Preliminary results year ended 31 December 2008
05 March 2009
M3 – New business
The tables below set out the present value of new business premiums (PVNBP), written by the life and related businesses, the value of new business and the resulting margin firstly gross and then net of tax and minority interests. The PVNBP calculation is equal to total single premium sales received in the period 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 the value of new business, so the components of the new business margin are on a consistent basis.
The value generated by new business written during the period is the present value of the projected stream of after tax distributable profit from that business. The value of new business has been calculated using economic assumptions at the point of sale which has been implemented with the assumptions being taken as those appropriate to the start of each quarter. For contracts that are re-priced more frequently, weekly or monthly economic assumptions have been used. The operating assumptions are consistent with those used to determine the embedded value. The value of new business is shown after the effect of the frictional costs of holding required capital, and after the effect of the costs of residual non-hedgeable risks on the same basis as for the in-force covered business.
(a) Geographical analysis of value of new business
| Present value of new business premiums |
Value of new business |
New business margin |
||||
|---|---|---|---|---|---|---|
| Life and pensions (gross of tax and minority interest) |
2008 £m |
Restated 2007 £m |
2008 £m |
Restated 2007 £m |
2008 % |
Restated 2007 % |
| United Kingdom | 11,858 | 11,797 | 204 | 278 | 1.7% | 2.4% |
| France | 3,880 | 3,790 | 135 | 144 | 3.5% | 3.8% |
| Ireland | 1,299 | 1,780 | 15 | 37 | 1.2% | 2.1% |
| Italy | 2,331 | 2,975 | 71 | 77 | 3.0% | 2.6% |
| Netherlands (including Belgium and Germany) | 4,097 | 3,133 | (73) | 8 | (1.8)% | 0.3% |
| Poland | 1,842 | 1,120 | 65 | 48 | 3.5% | 4.3% |
| Spain | 2,527 | 2,433 | 236 | 181 | 9.3% | 7.4% |
| Other Europe | 1,014 | 453 | 29 | 7 | 2.9% | 1.5% |
| Europe | 16,990 | 15,684 | 478 | 502 | 2.8% | 3.2% |
| North America | 5,715 | 3,646 | 55 | 52 | 1.0% | 1.4% |
| Asia | 1,351 | 1,141 | 30 | 49 | 2.2% | 4.3% |
| Australia | 369 | 454 | 13 | 16 | 3.5% | 3.5% |
| Asia Pacific | 1,720 | 1,595 | 43 | 65 | 2.5% | 4.1% |
| Total life and pensions | 36,283 | 32,722 | 780 | 897 | 2.1% | 2.7% |
| Present value of new business premiums |
Value of new business |
New business margin |
||||
|---|---|---|---|---|---|---|
| Life and pensions (net of tax and minority interest) | 2008 £m |
Restated 2007 £m |
2008 £m |
Restated 2007 £m |
2008 % |
Restated 2007 % |
| United Kingdom | 11,858 | 11,797 | 147 | 195 | 1.2% | 1.7% |
| France | 3,281 | 3,157 | 79 | 81 | 2.4% | 2.6% |
| Ireland | 974 | 1,335 | 10 | 26 | 1.0% | 1.9% |
| Italy | 980 | 1,284 | 21 | 20 | 2.1% | 1.6% |
| Netherlands (including Belgium and Germany) | 3,868 | 2,941 | (67) | 3 | (1.7)% | 0.1% |
| Poland | 1,604 | 966 | 46 | 34 | 2.9% | 3.5% |
| Spain | 1,376 | 1,223 | 80 | 57 | 5.8% | 4.7% |
| Other Europe | 1,014 | 453 | 24 | 4 | 2.4% | 0.9% |
| Europe | 13,097 | 11,359 | 193 | 225 | 1.5% | 2.0% |
| North America | 5,715 | 3,646 | 36 | 34 | 0.6% | 0.9% |
| Asia | 1,344 | 1,133 | 24 | 39 | 1.8% | 3.4% |
| Australia | 369 | 454 | 9 | 11 | 2.4% | 2.4% |
| Asia Pacific | 1,713 | 1,587 | 33 | 50 | 1.9% | 3.2% |
| Total life and pensions | 32,383 | 28,389 | 409 | 504 | 1.3% | 1.8% |
Life and pension sales increased by 11% to £36,283 million (2007: £32,722 million) gross of tax and minority interests. Total value of new business for 2008 was £780 million (2007: £897 million) resulting in a new business margin of 2.1% (2007: 2.7%).
United Kingdom
In 2008, despite the turmoil in the financial markets and the continued slowdown in the housing market, we delivered record life and pension sales for the third year in a row, up 1% to £11,858 million (2007 restated: £11,797 million). Our results were underpinned by the success of our pensions strategy, 24% growth in annuities and higher sales through our joint venture with RBSG of £1,639 million (2007 restated: £1,615 million).
