Time value of options and guarantees
The following table sets out the reductions to embedded value to allow for the time value of options and guarantees relating to covered business at
31 December 2004 and 31 December 2003 by business units.
| 2004 £m |
2003 £m |
|
|---|---|---|
| United Kingdom | 44 | 36 |
| Europe (excluding UK) | ||
| France | 79 | 71 |
| Ireland | 4 | 6 |
| Italy | 14 | 10 |
| Netherlands (including Belgium and Luxembourg) | 92 | 76 |
| Poland | 5 | 4 |
| Spain | 9 | 10 |
| Other Europe | 18 | 10 |
| International | 9 | 9 |
| 274 | 232 |
The time value of options and guarantees is most significant in the United Kingdom, France and the Netherlands. In the United Kingdom, this relates mainly to non-market value adjustment (MVA) guarantees on unitised with-profit business and guaranteed annuity rates. In France, this relates mainly to guaranteed crediting rates and surrender values on the AFER product. In the Netherlands, this relates mainly to maturity guarantees on unit-linked products and interest rate guarantees on traditional individual and group profit sharing business.
The increase in the time value of options and guarantees from £232 million at 31 December 2003 to £274 million at 31 December 2004 is primarily due to the 60bp fall in bond yields in continental Europe during the second half of 2004. The overall impact of the lower yields was an increase of £39 million.
The increased allowance in the UK largely reflected the new business written in Norwich Union Equity Release. In France, the allowance included in new business contribution of £10 million together with the impact of lower assumed bond yields of £7 million and a small allowance from Antarius in the acquired embedded value were partially offset by favourable investment variances, which reduced the time value of options and guarantees by £13 million. In the Netherlands, the key impacts were the increase due to lower assumed bond yields of £21 million and reduction arising from the tax assumption change of £10 million. The increase in Other Europe arose in our German business and reflects the impact of lower assumed bond yields.
