participating contracts, where the Group's key exposure to sustained low interest rates arises.

	Weighted average minimum guaranteed crediting rate	Weighted average book value yield on assets	Participating contract liabilities £m
France	0.69%	1.94%	72,620
Italy	0.20%	3.40%	23,941
Other¹	N/A	N/A	45,237
Total	N/A	N/A	141,798

1 'Other' includes UK participating business

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

	Portfolio investment yield¹	Average assets £m
2018	2.28%	14,651
2019	2.21%	14,350
2020	1.88%	15,023

1 Before realised and unrealised gains and losses and investment expenses

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

Sensitivity to changes in interest rates is given in section (i) Risk and capital management, below.

(iv) Inflation risk

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

(v) Currency risk

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

The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately 50% (2019: 58%) of the Group's premium income arises in currencies other than sterling and the Group's net assets are denominated in a variety of currencies, of which the largest are sterling, euro and Canadian dollars. The Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group's business and meet local regulatory and market requirements. However, the Group does use foreign currency forward contracts to hedge planned dividends from its subsidiaries.

Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities, however movements may impact the value of the Group's consolidated shareholders' equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the Group's regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set. Except where the Group has applied net investment hedge accounting, foreign exchange gains and losses on foreign currency borrowings are recognised in the income statement, whereas foreign exchange gains and losses arising on consolidation from the translation of assets and liabilities of foreign subsidiaries are recognised in other comprehensive income. At 31 December 2020 and 2019, the Group's net assets by currency including assets 'held for sale' was:

	Sterling £m	Euro £m	CAD$ £m	Other £m	Total £m
Net assets at 31 December 2020	16,438	2,374	635	1,113	20,560
Net assets at 31 December 2019	16,036	819	397	1,433	18,685

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(v) Currency risk continued

A 10% change in sterling to euro/CAD$ period-end foreign exchange rates would have had the following impact on net assets.

	10% increase in sterling / euro rate £m	10% decrease in sterling / euro rate £m	10% increase in sterling / CAD$ rate £m	10% decrease in sterling / CAD$ rate £m
Net assets at 31 December 2020	(237)	237	(64)	64
Net assets at 31 December 2019	(82)	82	(40)	40

The balance sheet changes arise from retranslation of business unit statements of financial position from their functional currencies into sterling, with above movements being taken through the currency translation reserve. These balance sheet movements in exchange rates therefore have no impact on profit.

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

	10% increase in sterling/ euro rate £m	10% decrease in sterling/ euro rate £m	10% increase in sterling/ CAD$ rate £m	10% decrease in sterling/ CAD$ rate £m
Impact on profit before tax 31 December 2020	(48)	59	(31)	37
Impact on profit before tax 31 December 2019	(67)	82	(18)	22

Net asset and profit before tax figures are stated after taking account of the effect of currency hedging activities.

(vi) Derivatives risk

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

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

(vii) Correlation risk

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

(d) Liquidity risk

Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid assets such as commercial mortgages and infrastructure loans. The Group seeks to ensure that it maintains sufficient financial resources to meet its obligations as they fall due through the application of a Group liquidity risk policy and business standard and through the development of its liquidity risk management plan. At Group and business unit level, there is a liquidity risk appetite which requires that sufficient liquid resources be maintained to cover net outflows in a stress scenario. In addition to the existing liquid resources and expected inflows, the Group maintains significant undrawn committed borrowing facilities (£1,700 million) from a range of leading international banks to further mitigate this risk.

A cautious approach on cash remittances is being taken across the Group with some markets retaining cash rather than remitting to Group in the wake of the unprecedented challenges COVID-19 presents for businesses, households and customers, and the adverse and highly uncertain impact on the global economy.

Maturity analyses

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

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

For non-linked insurance business, the following table shows the gross liability at 31 December 2020 and 2019 analysed by remaining duration. The total liability is split by remaining duration in proportion to the cash-flows expected to arise during that period, as permitted under IFRS 4, Insurance Contracts.

