Achieved Profit Basis Notes
Basis of preparation – achieved profit basis
The achieved profit statement includes the results of the Group's life operations reported under the achieved profit basis combined with the modified statutory basis results of the Group's non-life operations. In the directors’ opinion, the achieved profit basis provides a more accurate reflection of the performance of the Group's life operations year on year than results under the modified statutory basis. The achieved profit methodology used is in accordance with the guidance on “Supplementary reporting for long-term insurance business (the achieved profit method)” circulated by the Association of British Insurers in December 2001. Further details are set out on the methodology and assumptions notes.
The results of the Group's life operations under the modified statutory basis, which is the basis used in the annual statutory accounts, can be found in the modified statutory basis section.
The contribution from the Group’s share of the alliance with The Royal Bank of Scotland (RBSG) is incorporated within the achieved operating profit. Goodwill amortised in the period in respect of the Group's holding in the associated company, RBS Life Investments Limited, is included within the Amortisation of goodwill.
The results for the six month periods to 30 June 2004 and 30 June 2003 are unaudited but have been reviewed by the auditors, Ernst & Young LLP. Their report in respect of 30 June 2004 is included in the Interim Report on page 31 of that document. The interim accounts do not constitute statutory accounts as defined by section 240 of the Companies Act 1985. The results for the full year 2003 have been taken from the Group’s 2003 Annual Report and Accounts.
Components of total life achieved profit
Total life achieved profit, including the Group’s share from the alliance with RBSG, comprises the following components, the first three of which in aggregate are referred to as life achieved operating profit:
- new business contribution written during the period including value added between the point of sale and end of the period;
- the profit from existing business equal to:
– the expected return on the value of the in-force business at the beginning of the period,
– experience variances caused by the differences between the actual experience during the period and expected experience based on the operating assumptions used to calculate the start of year value,
– the impact of changes in operating assumptions including risk margins; - the expected investment return on the shareholders' net worth, based upon assumptions applying at the start of the year;
- investment return variances caused by differences between the actual return in the period and the expected experience based on economic assumptions used to calculate the start of year value; and
- the impact of changes in economic assumptions in the period.
| 6 months 2004 £m |
6 months 2003 £m |
Full year 2003 £m |
|
|---|---|---|---|
| New business contribution (after the effect of solvency margin) | 246 | 211 | 472 |
| Profit from existing business | |||
| – expected return | 406 | 376 | 757 |
| – experience variances | (13) | (19) | (12) |
| – operating assumption changes* | (4) | (10) | 38 |
| Expected return on shareholders' net worth | 165 | 147 | 300 |
| Life achieved operating profit before tax | 800 | 705 | 1,555 |
| Investment return variances | (214) | 208 | 683 |
| Effect of economic assumption changes | 205 | (217) | 11 |
| Total life achieved profit before tax | 791 | 696 | 2,249 |
| Tax on operating profit | (243) | (213) | (473) |
| Tax on other ordinary activities | - | 9 | (191) |
| Total life achieved profit after tax | 548 | 492 | 1,585 |
| * In 2003, operating assumption changes included the impact of reducing risk margins in Poland, the US and Australia in line with the directors’ views of the risks associated with this in-force portfolio. The impact of this change was nil for the six months to 30 June 2003 and £24 million in the full year 2003. | |||
New business contribution
The following table sets out the contribution from new business written by the long-term business operations. The contribution generated by new business written during the period is the present value of the projected stream of after tax distributable profit from that business. Contribution before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at appropriate rates of tax for other countries.
