Proforma reconciliation of group operating profit to profit after tax – MCEV basis
10. Life MCEV operating earnings
In this table the life and pensions MCEV earnings have been broken down into constituent parts. The life and pensions MCEV operating earnings comprise:
- the value of new business written during the period;
- the earnings from existing business; and,
- the expected investment return on the shareholders’ net worth.
These components are calculated using economic assumptions as at the start of the year (in-force business) or start of the quarter (new business) and operating (demographic and expenses) assumptions as at the end of the period.
| Life and pensions MCEV earnings | 6 months 2009 £m |
Restated 6 months 2008 £m |
Full year 2008 £m |
|---|---|---|---|
| Value of new business | 367 | 346 | 772 |
| Earnings from existing business | |||
| - expected returns at the reference rate | 300 | 464 | 992 |
| - expected returns in excess of the reference rate | 601 | 219 | 429 |
| expected returns | 901 | 683 | 1,421 |
| experience variances | (175) | 44 | (224) |
| operating assumption changes | 86 | (97) | (165) |
| other operating variances | 173 | (5) | 305 |
| Expected return on shareholders' net worth | 255 | 309 | 701 |
| Life and pensions operating earnings before tax | 1,607 | 1,280 | 2,810 |
| Economic variances | (29) | (4,086) | (12,058) |
| Other non-operating variances¹ | (218) | (71) | (329) |
| Life and pensions earnings/(loss) before tax | 1,360 | (2,877) | (9,577) |
| Tax on operating earnings | (435) | (365) | (823) |
| Tax on other activities | 145 | 1,206 | 3,678 |
| Life and pensions earnings/(loss) after tax | 1,070 | (2,036) | (6,722) |
- Exceptional item of £218 million for the six month period to 30 June 2009 is in relation to legislation changes on pensions in Poland
United Kingdom
MCEV operating earnings are 17% lower at £345 million (six months to 30 June 2008: £417 million).
Value of New Business is £101 million (six months to 30 June 2008: £73 million), an increase of 38%, driven by a number of factors including reduced commission and sales expenses and a change in business mix to higher margin annuity business.
Expected return is £194 million (six months to 30 June 2008: £240 million), with the reduction driven by lower real world returns and lower opening assets compared to 2008.
Variances and assumption changes on existing business were £18 million unfavourable (six months to 30 June 2008: £26 million favourable). The 2009 negative result is primarily driven by an adverse persistency variance of £17m in respect of the loss of a single corporate contract. The positive variance in 2008 includes the benefit of the special distribution to with-profit policyholders of £22 million.
Expected returns on shareholders' net worth were £68 million (six months to 30 June 2008: £78 million), a reduction of 13% as a result of lower real world returns.
Europe
Total regional operating return has increased to £1,105 million (six months to 30 June 2008: £729 million), an increase of 52% with the strengthening of the euro contributing around one third of the improvement.
Value of New Business was £234 million (six months to 30 June 2008: £249 million), a reduction of 6%, with the decrease largely driven by a reduction in sales volumes. Increased contributions from Italian protection and profit sharing products has been more than offset by decreases in Spain and Other Europe where, in 2008, there were one off positive contributions from Caja Murcia and Romanian pensions business respectively.
Expected returns were £542 million (six months to 30 June 2008: £353 million). After allowing for movements in currency this increase is largely explained by the expected reduction in the allowance for short term investment guarantees that is included in the MCEV balance sheet in France of £130 million. This allowance is expected to be released evenly through 2009.
Variances and assumption changes on existing business were £196 million (six months to 30 June 2008: £65 million adverse). In 2009 positive variances from modelling refinements in France and the Netherlands (£120 million), assumption changes in the Netherlands to reflect revisions to investment and bonus strategies in Germany as this business is repositioned (£116 million) and continued positive mortality experience across the region (£18 million) have been partially offset by negative lapse experience, mainly in Spain, Ireland and France (£86 million in total) driven by the general economic downturn. A number of customer retention initiatives are being put in place to address this issue.
Expected returns on shareholders net worth were £133 million (six months to 30 June 2008: £192 million), a reduction of 31%. This a result of lower real world returns and lower opening shareholder assets compared to 2008.
North America
Operating earnings have increased to £120 million (six months to 30 June 2008: £73 million), a growth of 64%, with the strengthening of the US dollar contributing around half of this improvement.
Value of new business was £16 million (six months to 30 June 2008: £8 million loss), with the improvement driven by management action on pricing and commission during the period.
Expected return was £147 million (six months to 30 June 2008: £67 million). Within this total, default assumptions have been strengthened, reducing expected return by approximately £60 million but this has been more than offset by the recognition of £134 million of expected reduction, in line with the assumed investment return, of unrealised losses on corporate bonds backing policyholder liabilities which are being held to maturity.
Variances and assumption changes on existing business were £90 million unfavourable (six months to 30 June 2008: £14 million unfavourable), with the deterioration principally driven by spread compression in the current economic environment (£74 million unfavourable) and negative lapse experience (£8 million unfavourable).
Expected returns on shareholders net worth were £47 million (six months to 30 June 2008: £28 million) being impacted in the same way as expected returns.
Asia Pacific
Operating earnings have decreased to £37 million (six months to 30 June 2008: £61 million), a reduction of 39%. Value of new business was £16 million (six months to 30 June 2008: £32 million), a reduction of 50%, driven by lower sales volumes and changed policy duration assumptions in Hong Kong, China, India and Singapore.
Expected returns were £18 million (six months to 30 June 2008: £23 million), a reduction of 22% on lower opening assets. Variances and assumption changes on existing business were £4 million adverse (six months to 30 June 2008: £5 million adverse), largely reflecting the negative lapse variances across the region of £24 million which were partially offset by positive modelling variances of £17 million.
Expected returns on shareholders net worth was £7 million (six months to 30 June 2008: £11 million) with the change the result of lower real world returns.
