Preliminary results year ended 31 December 2008
05 March 2009
M25 – Sensitivity analysis
(a) Economic assumptions
The following tables show the sensitivity of the embedded value and the value of new business to:
- using swap yields as the risk-free rate;
- one and two percentage point increase and decrease in the risk-free rate, including all consequential changes (including assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);
- 10% increase and decrease in market values of equity and property assets;
- 25% increase in equity and swaption volatilities;
- 50 basis point increase and decrease in credit spreads; and
- decrease in the level of required capital to 100% EU minimum (or equivalent).
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns. Some of the sensitivity scenarios may have consequential effects on valuation bases, where the basis for certain blocks of business is actively updated to reflect current economic circumstances. Consequential valuation impacts on the sensitivities are allowed for where an active valuation basis is used. Where businesses have a target asset mix, the portfolio is re-balanced after a significant market movement otherwise no rebalancing is assumed.
For new business, the sensitivities reflect the impact of a change immediately after inception of the policy.
In general, the magnitude of the sensitivities will reflect the size of the embedded values, though this will vary as the sensitivities have different impacts on the different components of the embedded value. In addition, other factors can have a material impact, such as the nature of the options and guarantees, as well as the types of investments held.
Sensitivities will also vary according to the current economic assumptions, mainly due to the impact of changes to both the intrinsic cost and time value of options and guarantees. Options and guarantees are the main reason for the asymmetry of the sensitivities where the guarantee impacts to different extents under the different scenarios. This can be seen in the sensitivity of a 1%–2% movement in the interest rate for the Netherlands and US, where there is a significant amount of business with investment return guarantees.
Embedded value
| Risk free rates | ||||||
|---|---|---|---|---|---|---|
| 2008 Embedded value (net of tax and minority interest) |
As reported in M18 £m |
Risk free rate as swap yields £m |
1% increase £m |
1% decrease £m |
2% increase £m |
2% decrease £m |
| United Kingdom | 4,887 | (2,117) | (105) | 90 | (215) | 175 |
| France | 2,519 | – | (70) | (60) | (210) | (360) |
| Ireland | 990 | – | (50) | 55 | (90) | 120 |
| Italy | 645 | – | 5 | (45) | 5 | (100) |
| Netherlands (including Belgium and Germany) | 2,110 | (120) | 560 | (805) | 900 | (1,525) |
| Poland | 1,228 | – | (30) | 40 | (55) | 95 |
| Spain | 655 | – | (15) | 20 | (35) | 40 |
| Other Europe | 236 | – | (5) | 5 | (10) | 10 |
| Europe | 8,383 | (120) | 395 | (790) | 505 | (1,720) |
| North America | 64 | (3,862) | (505) | 210 | (845) | 90 |
| Asia | 424 | – | 20 | (35) | 30 | (175) |
| Australia | 331 | – | (15) | 15 | (25) | 30 |
| Asia Pacific | 755 | – | 5 | (20) | 5 | (145) |
| Total | 14,089 | (6,099) | (210) | (510) | (550) | (1,600) |
| Equity/property | ||||
|---|---|---|---|---|
| 2008 Embedded value (net of tax and minority interest) |
As reported in M18 £m |
