New business
Post-tax internal rate of return on life and pensions new business
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 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 9.5% (30 June 2008: 12.9%; 31 December 2008: 11.4%)
| 30 June 2009 | Internal rate of return % | Initial capital £m | Required capital £m | Total invested capital £m |
|---|---|---|---|---|
| United Kingdom | 13% | 77 | 59 | 136 |
| France | 10% | 17 | 84 | 101 |
| Ireland | 5% | 26 | 12 | 38 |
| Italy | 10% | 14 | 93 | 107 |
| Netherlands (including Belgium and Germany) | 5% | 59 | 51 | 110 |
| Poland | 23% | 10 | 4 | 14 |
| Spain | 27% | 13 | 41 | 54 |
| Other Europe | 14% | 19 | 3 | 22 |
| Europe | 11% | 158 | 288 | 446 |
| North America | 7% | 139 | 285 | 424 |
| Asia | 5% | 31 | 12 | 43 |
| Australia | 11% | 1 | 18 | 19 |
| Asia Pacific | 7% | 32 | 30 | 62 |
| Total | 9.5% | 406 | 662 | 1,068 |
| Restated 30 June 2008 |
Internal rate of return % | Initial capital £m | Required capital £m | Total invested capital £m |
|---|---|---|---|---|
| United Kingdom | 13% | 130 | 80 | 210 |
| France | 11% | 21 | 60 | 81 |
| Ireland | 9% | 35 | 12 | 47 |
| Italy | 17% | 6 | 23 | 29 |
| Netherlands (including Belgium and Germany) | 6% | 73 | 138 | 211 |
| Poland | 20% | 15 | 7 | 22 |
| Spain | 39% | 13 | 39 | 52 |
| Other Europe | 18% | 38 | 7 | 45 |
| Europe | 13% | 201 | 286 | 487 |
| North America | 11% | 61 | 174 | 235 |
| Asia | 18% | 30 | 12 | 42 |
| Australia | 13% | 2 | 14 | 16 |
| Asia Pacific | 17% | 32 | 26 | 58 |
| Total | 12.9% | 424 | 566 | 990 |
| 31 December 2008 | Internal rate of return % | Initial capital £m | Required capital £m | Total invested capital £m |
|---|---|---|---|---|
| United Kingdom | 14% | 157 | 136 | 293 |
| France | 9% | 35 | 118 | 153 |
| Ireland | 8% | 53 | 24 | 77 |
| Italy | 14% | 9 | 48 | 57 |
| Netherlands (including Belgium and Germany) | 5% | 277 | 244 | 521 |
| Poland | 21% | 31 | 12 | 43 |
| Spain | 37% | 28 | 75 | 103 |
| Other Europe | 13% | 57 | 9 | 66 |
| Europe | 11% | 490 | 530 | 1,020 |
| North America | 11% | 124 | 489 | 613 |
| Asia | 13% | 64 | 23 | 87 |
| Australia | 12% | 3 | 30 | 33 |
| Asia Pacific | 12% | 67 | 53 | 120 |
| Total | 11.4% | 838 | 1,208 | 2,046 |
