Post-tax internal rate of return on life and pensions new business
The internal rate of return (IRR) on life and pensions new business for the Group was 12.3% for the year to 31 December 2004 (31 December 2003: 12.4%).
The internal rate of return is equivalent to the discount rate at which the present value of the post–tax cash flows expected to be earned over the lifetime of the business written is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is the initial capital required to pay acquisition costs and set up statutory reserves in excess of premiums received, plus required capital at the same level as for the calculation of new business contribution post cost of capital.
| 2004 | ||||
|---|---|---|---|---|
| Internal rate of return % |
Initial capital £m |
Required capital £m |
Total invested capital £m |
|
| UK | 11% | 421 | 148 | 569 |
| Continental Europe | ||||
| France | 11% | 23 | 85 | 108 |
| Ireland | 12% | 32 | 18 | 50 |
| Italy | 15% | 10 | 39 | 49 |
| Netherlands (including Belgium and Luxembourg) | 9% | 42 | 66 | 108 |
| Poland | 18% | 9 | 3 | 12 |
| Spain | 24% | 15 | 53 | 68 |
| Other Europe | 8% | 28 | 16 | 44 |
| International | 15% | 20 | 30 | 50 |
| Total | 12% | 600 | 458 | 1,058 |
The total initial capital for life and pensions new business for 31 December 2004 of £600 million (2003: £655 million) shown above is expressed at the point of sale. Hence it is higher than the impact of writing that new business on net worth of £520 million (2003: £581 million) shown on Analysis of movement in life and related businesses embedded value, because the latter amount includes expected profits from the point of sale to the end of the reporting period, partly offset by the expected return on the initial capital.
