Preliminary results year ended 31 December 2008
05 March 2009
Appendix A – Capital management
A2 – Group capital structure
Deployment of equity shareholders’ funds
In order to better reflect the risk to shareholder funds the following table ‘looks through’ unitised investments which are classified as "other" within the IFRS balance sheet and makes adjustments for minority holdings that are fully consolidated on the balance sheet. In addition, we have explicitly shown the market risks within the staff pension schemes.
| 2008 | Restated 2007 |
||||||
|---|---|---|---|---|---|---|---|
| Equities £m |
Property £m |
Cash, loans & Debt securities £m |
Other invest-ments £m |
Other net assets £m |
Total £m |
Total £m |
|
| Total assets included in the statutory IFRS balance sheet | 43,351 | 15,390 | 216,673 | 36,116 | 43,032 | 354,562 | 321,326 |
| Goodwill1 | (4,017) | (4,017) | (3,502) | ||||
| Acquired value of in-force business and intangible assets | (4,216) | (4,216) | (3,379) | ||||
| Liabilities of the long-term, general & other businesses | (37,798) | (12,879) | (207,381) | (32,949) | (49,109) | (340,116) | (305,395) |
| Pension fund deficit | 613 | 613 | 178 | ||||
| Debt | 7,635 | 7,635 | 5,457 | ||||
| Liabilities of the long-term, general & other businesses excluding pension fund deficit and debt | (37,798) | (12,879) | (207,381) | (32,949) | (40,861) | (331,868) | (299,760) |
| Minorities and other investments reclassification2 | 160 | 106 | 1,398 | (2,457) | 793 | - | - |
| Shareholder funds | 5,713 | 2,617 | 10,690 | 710 | (5,269) | 14,461 | 14,685 |
| Pension fund | 3,569 | 507 | 4,510 | 752 | (9,951) | (613) | (178) |
| Adjusted shareholder funds | 9,282 | 3,124 | 15,200 | 1,462 | (15,220) | 13,848 | 14,507 |
| Goodwill1 | 4,017 | 3,502 | |||||
| Additional and acquired value of in-force long-term business and intangible assets | 6,885 | 11,137 | |||||
| Assets backing total capital employed in continuing operations | 24,750 | 29,146 | |||||
| Subordinated debt | (4,606) | (3,054) | |||||
| External debt | (919) | (1,257) | |||||
| Net internal debt3 | (2,110) | (1,146) | |||||
| 17,115 | 23,689 | ||||||
| Minority interests | (3,013) | (2,501) | |||||
| Direct capital instrument | (990) | (990) | |||||
| Preference capital | (200) | (200) | |||||
| Equity shareholders’ funds | 12,912 | 19,998 | |||||
- Includes goodwill relating to the joint ventures and associates including amounts held for sale.
- Minority and other investments reclassification represent the reallocation of unit trusts to their constituent parts net of net asset value attributable to unitholders.
- Net internal debt represents the upstream of internal loans from business operations to corporate and holding entities net of tangible assets held by those entities.