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

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(d) Liquidity risk continued

As at 31 December 2020	Total £m	On demand or within 1 year £m	1-5 years £m	5-15 years £m	Over 15 years £m
Long-term business
Insurance contracts - non-linked	116,352	8,433	26,288	43,385	38,246
Investment contracts - non-linked	78,024	4,348	17,555	32,203	23,918
Linked business	178,932	8,187	27,420	58,411	84,914
General insurance and health	17,596	7,413	7,260	2,325	598
Total contract liabilities	390,904	28,381	78,523	136,324	147,676

As at 31 December 2019	Total £m	On demand or within 1 year £m	1-5 years £m	5-15 years £m	Over 15 years £m
Long-term business
Insurance contracts - non-linked	111,731	8,811	27,184	41,728	34,008
Investment contracts - non-linked	74,641	5,978	19,532	28,313	20,818
Linked business	177,448	16,226	26,002	58,601	76,619
General insurance and health	16,656	7,136	6,665	2,258	597
Total contract liabilities	380,476	38,151	79,383	130,900	132,042

(ii) Analysis of maturity of financial assets

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

As at 31 December 2020	Total £m	On demand or within 1 year £m	1-5 years £m	Over 5 years £m	No fixed term £m
Fixed maturity securities	202,837	50,488	45,917	106,432	-
Equity securities	100,404	-	-	-	100,404
Other investments	48,137	39,681	126	7,469	861
Loans	43,679	14,049	4,339	25,290	1
Cash and cash equivalents	16,900	16,900	-	-	-
	411,957	121,118	50,382	139,191	101,266

As at 31 December 2019	Total £m	On demand or within 1 year £m	1-5 years £m	Over 5 years £m	No fixed term £m
Fixed maturity securities	198,832	42,644	47,983	106,981	1,224
Equity securities	99,570	-	-	-	99,570
Other investments	45,016	38,817	25	5,365	809
Loans	38,579	9,641	4,643	24,293	2
Cash and cash equivalents	19,524	19,524	-	-	-
	401,521	110,626	52,651	136,639	101,605

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

(e) Life insurance risk

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

We have reinsurance in place across all our markets to reduce our net exposure to potential losses. In the UK we have extensive quota share reinsurance in place on Individual Protection business and for UK Group Life protection business we have surplus reinsurance for large individual claims.

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(e) Life insurance risk continued

The impact of COVID-19 on the profile of our life insurance risks, primarily longevity, persistency, mortality and expense risk, has been limited during 2020. We track the potential longer term impacts from the pandemic (e.g. morbidity impacts). We are also exposed to longevity risk through the Aviva Staff Pension Scheme, to which our economic exposure has been reduced since 2014 by entering into a longevity swap covering approximately £5 billion of pensioner in payment scheme liabilities. Longevity risk remains the Group's most significant life insurance risk. We purchased reinsurance for longevity risk for our annuity business, including the bulk annuity buy-in transaction with the Aviva Staff Pension scheme. Group has continued to write considerable volumes of life protection business, and to utilise reinsurance to reduce exposure to potential losses. More generally, life insurance risks are believed to provide a significant diversification against other risks in the portfolio. Life insurance risks are modelled within the internal capital model and subject to sensitivity and stress and scenario testing.

In all of our markets, underwriting procedures on Individual Life Protection products limit our exposure to cohorts of the population at highest risk of COVID-19. While we have greater potential net exposure through Group Life Protection, we have taken pricing actions to limit our potential exposure from new business. We expect there to be some offset to increased protection claims as a result of COVID-19 from technical provision releases on our UK annuity portfolio

The assumption and management of life and health insurance risks is governed by the Group-wide business standards covering underwriting, pricing, product design and management, in-force management, claims handling, and reinsurance. The individual life and health insurance risks are managed as follows:

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

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

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

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

Embedded derivatives

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

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

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

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

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

The impact of these is reflected in the capital model and managed as part of the asset liability framework. Further disclosure on financial guarantees and options embedded in contracts and their inclusion in insurance and investment contract liabilities is provided in note B13.

