HY12 Part 3 of 5

Part 3 of 5

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IFRS condensed consolidated financial statements

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IFRS condensed consolidated financial statements

Condensed consolidated income statement

For the six month period ended 30 June 2012

1. Statements have been prepared in accordance with the Basis of Preparation

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IFRS condensed consolidated financial statements continued

Condensed consolidated statement of comprehensive income

For the six month period ended 30 June 2012

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IFRS condensed consolidated financial statements

Condensed consolidated statement of changes in equity

For the six month period ended 30 June 2012

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IFRS condensed consolidated financial statements

Condensed consolidated statement of financial position

As at 30 June 2012

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IFRS condensed consolidated financial statements

Condensed consolidated statement of cash flows

For the six month period ended 30 June 2012

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.

Further detail on cash and cash equivalents is provided in note A15.

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Notes to the condensed consolidated financial statements

A1 - Basis of preparation

(a) The condensed consolidated financial statements for the six months to 30 June 2012 have been prepared in accordance with the disclosure and transparency rules of the Financial Services Authority and using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). These include IAS 34, Interim Financial Reporting, which specifically addresses the contents of interim condensed financial statements. The results apply the accounting policies set out in Aviva plc's 2011 Annual Report and Accounts and these interim accounts should be read in conjunction with the financial statements therein.

In 2010, the IASB issued an amendment to IFRS 7, Financial Instruments - Disclosures, relating to the transfer of financial assets, which has been endorsed by the EU. It is applicable for the first time in the current accounting period and is reflected in the Group's financial reporting, with no material impact.

The results for the six months to 30 June 2012 are unaudited but have been reviewed by the auditor, PricewaterhouseCoopers LLP. The comparative results for the six months to 30 June 2011 are also unaudited but were reviewed by the previous auditor, Ernst & Young LLP. The interim results do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The results for the full year 2011 have been taken from the Group's 2011 Annual Report and Accounts and do not in themselves constitute statutory accounts. Ernst & Young LLP reported on the 2011 financial statements and their report was unqualified and did not contain a Statement under section 498 (2) or (3) of the Companies Act 2006. The Group's 2011 Report and Accounts has been filed with the Registrar of Companies.

After making enquiries, the directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the interim 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 sterling, which is the Company's functional and presentational currency. Unless otherwise noted, the amounts shown in the financial statements are in millions of pounds sterling (£m).

(c) The long-term nature of much of the Group's operations means that, for management's decision-making and internal performance management, short-term realised and unrealised investment gains and losses are treated as non-operating items. The Group focuses instead on an operating profit measure (also referred to as adjusted operating profit) that incorporates an expected return on investments supporting its long-term and non-long-term businesses. Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and short-term fluctuations from that level. Operating profit also excludes amortisation and impairment of goodwill and intangibles; the profit or loss on disposal of subsidiaries, joint ventures and associates; integration and restructuring costs; and exceptional items.

(d) On 19 April 2012, the Company announced a restructuring of the organisation into two distinct areas - Developed Markets and Higher Growth Markets. As a result, the operating segments in our reported results were reviewed to ensure that they remained consistent with the new organisational reporting structure. This has resulted in changes to the operating segments as described in note A4.

A2 - Exchange rates

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

Total foreign currency movements during the period relating to the translation by businesses of transactions not denominated in their local reporting currency resulted in a gain recognised in the income statement of £50 million (HY11: £61 million gain; FY11: £35 million loss).

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Notes to the condensed consolidated financial statements continued

A3 - Subsidiaries, joint ventures and associates

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

(a) Acquisitions

Pelayo Vida

On 17 January 2012, the Group acquired 50% of Pelayo Mondiale Vida de Seguros y Reaseguros SA ("PMV"), which writes long-term insurance business in Spain, for £7 million. The Group also entered into an exclusive distribution agreement with Grupo Pelayo to expand its national life and pensions distribution capability through Pelayo's network of branches and agents. PMV was subsequently renamed Pelayo Vida de Seguros y Reaseguros SA ("PV"). As the Group has management control of PV, this company has been treated as a subsidiary since acquisition.

The estimated book and fair values of PV's assets and liabilities at the acquisition date are shown below. The acquisition has given rise to goodwill of £1 million, calculated as follows:

(b) Disposal of subsidiaries, joint ventures and associates

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

The loss in respect of RAC Limited in the current period arises from residual costs related to the sale of that company in September 2011.

