Basis of preparation - EEV basis
The consolidated income statement and balance sheet present the Group’s results and financial position for the life and related businesses on the European Embedded Value (EEV) basis and for its non-life businesses on the International Financial Reporting Standards (IFRS) basis. The EEV methodology adopted is in accordance with the EEV Principles introduced by the CFO Forum in May 2004.
In the Directors’ opinion, the EEV basis provides a more accurate reflection of the performance of the Group’s life and related operations year on year than results presented under the IFRS basis. The Directors consider that the EEV methodology is a refinement to the Achieved Profits basis previously adopted by the Group and represents a more meaningful basis of reporting the underlying value in our life business and the underlying drivers of performance. This basis allows for the impact of uncertainty in the future investment returns more explicitly and is consistent with the way the business is priced and managed.
The Group’s revised approach to establishing economic assumptions (specifically investment returns, required capital and discount rates) was reviewed by Tillinghast, a firm of actuarial consultants, as part of the restatement work. The approach is based on the well established capital asset pricing model theory and is in line with the EEV Principles and Guidance.
In addition, the results of our equity release business have been reclassified from non-insurance operations to life insurance operations. This has resulted in assets, liabilities and operating profits being reclassified out of non-insurance segments and into life segments. Comparatives for 30 June 2004 have been restated accordingly and the impact of the reclassification on consolidated shareholders’ funds and consolidated profit for the six months to 30 June 2004 is nil.
The results for the six month period to 30 June 2005 and 30 June 2004 are unaudited but have been reviewed by the auditors, Ernst & Young LLP. Their report in respect of 30 June 2005 is included in the Interim Report on page 58 of that document. The interim accounts do not constitute statutory accounts as defined by Section 240 of the Companies Act 1985.
Covered business
The EEV calculations cover the following lines of business: life insurance, long term health and accident insurance, savings,
pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our
share of the other life and related business written in our associated undertakings and joint ventures, as well as the equity
release business written in the UK. The adoption of IFRS has resulted in no change to the Group’s definition of new business
and so includes contracts that meet the definition of “non-participating investment” contracts under IFRS.
Covered business includes the Group’s share of our joint venture operations including our arrangement with The Royal Bank of Scotland Group (RBSG) and our operations in India and China. In addition, the results of Group companies providing significant administration, investment management and other services and of Group holding companies have been included to the extent that they relate to covered business. Together these businesses are referred to as “Life and related businesses”.
New business premiums
New business premiums include:
- premiums arising from the sales of new contracts during the period;
- non-contractual additional premiums, including future Department of Work and Pensions (DWP) rebate premiums; and
- expected renewals on new contracts and expected future contractual alterations to new contracts.
For products sold to individuals, premiums are generally considered to represent new business in certain circumstances, including where a new contract has been signed, or where underwriting has been performed. Renewal premiums include contractual renewals, non-contractual variations that are reasonably predictable and recurrent single premiums that are pre-defined and reasonably predictable.
For group products, new business includes new contracts and increases to aggregate premiums under existing contracts. Renewal premiums are based on the level of premium received during the reporting period and allow for premiums expected to be received beyond the expiry of any guaranteed premium rates.
Foreign exchange adjustments
Embedded value and other balance sheet items denominated in foreign currencies have been translated to sterling using the
appropriate closing exchange rate. New business contribution and other income statement items have been translated using an
average exchange rate for the relevant period. View the exchange rates adopted in this announcement.