(f) General insurance and health risk

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

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

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

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(f) General insurance and health risk continued

We continue to closely monitor the impact of COVID-19 on our General insurance and health business. Our exposures, together with mitigants, are:

· Business Interruption: For the significant majority of the Group's UK General Insurance commercial policies, where policy wordings are determined by the company, cover is based on a specified list of diseases. These policies exclude business interruption due to new and emerging diseases, like COVID-19. Business interruption losses stemming from the current COVID-19 outbreak are therefore not covered under the significant majority of policies but there is a risk that litigation will be required to provide legal clarity in terms of the events and the cover provided under broker determined business interruption policy wordings where we are the lead or follow insurer and many of the issues were subject to the outcome of the FCA test case. Judgement in the FCA test case was received on 15 September 2020 and followed by the Supreme Court appeal on 15 January 2021. Following the verdict the legal uncertainty in the UK around gross losses has been significantly reduced. In order to provide clarity to policyholders and mitigate exposure to future events of a similar nature, exclusions have been added to relevant policy wordings at renewal. In Canada, we are party to a number of litigation proceedings challenging coverage under certain policies; however, we do not believe there is coverage under these policies. In Ireland, the vast majority of commercial insurance products do not respond to business interruption losses arising from the COVID-19 pandemic. In respect of broker-led wordings, Ireland continues to assess developments arising from the changing nature of Government restrictions and the outcome of both the FCA case and test case litigation in the local market.

· Travel Insurance: We are potentially exposed to claims due to travel cancellation, disruption and sickness where this is insured by the Group, primarily in the UK. We are only exposed to losses after recoveries have been made from travel providers (e.g. tour operators or airlines) and agents. Travel disruption is not part of our Aviva UK Direct cover and was removed as a policy option on 9 March but is included as standard in the majority of the added value accounts with our banking partners. COVID-19 wording has been clarified to eliminate ambiguity, pricing adjusted to ensure risk is appropriately priced and further reinsurance cover has been purchased. These costs are offset by reduced claims frequency as a result of the current low levels of international travel, and are also partially mitigated through profit commission and future pricing agreements with distribution partners.

· Other: There have also been impacts in other product lines as a result of reduced economic activity, for example there has been a reduction in claims frequency and a change in the severity of claims on motor lines. Private health insurance claims were also lower than expected levels in 2020 as a result of the disruption caused by the COVID-19 pandemic, and in the UK we provided a fair value pledge to policyholders to recognise the ongoing uncertainty around the ability to access treatment.

These exposures are partially offset by favourable impacts in other product lines (e.g. frequency benefits on motor lines). The Group purchases reinsurance protections on its property portfolio that includes coverage for business interruption and will seek reinsurance recoveries of those of its business interruption losses that are covered by reinsurance. The continuing nature of the event means that our final exposure is subject to a significant degree of uncertainty.

Reinsurance strategy

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

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

The Group cedes much of its worldwide catastrophe risk to third-party reinsurers through excess of loss and aggregate excess of loss structures. The Group purchases a Group-wide catastrophe reinsurance programme to protect against catastrophe losses up to a 1 in 250 year return period. The total Group potential retained loss from its most concentrated catastrophe exposure peril (Northern Europe Windstorm) is approximately £150 million on a per occurrence basis and £175 million on an annual aggregate basis. Any losses above these levels are covered by the group-wide catastrophe reinsurance programme to a level in excess of a 1 in 250 year return period. In addition the Group purchases a number of GI business line specific reinsurance programmes with various retention levels to protect both capital and earnings, and has reinsured 100% of its latent exposures to its historic UK employers' liability and public liability business written prior to 31 December 2000. The Group's property reinsurance programme and several of its smaller specialty programmes no longer provide coverage for pandemic catastrophes following the 1 January 2021 renewal in line with the rest of the market.

