Preliminary results year ended 31 December 2008
05 March 2009
M4 – Geographical analysis of MCEV operating earnings
| Gross of tax and minority interests 2008 |
UK £m |
France £m |
Ireland £m |
Italy £m |
Nether- lands £m |
Poland £m |
Spain £m |
Other Europe £m |
Europe £m |
North America £m |
|---|---|---|---|---|---|---|---|---|---|---|
| Value of new business | 204 | 135 | 15 | 71 | (73) | 65 | 236 | 29 | 478 | 55 |
| Earnings from existing business | ||||||||||
| – expected existing business contribution (reference rate) | 338 | 188 | 39 | 30 | 107 | 91 | 60 | 19 | 534 | 86 |
| – expected existing business contribution (in excess of reference rate) | 210 | 38 | 8 | 6 | 95 | 8 | 22 | – | 177 | 53 |
| Experience variances | ||||||||||
| – maintenance expense1 | 20 | 2 | (2) | (6) | (35) | 6 | (1) | (1) | (37) | – |
| – project and other related expenses1 | (62) | (10) | (7) | – | (26) | – | (6) | (6) | (55) | (14) |
| – mortality/ morbidity2 | 18 | 42 | 2 | 2 | 19 | 20 | 4 | 1 | 90 | – |
| – lapses3 | (23) | (8) | (7) | (15) | (11) | 26 | (24) | (10) | (49) | (5) |
| – other4 | 7 | (45) | (42) | (15) | 34 | (8) | 2 | (1) | (75) | (31) |
| Operating assumption changes: | ||||||||||
| – maintenance expenses5 | (15) | (12) | (2) | (9) | (167) | 4 | – | (12) | (198) | (5) |
| – project and other related expenses | 13 | – | – | – | 9 | – | – | – | 9 | – |
| – mortality/ morbidity6 | 54 | – | 25 | 11 | (79) | 4 | (1) | – | (40) | – |
| – lapses7 | (73) | 108 | 7 | (9) | – | (10) | (19) | (20) | 57 | – |
| – other8 | 16 | (1) | 23 | 3 | (28) | 24 | – | 13 | 34 | 1 |
| Expected return on shareholders’ net worth | 166 | 107 | 34 | 63 | 204 | 13 | 23 | 8 | 452 | 61 |
| Other operating variances9 | 10 | 148 | (15) | (1) | 138 | (2) | (10) | 3 | 261 | – |
| Earnings before tax and minority interests | 883 | 692 | 78 | 131 | 187 | 241 | 286 | 23 | 1,638 | 201 |
| Gross of tax and minority interests 2008 |
Asia £m |
Australia £m |
Asia Pacific £m |
Total £m |
|---|---|---|---|---|
| Value of new business | 30 | 13 | 43 | 780 |
| Earnings from existing business | ||||
| – expected existing business contribution (reference rate) | 9 | 25 | 34 | 992 |
| – expected existing business contribution (in excess of reference rate) | 4 | 2 | 6 | 446 |
| Experience variances | ||||
| – maintenance expense1 | (2) | – | (2) | (19) |
| – project and other related expenses1 | – | – | – | (131) |
| – mortality/ morbidity2 | 5 | 2 | 7 | 115 |
| – lapses3 | (4) | 3 | (1) | (78) |
| – other4 | (1) | (11) | (12) | (111) |
| Operating assumption changes: | ||||
| – maintenance expenses5 | (3) | – | (3) | (221) |
| – project and other related expenses | – | – | – | 22 |
| – mortality/ morbidity6 | 1 | (1) | – | 14 |
| – lapses7 | (12) | 1 | (11) | (27) |
| – other8 | (10) | 6 | (4) | 47 |
| Expected return on shareholders’ net worth | 14 | 8 | 22 | 701 |
| Other operating variances9 | – | – | – | 271 |
| Earnings before tax and minority interests | 31 | 48 | 79 | 2,801 |
- Project and other related expenses in the UK reflect project costs associated with strategic initiatives, including developments designed to offer a wider range of products to customers, and the simplification of systems and processes. Expenses in the Netherlands reflect an overrun in Belgium following the acquisition of Swiss Life Belgium, and restructuring within the intermediary division.