Shareholders' funds, including minority interests
| 2008 Closing shareholders' funds |
Restated 2007 Closing shareholders' funds |
|||||||
|---|---|---|---|---|---|---|---|---|
| IFRS net asset £m |
Internally generated AVIF £m |
Total Equity £m |
IFRS net asset £m |
Internally generated AVIF £m |
Total Equity £m |
|||
| Life assurance | ||||||||
| United Kingdom | 3,649 | 1,420 | 5,069 | 3,670 | 3,484 | 7,154 | ||
| France | 1,854 | 970 | 2,824 | 1,447 | 1,323 | 2,770 | ||
| Ireland | 1,212 | 280 | 1,492 | 943 | 286 | 1,229 | ||
| Italy | 1,407 | 264 | 1,671 | 1,020 | 238 | 1,258 | ||
| Netherlands (including Belgium and Germany) | 2,979 | (665) | 2,314 | 2,994 | 950 | 3,944 | ||
| Poland | 310 | 1,105 | 1,415 | 276 | 926 | 1,202 | ||
| Spain | 1,373 | 682 | 2,055 | 1,122 | 624 | 1,746 | ||
| Other Europe | 369 | (34) | 335 | 346 | (68) | 278 | ||
| Europe | 9,504 | 2,602 | 12,106 | 8,148 | 4,279 | 12,427 | ||
| North America | 2,693 | (1,599) | 1,094 | 2,202 | (227) | 1,975 | ||
| Asia Pacific | 735 | 246 | 981 | 619 | 222 | 841 | ||
| 16,581 | 2,669 | 19,250 | 14,639 | 7,758 | 22,397 | |||
| General insurance and health | ||||||||
| United Kingdom | 2,592 | - | 2,592 | 3,049 | - | 3,049 | ||
| France | 400 | – | 400 | 301 | – | 301 | ||
| Ireland | 545 | – | 545 | 435 | – | 435 | ||
| Netherlands | 705 | – | 705 | 756 | – | 756 | ||
| Other Europe | 377 | – | 377 | 295 | – | 295 | ||
| Europe | 2,027 | - | 2,027 | 1,787 | - | 1,787 | ||
| North America | 878 | - | 878 | 732 | - | 732 | ||
| Asia Pacific | 19 | - | 19 | 26 | - | 26 | ||
| 5,516 | - | 5,516 | 5,594 | - | 5,594 | |||
| Fund management | 340 | – | 340 | 355 | – | 355 | ||
| Other business | (326) | – | (326) | 831 | – | 831 | ||
| Corporate | (30) | – | (30) | (31) | – | (31) | ||
| Subordinated debt | (4,606) | – | (4,606) | (3,054) | – | (3,054) | ||
| External debt | (919) | – | (919) | (1,257) | – | (1,257) | ||
| Internal debt | (2,110) | - | (2,110) | (1,146) | - | (1,146) | ||
| (7,651) | - | (7,651) | (4,302) | - | (4,302) | |||
| Shareholders funds', including minority interests | 14,446 | 2,669 | 17,115 | 15,931 | 7,758 | 23,689 | ||
| Less: | ||||||||
| Minority interests | (3,013) | (2,501) | ||||||
| Direct capital instruments | (990) | (990) | ||||||
| Preference capital | (200) | (200) | ||||||
| Equity shareholders’ funds | 12,912 | 19,998 | ||||||
| Less: goodwill and intangibles1 | (4,944) | (4,258) | ||||||
| Equity shareholders funds’ excluding goodwill and intangibles | 7,968 | 15,740 | ||||||
- Goodwill and intangibles comprise £3,583 million (2007:£3,082 million) of goodwill and subsidiaries, £1,557 million (2007: £1,407 million) of intangibles in subsidiaries, £163 million (2007: £162 million) of goodwill and intangibles in joint ventures and £335 million (2007: £310 million) of goodwill in associates, net of associated deferred tax liabilities of £423 million (2007: £419 million) and the minority share of intangibles of £271 million (2007: £284 million).
Analysis of return on capital employed
Return on capital at business level is calculated on shareholders' funds excluding goodwill and intangibles, with the impact of these items on group shareholders' funds shown separately. This allows for returns on capital at the operational level to be based on tangible capital employed (including value of in-force business), whilst retaining accountability at an aggregate group level for the requirement to generate returns on capital invested in goodwill and intangibles.
