Preliminary results - 12 months ended 31 December 2006 01 March 2007
Sensitivity analysis – economic assumptions
The tables below show the sensitivity of the embedded value as at 31 December 2006 and the new business contribution before the effect of required capital for 2006 to:
- one percentage point increase and decrease in the discount rates;
- one percentage point increase and decrease in interest rates, including all consequential changes (including assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);
- one percentage point increase and decrease in the assumed investment returns for equity and property investments, excluding any consequential changes to the risk discount rate;
- 10% rise and fall in market value of equity and property assets (not applicable for new business contribution); and
- decrease in the level of required capital to 100% EU minimum (or equivalent) (not applicable for new business contribution).
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns. Some of the sensitivity scenarios may have consequential effects on valuation bases, where the basis for certain blocks of business is actively updated to reflect current economic circumstances. Consequential valuation impacts on the sensitivities are allowed for where an active valuation basis is used. Where businesses have a target asset mix, the portfolio is re-balanced after a significant market movement otherwise no re-balancing is assumed.
| Embedded value (net of tax) 31 December 2006 | As reported £m | 1% increase in discount rates £m | 1% decrease in discount rates £m | 1% increase in interest rates £m | 1% decrease in interest rates £m |
|---|---|---|---|---|---|
| France | 2,291 | (135) | 155 | (90) | 85 |
| Ireland | 892 | (40) | 40 | (30) | 30 |
| Italy | 792 | (20) | 25 | (5) | (60) |
| Netherlands (including Belgium, Germany and Luxembourg) | 3,867 | (165) | 195 | 50 | (210) |
| Poland | 719 | (35) | 40 | (5) | 5 |
| Spain | 857 | (45) | 50 | (25) | 25 |
| Other Europe | 106 | (5) | 5 | - | - |
| Continental Europe | 9,524 | (445) | 510 | (105) | (125) |
| United States | 1,478 | (80) | 85 | (85) | 85 |
| Other | 460 | (15) | 20 | - | - |
| Rest of the World | 1,938 | (95) | 105 | (85) | 85 |
| International | 11,462 | (540) | 615 | (190) | (40) |
| United Kingdom | 6,636 | (470) | 560 | (310) | 350 |
| Total | 18,098 | (1,010) | 1,175 | (500) | 310 |
| Embedded value (net of tax) 31 December 2006 | As reported £m | 1% increase in equity / property returns £m | 1% decrease in equity / property returns £m | 10% rise in equity / property market values £m | 10% fall in equity / property market values £m | EU minimum capital (or equivalent) £m |
|---|---|---|---|---|---|---|
| France | 2,291 | 75 | (75) | 115 | (135) | 40 |
| Ireland | 892 | 20 | (20) | 30 | (30) | 15 |
| Italy | 792 | 10 | (10) | 10 | (10) | 10 |
| Netherlands (including Belgium, Germany and Luxembourg) | 3,867 | 225 | (225) | 405 | (415) | 95 |
| Poland | 719 | 10 | (10) | 10 | (10) | 10 |
| Spain | 857 | 15 | (15) | 15 | (15) | 5 |
| Other Europe | 106 | - | - | - | - | 5 |
| Continental Europe | 9,524 | 355 | (355) | 585 | (615) | 180 |
| United States | 1,478 | 25 | (10) | 5 | (5) | 80 |
| Other | 460 | 5 | (5) | 10 | (10) | 5 |
| Rest of the World | 1,938 | 30 | (15) | 15 | (15) | 85 |
| International | 11,462 | 385 | (370) | 600 | (630) | 265 |
| United Kingdom | 6,636 | 220 | (230) | 435 | (435) | 95 |
| Total | 18,098 | 605 | (600) | 1,035 | (1,065) | 360 |
In general, the magnitude of the sensitivities will reflect the size of the embedded values, though this will vary as the sensitivities have different impacts on the different components of the embedded value. In addition, other factors can have a material impact, such as the nature of the options and guarantees, as well as the types of investments held. The interest rate sensitivity will vary significantly by territory, depending on the type of business written: for example, where non-profit business is well matched by backing assets, the favourable impact of reducing the risk discount rate is the dominant factor.
Sensitivities will also vary according to the current economic assumptions, mainly due to the impact of changes to both the intrinsic cost and time value of options and guarantees. Options and guarantees are the main reason for the asymmetry of the sensitivities where the guarantee impacts to different extents under the different scenarios. This can be seen in the sensitivity of a 1% movement in the interest rate for the Netherlands, where there is a significant amount of business with investment return guarantees. The increase of 70 basis points to the assumed pre-tax investment returns at 31 December 2006 has significantly decreased this sensitivity, reflecting the level of the guarantees relative to the interest rate assumption.
Sensitivities to a 1% movement in the equity/property return will only impact the value of the in-force covered business, whereas a 10% movement in equity/property values may impact both the net worth and the value of in-force, depending on the allocation of assets.
| New business contribution before required capital (gross of tax) 31 December 2006 | As reported £m | 1% increase in discount rates £m | 1% decrease in discount rates £m | 1% increase in interest rates £m | 1% decrease in interest rates £m |
|---|---|---|---|---|---|
| France | 153 | (13) | 15 | (1) | (2) |
| Ireland | 15 | (4) | 4 | (2) | 1 |
| Italy | 70 | (4) | 5 | 2 | (12) |
| Netherlands (including Belgium, Germany and Luxembourg) | 56 | (10) | 11 | 43 | (39) |
| Poland | 28 | (2) | 3 | - | 1 |
| Spain | 184 | (12) | 14 | (5) | 5 |
| Other Europe | (4) | (2) | 2 | (1) | - |
| Continental Europe | 502 | (47) | 54 | 36 | (46) |
| United States | 20 | (3) | 3 | (1) | (2) |
| Other | 43 | (8) | 9 | 3 | (4) |
| Rest of the World | 63 | (11) | 12 | 2 | (6) |
| International | 565 | (58) | 66 | 38 | (52) |
| United Kingdom | 327 | (55) | 65 | (20) | 23 |
| Total | 892 | (113) | 131 | 18 | (29) |
| New business contribution before required capital (gross of tax) 31 December 2006 | As reported £m | 1% increase in equity / property returns £m | 1% decrease in equity/ property returns £m |
|---|---|---|---|
| France | 153 | 6 | (6) |
| Ireland | 15 | 2 | (2) |
| Italy | 70 | 1 | (1) |
| Netherlands (including Belgium, Germany and Luxembourg) | 56 | 16 | (21) |
| Poland | 28 | 1 | (1) |
| Spain | 184 | 2 | (1) |
| Other Europe | (4) | 1 | (1) |
| Continental Europe | 502 | 29 | (33) |
| United States | 20 | 1 | (1) |
| Other | 43 | 1 | (1) |
| Rest of the World | 63 | 2 | (2) |
| International | 565 | 31 | (35) |
| United Kingdom | 327 | 31 | (31) |
| Total | 892 | 62 | (66) |