(g) Asset management risk

Aviva is directly exposed to the risks associated with operating an asset management business through its ownership of Aviva Investors. The underlying risk profile of our asset management risk is derived from investment performance, specialist investment professionals and leadership, product development capabilities, fund liquidity, margin, client retention, regulatory developments, fiduciary and contractual responsibilities. Funds invested in illiquid assets such as commercial property are particularly exposed to liquidity risk. The risk profile is regularly monitored.

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

Due to the adverse impact of COVID-19 on the UK commercial property sectors, and in particular the difficulty in being able to assign values to our commercial property portfolios, we temporarily suspended our unit-linked property funds to redemptions for six months in March 2020. We perform stress tests to ensure that our portfolios are managed within client mandates.

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(h) Operational risk

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

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

COVID-19 has resulted in an increased level of inherent operational risk through new practices including enforced remote working, staff absences for sickness and childcare, market volatility and through our outsourcing arrangements. Additional risks relating to extensive working from home; include cyber, data loss and occupational health. We have adapted and strengthened our processes and controls to ensure operational risks remain at an acceptable level. Since the onset of the pandemic the Group has remained operationally resilient, with key activities such as cash payments and transaction processing being maintained, IT systems remaining operational, and employees including frontline customer facing staff being supported to ensure that that we are there to support our customers when they need us most.

Aviva has not seen a material increase in the volume of cyber incidents/attacks as a result of COVID-19 but has seen external threat actors exploiting the COVID-19 pandemic within such attacks e.g. phishing, texts and phone calls. In response to this Aviva has put in place a programme of communications to ensure Aviva employees are aware of such scams, published safe homeworking guides and run online training for our employees and their families. Support has also been given to our customers, including the launch of an online reporting facility to help combat fraud.

The importance of digital interaction with our customers and advanced data analytics, the conduct, data protection and financial crime agenda of the European institutions, the FCA and other regulators, as well as the increasing cyber security threat, as evidenced by continuing instances of high profile cyber security breaches for other corporates in the UK and elsewhere, mean the Group has inherent risk exposure to data theft, conduct regulatory breaches (including financial crime) and customer service interruption due to IT systems failure. During 2020 we have continued to take action to reduce our residual exposure to these risks and improve our operational resilience through our conduct risk management framework, financial crime risk mitigation programme and significant investment in upgrading our IT infrastructure and security.

On 26 October 2020 the FCA published the outcome of its investigation into Aviva's announcement on preference shares made in March 2018. The FCA found that Aviva contravened certain provisions of the Listing Rules and the Disclosure and Transparency Rules by failing to take reasonable care to ensure that information in the announcement was not misleading and did not omit anything likely to affect the import of the information in the announcement. We have accepted the FCA decision and lessons have been learned.

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

The FCA regularly considers whether we are meeting the requirement to treat our customers fairly and we make use of various metrics to assess our own performance, including customer advocacy, retention and complaints. Failure to meet these requirements could also impact our brands or reputation. During 2020, the FCA published their General Insurance Pricing Practices Report. We support the FCA's intent to bring greater clarity and consistency to consumers across general insurance pricing. This will be a significant area of focus for us over the next 12 months.

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

(i) Risk and capital management

(i) Sensitivity test analysis

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

(ii) Life insurance and investment contracts

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

(iii) General insurance and health business

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

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(i) Risk and capital management continued

(iv) Sensitivity test results

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

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

Long-term business sensitivities as at 31 December 2020

31 December 2020 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	10	(375)	(80)	(20)	(40)	(65)	20	(5)
Insurance non-participating	(965)	1,215	(735)	(115)	100	(215)	(155)	(1,020)
Investment participating	(60)	75	-	(20)	20	(50)	-	-
Investment non-participating	(5)	5	-	5	(10)	(5)	-	-
Assets backing life shareholders' funds	(145)	180	(45)	(25)	25	-	-	-
Total	(1,165)	1,100	(860)	(175)	95	(335)	(135)	(1,025)