| 2008 | ||||||
|---|---|---|---|---|---|---|
| Operating return2 | Restated Opening shareholders’ funds including minority interests £m |
Restated Opening shareholders’ funds (excluding goodwill and intangibles) £m |
Return on capital % |
|||
| Before tax £m |
After tax £m |
|||||
| Life assurance | ||||||
| United Kingdom | 883 | 635 | 7,154 | 6,888 | 9.2% | |
| France | 692 | 455 | 2,770 | 2,770 | 16.4% | |
| Ireland | 78 | 67 | 1,229 | 1,091 | 6.1% | |
| Italy | 131 | 88 | 1,258 | 1,040 | 8.5% | |
| Netherlands (including Belgium and Germany) | 187 | 134 | 3,944 | 3,939 | 3.4% | |
| Poland | 241 | 196 | 1,202 | 1,197 | 16.4% | |
| Spain | 286 | 199 | 1,746 | 1,042 | 19.1% | |
| Other Europe | 23 | 17 | 278 | 177 | 9.6% | |
| Europe | 1,638 | 1,156 | 12,427 | 11,256 | 10.3% | |
| North America | 201 | 132 | 1,975 | 1,206 | 10.9% | |
| Asia Pacific | 79 | 57 | 841 | 688 | 8.3% | |
| 2,801 | 1,980 | 22,397 | 20,038 | 9.9% | ||
| General insurance and health | ||||||
| United Kingdom | 557 | 398 | 3,049 | 2,557 | 15.6% | |
| France | 107 | 70 | 301 | 301 | 23.3% | |
| Ireland | 68 | 59 | 435 | 353 | 16.7% | |
| Netherlands | 177 | 129 | 756 | 734 | 17.6% | |
| Other Europe | 45 | 31 | 295 | 187 | 16.6% | |
| Europe | 397 | 289 | 1,787 | 1,575 | 18.3% | |
| North America | 145 | 94 | 732 | 729 | 12.9% | |
| Asia Pacific | – | – | 26 | 26 | – | |
| 1,099 | 781 | 5,594 | 4,887 | 16.0% | ||
| Fund management | 42 | 29 | 355 | 305 | 9.5% | |
| Other business | (163) | (114) | 831 | (595) | 19.2% | |
| Corporate | (37) | 118 | (31) | (31) | (380.6)% | |
| Subordinated debt | (229) | (164) | (3,054) | (3,054) | 5.4% | |
| External debt | (57) | (41) | (1,257) | (1,257) | 3.3% | |
| Net internal debt3 | (98) | (70) | (1,146) | (1,146) | 6.1% | |
| 3,358 | 2,519 | 23,689 | 19,147 | 13.2% | ||
| Less: | ||||||
| Minority interests | (257) | (2,501) | (2,217) | 11.6% | ||
| Direct capital instrument | (40) | (990) | (990) | 4.0% | ||
| Preference capital | (17) | (200) | (200) | 8.5% | ||
| Operating return | 2,205 | 19,998 | 15,740 | 14.0% | ||
| Goodwill and intangibles1 | 4,258 | |||||
| Operating return (including goodwill and intangibles) | 2,205 | 19,998 | 19,998 | 11.0% | ||
- Goodwill and intangibles comprises £3,082 million of goodwill in subsidiaries, £1,407 million of intangibles in subsidiaries, £162 million goodwill and intangibles in joint ventures, and £310 million of goodwill in associates, net of associated deferred tax liabilities of £419 million and the minority share of intangibles of £284 million.
- The operating return is based upon group MCEV operating profit, which is stated before impairment of goodwill, amortisation of intangibles, exceptional items and investment variance.
- The net internal debt return loss before tax of £98 million comprises investment return of £99 million offset by group internal debt costs and other interest of £197 million.
| Restated 2007 | ||||||
|---|---|---|---|---|---|---|
| Operating return2 | Opening shareholders’ funds including goodwill and intangibles £m |
Opening shareholders’ funds excluding goodwill and intangibles £m |
Return on capital % |
|||
| Before tax £m |
After tax £m |
|||||
| Life assurance | ||||||
| United Kingdom | 822 | 575 | 6,629 | 6,394 | 9.0% | |
| France | 568 | 373 | 2,355 | 2,355 | 15.8% | |
| Ireland | 85 | 74 | 1,103 | 977 | 7.6% | |
| Italy | 137 | 84 | 852 | 841 | 10.0% | |
| Netherlands (including Belgium and Germany) | 316 | 236 | 3,514 | 3,508 | 6.7% | |
| Poland | 181 | 147 | 946 | 946 | 15.5% | |
| Spain | 233 | 163 | 1,412 | 894 | 18.2% | |
| Other Europe | (17) | (12) | 132 | 132 | (9.1)% | |
| Europe | 1,503 | 1,065 | 10,314 | 9,653 | 11.0% | |
| North America | 124 | 80 | 2,078 | 1,267 | 6.3% | |
| Asia Pacific | 95 | 70 | 575 | 511 | 13.7% | |
| 2,544 | 1,790 | 19,596 | 17,825 | 10.0% | ||
| General insurance and health | ||||||
| United Kingdom | 294 | 206 | 2,984 | 2,487 | 8.3% | |
| France | 70 | 45 | 333 | 333 | 13.5% | |
