Interim results for 6 months ended 30 June 2006
Operating and financial review
Profit on ordinary activities before tax
| EEV basis | IFRS basis | ||||
|---|---|---|---|---|---|
| 6 months 2006 £m |
6 months 2005 £m |
6 months 2006 £m |
6 months 2005 £m |
||
| Operating profit before tax | 1,699 | 1,318 | 1,376 | 943 | |
| Impairment of goodwill | - | (10) | - | (10) | |
| Amortisation of acquired additional value of in-force long-term business | - | - | (33) | (44) | |
| Amortisation and impairment of intangibles | (10) | (8) | (19) | (16) | |
| Financial Services Compensation Scheme and other levies | 6 | - | 6 | - | |
| Profit on disposal of subsidiary and associates | 86 | 145 | 147 | 145 | |
| Short-term fluctuations on return of investments backing general insurance and health business | (205) | 120 | (205) | 120 | |
| Variation from longer-term investment return – life business | (739) | 719 | - | - | |
| Effect of economic assumption changes | 471 | (531) | - | - | |
| Integration costs | (24) | (14) | (24) | (14) | |
| Profit before tax/Profit before tax attributable to shareholders’ profits | 1,284 | 1,739 | 1,248 | 1,124 | |
Profit before tax on an EEV basis was lower at £1,284 million (2005: £1,739 million), and includes adverse investment return variances and short-term investment fluctuations of £944 million (2005: £839 million favourable) partially offset by positive economic assumption changes of £471 million (2005: £531 million negative).
During the first half we completed the sale of our remaining RAC non-core businesses generating disposal profits of £66 million. Additionally as part of the Ark Life transaction in January we completed the sale of a minority stake in our Irish life business at fair value resulting in a profit on an EEV basis of £26 million and £87 million on an IFRS basis as, under the latter, the additional value of long-term in-force business is excluded from the IFRS balance sheet. Other small disposals in the period amounted to a total loss of £6 million. The integration of RAC successfully completed during the period and accordingly no further costs associated with this will be reported. The total integration costs incurred since the acquisition were in line with the £130 million previously announced.
The variance from the longer-term investment return primarily reflects lower market values of fixed income securities following the increase of 60 basis points and 80 basis points in UK and Euro zone long-term bond yields respectively. This was partly offset by slightly higher than assumed overall equity returns during the period. Long-term economic assumptions, which are set by reference to long-term bond yields, were revised upward at 30 June 2006 and these higher assumptions have increased the expected value of future profits from in-force life contracts, benefiting profits by £471 million.
Included within the investment variances is a one off charge reflecting changes in the UK Inland Revenue legislation introduced by the 2006 Finance Bill amounting to £75 million on a post tax basis.
The non-life short-term fluctuations loss of £205 million (2005: £120 million positive) is principally due to the rise in bond yields. The effect of the non-life investment market movements, profit on disposal, and integration costs are included in the IFRS profit before tax attributable to shareholders’ profits of £1,248 million (2005: £1,124 million).
The taxation charge for the period was £524 million (2005: £530 million) on an EEV basis and includes a charge of £573 million (2005: £412 million) in respect of operating profit, which is equivalent to an effective rate of 33.7% (2005: 31.3%). The effective tax rate on IFRS operating profit of 26.9% (2005: 27.1%) reflects in net terms the use of unrecognised deferred tax assets which reduced the tax charge.
