Capital management
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.
| 30 June 2009 £bn |
Restated 30 June 20081 £bn |
Restated 31 December 20081 £bn |
|
|---|---|---|---|
| Operational capital generation: | |||
| Life in-force profits | 0.8 | 1.0 | 2.4 |
| New business strain | (0.4) | (0.4) | (0.8) |
| Non-life profits | 0.3 | 0.3 | 0.8 |
| Operational capital generated | 0.7 | 0.9 | 2.4 |
| Increase in capital requirements | (0.2) | (0.4) | (0.8) |
| Free operational capital generated | 0.5 | 0.5 | 1.6 |
| Interest cost | (0.2) | (0.1) | (0.3) |
| External dividend | (0.5) | (0.6) | (1.0) |
| Scrip dividend | 0.2 | 0.2 | 0.2 |
| Capital generation after financing | – | – | 0.5 |
| Capital released from disposals | 0.1 | – | – |
| Capital raising | 0.2 | 0.8 | 1.0 |
| Issuance of hybrid debt in the Netherlands | 0.4 | – | – |
| Cost of acquisitions | – | (0.3) | (0.3) |
| Qualifying assets acquired net of capital requirements | – | 0.1 | 0.1 |
| Pension funding, restructuring costs and exceptional items | (0.1) | (0.4) | (0.9) |
| Foreign exchange impact on surplus capital | (0.2) | 0.1 | 0.2 |
| Other | – | (0.1) | 0.1 |
| Net capital generated before investment return and economic variances | 0.4 | 0.2 | 0.7 |
| Investment return variances and economic variances | 0.8 | (1.7) | (3.9) |
| Net capital generated/(consumed) after investment return and economic variances | 1.2 | (1.5) | (3.2) |
1. In prior periods the effect of economic variances on life required capital has been included within the “increase in capital requirements” line in determining “free operational capital generated”. We have revised this approach, and have restated prior periods accordingly, to transfer the effect of economic variances on required capital to the “investment return variances and economic variances” line. This has the effect of decreasing “free operational capital generated” by £0.1 billion and £0.4 billion in the period to 30 June 2008 and 31 December 2008 respectively. The 30 June 2008 comparatives have been restated to reflect the move to MCEV from EEV, including presentation of numbers on a net of minorities’ basis.
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, economic variances and other one off changes to required capital.
