3 - Life EEV operating return
Worldwide Life EEV operating return before tax was 18% higher at £1,480 million (six months to 30 June 2007: £1,251 million) due to increased contributions from both new and existing business. New business contribution after the effect of required capital was 16% higher at £488 million (six months to 30 June 2007: £419 million) with the Group’s new business margin after the effect of required capital improving to 2.8% (six months to 30 June 2007: 2.7%).
| 6 months 2008 £m |
6 months 2007 £m |
|
|---|---|---|
| Life EEV return | ||
| New business contribution (after the effect of required capital) | 488 | 419 |
| Profit from existing business | ||
| – expected return | 694 | 600 |
| – experience variances | 43 | (19) |
| – operating assumption changes | (46) | 11 |
| Expected return on shareholders' net worth | 301 | 240 |
| Life EEV operating return before tax | 1,480 | 1,251 |
| Analysed by: | ||
| United Kingdom | 471 | 413 |
| Europe | 823 | 679 |
| North America | 139 | 112 |
| Asia Pacific | 47 | 47 |
| 1,480 | 1,251 |
| 6 months 2008 £m |
6 months 2007 £m |
|
|---|---|---|
| New business value post cost of capital | 488 | 419 |
| Persistency experience variances | (9) | (10) |
| Persistency assumption changes | (1) | – |
| Net flows after persistency | 478 | 409 |
| Other experience variances | 52 | (9) |
| Other operating assumption changes | (45) | 11 |
| Net flows after all operating experience and variances | 485 | 411 |
After adjusting for adverse persistency experience and assumption changes of £10 million (six months to 30 June 2007: £10 million adverse) we continue to generate positive net flows into our life and pension book.
Geographical analysis of new business
| Before the effect of required capital | After the effect of required capital | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Present value of new business premiums | New business contribution | New business margin1 | New business contribution | New business margin1 | ||||||||||
| 6 months | 6 months | 6 months | 6 months | 6 months | ||||||||||
| 2008 £m |
2007 £m |
2008 £m |
2007 £m |
2008 % |
2007 % |
2008 £m |
2007 £m |
2008 % |
2007 % |
|||||
|
||||||||||||||
| United Kingdom | 5,863 | 5,820 | 183 | 178 | 3.1% | 3.1% | 154 | 143 | 2.6% | 2.5% | ||||
| France | 2,010 | 1,832 | 84 | 80 | 4.2% | 4.4% | 52 | 54 | 2.6% | 2.9% | ||||
| Ireland | 648 | 889 | 5 | 14 | 0.8% | 1.6% | 2 | 12 | 0.3% | 1.3% | ||||
| Italy | 1,275 | 1,818 | 37 | 49 | 2.9% | 2.7% | 29 | 37 | 2.3% | 2.0% | ||||
| Netherlands (including Belgium and Germany) | 1,991 | 1,146 | 60 | 37 | 3.0% | 3.2% | 15 | 24 | 0.8% | 2.1% | ||||
| Poland | 739 | 379 | 21 | 17 | 2.8% | 4.5% | 18 | 15 | 2.4% | 4.0% | ||||
| Spain | 1,259 | 1,114 | 133 | 88 | 10.6% | 7.9% | 124 | 79 | 9.8% | 7.1% | ||||
| Other Europe | 509 | 175 | 7 | (2) | 1.4% | (1.1)% | 5 | (3) | 1.0% | (1.7)% | ||||
| Europe | 8,431 | 7,353 | 347 | 283 | 4.1% | 3.8% | 245 | 218 | 2.9% | 3.0% | ||||
| North America | 2,205 | 1,716 | 92 | 57 | 4.2% | 3.3% | 68 | 35 | 3.1% | 2.0% | ||||
| Asia | 580 | 414 | 22 | 20 | 3.8% | 4.8% | 15 | 16 | 2.6% | 3.9% | ||||
| Australia | 204 | 240 | 12 | 12 | 5.9% | 5.0% | 6 | 7 | 2.9% | 2.9% | ||||
| Asia Pacific | 784 | 654 | 34 | 32 | 4.3% | 4.9% | 21 | 23 | 2.7% | 3.5% | ||||
| Total life and pensions business |
17,283 | 15,543 | 656 | 550 | 3.8% | 3.5% | 488 | 419 | 2.8% | 2.7% | ||||
United Kingdom
Our UK Life business delivered strong life and pension sales, up 1% at £5,863 million (six months to 30 June 2007: £5,820 million) in a declining market. Life EEV operating return increased 14% to £471 million (six months to 30 June 2007: £413 million), reflecting the increased profitability of our new business and strong improvement in expense experience.
New business margin was maintained at 3.1% (30 June 2007: 3.1%), as strong annuity volumes and expenses savings enabled us to absorb the impacts of a very competitive market and the transition to a 1% charge on stakeholder pensions. After required capital, our new business contribution was £154 million (six months to 30 June 2007: £143 million), with a margin of 2.6% (30 June 2007: 2.5%).
Total experience variances have improved to show an adverse variance of £5 million (six months to 30 June 2007: £37 million adverse). We have further reduced our adverse expense variance to £24 million (six months to 30 June 2007: £52 million) as we embed initiatives previously announced as part of our operational review. We continue to focus on extracting further value from our business as we simplify our infrastructure and streamline our operations. In October 2007 we announced that we were targeting a further £100 million savings. By the end of June 2008, we have achieved annualised savings of £30 million, which contributed £14 million to our half year financial performance. Adverse lapse experience of £10 million (six months to 30 June 2007: £6 million adverse) reflects the impact of changes to capital gains tax rules for unit-linked bonds. We continue to focus on customer retention activities in light of the current economic conditions.