Value of new business declined 27% in 2008 to £204 million (2007 restated: £278 million) leading to a new business margin of 1.7% in 2008 (2007: 2.4%). As we outlined in February 2009, the reduction in margin in 2008 reflects the volatility inherent in MCEV profit methods at times of economic and financial stress. The reduction in margin in 2008 is attributable to annuity business and reflects non-recognition of asset yields (net of credit default allowances) which we have secured above risk-free rate. In 2008 an estimated 0.5% of additional asset yields has been achieved (net of default allowances) but not recognised. This is equivalent to a pre-tax value of £130 million and will emerge in future years through expected return. The effect in 2007 is less pronounced. Excluding this effect, new business contribution has improved reflecting pricing changes, management of business mix and the benefit of operational efficiencies.
Europe
Our European life and pensions sales increased by 8% to £16,990 million (2007 restated: £15,684 million), supported by the strong euro. On a local currency basis sales were down 7%. Reflecting the challenging conditions and reduced sales volumes our new business margin was 2.8% (2007 restated: 3.2%). Margin has been maintained through increased process efficiency and strong cost management across the region. This will remain a priority in 2009 as new business markets continue to contract across much of the region. In 2009 we will optimise our sales volumes consistent with our focus on prudent capital management and seeking the greatest returns on capital.
In France, sales were up 2% including the beneficial effect of the euro. On a local currency basis sales were down 12%, in line with the market. The decline was a consequence of volatility in the equity markets, which reduced consumer demand for unit-linked contracts. However, this impact was offset by growth in our euro-based business, particularly in products with guarantees which offer customers a safe and attractive investment option in the current market conditions. The value of new business declined to £135 million (2007 restated: £144 million) with margin at 3.5% (2007: 3.8%) due to lower sales of higher margin unit-linked products.
In Ireland our sales were down 27% reflecting reduced demand for unit-linked products across both our retail and bancassurance channels. Consumers were deterred by volatile equity markets and the slowdown in economic growth. Value of new business was down to £15 million (2007 restated: £37 million) with margin declining to 1.2% (2007: 2.1%) reflecting the impact of lower sales and the downturn in economic conditions affecting consumer confidence.
In Italy, our acquisition of Avipop and UBI Vita increased sales of protection and pension products respectively but overall sales were down 22% to £2,331 million (2007 restated: £2,975 million). New business margin of 3.0% (2007 restated: 2.6%), giving a value of new business of £71 million (2007 restated: £77 million), reflected a focus on more profitable credit protection business.
Sales in the Netherlands were up 31% to £4,097 million (2007 restated: £3,133 million) including the beneficial effect of the euro. This performance includes a significant increase in corporate pension sales, as a result of our success in securing five large group schemes which contributed a total of £1,106 million. Sales of annuity products were lower due to increased competition from the banking sector, which is now allowed to offer unit-linked savings and pension products on the same terms as insurers. A new business loss of £73 million (2007 restated: £8 million profit) reflected the change in business mix towards corporate pension business. The profits on this business will be recognised as they emerge over the lifetime of the contracts.
In Poland our life and pension sales increased to £1,842 million (2007 restated: £1,120 million) driven by the success of a new individual regular premium product launched in late 2007 and significant volumes of short-term endowment policies sold through Deutsche Bank in the first half of the year. The change in product mix led to an improvement in the margin in the second half of 2008 although full year margin was down at 3.5% (2007 restated: 4.3%).
In Spain, our sales increased by 4% to £2,527 million (2007 restated: 2,433 million), driven by the distribution agreement with Cajamurcia launched in the last quarter of 2007 which contributed £304 million in 2008, including one-off transfers of £151 million. This had a positive impact on the margin improvement to 9.3% (2007 restated: 7.4%) with an increased proportion of higher margin protection business.
Other Europe includes a number of markets which have high potential for future growth, comprising Russia, Turkey, Hungary, Romania and the Czech Republic. Sales in these markets increased by 124% to £1,014 million (2007 restated: £453 million). Romania’s performance was significantly higher, largely due to one-off sales of £545 million as part of the introduction of compulsory pensions, which has improved margin to 2.9% (2007 restated: 1.5%).
North America
In the US, our long-term savings sales increased by 57% to £5,715 million (2007 restated: £3,646 million). This was the second consecutive year of record volumes despite significant challenges in the financial markets which have changed the competitive landscape and shaken consumer confidence. We retained our number one sales position in both the indexed annuity and the indexed life insurance markets and have already doubled sales within two years of the acquisition of the former AmerUs business, one year ahead of the stated target.
Expanded distribution, marketing programmes and new product launches contributed to sales of both our annuity and life products. 63% growth in annuity sales was a significant accomplishment given the challenging economic environment. In such times, customers look for guarantees and we responded by improving guaranteed income withdrawal benefits and introducing a new bonus index deferred annuity. Sales of life products, which mainly include indexed universal life and term assurance products, were slightly down on the prior year as growth was offset by the impact of our tactical decision to exit certain markets in late 2007 to focus on selling higher margin products.
Funding agreement sales were very strong as the volatile investment markets created a favourable environment for these large institutional transactions.
Value of new business increased by 6% to £55 million (2007 restated: £52 million). New business margin has decreased to 1.0% (2007: 1.4%) due to increased reference rates offset by a shift in business mix to lower margin annuity business.