- Mortality experience continues to be better than the assumptions set across a number of our businesses.
- Lapse experience has been volatile, in part reflecting wider economic volatility. In Poland, lapse experience continued to be better than the long-term assumptions for both life and pension products.
- In France, other experience profits include the reduction in value arising from reductions in fees and commissions received. In Ireland, certain statutory provisions were increased following a review. The movement in the Netherlands reflects changes on group pension scheme contribution. In the USA, other experience reflects the cost of enhancing policyholder crediting rates.
- In the Netherlands, expense assumptions have been updated following a review of expense allocations.
- In UK, favourable mortality assumption changes are in respect of mortality and morbidity changes across a range of products. In the Netherlands, mortality assumption changes reflect the impact of using a new industry mortality basis.
- In the UK, an additional lapse provision has been set up in anticipation of higher short-term recession related withdrawals (pre tax £50m) and higher mortgage and income protection claims (pre tax £20m) to reflect rising unemployment. In France, persistency assumptions have been weakened following continual favourable experience on AFER products.
- In the UK, other operating assumption changes include the impact of the with-profit special distribution. In Ireland, other assumption changes reflect a reduction in the assumed future tax charges. In Poland, other assumptions reflect a change in the pattern of future mortality charging structure.
- Other operating variances in France are mainly in respect of the impact of the mutualisation of funds following the merger of two legal entities. In the Netherlands, changes are mainly in respect of aligning the profit sharing policy for existing group business in Belgium, following the acquisition of Swiss Life Belgium.
| Gross of tax and minority interests Restated 2007 |
UK £m |
France £m |
Ireland £m |
Italy £m |
Nether- lands £m |
Poland £m |
Spain £m |
Other Europe £m |
Europe £m |
North America £m |
|---|---|---|---|---|---|---|---|---|---|---|
| Value of new business | 278 | 144 | 37 | 77 | 8 | 48 | 181 | 7 | 502 | 52 |
| Earnings from existing business | ||||||||||
| – expected existing business contribution (reference rate) | 373 | 148 | 26 | 23 | 96 | 50 | 46 | 10 | 399 | 75 |
| – expected existing business contribution (in excess of reference rate) | 190 | 31 | 8 | 5 | 132 | 6 | 23 | - | 205 | 22 |
| Experience variances – maintenance expense | 10 | 2 | (3) | 9 | (6) | 3 | (1) | (5) | (1) | (21) |
| – project and other related expenses1 | (87) | 10 | (4) | – | (16) | – | (3) | (8) | (21) | – |
| – mortality/ morbidity2 | 12 | 29 | (1) | – | 2 | 14 | (4) | 2 | 42 | (3) |
| – lapses3 | (11) | 7 | 6 | (15) | 7 | 17 | – | 1 | 23 | – |
| – other4 | (24) | (24) | (6) | – | 17 | 7 | 7 | – | 1 | (27) |
| Operating assumption changes: | ||||||||||
| – maintenance expenses5 | 8 | 3 | (1) | (1) | (9) | 5 | 1 | (10) | (12) | (29) |
| – project and other related expenses1 | 2 | (1) | – | – | (7) | - | - | (11) | (19) | – |
| – mortality/ morbidity6 | 29 | (2) | – | 4 | (34) | 15 | (13) | 1 | (29) | – |
| – lapses | (16) | 1 | – | 1 | 4 | 12 | (16) | 3 | 5 | (4) |
| – other7 | (31) | 134 | – | 4 | (40) | (4) | – | (14) | 80 | 9 |
| Expected return on shareholders’ net worth | 93 | 86 | 23 | 40 | 147 | 8 | 14 | 4 | 322 | 51 |
| Other operating variances8 | (4) | – | – | (10) | 15 | - | (2) | 3 | 6 | (1) |
| Earnings before tax and minority interests | 822 | 568 | 85 | 137 | 316 | 181 | 233 | (17) | 1,503 | 124 |
| Gross of tax and minority interests Restated 2007 |
Asia £m |
Australia £m |
Asia Pacific £m |
Total £m |
|---|---|---|---|---|
| Value of new business | 49 | 16 | 65 | 897 |
| Earnings from existing business | ||||
| – expected existing business contribution (reference rate) | 10 | 20 | 30 | 877 |
| – expected existing business contribution (in excess of reference rate) | 2 | 1 | 3 | 420 |
| Experience variances – maintenance expense | (1) | (3) | (4) | (16) |
| – project and other related expenses1 | (1) | – | (1) | (109) |
| – mortality/ morbidity2 | 6 | 3 | 9 | 60 |
| – lapses3 | (11) | – | (11) | 1 |
| – other4 | – | 3 | 3 | (47) |
| Operating assumption changes: | ||||
| – maintenance expenses5 | 1 | - | 1 | (32) |
| – project and other related expenses1 | – | – | – | (17) |
| – mortality/ morbidity6 | (9) | 4 | (5) | (5) |
| – lapses | (8) | (2) | (10) | (25) |
| – other7 | (4) | – | (4) | 54 |
| Expected return on shareholders’ net worth | 11 | 8 | 19 | 485 |
| Other operating variances8 | – | – | – | 1 |
| Earnings before tax and minority interests | 45 | 50 | 95 | 2,544 |
- Project and other related expenses in the UK reflect project costs associated with strategic initiatives, including developments designed to offer simpler products to customers, and the simplification of systems and processes. In the Netherlands, project costs mainly represent one-off restructuring costs in the Dutch business.