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Notes to the condensed consolidated financial statements continued

A3 - Subsidiaries, joint ventures and associates continued

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

The assets and liabilities of operations classified as held for sale as at 30 June 2012 relate to subsidiaries in Ireland, the Czech Republic, Hungary and Romania, and a joint venture in Taiwan, and are as follows:

(i) Irish long-term business

Our Irish long-term business is carried out through a subsidiary, Aviva Life Holdings Ireland Limited ("ALHI"), which is 75% owned by Aviva and 25% owned by Allied Irish Bank ("AIB"). ALHI holds four subsidiaries, one of which is Ark Life Assurance Company Limited ("Ark Life") which carries out bancassurance business via a distribution agreement with AIB. The original distribution agreement was renewable in 2011 but, on 15 December 2011, AIB notified us that they did not wish to renew it and the existing shareholders' agreement governing ALHI was terminated. The termination of this agreement triggered the ability for both parties to exercise put and call options that will result in the unwind of the original structure such that the Ark Life business returns 100% to AIB and the Group will purchase the 25% minority stake in ALHI. The formal exercise of these options was approved on 17 January 2012 and, as a result, the Ark Life business became held for sale on that date. Any change in that company's ownership is subject to regulatory approval in Ireland, and completion is not expected until later in 2012.

The shareholders' agreement with AIB specifies that calculation of the Ark Life exit value should be based on the embedded value of the business at 31 December 2011. This is estimated as £262 million, which is lower than its carrying value following impairments charged in 2011. As a result, a further charge to profit of £91 million has been recognised in the six months ended 30 June 2012, after exchange movements on the opening balance of £7 million.

The exercise of the put options in January 2012 over AIB's minority share in ALHI led to our reclassifying £205 million from non-controlling interests within equity to financial liabilities as at 31 December 2011. Our current estimate of the liability as at 30 June 2012 is £110 million, resulting in a credit to the income statement of £89 million after exchange movements on the opening balance of £6 million.

The net impact of these two movements is a charge to profit of £2 million, before exchange movements. Finalisation of the exit value for Ark Life and the purchase value for the minority share in ALHI is subject to the conclusion of discussions with AIB.

(ii) Czech Republic, Hungary and Romania

During 2011, the Group decided to sell, and was actively marketing, its operations in the Czech Republic, Hungary and Romania.On 30 January 2012, we announced the sale of these businesses to MetLife, Inc. The sale of our businesses in the Czech Republicand Hungary, and of our Romania life operation, completed on 31 July 2012. The sale of our Romania pensions business is still subject to regulatory approval and is expected to complete later in 2012. The assets and liabilities of all these businesses have therefore been classified as held for sale at their expected disposal proceeds in the consolidated statement of financial position at 30 June 2012.

(iii) Revised strategic plan

On 5 July 2012, we announced a revised strategic plan which included a review of all the Group's businesses into those that are performing, improving or non-core. Although the review may lead to future disposals of some of the non-core businesses, no firm decisions have been made in this respect and the criteria required by IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, to classify any such businesses as held for sale as at 30 June 2012, apart from those in the table above, had not been met.

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Notes to the condensed consolidated financial statements continued

A3 - Subsidiaries, joint ventures and associates continued

(d) Subsequent event - Delta Lloyd

On 5 July 2012, the Group sold 37.2 million shares in Delta Lloyd N.V. ("Delta Lloyd") (the Group's Dutch long-term insurance, general insurance and fund management associate) for £313 million (net of costs), reducing our holding to 19.8% of Delta Lloyd's ordinary share capital, representing 18.6% of shareholder voting rights. As the Group no longer has significant influence over Delta Lloyd, we have ceased to account for that company as an associate from 5 July 2012. From that date, our holding is now classified as a financial investment, held at fair value through profit and loss.

The recoverable amount of Delta Lloyd at 30 June 2012 has been determined on the basis of fair value less costs to sell. The fair value at that date has been calculated based on the price achieved in the transaction described above for the shares sold on 5 July and, for the continuing shareholding, on the market price of Delta Lloyd's ordinary shares quoted on NYSE Euronext Amsterdam as at 30 June 2012.

No impairment has been recognised because the carrying value of the associate is less than its recoverable amount. During the period, the Group's share of Delta Lloyd's net asset value declined to a value below its quoted market value and therefore the impairment recognised in 2011 to reduce the carrying value of the associate to the quoted market value was redundant and no longer required. The amount previously recognised as an impairment of £205 million has therefore been reversed during the current period, after exchange movements on the opening balance of £12 million.

(e) Impairment of goodwill and other intangibles - United States

Following the business review, the Directors have concluded that the goodwill and other intangible assets associated with the US long-term cash generating unit and associated investment management business are no longer recoverable. As a result, impairments of £787 million in relation to goodwill and £89 million in relation to other intangibles have been recognised during the period, reducing the carrying value of goodwill and other intangibles to £nil.