Asia Pacific
Our life and pension sales grew by 8% to £1,720 million (2007 restated: £1,595 million). On a local currency basis these sales were 1% down on the prior year. Value of new business for 2008 was down 34% to £43 million (2007: £65 million) resulting in a margin of 2.5% (2007 restated: 4.1%).
In Australia, life and pension sales decreased 19% to £369 million (2007 restated: £454 million). In addition to the impact of a difficult economic climate, sales in 2007 were very strong following a one-off group pension transfer and favourable changes to superannuation legislation. Value of new business was £13 million (2007 restated: £16 million) driven by the lower volumes. New business margin remained unchanged at 3.5% (2007 restated: 3.5%).
Sales of life and pensions products in Asia grew 18% to £1,351 million (2007 restated: £1,141 million). This was driven by 66% growth in China, following significant expansion of our distribution network, and first-time contributions from our new joint ventures in South Korea and Taiwan. This growth was partly offset by results from our other Asian operations. In India and Singapore, regulatory changes had a negative impact on our sales while in Hong Kong our products are mainly investment related and were therefore greatly impacted by the market volatility. Value of new business was down by 39% to £30 million (2007 restated: £49 million) reflecting lower volumes in Hong Kong and changes in lapse assumptions in India, together with the impact of the start-up businesses in South Korea and Taiwan and changes in business mix to lower margin products in China and India. These resulted in a lower new business margin of 2.2% (2007 restated: 4.3%).
(b) Post-tax internal rate of return on life and pensions new business and payback period
The new business written requires up front capital investment, due to high set-up costs and capital requirements. The internal rate of return (IRR) is a measure of the shareholder return expected on this capital investment. It 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 the value of new business.
The payback period shows how quickly shareholders can expect the total capital to be repaid. The payback period has been calculated based on undiscounted cash flows and allows for the initial and required capital.
The projected investment returns in both the IRR and payback period calculations assume that equities, properties and bonds earn a return in excess of risk-free consistent with the long-term rate of return assumed in operating earnings.
The IRR on life and pensions new business for the group was 11.4% (2007 restated: 12.9%)
| 2008 | Internal rate of return % |
Initial capital £m |
Required capital £m |
Total invested capital £m |
Payback period Years |
|---|---|---|---|---|---|
| United Kingdom | 14% | 157 | 136 | 293 | 8 |
| France | 9% | 35 | 118 | 153 | 9 |
| Ireland | 8% | 53 | 24 | 77 | 9 |
| Italy | 14% | 9 | 48 | 57 | 6 |
| Netherlands (including Belgium and Germany)1 | 5% | 277 | 244 | 521 | n/a |
| Poland | 21% | 31 | 12 | 43 | 4 |
| Spain | 37% | 28 | 75 | 103 | 3 |
| Other Europe | 13% | 57 | 9 | 66 | 6 |
| Europe1 | 11% | 490 | 530 | 1,020 | 7 |
| North America | 11% | 124 | 489 | 613 | 6 |
| Asia | 13% | 64 | 23 | 87 | 8 |
| Australia | 12% | 3 | 30 | 33 | 8 |
| Asia Pacific | 12% | 67 | 53 | 120 | 8 |
| Total1 | 11.4% | 838 | 1,208 | 2,046 | 7 |
- In the Netherlands, the 2008 value of new business is low on a real world basis and so it is not possible to calculate a meaningful payback period. Consequently, the total and Europe average payback periods exclude the Netherlands. On a comparable basis the total payback period in 2007 is 7 years.
| 2007 | Internal rate of return % |
Initial capital £m |
Required capital £m |
Total invested capital £m |
Payback period Years |
|---|---|---|---|---|---|
| United Kingdom | 13% | 256 | 149 | 405 | 8 |
| France | 12% | 29 | 107 | 136 | 8 |
| Ireland | 11% | 69 | 23 | 92 | 7 |
| Italy | 15% | 4 | 52 | 56 | 6 |
| Netherlands (including Belgium and Germany) | 6% | 78 | 181 | 259 | 22 |
| Poland | 23% | 18 | 10 | 28 | 4 |
| Spain | 28% | 24 | 68 | 92 | 3 |
| Other Europe | 18% | 48 | 4 | 52 | 5 |
| Europe | 13% | 270 | 445 | 715 | 12 |
| North America | 12% | 125 | 280 | 405 | 6 |
| Asia | 23% | 48 | 11 | 59 | 4 |
| Australia | 15% | – | 23 | 23 | 6 |
| Asia Pacific | 21% | 48 | 34 | 82 | 4 |
| Total | 12.9% | 699 | 908 | 1,607 | 9 |
Total initial capital for life and pensions new business of £838 million (2007 restated: £699 million) is expressed at the point of sale. Hence, it is higher than the impact of writing that new business on net worth of £758 million (2007 restated: £624 million) shown in the analysis of life and pensions earnings, because the latter amount includes expected profits from the point of sale to the end of the reporting period, partly offset by the cost of holding the initial capital. The fall in IRR reflects the reduction on reference rates and the higher weighting of the Netherlands.