31 December 2020 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	10	(375)	(80)	(20)	(40)	(65)	20	(5)
Insurance non-participating	(965)	1,215	(735)	(115)	100	(215)	(155)	(1,020)
Investment participating	(60)	75	-	(20)	20	(50)	-	-
Investment non-participating	(5)	5	-	5	(10)	(5)	-	-
Assets backing life shareholders' funds	(195)	220	(50)	(25)	25	-	-	-
Total	(1,215)	1,140	(865)	(175)	95	(335)	(135)	(1,025)

Sensitivities as at 31 December 2019

31 December 2019 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	-	5	(10)	(65)	60	(50)	10	(5)
Insurance non-participating	(985)	1,265	(800)	(120)	105	(240)	(145)	(955)
Investment participating	(85)	55	(5)	(5)	5	(25)	-	-
Investment non-participating	-	5	-	5	(5)	(5)	-	-
Assets backing life shareholders' funds	(150)	170	(35)	(35)	30	-	-	-
Total	(1,220)	1,500	(850)	(220)	195	(320)	(135)	(960)

31 December 2019 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	-	5	(10)	(65)	60	(50)	10	(5)
Insurance non-participating	(985)	1,265	(800)	(120)	105	(240)	(145)	(955)
Investment participating	(85)	55	(5)	(5)	5	(25)	-	-
Investment non-participating	-	5	-	5	(5)	(5)	-	-
Assets backing life shareholders' funds	(190)	205	(30)	(30)	30	-	-	-
Total	(1,260)	1,535	(845)	(215)	195	(320)	(135)	(960)

Changes in sensitivities between 2020 and 2019 reflect underlying movements in the value of assets and liabilities, the relative duration of assets and liabilities and asset liability management actions. The sensitivities to economic and demographic movements relate mainly to business in the UK.

General insurance and health business sensitivities as at 31 December 2020

31 December 2020 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(380)	445	(110)	100	(100)	(145)	(325)
Net of reinsurance	(435)	490	(110)	100	(100)	(145)	(305)

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(i) Risk and capital management

(iv) Sensitivity test results continued

31 December 2020 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(380)	445	(110)	100	(100)	(25)	(325)
Net of reinsurance	(435)	490	(110)	100	(100)	(25)	(305)

Sensitivities as at 31 December 2019

31 December 2019 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(210)	165	(115)	185	(175)	(140)	(315)
Net of reinsurance	(270)	215	(115)	185	(175)	(140)	(300)

31 December 2019 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(210)	165	(115)	185	(175)	(25)	(315)
Net of reinsurance	(270)	215	(115)	185	(175)	(25)	(300)

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

Fund management and non-insurance business sensitivities as at 31 December 2020

31 December 2020 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	-	-	50	(10)	20

31 December 2020 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	-	-	50	(10)	15

Sensitivities as at 31 December 2019

31 December 2019 Impact on profit before tax £m

Interest rates

+1%

Interest rates

-1%

Credit spreads
+0.5%

Equity/
property
+10%

Equity/

property
-10%

Total

(20)

(10)

31 December 2019 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	(15)	15	40	(10)	15

Limitations of sensitivity analysis

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

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

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

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

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

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B21 - Direct capital instrument and tier 1 notes

Notional amount	2020 £m	2019 £m
5.9021% £500 million direct capital instrument - Issued November 2004	-	500
6.875% £210 million STICS - Issued November 2003	-	-
Total	-	500

The DCI was issued on 25 November 2004. The DCI had no fixed redemption date however, on 23 June 2020 notification was given that the Group would redeem the DCI at its principal amount together with accrued interest to (but excluding) 27 July 2020. The 27 July 2020 being the first optional call date for the DCI. On the notification date the instrument was reclassified as a financial liability of £499 million, representing its fair value at that date. The resulting 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 instruments were reclassified as a financial liability of £210 million, representing the fair value at that date. On 21 November 2019 the instruments were redeemed in full at a cost of £210 million. The difference of £21 million between the carrying amount of £231 million and fair value of £210 million was charged to retained earnings