- Mortality experience continues to be better than the assumptions set across a range of businesses.
- Lapse experience in Poland continues to be better than assumptions set across both Life and Pensions businesses.
- Other experience profits reflect an accumulation of small items, including an increased allowance for operational risk in the USA.
- Maintenance expense assumptions have been strengthened in the USA following investment to support the growth of the business, and in the Netherlands following a review of expenses.
- Mortality assumptions in the UK reflect changes to the anti-selection loading on annuities. In the Netherlands, the mortality assumption strengthening reflected a partial implementation of a new industry mortality basis.
- In France, other operating assumption changes reflect increased profitability driven by product development and the increased proportion of unit-linked assets within managed funds.
- Other operating variances in the Netherlands relate to changes in asset management fees.
United Kingdom
Our operating profit for the year was up 7% to £883 million (2007 restated: £822 million) as we improved performance from our in-force book, maintained our focus on the control of persistency experience and continued to deliver on our efficiency saving commitments.
Our continued focus on retention initiatives have enabled us to contain our lapse experience to a loss of £23 million, against a backdrop of changes to capital gains tax rules for bonds and the prevailing economic climate. Furthermore we have established an additional provision of £50 million in anticipation of higher short-term recession related withdrawals and a further £20 million in relation to higher mortgage and income protection claims to reflect rising unemployment.
The adverse expense experience variance was halved in 2008 leaving us on track to achieve our commitment to a zero cost overrun in 2009. In 2008 we achieved £60 million of the £100 million annualised cost savings target announced in October 2007 with £40 million included in the results for the year. The outsourcing of administration to WNS, Swiss Re, Scottish Friendly and IFDS contributed to a reduced and more flexible cost base and allowed us to decommission over 200 systems.
Europe
Operating earnings increased by 9% to £1,638 million (2007 restated: £1,503 million). The strengthening of the euro and the Polish Zloty has had a favourable impact on the result. On a local currency basis operating earnings reduced by 6% which was due to a strengthening of allowances for annuitant mortality in the Netherlands and negative experience variances due to the worsening economic climate. This was partly offset by growth across our central and eastern European operations generating increased value of new business in these growing markets and higher expected returns.
In France, operating earnings were £692 million (2007 restated: £568 million) reflecting higher expected earnings, and the one-off favourable assumption changes of £71 million on savings business following a detailed review of lapse rates. Furthermore, operating profit benefited by £104 million from the one-off mutualisation of funds following the merger of two legal entities.
In Ireland, operating earnings reduced by 8% to £78 million (2007 restated: £85 million), driven by a lower value of new business and a larger negative experience variance. The impact of this is partially offset by the strengthening of the euro.
In Italy, operating earnings decreased by 4% to £131 million (2007 restated: £137 million) largely reflecting an adverse experience variance as we prudently made provisions to support customers affected by counterparty defaults on structured bond products.
In the Netherlands, operating earnings of £187 million (2007 restated: £316 million) primarily reflects the lower value of new business due to the large corporate pension schemes and strengthening of annuitant mortality.