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Notes to the condensed consolidated financial statements continued

A4 - Segmental information

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

(a) Operating segments

Following the announcement in Q2 2012 relating to the restructuring of the Group, the Group's operating segments were changedto align them with the new organisational reporting structure. The new segments are set out below. Results for prior periods have been restated to facilitate comparison with this new structure. The Group has determined its operating segments along market reporting lines. These reflect the management structure whereby a member of the Executive Management team is accountable to the Group Executive Chairman for the operating segment for which they are responsible.The activities of each operating segment are described below:

United Kingdom and Ireland

The United Kingdom and Ireland comprises two operating segments - Life and General Insurance. In October 2011 it was announced that management control of the Irish life and general insurance businesses was being transferred from Aviva Europe to the UK, with the UK Life and General Insurance businesses taking control of the respective components.

The principal activities of our UK and Ireland Life operations are life insurance, long-term health and accident insurance, savings, pensions and annuity business, whilst UK and Ireland General Insurance provides insurance cover to individuals and businesses, for risks associated mainly with motor vehicles, property and liability (such as employers' liability and professional indemnity liability) and medical expenses. For the period to its disposal on 30 September 2011, UK and Ireland General Insurance also includes the RAC motor recovery business.

France

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

United States

The principal activity of the United States operations is long-term business, providing fixed life insurance and fixed annuities with a focus on index products, through more than 50 key distribution partners.

Canada

The principal activity of the Canadian operation is general insurance. In particular it provides personal and commercial lines insurance products through a range of distribution partners.

Italy, Spain and Other

These countries are not individually significant at a group level, so have been aggregated into a single reporting segment in line with IFRS8. This segment includes our operations in other developed markets including Italy and Spain. It also includes our Czech, Hungarian and Romanian businesses which are held for sale as well as our Reinsurance and Run Off businesses. The principal activities of our Italian operations are long-term business and general insurance. The life business offers a range of long-term insurance and savings products. The general insurance business provides motor and home insurance products to individuals, as well as small commercial risk insurance to businesses. The principal activity of the Spanish operation is the sale of long-term business, accident and health insurance and a selection of savings products.

Higher Growth markets

Activities reported in the higher growth markets operating segment include our businesses in Asia, Poland, Turkey and Russia. Our activities in Asia principally comprise our long-term business operations in China, India, Singapore, Hong Kong, Sri Lanka, Taiwan, Malaysia, South Korea, Vietnam and Indonesia, as well as our General Insurance operations in Singapore and Indonesia. Our activities in Poland and Turkey comprise both long-term business and General Insurance operations, while in Russia they comprise long-term business operations.

Aviva Investors

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

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Notes to the condensed consolidated financial statements continued

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'. Similarly, central core structural borrowings and certain tax balances are included in 'Other Group activities' in the segmental statement of financial position. Also included here are consolidation and elimination adjustments and the Group's continuing interest in Delta Lloyd as an associate.

Discontinued operations

On 6 May 2011 the Group ceased to hold a majority of the shareholder voting rights in Delta Lloyd and therefore the results of Delta Lloyd up to 6 May 2011 are presented as discontinued operations for the comparative periods. After this date, the Group ceased to consolidate Delta Lloyd.

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 on normal commercial terms and market conditions. The Group evaluates performance of operating segments on the basis of:

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

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

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Notes to the condensed consolidated financial statements continued

A4 - Segmental information continued

(i) Segmental income statement for the six month period ended 30 June 2012

* Impairment losses, and reversal of such losses, recognised directly in other comprehensive income were £8 million and £nil respectively.

** Other developed markets include Czech Republic, Romania, Hungary, Group Reinsurance and agencies in runoff.

† Aviva Investors operating profit includes £1 million profit relating to the Aviva Investors Pooled Pension business.

# Other group activities include Delta Lloyd as an associate.

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Notes to the condensed consolidated financial statements continued

A4 - Segmental information continued

(ii) Segmental income statement for the six month period ended 30 June 2011

* Impairment losses, and reversal of such losses, recognised directly in other comprehensive income were £8 million and £nil respectively.

** Other developed markets include Czech Republic, Romania, Hungary, Group Reinsurance and agencies in runoff.† Aviva Investors operating profit includes £2 million profit relating to the Aviva Investors Pooled Pension business.# Other group activities include Delta Lloyd as an associate.

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Notes to the condensed consolidated financial statements continued

A4 - Segmental information continued

(iii) Segmental income statement for the year ended 31 December 2011