| Ireland | 162 | 142 | 434 | 359 | 39.6% | |
| Netherlands | 169 | 123 | 684 | 682 | 18.0% | |
| Other Europe | 41 | 29 | 161 | 161 | 18.0% | |
| Europe | 442 | 339 | 1,612 | 1,535 | 22.1% | |
| North America | 154 | 101 | 670 | 667 | 15.1% | |
| Asia Pacific | 4 | 3 | 22 | 22 | 13.6% | |
| 894 | 649 | 5,288 | 4,711 | 13.8% | ||
| Fund management | 90 | 63 | 305 | 243 | 25.9% | |
| Other business | (70) | (49) | 874 | (458) | 10.7% | |
| Corporate | (82) | (95) | (19) | (19) | 500.0% | |
| Subordinated debt | (179) | (125) | (2,937) | (2,937) | 4.3% | |
| External debt | (79) | (55) | (1,258) | (1,258) | 4.4% | |
| Net internal debt3 | (53) | (37) | (1,406) | (1,406) | 2.6% | |
| 3,065 | 2,141 | 20,443 | 16,701 | 12.8% | ||
| Less: | ||||||
| Minority interests | (265) | (1,817) | (1,808) | 14.7% | ||
| Direct capital instrument | (37) | (990) | (990) | 3.7% | ||
| Preference capital | (17) | (200) | (200) | 8.5% | ||
| Operating return | 1,822 | 17,436 | 13,703 | 13.3% | ||
| Goodwill and intangibles1 | 3,733 | |||||
| Operating return (including goodwill and intangibles) | 1,822 | 17,436 | 17,436 | 10.4% | ||
- Goodwill and intangibles comprises £2,910 million of goodwill in subsidiaries, £830 million of intangibles in subsidiaries and £280 million of goodwill in associates, net of associated deferred tax liabilities of £278 million and the minority share of intangibles of £9 million.
- The operating return is based upon group MCEV operating profit, which is stated before impairment of goodwill, amortisation of intangibles, exceptional items and investment variance.
- The net internal debt return loss before tax of £53 million comprises investment return of £127 million offset by group internal debt costs and other interest of £180 million.
Capital Generation and Utilisation
As part of our capital management processes, we regularly review the generation and deployment of capital. The table below demonstrates the net capital generation of the group based on MCEV net worth before and after investment variances.
| 2008 £bn |
Restated 2007 £bn |
|
|---|---|---|
| Operational capital generation: | ||
| Life in-force profits | 2.4 | 1.8 |
| New business strain | (0.8) | (0.6) |
| Non-life profits | 0.8 | 0.5 |
| Operational capital generated | 2.4 | 1.7 |
| Increase in capital requirements | (0.4) | (0.4) |
| Free operational capital generated | 2.0 | 1.3 |
| Interest cost | (0.3) | (0.2) |
| External dividend | (1.0) | (0.9) |
| Scrip dividend | 0.2 | 0.3 |
| Capital generation after financing | 0.9 | 0.5 |
| Profit on disposals | – | 0.1 |
| Capital raising | 1.0 | – |
| Cost of acquisitions | (0.3) | (0.6) |
| Qualifying assets acquired net of capital requirements | 0.1 | 0.1 |
| Pension funding, restructuring costs and exceptional items | (0.9) | (0.1) |
| Foreign exchange impact on surplus capital | 0.2 | 0.3 |
| Other | 0.1 | – |
| Net capital generated before investment return and economic variances | 1.1 | 0.3 |
| Investment return variances and economic variances | (4.3) | 0.1 |
| Net capital (consumed)/generated after investment return and economic variances | (3.2) | 0.4 |
Free operational capital generated represents the net of the following:
- Operating profits emerging in net worth for the life in-force business, net of new business strain, and IFRS operating profits earned by non-life businesses.
- The increase in capital requirements of ongoing businesses. Capital requirements represent target operating capital levels rather than regulatory minimum levels as this is considered a better reflection of capital utilised in the business. For the life businesses this is the capital used in the calculation of embedded value to evaluate the cost of locked in capital. For general insurance businesses we have calculated target capital based on two times the regulatory minimum. Where appropriate, the increase in capital requirements shown has been adjusted for the impact of foreign exchange movements and other one off changes to required capital.