In Poland, operating earnings increased by 33% to £241 million (2007 restated: £181 million), driven by higher expected return and increased value of new business.
Operating earnings in Spain were £286 million (2007 restated: £233 million) driven by increased value of new business, partially offset by negative experience variances and assumptions relating to deteriorating lapse experience in the current economic climate.
Operating earnings from our central and eastern European businesses was a £23 million profit (2007 restated: £17 million loss). This excellent performance reflects the increased value of new business and higher expected returns generated in these growing markets, which we are confident offer further potential.
North America
Operating earnings were £201 million (2007 restated: £124 million), an increase of 62% driven by improved value of new business, higher expected return from widening credit spreads and less adverse operating assumption changes.
Asia Pacific
Our businesses in Asia Pacific reported a 17% decline in operating earnings to £79 million (2007 restated: £95 million). In Australia, operating earnings of £48 million (2007 restated: £50 million) slightly decreased from prior year. Operating earnings for Asia of £31 million (2007 restated: £45 million) driven by lower value of new business and higher lapses in India, offset by lapse improvements in Hong Kong.
| Net of tax and minority interests 2008 | UK £m |
France £m |
Ireland £m |
Italy £m |
Nether- lands £m |
Poland £m |
Spain £m |
Other Europe £m |
Europe £m |
North America £m |
|---|---|---|---|---|---|---|---|---|---|---|
| Value of new business | 147 | 79 | 10 | 21 | (67) | 46 | 80 | 24 | 193 | 36 |
| Earnings from existing business | ||||||||||
| – expected existing business contribution (reference rate) | 244 | 115 | 26 | 9 | 74 | 64 | 23 | 15 | 326 | 56 |
| – expected existing business contribution (in excess of reference rate) | 151 | 24 | 5 | 2 | 68 | 6 | 9 | – | 114 | 35 |
| Experience variances | ||||||||||
| – maintenance expense | 15 | 1 | (1) | (2) | (22) | 4 | – | (1) | (21) | – |
| – project and other related expenses | (45) | (7) | (5) | – | (18) | – | (4) | (5) | (39) | (9) |
| – mortality/ morbidity | 13 | 26 | 1 | 1 | 12 | 15 | – | 1 | 56 | – |
| – lapses | (17) | (4) | (5) | (5) | (1) | 18 | (10) | (9) | (16) | (2) |
| – other | 5 | (29) | (27) | (6) | 29 | (6) | 1 | (1) | (39) | (20) |
| Operating assumption changes: | ||||||||||
| – maintenance expenses | (11) | (8) | (1) | (3) | (109) | 3 | – | (10) | (128) | (3) |
| – project and other related expenses | 9 | – | – | – | 4 | – | – | – | 4 | – |
| – mortality/ morbidity | 39 | – | 16 | 4 | (77) | 3 | (1) | – | (55) | – |
| – lapses | (53) | 65 | 4 | (3) | – | (8) | (7) | (16) | 35 | – |
| – other | 12 | – | 15 | 1 | (13) | 18 | – | 11 | 32 | – |
| Expected return on shareholders’ net worth | 119 | 66 | 23 | 20 | 145 | 10 | 10 | 6 | 280 | 39 |
| Other operating variances | 7 | 98 | (11) | (1) | 104 | (1) | (4) | 2 | 187 | – |
| Earnings after tax and minority interests | 635 | 426 | 50 | 38 | 129 | 172 | 97 | 17 | 929 | 132 |
| Net of tax and minority interests 2008 | Asia £m |
Australia £m |
Asia Pacific £m |
Total £m |
|---|---|---|---|---|
| Value of new business | 24 | 9 | 33 | 409 |
| Earnings from existing business | ||||
| – expected existing business contribution (reference rate) | 10 | 18 | 28 | 654 |
| – expected existing business contribution (in excess of reference rate) | 2 | 1 | 3 | 303 |