Market values | Volatility 25% increase £m |
|
| 10% increase £m |
10% decrease £m |
|||
| United Kingdom | 4,887 | 400 | (410) | (25) |
| France | 2,519 | 145 | (160) | (150) |
| Ireland | 990 | 15 | (10) | – |
| Italy | 645 | – | – | – |
| Netherlands (including Belgium and Germany) | 2,110 | 410 | (385) | (220) |
| Poland | 1,228 | 15 | (15) | – |
| Spain | 655 | 5 | (10) | (10) |
| Other Europe | 236 | 5 | – | – |
| Europe | 8,383 | 595 | (580) | (380) |
| North America | 64 | – | – | – |
| Asia | 424 | 10 | (10) | – |
| Australia | 331 | 5 | (5) | – |
| Asia Pacific | 755 | 15 | (15) | – |
| Total | 14,089 | 1,010 | (1,005) | (405) |
| 2008 Embedded value (net of tax and minority interest) |
As reported in M18 £m |
Swaption implied volatilities 25% increase £m |
Corporate bond credit spreads | EU minimum capital (or equivalent) £m |
|
|---|---|---|---|---|---|
| 50bps increase £m |
50bps decrease £m |
||||
| United Kingdom | 4,887 | – | (610) | 770 | 10 |
| France | 2,519 | (95) | (120) | 125 | 15 |
| Ireland | 990 | – | – | – | 5 |
| Italy | 645 | – | – | – | 5 |
| Netherlands (including Belgium and Germany) | 2,110 | (165) | (265) | 285 | 100 |
| Poland | 1,228 | – | – | – | 5 |
| Spain | 655 | – | (55) | 60 | 5 |
| Other Europe | 236 | – | – | – | – |
| Europe | 8,383 | (260) | (440) | 470 | 135 |
| North America | 64 | (45) | (625) | 660 | 5 |
| Asia | 424 | – | (25) | 20 | 15 |
| Australia | 331 | – | (5) | 10 | 5 |
| Asia Pacific | 755 | – | (30) | 30 | 20 |
| Total | 14,089 | (305) | (1,705) | 1,930 | 170 |
Value of new business
| Risk free rates | ||||||
|---|---|---|---|---|---|---|
| 2008 Value of new business (net of tax and minority interest) |
As reported in M3 £m |
Risk free rate as swap yields £m |
1% increase £m |
1% decrease £m |
2% increase £m |
2% decrease £m |
| United Kingdom | 147 | (161) | 17 | (25) | 28 | (60) |
| France | 79 | – | 4 | (7) | 7 | (21) |
| Ireland | 10 | – | 3 | (3) | 6 | (8) |
| Italy | 21 | – | (1) | – | (2) | (1) |
| Netherlands (including Belgium and Germany) | (67) | (10) | 30 | (47) | 58 | (138) |
| Poland | 46 | – | (3) | 3 | (5) | 7 |
| Spain | 80 | – | (4) | 4 | (8) | 8 |
| Other Europe | 24 | – | (1) | 3 | (5) | 8 |
| Europe | 193 | (10) | 28 | (47) | 51 | (145) |
| North America | 36 | (101) | (61) | 50 | (127) | 68 |
| Asia | 24 | – | 5 | (9) | 8 | (31) |
| Australia | 9 | – | (2) | 4 | (5) | 7 |
| Asia Pacific | 33 | – | 3 | (5) | 3 | (24) |
| Total | 409 | (272) | (13) | (27) | (45) | (161) |
| Equity/property | ||||
|---|---|---|---|---|
| 2008 Value of new business (net of tax and minority interest) |
As reported in M3 £m |
Market values | Volatility 25% increase £m |
|
| 10% increase £m |
10% decrease £m |
|||
| United Kingdom | 147 | 5 | (5) | (2) |
| France | 79 | 2 | (2) | (3) |
| Ireland | 10 | 1 | (1) | – |
| Italy | 21 | – | – | – |
| Netherlands (including Belgium and Germany) | (67) | – | – | (1) |
| Poland | 46 | – | – | – |
| Spain | 80 | – | – | – |
| Other Europe | 24 | 1 | (2) | – |
| Europe | 193 | 4 | (5) | (4) |
| North America | 36 | – | – | – |
| Asia | 24 | – | – | – |
| Australia | 9 | – | – | – |
| Asia Pacific | 33 | – | – | – |
| Total | 409 | 9 | (10) | (6) |
| 2008 Value of new business (net of tax and minority interest) |
As reported in M3 £m |
Swaption implied volatilities 25% increase £m |
