Preliminary results - 12 months ended 31 December 2006 01 March 2007
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 12.6% for 2006 (2005: 12.5%).
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 life time of the business written, including allowance for the time value of options and guarantees, 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 (“initial capital”), plus required capital at the same level as for the calculation of new business contribution post cost of capital.
| 2006 | ||||
|---|---|---|---|---|
| Internal rate of return % | Initial capital £m | Required capital £m | Total invested capital £m | |
| France | 13% | 20 | 93 | 113 |
| Ireland | 7% | 54 | 33 | 87 |
| Italy | 12% | 17 | 59 | 76 |
| Netherlands (including Belgium, Germany and Luxembourg) | 7% | 42 | 88 | 130 |
| Poland | 23% | 15 | 6 | 21 |
| Spain | 30% | 19 | 63 | 82 |
| Other Europe | 7% | 37 | 3 | 40 |
| Continental Europe | 13% | 204 | 345 | 549 |
| United States | 9% | 41 | 37 | 78 |
| Other | 25% | 28 | 22 | 50 |
| Rest of the World | 15% | 69 | 59 | 128 |
| International | 13% | 273 | 404 | 677 |
| United Kingdom | 12% | 360 | 149 | 509 |
| Total | 13% | 633 | 553 | 1,186 |
The total initial capital for life and pensions new business for 2006 of £633 million (2005: £544 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 £602 million (2005: £536 million) shown in the 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.