| Experience variances | ||||
| – maintenance expense | (3) | – | (3) | (9) |
| – project and other related expenses | – | – | – | (93) |
| – mortality/ morbidity | 4 | 1 | 5 | 74 |
| – lapses | (3) | 2 | (1) | (36) |
| – other | (1) | (8) | (9) | (63) |
| Operating assumption changes: | ||||
| – maintenance expenses | (3) | – | (3) | (145) |
| – project and other related expenses | – | – | – | 13 |
| – mortality/ morbidity | 1 | (1) | – | (16) |
| – lapses | (10) | 1 | (9) | (27) |
| – other | (8) | 4 | (4) | 40 |
| Expected return on shareholders’ net worth | 8 | 6 | 14 | 452 |
| Other operating variances | 3 | – | 3 | 197 |
| Earnings after tax and minority interests | 24 | 33 | 57 | 1,753 |
| Net of tax and minority interests Restated 2007 | UK £m |
France £m |
Ireland £m |
Italy £m |
Nether- lands £m |
Poland £m |
Spain £m |
Other Europe £m |
Europe £m |
North America £m |
|---|---|---|---|---|---|---|---|---|---|---|
| Value of new business | 195 | 81 | 26 | 20 | 3 | 34 | 57 | 4 | 225 | 34 |
| Earnings from existing business | ||||||||||
| – expected existing business contribution (reference rate) | 261 | 90 | 17 | 6 | 66 | 36 | 18 | 8 | 241 | 48 |
| – expected existing business contribution (in excess of reference rate) | 133 | 20 | 5 | 1 | 95 | 5 | 9 | – | 135 | 14 |
| Experience variances | ||||||||||
| – maintenance expense | 7 | 1 | (2) | 3 | (3) | 2 | – | (4) | (3) | (13) |
| – project and other related expenses | (61) | 6 | (3) | – | (13) | – | (1) | (7) | (18) | – |
| – mortality/ morbidity | 8 | 18 | (1) | – | (1) | 10 | (3) | 2 | 25 | (2) |
| – lapses | (9) | 5 | 4 | (5) | 4 | 13 | (1) | 1 | 21 | – |
| – other | (17) | (14) | (4) | 1 | 12 | 5 | 5 | 1 | 6 | (18) |
| Operating assumption changes: | ||||||||||
| – maintenance expenses | 6 | (2) | (2) | – | (12) | 4 | – | (8) | (20) | (19) |
| – project and other related expenses | 1 | (1) | – | – | (3) | – | – | (9) | (13) | – |
| – mortality/ morbidity | 20 | (1) | – | 1 | (24) | 11 | (5) | 2 | (16) | – |
| – lapses | (11) | – | – | – | 2 | 8 | (7) | 3 | 6 | (3) |
| – other | (22) | 85 | – | 2 | (23) | (4) | – | (11) | 49 | 6 |
| Expected return on shareholders’ net worth | 66 | 53 | 15 | 12 | 103 | 5 | 6 | 3 | 197 | 33 |
| Other operating variances | (2) | – | – | (3) | 11 | – | (3) | 3 | 8 | – |
| Earnings after tax and minority interests | 575 | 341 | 55 | 38 | 217 | 129 | 75 | (12) | 843 | 80 |
| Net of tax and minority interests Restated 2007 | Asia £m |
Australia £m |
Asia Pacific £m |
Total £m |
|---|---|---|---|---|
| Value of new business | 39 | 11 | 50 | 504 |
| Earnings from existing business | ||||
| – expected existing business contribution (reference rate) | 9 | 14 | 23 | 573 |
| – expected existing business contribution (in excess of reference rate) | 1 | 1 | 2 | 284 |
| Experience variances | ||||
| – maintenance expense | (1) | (2) | (3) | (12) |
| – project and other related expenses | (1) | – | (1) | (80) |
| – mortality/ morbidity | 4 | 2 | 6 | 37 |
| – lapses | (9) | – | (9) | 3 |
| – other | 2 | 1 | 3 | (26) |
| Operating assumption changes: | ||||
| – maintenance expenses | 1 | – | 1 | (32) |
| – project and other related expenses | – | – | – | (12) |
| – mortality/ morbidity | (7) | 3 | (4) | – |
| – lapses | (7) | (1) | (8) | (16) |
| – other | (3) | – | (3) | 30 |
| Expected return on shareholders’ net worth | 6 | 6 | 12 | 308 |
| Other operating variances | – | – | – | 6 |
| Earnings after tax and minority interests | 34 | 35 | 69 | 1,567 |