B22 - Cash and cash equivalents

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

	2020 £m	2019 £m
Cash and cash equivalents	16,900	19,524
Cash and cash equivalents of operations classified as held for sale	190	780
Bank overdrafts	(908)	(870)
Net cash and cash equivalents at 31 December	16,182	19,434

B23 - Contingent liabilities and other risk factors

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

(a) Uncertainty over claims provisions

Note B12 gives details of the estimation techniques used by the Group to determine the general insurance business outstanding claims provisions and of the methodology and assumptions used in determining the long-term business provisions. These approaches are designed to allow for the appropriate cost of policy-related liabilities, with a degree of prudence, to give a result within the normal range of outcomes. However, the actual cost of settling these liabilities may differ, for example because experience may be worse than that assumed, or future general insurance business claims inflation may differ from that expected, and hence there is uncertainty in respect of these liabilities.

In addition, COVID-19 has given rise to an increase in the uncertainty over the general insurance business outstanding claims provisions and long-term business provisions. The impact on the Group's insurance liabilities as a result of the global pandemic has been recognised. However, due to the uncertainty around the long-term impacts of COVID-19, actual experience may differ from that expected.

Business Interruption

On 15 January 2021, the Supreme Court handed down its judgement on the appeal for the FCA Test Case on business interruption cover. Aviva was not a party to the Test Case, but fully supported the process. The Supreme Court judgement has been carefully considered and the impact on claims related to business interruption policies assessed. In Canada, we are party to a number of litigation proceedings challenging coverage under certain policies; however, we do not believe there is coverage under these policies. In the opinion of management, adequate provisions have been established for such claims based on information available at the reporting date. For further information on our general insurance risk management see note 59(f).

(b) Asbestos, pollution and social environmental hazards

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

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

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B23 - Contingent liabilities and other risk factors continued

(d) Regulatory compliance

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

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

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

(e) Structured settlements

The Group has purchased annuities from licensed Canadian life insurers to provide for fixed and recurring payments to claimants. As a result of these arrangements, the Group is exposed to credit risk to the extent that any of the life insurers fail to fulfil their obligations. The Group's maximum exposure to credit risk for these types of arrangements is approximately £742 million as at 31 December 2020 (2019: £707 million). Credit risk is managed by acquiring annuities from a diverse portfolio of life insurers with proven financial stability. This risk is reduced to the extent of coverage provided by Assuris, the Canadian life insurance industry compensation plan. As at 31 December 2020, no information has come to the Group's attention that would suggest any weakness or failure in life insurers from which it has purchased annuities and consequently no provision for credit risk is required.

(f) Other

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

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

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

B24 - Acquired value of in-force business and intangible assets

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

	2020 £m	2019 £m
Acquired value of in-force business on insurance contracts¹	1,078	1,235
Acquired value of in-force business on investment contracts²	664	1,244
Intangible assets	704	847
	2,446	3,326
Less: Assets classified as held for sale	(12)	(526)
Total	2,434	2,800

1 On insurance and participating investment contracts.

2 On non-participating investment contracts.

The acquired value of in-force (AVIF) business on insurance and investment contracts has reduced in the year primarily due to an amortisation charge of £278 million (2019: £406 million charge) and the disposal of FPI. There was also an impairment of AVIF on investment contracts of £19 million in the year relating to FPI (2019: £28 million) recorded as a remeasurement loss as FPI was held for sale (see note B5(b)).

The decrease in intangible assets primarily relates to the amortisation charge of £197 million (2019: £212 million charge) and an impairment charge of £23 million (2019: £13 million charge), partially offset by additions of £76 million largely relating to computer software.

B25 - Subsequent events

· For details of subsequent events relating to disposals see note B5(f).

· For details of subsequent events relating to borrowings see note B17(c).

END PART 3 of 4