Preliminary results year ended 31 December 2008
05 March 2009
10. Long-term business investment return variances and economic assumption changes
(a) Definitions
Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
(b) Economic volatility
The investment variances and economic assumption changes excluded from the long-term business operating profit are as follows:
| Long-term business | ||
|---|---|---|
| 2008 £m |
2007 £m |
|
| Investment variances and economic assumption changes | (1,631) | 15 |
(c) Assumptions
The expected rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification under IFRS.
Where assets are classified as fair value through profit or loss, the group has applied the same ‘real-world’ economic assumptions for fixed interest securities, equities and properties as are used under MCEV principles. 2007 rates were based on EEV returns. The principal assumptions underlying the calculation of the expected investment return are:
| Fixed interest | Equities | Properties | ||||
|---|---|---|---|---|---|---|
| 2008 % |
2007 % |
2008 % |
2007 % |
2008 % |
2007 % |
|
| United Kingdom | 5.7% | 4.6% | 9.2% | 7.6% | 7.7% | 6.6% |
| Eurozone | 4.8% | 4.0% | 8.3% | 7.0% | 6.8% | 6.0% |
Where fixed interest securities are classified as available for sale, such as in the United States, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.
