3. New business contribution
The table below sets out the premium volumes, the contribution from and the resulting margin achieved on new business written by the life and related businesses.
The contribution generated by new business written during the year is the present value of the projected stream of after tax distributable profit from that business. New business contribution before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at appropriate rates of tax for other countries. New business contribution has been calculated using the same economic assumptions as those used to determine the embedded value as at the start of the year and operating assumptions used to determine the embedded value as at the end of the year, and is rolled forward to the end of the financial year. New business contribution is shown before and after the effect of required capital, calculated on the same basis as for in-force covered business.
New business sales are expressed on two bases: annual premium equivalent (APE) and the present value of new business premiums (PVNBP). The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate new business contribution, so the components of the new business margin are on a consistent basis.
(a) Geographical analysis of new business
| Annual premium equivalent |
Present value of new business premiums | New business contribution | New business margin1 |
New business contribution | New business margin1 |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Before the effect of required capital | After the effect of required capital | ||||||||||||||
| 2007 £m |
2006 £m |
2007 £m |
2006 £m |
2007 £m |
2006 £m |
2007 % |
2006 % |
2007 £m |
2006 £m |
2007 % |
2006 % |
||||
| Life and pensions | |||||||||||||||
| United Kingdom | 1,498 | 1,439 | 11,655 | 11,146 | 360 | 327 | 3.1% | 2.9% | 305 | 263 | 2.6% | 2.4% | |||
| France | 406 | 391 | 3,662 | 3,552 | 169 | 153 | 4.6% | 4.3% | 117 | 110 | 3.2% | 3.1% | |||
| Ireland | 256 | 190 | 1,730 | 1,273 | 30 | 15 | 1.7% | 1.2% | 25 | 9 | 1.4% | 0.7% | |||
| Italy | 343 | 323 | 2,924 | 2,768 | 82 | 70 | 2.8% | 2.5% | 61 | 50 | 2.1% | 1.8% | |||
| Netherlands (including Belgium and Germany) | 335 | 270 | 2,944 | 2,346 | 93 | 56 | 3.2% | 2.4% | 53 | 25 | 1.8% | 1.1% | |||
| Poland | 105 | 72 | 844 | 534 | 35 | 28 | 4.1% | 5.2% | 32 | 25 | 3.8% | 4.7% | |||
| Spain | 290 | 248 | 2,392 | 2,059 | 189 | 184 | 7.9% | 8.9% | 173 | 168 | 7.2% | 8.2% | |||
| Other Europe | 85 | 63 | 418 | 308 | - | (4) | - | (1.3)% | (5) | (6) | (1.2)% | (1.9)% | |||
| Europe | 1,820 | 1,557 | 14,914 | 12,840 | 598 | 502 | 4.0% | 3.9% | 456 | 381 | 3.1% | 3.0% | |||
| North America | 378 | 97 | 3,602 | 884 | 154 | 20 | 4.3% | 2.3% | 108 | 8 | 3.0% | 0.9% | |||
| Asia | 160 | 107 | 990 | 685 | 36 | 26 | 3.6% | 3.8% | 27 | 22 | 2.7% | 3.2% | |||
| Australia | 80 | 58 | 439 | 297 | 26 | 17 | 5.9% | 5.7% | 16 | 9 | 3.6% | 3.0% | |||
| Asia Pacific | 240 | 165 | 1,429 | 982 | 62 | 43 | 4.3% | 4.4% | 43 | 31 | 3.0% | 3.2% | |||
| Total life and pensions | 3,936 | 3,258 | 31,600 | 25,852 | 1,174 | 892 | 3.7% | 3.5% | 912 | 683 | 2.9% | 2.6% | |||
| Investment sales | 761 | 534 | 6,983 | 4,910 | |||||||||||
| Total long-term savings (including share of associates and joint ventures)2 | 4,697 | 3,792 | 38,583 | 30,762 | |||||||||||
- New business margin represents the ratio of new business contribution to PVNBP, expressed as a percentage.
- Total long-term savings includes investment sales. Investment sales are calculated as new single premiums plus annualised value of new regular premiums.
(b) Analysis of new business by distribution channel
(i) Before the effect of required capital, tax and minority interest
| Annual premium equivalent |
Present value of new business premiums |
New business contribution | New business margin |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 £m |
2006 £m |
2007 £m |
2006 £m |
2007 £m |
2006 £m |
2007 % |
2006 % |
||||
| Analysed between: | |||||||||||
| – Principal bancassurance channels | 1,016 | 942 | 8,281 | 7,737 | 397 | 369 | 4.8% | 4.8% | |||
| – Other distribution channels | 2,920 | 2,316 | 23,319 | 18,115 | 777 | 523 | 3.3% | 2.9% | |||
| Total | 3,936 | 3,258 | 31,600 | 25,852 | 1,174 | 892 | 3.7% | 3.5% | |||
(ii) After the effect of required capital, tax and minority interest
| Annual premium equivalent |
Present value of new business premiums |
New business contribution | New business margin |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 £m |
2006 £m |
2007 £m |
2006 £m |
2007 £m |
2006 £m |
2007 % |
2006 % |
||||
| Analysed between: | |||||||||||
| – Principal bancassurance channels | 590 | 553 | 4,730 | 4,465 | 133 | 121 | 2.8% | 2.7% | |||
| – Other distribution channels | 2,839 | 2,252 | 22,674 | 17,607 | 396 | 255 | 1.7% | 1.4% | |||
| Total | 3,429 | 2,805 | 27,404 | 22,072 | 529 | 376 | 1.9% | 1.7% | |||
(c) 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 14.1% for 2007 (2006: 12.6%).
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.
| 2007 | ||||
|---|---|---|---|---|
| Internal rate of return % |
Initial capital £m |
Required capital £m |
Total invested capital £m |
|
| United Kingdom | 13% | 275 | 138 | 413 |
| France | 13% | 30 | 108 | 138 |
| Ireland | 10% | 66 | 27 | 93 |
| Italy | 17% | 6 | 48 | 54 |
| Netherlands (including Belgium and Germany) | 8% | 68 | 144 | 212 |
| Poland | 22% | 20 | 10 | 30 |
| Spain | 32% | 22 | 73 | 95 |
| Other Europe | 12% | 50 | 4 | 54 |
| Europe | 14% | 262 | 414 | 676 |
| North America | 14% | 103 | 224 | 327 |
| Asia Pacific | 20% | 46 | 34 | 80 |
| Total | 14% | 686 | 810 | 1,496 |
The total initial capital for life and pensions new business for 2007 of £686 million (2006: £633 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 £649 million (2006: £602 million) shown within 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 year, partly offset by the cost of holding the initial capital.