Proforma reconciliation of group operating profit to profit after tax – MCEV basis
| For the six month period to 30 June 2009 | 6 months 2009 £m |
Restated 6 months 2008 £m |
Restated Full year 2008 £m |
|---|---|---|---|
| Operating profit before tax attributable to shareholders' profits | |||
| Long-term business | |||
| United Kingdom | 345 | 417 | 883 |
| Europe | 1,105 | 728 | 1,647 |
| North America | 120 | 74 | 201 |
| Asia Pacific | 37 | 61 | 79 |
| 1,607 | 1,280 | 2,810 | |
| General insurance and health | 545 | 528 | 1,198 |
| Fund management¹ | (4) | 30 | 42 |
| Other: | |||
| Other operations and regional costs² | (99) | (57) | (163) |
| Corporate Centre | (46) | (71) | (141) |
| Group debt costs and other interest | (318) | (201) | (379) |
| Operating profit before tax attributable to shareholders' profits | 1,685 | 1,509 | 3,367 |
| Adjusted for the following: | |||
| Economic variances on long-term business | (29) | (4,086) | (12,058) |
| Short-term fluctuation in return on investments on non-long-term business | (125) | (314) | (819) |
| Economic assumption changes on general insurance and health business | 52 | 6 | (94) |
| Impairment of goodwill | (5) | (42) | (66) |
| Amortisation and impairment of intangibles | (52) | (44) | (108) |
| Profit on the disposal of subsidiaries and associates | 20 | 9 | 7 |
| Integration and restructuring costs | (148) | (132) | (326) |
| Exceptional items³ | (218) | (155) | (754) |
| Profit/(loss) before tax | 1,180 | (3,249) | (10,851) |
| Tax on operating profit | (416) | (453) | (841) |
| Tax on other activities | 320 | 1,341 | 4,252 |
| (96) | 888 | 3,411 | |
| Profit/(loss) for the period | 1,084 | (2,361) | (7,440) |
The six months to 30 June 2008 and full year 2008 results have been restated for the adjustment to reflect the reclassification of premium increases on Spanish Annual Renewable Term (ART) business and for the extension of the liquidity premium to additional businesses. More detail is included in the Financial Supplement - B1 Basis of Preparation.
- Excludes the proportion of the results of Aviva Investors fund management businesses and other fund management operations within the group that arise from the provision of fund management services to our life businesses. These results are included within the life MCEV operating earnings consistent with Aviva's MCEV methodology.
- Excludes the proportion of the results of subsidiaries providing services to the Life business. These results are included within the life MCEV operating earnings.
- Exceptional item of £218 million for the six month period to 30 June 2009 is in relation to legislation changes on pensions in Poland.
Total MCEV operating profit before shareholder tax was £1,685 million (six months to 30 June 2008: £1,509 million), an increase of 12%. Within this total the long-term business operating profit before shareholder tax was £1,607 million (six months to 30 June 2008: £1,280 million), an increase of 26%. This includes the impact, reported through expected returns, of a change in the basis of setting normalised investment returns consistently with IFRS. If the previous basis, which referenced the one year swap rate, had been used the total expected return would have been around £350 million lower. There is no impact on MCEV profit before tax.
Within the 2008 results, the expected rate of investment return was calculated by reference to the one year swap rate in the relevant currency plus an appropriate risk premium for equities and properties. For 2009, the group considers that the return over the typical duration of the assets held is more appropriate and is more consistent with the group's expectation of long term rates of return. Therefore, the expected return on equities and properties has been calculated by reference to the ten year swap rate in the relevant currency plus an appropriate risk premium. For fixed interest investments a similar change has been made to reflect the actual duration of the assets held.
This mainly impacts Aviva UK and the Netherlands, where the additional investment earnings on assets backing the policyholder liabilities flow straight to shareholders. In the US, the assumed return on bonds net of defaults, includes a partial recovery of the unrealised losses reported in previous periods through expected returns on existing business and on shareholders' net worth of £134 million.
Economic variances in 2009 of £29 million reflect the large benefit from the reduction in credit spreads on corporate bonds, offset by the reduction in the adjustment to risk free rates and adverse experience on equities and property of approximately £4 billion, £3 billion adverse and £1 billion adverse respectively. In 2008, the loss of £12,058 million was driven by bond yields falling in the United Kingdom and Eurozone, significant falls in equity markets down between 30% and 50% and credit spreads widening significantly in the final quarter of 2008.