Corporate bond credit spreads | EU minimum capital (or equivalent) £m |
|
|---|---|---|---|---|---|
| 50bps increase £m |
50bps decrease £m |
||||
| United Kingdom | 147 | – | (79) | 85 | 1 |
| France | 79 | (2) | 2 | (9) | 1 |
| Ireland | 10 | – | – | – | 1 |
| Italy | 21 | – | – | – | – |
| Netherlands (including Belgium and Germany) | (67) | – | (11) | 12 | 14 |
| Poland | 46 | – | – | – | – |
| Spain | 80 | – | (4) | 5 | – |
| Other Europe | 24 | – | (1) | (1) | 2 |
| Europe | 193 | (2) | (14) | 7 | 18 |
| North America | 36 | (12) | (67) | 72 | 10 |
| Asia | 24 | – | – | – | 2 |
| Australia | 9 | – | – | – | – |
| Asia Pacific | 33 | – | – | – | 2 |
| Total | 409 | (14) | (160) | 164 | 31 |
(b) Non-economic assumptions
The following tables below show the sensitivity of the embedded value and the value of new business to the following changes in non-economic assumptions:
- 10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of £10 pa would represent an expense assumption of £9 pa). Where there is a "look through" into service company expenses the fee charged by the service company is unchanged while the underlying expense decreases;
- 10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% pa would represent a lapse rate of 4.5% pa); and
- 5% decrease in both mortality and morbidity rates disclosed separately for life assurance and annuity business.
No future management actions are modelled in reaction to the changing non-economic assumptions. In each sensitivity calculation all other assumptions remain unchanged. No changes to valuation bases have been included.
Embedded value
| 2008 Embedded value (net of tax) |
As reported in M18 £m |
10% decrease in maintenance expenses £m |
10% decrease in lapse rates £m |
5% decrease in mortality/morbidity rates – life assurance £m |
5% decrease in mortality/morbidity rates – annuity business £m |
|---|---|---|---|---|---|
| United Kingdom | 4,887 | 165 | 100 | 70 | (190) |
| France | 2,519 | 50 | 35 | 30 | – |
| Ireland | 990 | 20 | 25 | 10 | (5) |
| Italy | 645 | 5 | 5 | 5 | – |
| Netherlands (including Belgium and Germany) | 2,110 | 195 | 5 | 30 | (195) |
| Poland | 1,228 | 40 | 65 | 15 | – |
| Spain | 655 | 10 | 45 | 15 | (5) |
| Other Europe | 236 | 5 | 15 | – | – |
| Europe | 8,383 | 325 | 195 | 105 | (205) |
| North America | 64 | 85 | 80 | 70 | (20) |
| Asia | 424 | 15 | 5 | 5 | – |
| Australia | 331 | 10 | 20 | 15 | – |
| Asia Pacific | 755 | 25 | 25 | 20 | – |
| Total | 14,089 | 600 | 400 | 265 | (415) |
Value of new business
| 2008 Value of new business (net of tax) |
As reported in M3 £m |
10% decrease in maintenance expenses £m |
10% decrease in lapse rates £m |
5% decrease in mortality/ morbidity rates – life assurance £m |
5% decrease in mortality/ morbidity rates – annuity business £m |
|---|---|---|---|---|---|
| United Kingdom | 147 | 18 | 23 | 15 | (20) |
| France | 79 | 1 | 2 | 1 | – |
| Ireland | 10 | 2 | 4 | – | – |
| Italy | 21 | 1 | – | – | – |
| Netherlands (including Belgium and Germany) | (67) | 15 | 4 | 2 | (14) |
| Poland | 46 | 3 | 5 | 2 | – |
| Spain | 80 | 2 | 12 | 3 | – |
| Other Europe | 24 | 2 | 6 | 2 | (2) |
| Europe | 193 | 26 | 33 | 10 | (16) |
| North America | 36 | 6 | 4 | 7 | (3) |
| Asia | 24 | 5 | 2 | 1 | – |
| Australia | 9 | 1 | 5 | 2 | – |
| Asia Pacific | 33 | 6 | 7 | 3 | – |
| Total | 409 | 56 | 67 | 35 | (39) |
