Interim results - 6 months ended 30 June 2007
Operating and financial review
Life EEV operating return
| 6 months 2007 %m | 6 months 2006 %m | ||
|---|---|---|---|
| New business contribution (after the effect of required capital) | 419 | 352 | |
| Profit from existing business | - expected return | 11 | 3 |
| - experience variances | 600 | 503 | |
| - operating assumption changes | (19) | (9) | |
| Expected return on shareholders' net worth | 240 | 172 | |
| Life EEV operating return before tax | 1,251 | 1,021 | |
| Analysed by: | |||
| United Kingdom | 413 | 350 | |
| Europe | 679 | 617 | |
| North America | 112 | 16 | |
| Asia Pacific | 47 | 38 | |
Worldwide life EEV operating return before tax was 24% higher at £1,251 million (2006: £1,021 million) due to increased contributions from both new and existing business. New business contribution after the effect of required capital was 20% higher at £419 million (2006: £352 million) with the Group's new business margin after the effect of required capital remaining stable at 2.7% (2006: 2.7%).
| months | currency | currency | currency | currency | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 6 months 2007 £m | 6 months 2006 £m | 6 months 2007 £m | 6 months 2006 £m | 6 months 2007 % | 6 months 2006 % | 6 months 2007 £m | 6 months 2006 £m | 6 months 2007 % | 6 months 2006 % | |
| United Kingdom | 5,820 | 5,816 | 178 | 167 | 3.1% | 2.9% | 143 | 135 | 2.5% | 2.3% |
| Europe | 7,353 | 6,645 | 283 | 268 | 3.8% | 4.0% | 3.0% | 202 | 3.0% | 3.0% |
| North America | 1,716 | 289 | 57 | 5 | 3.3% | 1.7% | 35 | 2 | 2.0% | 0.7% |
| Asia Pacific | 654 | 397 | 32 | 19 | 4.9% | 4.8% | 23 | 13 | 3.5% | 3.3% |
| Total life and pensions business | 15,543 | 13,147 | 550 | 459 | 3.5% | 3.5% | 419 | 352 | 2.7% | 2.7% |
(1) Before effect of required capital which amounted to £131 million (2006: £107 million).
(2) New business margin represents the ratio of new business contribution to present value of new business premiums, expressed as a percentage.
(3) After deducting the effect of required capital.
The expected returns on existing business and shareholders' net worth increased to £840 million (2006: £675 million) reflecting the higher start of year embedded values and higher economic assumptions. Adverse experience variances of £19 million (2006: £9 million) were partially offset by positive operating assumption changes of £11 million (2006: £3 million).
United Kingdom
Norwich Union's life EEV operating return increased 18% to £413 million (2006: £350 million), reflecting the increased profitability of our new business, higher expected returns and a strong improvement in expense and persistency experience.
New business margin has increased to 3.1% (2006: 2.9%), driven by a combination of the savings from our ongoing operational review and our commitment to maximising shareholder value through balancing price, volume and mix. After required capital, our new business contribution was £143 million (2006: £135 million) at a margin of 2.5% (2006: 2.3%).
Our efficiency review, announced in September 2006, remains on track to deliver £125 million annualised savings by the end of this year. By 30th June 2007 we had achieved annualised savings of £96 million, which contributed £35 million to our half year financial performance. This is evident both in our improved new business margin and our reduced expense overruns on existing business.
Total experience variances were £37 million adverse (2006: £67 million adverse). The improvement in the adverse expense variance (combined maintenance and project-related) to £52 million (2006: £76 million) is due to the impact of our efficiency review. We continue to record adverse project-related experience due to the one-off costs associated with simplifying our legacy infrastructure. Following the implementation of our recently announced administration outsource agreement with Swiss Re combined with the efficiency targets announced in September 2006 we expect to reduce significantly the risk of expense related experience variances from 2009. Improved persistency experience of adverse £6 million (2006: £35 million adverse) reflects the positive actions we have taken in implementing our customer retention strategy. Overall persistency experience for the period is broadly in line with expectations.
Europe
Life EEV operating return from our European businesses has increased 11% to £679 million (2006: £617 million).
New business contribution after the effect of required capital increased to £218 million (2006: £202 million), with strong growth in Italy, Ireland and the Netherlands. New business margins before and after required capital were 3.8% and 3.0% respectively (2006: 4.0% and 3.0% respectively).
Expected returns were higher at £429 million (2006: £360 million), reflecting higher start of year embedded value. Experience variances were favourable at £19 million (2006: £52 million), mainly driven by favourable operating variances in France and Poland, partly offset by adverse experience in the Netherlands and Spain. Improved expense management in France resulted in a positive operating assumption change in Europe of £13 million (2006: £3 million).
North America
The life EEV operating return was £112 million (2006: £16 million) reflecting the increase in expected return following the acquisition of AmerUs and the increased new business contribution.
New business margins before and after the effect of required capital increased to 3.3% and 2.0% respectively (2006: 1.7% and 0.7% respectively) reflecting a favourable change in product mix towards higher margin indexed life and indexed annuity products and the discontinuance of lower margin life products as part of a product rationalisation process.
Asia Pacific
The life EEV operating return increased to £47 million (2006: £38 million), benefiting from higher new business volumes.
New business margins before and after the effect of required capital were 4.9% and 3.5% respectively (2006: 4.8% and 3.3% respectively). New business margins are influenced by marketing campaigns and product launches, resulting in some volatility between quarters. Growth potential for the region remains strong and Aviva's diversified distribution model places the business in a strong position for continued future growth.