| Annual premium equivalent* | New business contribution before solvency margin** | New business contribution after solvency margin*** | |||||
|---|---|---|---|---|---|---|---|
| 6 months 2004 £m |
6 months 2003 £m |
Local currency growth % |
6 months 2004 £m |
6 months 2003 £m |
6 months 2004 £m |
6 months 2003 £m |
|
| United Kingdom | 547 | 531 | 3% | 126 | 117 | 112 | 102 |
| Europe (excluding UK) | |||||||
| France | 145 | 120 | 21% | 44 | 35 | 22 | 14 |
| Ireland | 44 | 39 | 13% | 10 | 11 | 8 | 9 |
| Italy | 89 | 117 | (24%) | 21 | 27 | 13 | 15 |
| Netherlands (including Belgium and Luxembourg) | 119 | 102 | 17% | 38 | 22 | 26 | 3 |
| Poland | 18 | 20 | 4% | 3 | - | 2 | (1) |
| Spain | 130 | 139 | (7%) | 66 | 68 | 53 | 58 |
| Other | 58 | 44 | 38% | (1) | (4) | (3) | (4) |
| International | 74 | 100 | (21%) | 17 | 21 | 13 | 15 |
| Total annualised premiums | 1,224 | 1,212 | 2% | ||||
| Total new business contribution before effect of solvency margin** | 324 | 297 | |||||
| Effect of solvency margin | (78) | (86) | |||||
| Total new business contribution including effect of solvency margin | 246 | 211 | 246 | 211 | |||
| * Annual premium equivalent represents regular premiums plus 10% of single premiums. ** New business contribution before effect of solvency margin includes minority interests in 2004 of £54 million (six months to 30 June 2003: £54 million). This comprises minority interests in France of £3 million (six months to 30 June 2003: £2 million), Italy £12 million (six months to 30 June 2003: £14 million), Netherlands £5 million (six months to 30 June 2003: £3 million), Poland £1 million (six months to 30 June 2003: nil) and Spain £33 million (six months to 30 June 2003: £35 million). *** New business contribution after the effect of solvency margin includes minority interests of £40 million (six months to 30 June 2003: £40 million). This comprises minority interests in France nil (six months to 30 June 2003: nil), Italy £8 million (six months to 30 June 2003: £8 million), Netherlands £4 million (six months to 30 June 2003: £2 million), Poland £1 million (six months to 30 June 2003: nil) and Spain £27 million (six months to 30 June 2003: £30 million). |
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New business contributions have been calculated using the same economic assumptions as those used to determine the embedded values as at the beginning of each year and operating assumptions used to determine the embedded values as at the end of the period. The effect of solvency margin represents the impact of holding the minimum European Union (EU) solvency margin (or equivalent for non-EU operations) and discounting to present value the projected future releases from the solvency margin to shareholders.
New business contribution – before effect of solvency margin, tax and minority interest
| Annual premium equivalent | New business contribution(1) |
|||
|---|---|---|---|---|
| 6 months 2004 £m |
6 months 2003 £m |
6 months 2004 £m |
6 months 2003 £m |
|
| Bancassurance arrangements | 275 | 295 | 111 | 107 |
| Other distribution | 949 | 917 | 213 | 190 |
| 1,224 | 1,212 | 324 | 297 | |
| (1) Stated before effect of solvency margin, tax and minority interest. | ||||
| Annual premium equivalent(1) |
New business contribution(2) |
|||
|---|---|---|---|---|
| 6 months 2004 £m |
6 months 2003 £m |
6 months 2004 £m |
6 months 2003 £m |
|
| Bancassurance arrangements | 154 | 168 | 32 | 29 |
| Other distribution | 928 | 895 | 111 | 90 |
| 1,082 | 1,063 | 143 | 119 | |
| (1) Stated after deducting minority interest. (2) Stated after effect of solvency margin, tax and minority interest. |
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Post-tax internal rate of return on life and pensions new business
The total internal rate of return on life and pensions new business for the Group was 14% (30 June 2003: 15%; 31 December 2003: 14%). The return is the discount rate at which the present value of the post-tax cash flows expected to be earned over the life time of the business written is equal to the initial capital required to support the writing of the business. The capital includes the statutory minimum solvency margin and amounts to £460 million (30 June 2003: £400 million; 31 December 2003: £900 million). This includes £160 million (30 June 2003: £170 million; 31 December 2003: £340 million) of solvency requirements.
Experience variances
Experience variances include the impact of the difference between expense, demographic and persistency assumptions, and actual experience incurred in the period. Also included are variances arising from tax, where such variances are due to management action. The source of profit is included in the table below.
| 30 June 2004 | Exceptional expenses(1) £m |
Mortality/ morbidity(2) £m |
Lapses(3) £m |
Other(4) £m |
Total £m |
|---|---|---|---|---|---|
| United Kingdom | (35) | 20 | (14) | 11 | (18) |
| France | (1) | 8 | 1 | 1 | 9 |
| Netherlands (including Belgium and Luxembourg) | (9) | 3 | - | 3 | (3) |
| Europe | - | 4 | (5) | 7 | 6 |
| International | (3) | 1 | 1 | (6) | (7) |
| (48) | 36 | (17) | 16 | (13) | |
| (1) Exceptional expenses reflect project spend, including costs associated with the pace of regulatory change in the UK. (2) Mortality experience has typically been better than anticipated in many of the group businesses in particular in the UK on annuity and PHI contracts. (3) Lapse experience has been adverse in a number of businesses including on savings businesses in the UK, and on some classes of business in Ireland. (4) In the UK, other experience profits include exceptional profits arising from better than assumed default experience on corporate bonds and commercial mortgages. |
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Operating assumption changes
Changes in operating assumptions are made when the assumed future levels of expenses, mortality or other operating assumptions are expected to change permanently. The impact of operating assumption changes in the period was a loss of £4 million (2003: loss of £10 million) and arose primarily in Ireland where the persistency assumptions with respect to certain classes of business were lowered, reflecting the recent actual experience. This has been partially offset by the beneficial impact of changes in asset mix in the Netherlands.