Europe
We have a strong portfolio of businesses across Europe with operations in both mature economies and the fast growing central and eastern European states. This diversity has enabled us to deliver resilient sales despite a challenging economic environment.
Life and pensions sales in Aviva Europe increased by 15% to £8,431 million (six months to 30 June 2007: £7,353 million). The strength of the euro has had a positive impact on these results and, on a local currency basis, sales in the region were flat. The results reflect both the volatile investment market conditions reducing customers’ appetite for long-term savings and banks’ current emphasis on offering higher rate deposits instead of long-term savings products in response to reduced liquidity in the market.
Life EEV operating return increased 21% to £823 million (six months to 30 June 2007: £679 million). New business contribution after the effect of required capital increased to £245 million (six months to 30 June 2007: £218 million), with strong growth in Spain partly offset by falls in Ireland and Italy where volumes were lower. New business margins before and after required capital were 4.1% and 2.9% respectively (30 June 2007: 3.8% and 3.0% respectively).
Expected returns on existing business and shareholders’ net worth were higher at £562 million (six months to 30 June 2007: £429 million), reflecting higher start of year embedded value. Experience variances were £71 million favourable (six months to 30 June 2007: £19 million), largely reflecting stronger cost control in the Netherlands. Operating assumption changes were £55 million adverse (six months to 30 June 2007: £13 million favourable) reflecting strengthening of allowances for annuitant mortality in the Netherlands.
In France, our sales of £2,010 million (six months to 30 June 2007: £1,832 million) reflect the strength of the euro. On a constant currency basis sales declined by 4% against prior year, however we out-performed the overall market which declined by 7%. The operating return on an EEV basis increased by 32% to £297 million (six months to 30 June 2007: £225 million) reflecting both the strong euro, continued positive experience variances on mortality and the reduction in cost of required capital arising from the recognition of an increased value of implicit items.
Ireland sales were down 27% to £648 million (six months to 30 June 2007: £889 million). The slowdown was mainly due to reduced demand for property and investment funds and less buoyant economic conditions. New business contribution of £5 million (six months to 30 June 2007: £14 million) reflected the fall in volumes and operating profit on an EEV basis was £30 million (six months to 30 June 2007: £37 million).
Sales in Italy were down 30% to £1,275 million (six months to 30 June 2007: £1,818 million), reflecting market volatility and a change in timing of marketing campaigns as our bank partners focused more on attracting bank deposits rather than marketing long-term savings products in response to reduced liquidity in the banking sector. EEV operating profit increased to £89 million (six months to 30 June 2007: £72 million), reflecting the strength of the euro and favourable experience variances which have offset lower returns resulting from decreased sales.
Netherlands sales were higher at £1,991 million (six months to 30 June 2007: £1,146 million), boosted by three large group pension scheme contracts totalling £758 million and a strong performance in Belgium. EEV operating return was down on the prior period at £139 million (six months to 30 June 2007: £166 million) reflecting adverse assumption changes for mortality and unit-linked contract charges partly offset by favourable experience variances.
In Spain, sales were up 13% to £1,259 million (six months to 30 June 2007: £1,114 million) with new business margin up to 10.6% (30 June 2007: 7.9%) reflecting the benefit of the Cajamurcia risk portfolio transfer. Operating return on an EEV basis was £157 million (six months to 30 June 2007: £107 million) largely due to the higher new business contribution.
Our businesses in central and eastern Europe grew life and pension sales by 125% to £1,248 million (six months to 30 June 2007: £554 million). Operating return for the period increased by 54% to £111 million (six months to 30 June 2007: £72 million) reflecting higher new business contribution and favourable mortality and lapse variances in Poland.
North America
Our business in the United States has continued the outstanding growth since the acquisition of the former AmerUs Group, with total new business sales of £2,205 million (six months to 30 June 2007: £1,716 million), an increase of 28% over the prior period. This strong growth was accomplished despite a volatile economic environment in the US.
New business margins were consistent with full year 2007 at 4.2% and up from the prior period of 3.3%. This is largely due to favourable margins achieved on funding agreement sales combined with improved life margins including a no lapse guarantee, offset by reduced annuity margins due to higher option costs. New business contribution has improved to £92 million (six months to 30 June 2007: £57 million) as a result of these higher margins combined with increased sales levels.
Life EEV operating return was £139 million (six months to 30 June 2007: £112 million), an increase of 24% driven by the increases in new business contribution and higher expected returns partly offset by adverse persistency experience.
Asia Pacific
Life and pension sales growth was 20% at £784 million (six months to 30 June 2007: £654 million) mainly driven by China and India.
New business contribution of £34 million (six months to 30 June 2007: £32 million) was slightly ahead of the prior year reflecting the growth in premium income, while the margin fell to 4.3% (30 June 2007: 4.9%) due to a higher proportion of business being generated by our expanding businesses in India and China and the start up nature of operations in Malaysia and Taiwan. After the effect of required capital, the margin was 2.7% (30 June 2007: 3.5%).
Life EEV operating return was £47 million (six months to 30 June 2007: £47 million) mainly reflecting higher expected return arising from an increasing in-force business offset by a decrease in new business contribution and higher adverse experience variances.
